UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)


o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, ~~2007~~2010


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

For the transition period from to .


o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-51116

~~HURRAY! HOLDING CO.~~Ku6 Media Co., ~~LTD.~~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)

~~15/F, Tower B, Gateway Plaza, No.18 Xia Guang Li, East Third Ring,~~

Building 6, Zhengtongchuangyi Centre
No. 18, Xibahe Xili, Chaoyang District
Beijing ~~100027,~~100020, People’s Republic of China
Fax number: +86 10 57586898
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act.
~~NONE~~


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

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

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 Global Market~~NONE
(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: ~~2,173,784,440~~3,481,174,498 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.
Yeso Noþ

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. Yeso Noþ

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. Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noþ

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 ~~or a smaller reporting company. See the definitions of “large~~and large accelerated ~~filer,” “accelerated~~ filer” ~~and “smaller reporting company”~~ in Rule 12b-2 of the Exchange Act. (Check one):


Large ~~accelerated filer~~Accelerated Filero	Accelerated ~~filer~~Filero	~~Non-accelerated filer~~Non-Accelerated Filerþ	~~Smaller reporting company~~o
		~~(Do not check if a smaller reporting company)~~

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:


U.S. GAAPþ	International Financial Reporting Standards as issued	~~Other~~o
	by the International Accounting Standards Boardo	Othero

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

o Item 17o Item 18o

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). Yeso Noþ

INTRODUCTION

Except where the context otherwise requires and for purposes of this annual report on Form 20-F only:

	•		~~“ADSs” refers to our American depositary shares, each of which represents 100 ordinary shares;~~

	•		~~“$,” “US$” and “U.S. dollars” refer to the legal currency of the United States;~~

	•		“China” and the “PRC” refer to the People’s Republic of China, excluding, for the purposes of this annual report on Form 20-F only, Taiwan and the special administrative regions of Hong Kong and Macau;

	•		~~“ordinary shares” refers to our ordinary shares, par value US$0.00005 per share;~~

	•		~~“RMB” and “Renminbi” refer to the legal currency of China; and~~

	•		~~“we,” “us,” “our company” and “our” refer to Hurray! Holding Co., Ltd. and its subsidiaries, affiliates and predecessor entities.~~

“ADSs” refers to our American depositary shares, each of which represents 100 ordinary shares;

“$,” “US$” and “U.S. dollars” refer to the legal currency of the United States;

“Beijing WOFE” means Ku6 (Beijing) Technology Co., Ltd.

“China” and the “PRC” refer to the People’s Republic of China, excluding, for the purposes of this annual report on Form 20-F only, Taiwan and the special administrative regions of Hong Kong and Macau;

“Cayman Companies Law” refers to the Companies Law (2010 Revision) of the Cayman Islands (as amended);

“Ku6” refers to Ku6 Holding Limited and its subsidiaries, affiliates and predecessor entities.

“ordinary shares” refers to our ordinary shares, par value US$0.00005 per share;

“RMB” and “Renminbi” refer to the legal currency of China;

“Shanda Interactive” refers to Shanda Interactive Entertainment Limited, a Cayman Islands company, whose ADSs are listed on the NASDAQ Global Select Market under the symbol “SNDA”;

“Shanda Group” refers to Shanda Interactive and its subsidiaries and VIEs and, unless the context requires otherwise, includes Ku6 Media Co., Ltd. and its subsidiaries and VIEs;

“telecom operators” refer to China Mobile, China Unicom and China Telecom, the three principal telecommunication network operators in China;

“Tianjin WOFE” means WeiMoSanYi (Tianjin) Technology Co., Ltd.; and

“we,” “us,” “our company” and “our” refer to Ku6 Media Co., Ltd. and its subsidiaries, affiliates and predecessor entities.

This annual report on Form 20-F includes our audited consolidated financial statements as of December 31, ~~2007~~2010 and ~~2006~~2009 and for the years ended December 31, ~~2007, 2006~~2010, 2009 and ~~2005.~~2008.

~~Forward-Looking Information~~FORWARD-LOOKING INFORMATION

This annual report on Form 20-F contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about us and our industry. All statements other than statements of ahistorical fact in this form are forward-looking ~~nature.~~statements. These forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “estimate,” “plan,” “believe,” “is/are ~~made under~~likely to” or other similar expressions. The forward-looking statements included in this form relate to, among others:

our goals and strategies;

our future business development, financial condition and results of operations;

our projected revenues, earnings, profits and other estimated financial information;

expected changes in our margins and certain costs or expenditures;

expected continued acceptance of our new revenue model;

our plans to expand and diversify the ~~“safe harbor” provisions~~sources of our revenues;

expected changes in the ~~U.S. Private Securities Litigation Reform Act~~respective shares of ~~1995. You can identify~~our revenues from particular sources;

our plans for staffing, research and development and regional focus;

our plans to launch new products and services;

our plans for strategic partnerships with other businesses;

our acquisition and divestiture strategy, and our ability to successfully integrate past or future acquisitions with our existing operations and complete planned divestitures;

competition in the PRC online video industry;

the outcome of ongoing, or any future, litigation or arbitration;

the expected growth in the number of Internet and broadband users in China, growth of personal computer penetration and developments in the ways most people in China access the Internet;

changes in PRC governmental preferential tax treatment and financial incentives we currently qualify for and expect to qualify for; and

PRC governmental policies relating to media and the Internet and Internet content providers and to the provision of advertising over the Internet.

These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements ~~by terminology such as “will,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “seeks, “estimates”~~are reasonable, we cannot assure you that our expectations will turn out to be correct. Our actual results could be materially different from and ~~similar statements. The accuracy of these statements may be impacted by a number of business~~worse than our expectations. Important risks and ~~uncertainties~~factors that could cause our actual results to ~~differ~~be materially different from ~~those projected or anticipated, including but not limited to those risks and uncertainties identified under~~our expectations are generally set forth in the ~~section heading~~ “Risk Factors” ~~below.~~

~~All~~section of Item 3 and elsewhere in this annual report. The forward-looking statements made in this ~~Form 20-F are made~~annual report relate only to events or information as of the date ~~of filing hereof, based~~ on ~~information available to us as of that date, and we assume~~which the statements are made in this annual report. We undertake no obligation to update ~~or revise~~ any ~~of these~~ forward-looking statements ~~even if experience~~to reflect events or ~~future changes show that~~circumstances after the ~~indicated results~~date on which the statements are made or ~~events will not be realized.~~to reflect the occurrence of unanticipated events.

PART I

Item 1. Identity of Directors, Senior Management and ~~Advisers~~Advisors

Not Applicable.

Item 2. Offer Statistics and Expected Timetable

Not Applicable.

Item 3. Key Information

A. Selected Financial Data

The following table presents certain selected consolidated financial information for our business. You should read the following information in conjunction with our audited consolidated financial statements, the notes thereto and Item 5 “Operating and Financial Review and Prospects” included elsewhere in this annual report on Form 20-F. The following data as of December 31, ~~2007~~2010 and ~~2006~~2009 and for the years ended December 31, ~~2007, 2006~~2010, 2009 and ~~2005~~2008 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.

In May 2010, we sold all of our 51% interest in Beijing Huayi Brothers Music Co., Ltd., or Huayi Music, to Huayi Brothers Media Corporation. In August 2010, we completed the disposal of our remaining wireless value-added services and recorded music businesses to Shanda Interactive and also acquired from Shanda Interactive an equity interest in Shanghai Yisheng Network, an online audio business. The ~~following~~acquisition of the online audio business from Shanda Interactive was accounted for as an acquisition under common control and the disposal of our wireless value-added services and recorded music businesses including Huayi Music was accounted for as a discontinued operation in accordance with U.S. GAAP in our consolidated financial statements. As required by U.S. GAAP, we have reclassified the comparative operating results of the discontinued operation for the respective fiscal years as presented below and prepared the consolidated financial statements as if the acquisition of Shanghai Yisheng Network had been in effect since the inception of common control, which is the date that we became controlled by Shanda Interactive.

As a result, our selected consolidated statement of operations data ~~as of December 31, 2005, 2004 and 2003 and~~ for the years ended December 31, ~~2004~~2006 and ~~2003~~2007 and our consolidated balance sheets as of December 31, 2006, 2007 and 2008 have ~~also~~ been ~~derived~~revised from our previously audited consolidated financial statements, ~~for those years,~~ which are not included in this annual report on Form 20-F to give effect to those changes. You should read the selected consolidated financial data in conjunction with the consolidated financial statements and the related notes included under “Item 18. Financial Statements” and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report on Form 20-F. Our ~~audited~~consolidated financial statements ~~for the foregoing periods were~~are prepared and presented in accordance with United States generally accepted accounting principles ~~or US GAAP.~~(“U.S. GAAP”). Our historical results do not necessarily indicate our results expected for any future periods.


	For the Year Ended December 31,
	2010			2009			2008			2007			2006
				(Adjusted)(1) (2)			(Adjusted) (1)			Adjusted) (1)			(Adjusted) (1)
	(in thousands of U.S. dollars, except for share and per share data)
Historical Condensed Consolidated Statement of Operations Data
Net revenues:
Advertising
Third parties	$	15,854		$	758		$	—		$	—		$	—
Related parties		702			279			—			—			—

Total net revenues		16,556			1,037			—			—			—

Cost of revenues:
Advertising
Third parties		(40,083	)		(557	)		—			—			—
Related parties		(376	)		—			—			—			—

Total cost of revenues		(40,459	)		(557	)		—			—			—


Gross profit (loss)		(23,903	)		480			—			—			—
Operating expenses		(29,703	)		(7,130	)		(2,401	)		(2,738	)		(2,184	)

Operating loss from continuing operations		(53,606	)		(6,650	)		(2,401	)		(2,738	)		(2,184	)
Interest income		57			356			1,432			2,084			2,373
Interest expense		(31	)		—			—			(179	)		(45	)
Gain on reduction of acquisition payable		—			—			5,000			—			—
Foreign exchange loss		—			—			(8,990	)		—			—
Other income, net		—			2			—			105			—

Income (loss) before income tax benefit (expense) from continuing operations		(53,580	)		(6,292	)		(4,959	)		(728	)		144
Income tax benefit		41			14			—			—			—

Income (loss) from continuing operations, net of tax		(53,539	)		(6,278	)		(4,959	)		(728	)		144

As of and for the Year Ended December 31,
2007 2006 2005⁽¹⁾ 2004⁽¹⁾ 2003⁽¹⁾
(in thousands of U.S. dollars, except percentages)
Historical Condensed Consolidated Statement of Operations Data

Revenues:
Wireless value-added services $ 50,038 $ 62,512 $ 56,063 $ 43,173 $ 17,760
Recorded music 10,489 6,203 — — —

Total revenues 60,527 68,715 56,063 43,173 17,760

Cost of revenues:
Wireless value-added services 36,394 40,672 28,635 18,053 6,692
Recorded music 6,233 3,553 — — —

Total cost of revenues 42,627 44,225 28,635 18,053 6,692

Gross profit 17,900 24,490 27,428 25,120 11,068
Operating expenses 61,462 19,882 14,277 10,436 7,338

(Loss) income from continuing operations (43,562 ) 4,608 13,151 14,684 3,730
Interest income 2,313 2,529 1,390 28 1
Interest expense (179 ) (45 ) (27 ) (312 ) (390 )
Other income, net 466 315 330 — —

(Loss) income before provision for income taxes, earnings in equity investments, gain from disposal of subsidiary, minority interest and discontinued operations (40,962 ) 7,407 14,844 14,400 3,341
Income taxes (credit) expense (182 ) 205 (323 ) — —

Net (loss) income from continuing operations after income taxes before minority interests (40,780 ) 7,202 14,521 14,400 3,341
Equity in losses of affiliate (63 ) — — — —
Minority interests (688 ) (562 ) — — —

Net (loss) income from continuing operations (41,531 ) 6,640 14,521 14,400 3,341

Discontinued operations:
Net ((loss) income from discontinued operations, net of tax (612 ) (836 ) 4,098 2,840 1,204
Gain from disposal of subsidiary 193 — — — —

Net (loss) income from discontinued operations, net of tax (419 ) (836 ) 4,098 2,840 1,204

Net (loss) income (41,950 ) 5,804 18,619 17,240 4,545
Deemed dividends on Series A convertible preference shares — — — (40 ) (113 )

Net (Loss) income attributable to holders of ordinary shares $ (41,950 ) $ 5,804 $ 18,619 $ 17,200 $ 4,432

Net (Loss) income per share, basic $ (0.02 ) $ 0.00 $ 0.01 $ 0.01 $ 0.00

Net (Loss) income per share, diluted $ (0.02 ) $ 0.00 $ 0.01 $ 0.01 $ 0.00

Shares used in calculating basic (loss) income per share 2,172,208,190 2,189,748,563 2,092,089,848 1,208,512,142 1,088,810,959

Shares used in calculating diluted (loss) income per share 2,172,208,190 2,208,758,636 2,129,228,961 1,572,887,775 1,343,606,622


	For the Year Ended December 31,
	2010			2009			2008			2007			2006
				(Adjusted)(1) (2)			(Adjusted) (1)			Adjusted) (1)			(Adjusted) (1)
	(in thousands of U.S. dollars, except for share and per share data)
Discontinued operations:
Income (loss) from operations of discontinued operations, net of tax		(3,383	)		(21,779	)		(7,744	)		(40,727	)		6,222
Gain from disposal of discontinued operations		4,487			222			413			193			—

Income (loss) from discontinued operations, net of tax		1,104			(21,557	)		(7,331	)		(40,534	)		6,222

Net income (loss)		(52,435	)		(27,834	)		(12,290	)		(41,262	)		6,366
Less: Net loss attributable to the non-controlling interests from continuing operations		681			257			—			—			—
Less: Net loss (income) attributable to the non-controlling interests and redeemable non-controlling interests from discontinued operations		244			4,183			337			(688	)		(562	)
Net (loss) income attributable to Ku6 Media Co., Ltd.		(51,510	)		(23,395	)		(11,953	)		(41,950	)		5,804

Income (loss) from continuing operations, net of tax, attributable to Ku6 Media Co., Ltd.		(52,858	)		(6,021	)		(4,959	)		(728	)		144
Income (loss) from discontinued operations, net of tax, attributable to Ku6 Media Co., Ltd.		1,348			(17,374	)		(6,994	)		(41,222	)		5,660

Net (loss) income attributable to Ku6 Media Co., Ltd.		(51,510	)		(23,395	)		(11,953	)		(41,950	)		5,804

Loss attributable to Ku6 Media Co., Ltd. ordinary shareholders per share from continuing operations, basic and diluted		(0.02	)		—			—			—			—
Loss attributable to Ku6 Media Co., Ltd. ordinary shareholders per share from discontinued operations, basic and diluted		—			(0.01	)		(0.01	)		(0.02	)		—

Loss attributable to Ku6 Media Co., Ltd. ordinary shareholders per share, basic and diluted		(0.02	)		(0.01	)		(0.01	)		(0.02	)		—

Weighted average share used in per share calculation-basic and diluted		3,096,421,097			2,196,291,947			2,185,615,129			2,172,208,190			2,189,748,563


	As of December 31,
	2010		2009		2008		2007		2006
			Adjusted(2)
	(in thousands of U.S. dollars, except for share data)
Historical Condensed Consolidated Balance Sheet Data
Cash and cash equivalents	$	27,295	$	49,744	$	59,473	$	65,979	$	74,597
Short term investments		—		10,000		—		—		—
Accounts receivable, net		8,461		4,062		12,658		14,691		13,449
Other current assets		9,051		2,155		5,580		8,777		3,342
Property and equipment, net		8,003		1,472		980		1,636		1,954
Goodwill		6,896		2,099		3,157		5,621		39,621
Other assets		27,265		1,976		6,476		8,890		7,027

Total assets		86,970		71,508		88,324		105,594		139,990


Current liabilities		36,406		13,783		6,316		14,467		12,960
Non-current liabilities		4,926		421		316		877		851


	As of December 31,
	2010			2009		2008		2007		2006
				Adjusted(2)
	(in thousands of U.S. dollars, except for share data)
Total liabilities		41,332			14,204		6,632		15,344		13,811


Redeemable non-controlling interests		—			371		—		—		—

Ordinary shares (3,481,174,498, 2,200,194,040, 2,193,343,740, 2,174,784,440 and 2,163,031,740 shares issued and outstanding as of December 31, 2010, 2009, 2008, 2007 and 2006, respectively)		174			110		110		109		108
Total Ku6 Media Co., Ltd. shareholders’ equity		45,572			54,966		76,799		85,474		122,712
Non-controlling interests		(108	)		1,857		4,783		4,667		3,359

Total liabilities, redeemable non-controlling interests and shareholders’ equity	$	86,970		$	71,508	$	88,324	$	105,594	$	139,990


(1)		~~The amounts~~Reflects the retrospective presentation of ~~share-based compensation included~~the operations data of the wireless value-added service and recorded music business in operating expenses for 2006 and 2007 reflect the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” effective January 1, 2006. Had we applied the fair value recognition provisions of SFAS No. 123, “Stock-Based Compensation,” in prior periods, we would have reported net income of $4,318 thousands, $16,511 thousands and $17,007 thousands for 2003, 2004 and 2005, respectively, and net income per share (diluted) of $0.00, $0.01 and $0.01 for 2003, 2004, and 2005, respectively.discontinued operations.

As of and for the Year Ended December 31,
2007 2006 2005 2004 2003
(in thousands of U.S. dollars, except percentages)
Historical Condensed Consolidated Balance Sheet Data

Cash $ 65,979 $ 74,597 $ 75,959 $ 8,714 $ 11,151
Restricted cash — — — — 1,510
Accounts receivable, net 14,691 13,449 18,089 11,883 7,892
Other current assets 8,777 3,342 2,297 2,133 228
Property and equipment, net 1,636 1,954 2,536 2,617 1,897
Goodwill 5,621 39,621 23,869 20,412 3,950
Other assets 8,890 7,027 4,953 705 231

Total assets $ 105,594 $ 139,990 $ 127,703 $ 46,464 $ 26,859

Current liabilities $ 14,467 $ 12,960 $ 7,636 $ 8,743 $ 12,165
Non-current liabilities 877 851 843 — —

Total liabilities $ 15,344 $ 13,811 $ 8,479 $ 8,743 $ 12,165

Minority interests 4,667 3,359 605 — —
Series A convertible preference shares (16,924,497 and 12,347,966 shares issued and outstanding as of December 31, 2004 and 2003, respectively) — — — 17 12
Ordinary shares (2,173,784,440, 2,162,031,740, 2,229,754,340, shares issued and outstanding as of December 31, 2007, 2006 and 2005, respectively) 109 108 111 59 59
Other shareholders’ equity 85,474 122,712 118,508 37,645 14,623

Total liabilities, minority interests and shareholders’ equity $ 105,594 $ 139,990 $ 127,703 $ 46,464 $ 26,859

Other Historical Condensed Consolidated Financial Data:

Gross profit margin
Wireless value-added services 27.3 % 34.9 % 48.9 % 58.2 % 62.3 %
Recorded music 40.6 42.7 — — —
Total gross profit margin 29.6 35.6 48.9 58.2 62.3
(Loss) income from continuing operations margin⁽¹⁾
(72.0 ) 6.7 23.5 34.0 21.0
Net (loss) income from continuing operations margin⁽¹⁾
(68.6 ) 9.7 25.9 33.4 18.8
Net (loss) income margin⁽¹⁾
(69.3 ) 8.4 33.2 39.9 25.6
Depreciation 1,269 1,580 1,461 1,335 858
Amortization 2,375 1,901 478 651 276
Capital expenditure 864 957 1,289 1,871 1,388


~~(1)~~(2)		~~(Loss) income~~Reflects acquisition of online audio business from ~~continuing operations margin, net (loss) income from continuing operations margin and net (loss) income margin are~~Shanda Interactive since the ~~(loss) income from continuing operations, net (loss) income from continuing operations and net (loss) income as a percentage~~inception of ~~our total revenues.~~the common control, which is the date on which we became controlled by Shanda Interactive.

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 ~~RMB 7.2946~~RMB6.6000 = US$1.00, the prevailing rate on December 31, ~~2007.~~2010. 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(l)~~2(7) to our audited consolidated financial statements.

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 RMB 6.9400 = US$1.00 on May 30, 2008. The following table sets forth the high and low noon buying rates for cable transfers between Renminbi and U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York for each of periods indicated below.

Noon Buying Rate
RMB per US$1.00
High Low
December 2007 7.4120 7.2946
January 2008 7.2946 7.1818
February 2008 7.1973 7.1100
March 2008 7.1110 7.0105
April 2008 7.0185 6.9840
May 2008 7.0000 6.9377

The following table sets forth the average noon buying rates for cable transfers between Renminbi and U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York for each of 2003, 2004, 2005, 2006 and 2007, calculated by averaging the noon buying rates on the last day of each month during the relevant year.

Average Noon Buying Rate
RMB per US$1.00
2003 8.2771
2004 8.2768
2005 8.1826
2006 7.9579
2007 7.5806
2008 (through May 30) 7.0464

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 Wireless Value-added Services~~

We depend on China Mobile, China Unicom and China Telecom, three of the four major telecommunications network operators in China, for the major portion of our revenue, and any loss or deterioration of our relationship with China Mobile, China Unicom and China Telecom, due to expected government imposed restructurings or otherwise, may result in severe disruptions to our business operations and the loss of a major portion of our revenue.

We offer our services over mobile networks to consumers through the two principal telecom operators in China, China Mobile Communications Corporation, or China Mobile, and China United Telecommunications Corporation, or China Unicom. These principal operators service the major portion of China’s approximately 547 million mobile phone subscribers as of December 31, 2007, according to a December 2007 Report issued by China’s Ministry of Information Industry, or the MII. To a lesser extent, we also offer our services to consumers through China Telecommunications Corporation, or China Telecom, and China Network Communications Corporation, or China Netcom. 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). 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 any of China Mobile, China Unicom or China Telecom ceases to continue to cooperate with us, it would be impossible to find appropriate replacement telecom operators with the requisite licenses and permits, infrastructure and customer base to offer our wireless value-added services (“WVAS”). We derived approximately 60% of our combined WVAS revenue from China Mobile, 26% from China Unicom, 10% from China Telecom and 1% from China Netcom in 2007.

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. In an effort to promote greater competition among the telecommunications operators and foster the development of 3G mobile networks, on May 24, 2008, the MII, the PRC National Development and Reform Commission, or the NDRC, and the PRC Ministry of Finance jointly issued the Notice on Strengthening the Reform of Telecommunications Systems or the Telecom Notice, which aims to consolidate China’s currently existing telecommunication operators into three new telecommunications operators that can offer both mobile and fixed-line services. Under the Telecom Notice, China Mobile is expected to merge with China Railway Communication Co., Ltd., which operates a national fixed-line network, China Telecom is expected to acquire the Code Division Multiple Access (CDMA) wireless business and network from China Unicom, and China Unicom, which operates a Global System for Mobile communications (GSM) network and business, is expected to merge with China Netcom, which is principally a fixed-line operator. Once the consolidations are completed, the PRC government is expected to issue 3G licenses to such operators. We are currently assessing the potential impact of such expected consolidations on our business.

Any significant restructuring of any segment of the telecommunications industry in China, including in particular China Mobile, China Unicom, China Telecom or China Netcom (which are collectively referred to hereinafter in this annual report on Form 20-F as the “telecom operators”) or any other telecom operators in China and the potential combination of the mobile operations of various telecom operators in China, could significantly affect our relationships with these telecom operators, our operations and our revenues. Due to our reliance on China Mobile, China Telecom and China Unicom for our WVAS, 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 Mobile, China Unicom, China Telecom and their provincial affiliates would materially and adversely impact our revenue and profitability.

Given the dominant market position of China Mobile, China Unicom and China Telecom, our leverage with these telecom 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 telecom 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 telecom 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 2006, China Unicom entered into new contracts in certain provinces with service providers in which it changed the share percentages it retained for customer payments. For example, where prior to 2006, service providers would receive 70% of a payment from a customer purchase and China Unicom would retain 30%, China Unicom changed the share percentage of customer payments that service providers may retain to 40% in 2006. We may not be able to adequately respond to any such changes because we are not able to predict if the telecom operators will unilaterally amend our contracts with them.

Risks Related to Our Business

~~Unilateral~~ We are operating with a small amount of working capital. If we cannot meet our liquidity needs through improved operating results, we may need to obtain additional financing. We cannot be assured that we will be able to obtain financing under commercially reasonable terms, or at all.

We reported net losses attributable to our company of $12.0 million, $23.4 million and $51.5 million for the years ended December 31, 2008, 2009 and 2010, respectively. As of December 31, 2010, we had cash and cash equivalents of approximately $27.3 million and working capital of approximately $8.4 million. Our net cash used in operating activities in 2010 was $29.6 million. On April 1, 2011, we entered into agreements with Shanda Media Group Limited, or Shanda Media, a wholly owned subsidiary of Shanda Interactive, pursusnt to which we agreed to issue to Shanda Media 1,538,461,538 ordinary shares for an aggregate purchase price of $50,000,000 (or $0.0325 per share) and $50,000,000 aggregate principal amount of senior convertible bond. The bond will mature in three years after issuance and will bear an interest of 3% per annum. The issuance of the ordinary shares and the convertible bond has been approved by our independent directors and shareholders. Shanda Media has committed to make the investment and we anticipate to close these transactions in the early part of the third quarter of 2011. As a result, we believe we will have sufficient liquidity to finance our 2011 anticipated operations and capital expenditure requirements, as well as achieve projected cash collections from customers and contain expenses and cash used in operations. However, achievement of better operating performance is not assured and management expects to continue to implement its liquidity plans, which includes reducing operating expenses. In addition, various matters may impact our liquidity such as:

inability to achieve planned operating results that could increase liquidity requirements beyond those considered in our business plan;

changes in financial market conditions or our business condition that could limit our access to existing credit facilities or make new financings more costly or even unfeasible; and

changes in China’s currency exchange control regulations that could limit our ability to access cash in China to meet liquidity requirements for our operations in China or elsewhere;

If we cannot meet our liquidity needs through improved operating results, we may need to obtain additional financing from financial institutions. However, we cannot be assured that we will be able to obtain loans or obtain them under commercially reasonable terms. We may also have to sell additional securities to meet our liquidity needs, but our ability to sell our securities is not assured. In addition, any additional issuance of securities would dilute the ~~policies~~ownership of our stockholders.

We have a short operating history in a new and unproven market, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.

We entered into the online video business in January 2010 when we acquired Ku6 Holding Limited. Our previous wirelss value-added service and recorded music businesses were disposed in August 2010 and the only continuing business currently is online video and audio operations. We have a short operating history in a new and unproven market that may not develop as expected, if at all. This short operating history makes it difficult to effectively assess our future prospects. You should consider our business and prospects in light of the ~~MII, China Mobile, China Unicom,~~risks and ~~China Telecom~~difficulties we encounter in this rapidly evolving market.

We have a history of losses, and we may be unable to achieve or sustain profitability.

We incurred net losses in ~~their enforcement~~each of ~~their policies have resulted~~the fiscal years from 2007 through 2009, inclusive, and we continued to incur losses in ~~service suspensions~~fiscal year 2010 after we entered into the online video business. Our ability to achieve profitability is affected by various factors, including:

growth of the online video industry and the online advertising market;

the continued acceptance of our ~~having~~online video content by our users;

the continued growth and maintenance of our user base;

our ability to ~~pay additional charges~~control our costs and expenses; and

our ability to provide new advertising services to meet the ~~telecom operators, and further changes could materially and adversely impact~~demands of our ~~revenue~~advertising customers.

Many of these factors are beyond our control. For example, our revenues and profitability depend on the continuous development of the online advertising market in China and brand advertisers’ allocation of more budgets to online video industry. We cannot assure you that online advertising, as a new marketing channel, will become more widely accepted in China or that the advertisers will increase their spending on online video websites. We may continue to incur net losses in the ~~future.~~

~~The MII, China Mobile, China Unicom~~future due to our continued investments in content, bandwidth and ~~China Telecom have a wide range of policies~~technology. If we cannot successfully offset our increased costs with an increase in net revenues, our gross margin, financial condition and procedures regarding customer service, quality control and other aspects of the WVAS industry. As the industry has evolved over the last several years, the telecom operators have refined these policies to improve overall service quality and increase customer satisfaction. For example, in July 2006, China Mobile introduced new policies which require extended free trial periods for WVAS, new billing reminders for new and existing monthly subscribers and positive user confirmations for conversion of per-message subscriptions to monthly subscriptions. Subsequently, in May 2007, China Mobile began the operational practice of displaying service fee reminders and seeking express confirmation prior to processing the wireless application protocol (“WAP”) page download requests of mobile phone users. China Mobile also began the practice of only including links to its own WVAS offerings on the embedded menus of certain mobile handsets with customized software for China Mobile users. In the past, such embedded menus featured links to all popular products on China Mobile’s networks, including our products.

In August 2007, MII introduced new policies regarding WVAS that mobile phone users subscribe to on a free trial basis. Service providers are now required to notify such mobile phone users once the free trial period ends and must obtain confirmation from them prior to charging them for continued subscription to the services. Upon obtaining such confirmation, service providers are then required to notify mobile phone users of the exact pricing for such service and send billing reminders to them.

In addition, in the last several years, acting under the guidance of the MII, the telecom 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.

~~These new policies and practices negatively affected our~~ results of operations in the second half of 2006 and in 2007 and caused us to record impairment charges of $38.8 million in respect of our goodwill and $2.5 million in respect of our long-lived assets in 2007. 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 telecom operators’ policies are in a state of flux at this time and they are highly sensitive to customer complaints (even if the complaints have no merit), 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. Any future noncompliance with the telecom operators’ policies by us, whether inadvertent or not, could result in a material and adverse effect on our revenue and profitability.

Our 2.5G revenues were negatively affected in 2007 by the slow growth of China Unicom’s WAP business. If this trend continues or the telecom operators in China experience slow or negative growth in their WVAS user base, our revenue and profitability could be materially and adversely affected.

~~Revenues from 2.5G value-added services declined from $29.9 million for fiscal year 2006~~ We may also continue to $15.4 million for fiscal year 2007, representing a decline of 48.5%. 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 2008 pending anticipated receipt of 3G licenses. If this market does not grow and evolveincur net losses in the ~~manner or~~future due to changes in the ~~timeframe that we anticipate, we may not be able~~macroeconomic and regulatory environment, competitive dynamics and our inability to ~~generate significant sustainable revenues from our 2.5G business.~~

~~The Chinese government, China Mobile, China Unicom or China Telecom may prevent us from distributing,~~respond to these changes in a timely 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 Mobile, China Unicom and China Telecom 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 telecom operators informed them that certain of their content were 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 WVAS. In response, we reviewed our services and removed certain 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.effective manner.

~~The appropriateness~~We operate in a highly competitive market and we may not be able to compete successfully against our competitors.

We face significant competition, primarily from those companies that operate online video websites in China, which our management estimates to currently number over one hundred. A large number of independent online video sites, such as Youku.com and Tudou.com, compete against us. In addition, Chinese Internet portals, including Sina.com, Sohu.com and Baidu.com, and some of China’s major TV networks, such as China Central Television, or ~~inappropriateness~~CCTV, Phoenix Satellite TV and Hunan Satellite TV, which have longer operating histories and more experience in attracting and retaining users and managing customers than we do, have launched their own video businesses. We also face competition from Internet video streaming platforms based on the P2P technology, such as PPS and PPTV. We compete with these companies for content, users and advertisers. Our competitors may compete with us in a variety of ~~WAP~~ways, including by obtaining exclusive online distribution rights for popular content, conducting brand promotions and ~~IVR~~other marketing activities, and making acquisitions. In addition, certain online video websites may continue to derive their revenues from providing content isthat infringes third-party copyright and may not monitor their websites for any such infringing content. As a relatively new concept in 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 telecom operators in China. Their standards are generally more restrictive than those applied in many other countries like the United States. Accordingly, whileresult, we ~~intend to comply with all applicable rules regarding wireless content, it~~ may be ~~very difficult for us~~placed at a disadvantage to ~~assess whether any particular~~some of these websites that do not incur similar costs as we do with respect to content ~~we offer that could be construed by the telecom operators as inappropriate under current regulations in China. Any penalties imposed on us by the telecom operators for the~~acquisition and content monitoring. Some of our ~~services could~~competitors have a longer operating history and significantly greater financial resources than we do, and in turn may be able to attract and retain more users and advertisers. If any of our competitors achieves greater market acceptance than we do or is able to offer more attractive online video content, our user traffic may decrease and our market share may decrease, which may result in a loss of advertisers and have a material and adverse effect on our ~~revenue, profitability~~business, financial condition and ~~reputation.~~

China Mobile and China Unicom 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 WVAS are charged on a monthly subscription or per-use basis. As provided in our network service agreements, we rely on China Mobile and China Unicom for both billing~~results 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 Mobile, China Unicom and their provincial affiliates would materially and adversely impact our revenue and profitability,” our negotiating leverage with the telecom operators is limited. As a result, the telecom 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 WVAS.operations.

In addition, ~~under these agreements, these service fees in~~Internet streaming of content represents only one of many existing and potential new technologies for viewing video. Many users maintain simultaneous relationships with multiple video providers and can easily shift from one provider to another. For example, users may subscribe to cable, buy a DVD, and download a movie from Apple iTunes or other sources, or 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 willcombination thereof. New competitors may be able to ~~satisfy any performance criteria in the future or that the telecom operators will keep the criteria~~launch new businesses at ~~their current levels. Any increase~~a relatively low cost.

We also face competition from other types of advertising media, such as newspapers, magazines, yellow pages, billboards and other forms of outdoor media, television and radio. Most large companies in China ~~Mobile’s~~allocate, and will likely continue to allocate, most of their marketing budgets to traditional advertising media and only a small portion of their budgets to online marketing and other forms of advertising media. If these companies do not devote a larger portion of their marketing budgets to online marketing services provided by our online video business, or ~~China Unicom’s service or network fees~~if our existing customers reduce the amount they spend on online marketing, our results of operations and future growth prospects could ~~reduce our gross margins.~~be adversely affected.

We operate in a capital-intensive industry and require significant amount of cash to fund our operations and bandwidth, content and technology acquisitions. If ~~either China Mobile or China Unicom change their practices with regard to how service selections appear on their WAP portals, the revenue from~~we cannot obtain sufficient capital, our ~~services, and thus our overall~~business, financial condition ~~could~~and prospects may be materially and adversely affected.

The ~~current practice~~operation of ~~both China Mobile~~an online video business requires significant upfront capital expenditures as well as continuous, substantial investment in content, technology and ~~China Unicom~~infrastructure. In order to implement our development strategies to expand our infrastructure and optimize our services across Internet-enabled devices, and further expand and diversify our revenue sources, we may incur additional capital needs in the future. We may obtain additional financing, including equity offering and debt financing in capital markets, to fund the operation and expansion of our online video business. Our ability to obtain additional financing in the future, however, is ~~generally~~subject to ~~place the most popular WAP services at the top~~a number of ~~the menu on the first page~~uncertainties, including:

our future business development, financial condition and results 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,~~operations;

general market conditions for financing activities by companies 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 servicesindustry; and ~~significant challenges for newer~~

macroeconomic, political and ~~less popular services. We believe that our prominent position on the WAP portals of the two principal telecom operators~~other conditions in China historically helped us maintain our position in the market. 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 below under the heading “—Our revenue from WVAS may be adversely affected by China Unicom or China Mobile providing their own full portfolio of 2G and 2.5G services that compete with our services,” China Mobile also began the practice of only including links to its own WVAS offerings on the embedded menus of mobile handsets with customized software for China Mobile users while excluding links to products from third party WVAS service providers such as our company. Such practice has adversely affected our revenues. If additional similar changes occur, they will likely materially and adversely affect the revenue from our services, and thus our overall financial condition.elsewhere.

~~Our revenue from WVAS may be adversely affected by China Unicom or China Mobile providing their own full portfolio of 2G and 2.5G services that compete with our services.~~

In 2006, China Mobile began operating its own music 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 this effect has been mitigated by China Mobile procuring music content from our affiliated music companies. China Mobile also began the practice of only including links to its own WVAS offerings on the embedded menus of mobile handsets with customized software for China Mobile users while excluding links to products from third party WVAS service providers like us. Such practice has adversely affected our revenues. Our business would likely be adversely affected if China Unicom or China Mobile or both decide to provide 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 the networks of these telecom operators which would adversely affect our revenue from WVAS.

We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. If we cannot obtain sufficient capital to meet our capital expenditure needs, we may not be able to execute our growth strategies and our business, financial condition and prospects may be materially and adversely affected.

The ~~popularity~~online video industry in China and user acceptance of our 2Gonline video content may not grow as quickly as expected, which may adversely affect our revenues and ~~2.5G~~business prospects.

Our business prospects depend on the continuing development of the online video industry in China. As an emerging industry, China’s online video industry has experienced substantial growth in recent years in terms of both users and content. We cannot assure you, however, that the online video industry will continue to grow as rapidly as it has in the past. With the development of technology, new forms of media may emerge and render online video websites less attractive to users. Growth of the online video industry is affected by numerous factors, such as users’ general online video experience, technological innovations, development of Internet and Internet-based services, regulatory changes, especially regulations affecting copyrights, and ~~therefore revenues~~the macroeconomic environment. If the online video industry in China does not grow as quickly as expected or if we fail to benefit from ~~these services~~such growth by successfully implementing our business strategies, our user traffic may decrease and our ~~profitability, would~~business and prospects may be adversely ~~affected if~~affected.

We operate in a rapidly evolving industry. If we fail to keep up with the technological developments and users’ changing requirements, our ~~competitors offer more attractive~~business, results of operations and ~~engaging services or our services are rendered obsolete by the introduction of newer technologies such as 3G.~~prospects may be materially and adversely affected.

The ~~WVAS market~~online video industry is ~~highly competitive,~~rapidly evolving and ~~our competitors may offer new or different services, which are more popular than our 2G~~subject to continuous technological changes 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 telecom operators, and it is not clear when such licenseschanges in industry standards. Our success will be granted. Although we are planning to transition our 2.5G services to 3G services when 3G licenses are awarded 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 Mobile and China Unicom 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~~keep up with the changes in technology and user behavior resulting from the technological developments. For example, the development of broadband enabled the enjoyment of high definition videos online. In addition, the number of people accessing the Internet via devices other than personal computers, including mobile phones and other hand-held devices, has increased in recent years. With the introduction of 3G mobile services by all three mobile carriers in China in 2009, we expect this trend to ~~keep our services among the most popular offered through the telecom operators.~~

continue. If we ~~fail~~do not adapt our products and services to ~~achieve minimum customer usage, revenues~~such changes in an effective and ~~other criteria imposed by China Mobile~~timely manner, we may suffer from a decreased user traffic, which may result in a reduced number of advertisers using our online advertising services. Furthermore, changes in technologies may require substantial capital expenditures in product development as well as in modification of products, services or ~~China Unicom at its discretion from time to time,~~infrastructure. Failure in keeping up with technological development may result in our products and 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 availablebeing less attractive, which in each service category on the telecom operators’ WAP portals. The ranking of services on these WAP page menus depends on the satisfaction of performance criteria established by the telecom 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 WVAS revenue would be substantially reduced, which wouldturn, may materially and adversely affect our ~~overall~~business, results of operations and prospects.

We depend on studios, distributors and other content owners to license us professionally produced content that we can stream instantly over the Internet. Increases in market prices for professionally produced content may have an adverse effect on our business, financial condition and ~~the market price~~results of operations.

A majority of our ~~ADSs.~~

~~We must rely~~user traffic is attributable to professionally produced content. Our ability to provide our users with professionally produced content that they can watch instantly, such as movies and TV episodes, depends on ~~China Mobile~~studios and ~~China Unicom to maintain accurate records of fees paid by users of our services, deduct service and network fees due to them and pay~~distributors licensing us ~~fees due to us. Errors in record-keeping by the telecom operators could adversely affect our profitability~~such content specifically for Internet delivery. The license periods and the ~~market price~~terms and conditions of such licenses vary. If the studios and distributors change their terms and conditions or are no longer willing or able to provide us licenses, our ~~ADSs.~~

~~We must rely on China Mobile and China Unicom~~ability to ~~maintain accurate records~~stream content to our users will be adversely affected. Some of the ~~fees paid by users~~licenses provide for the studios or distributor to withdraw content from our service relatively quickly. Because of these provisions as well as other actions we may take, content available through our service can be withdrawn on short notice. If we are unable to secure and ~~deduct the service~~maintain rights to streaming content or if we cannot otherwise obtain such content upon terms that are acceptable to us, our ability to stream movies and network fees due to them under our network service agreements. Specifically, the telecom 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 telecom operators for our 2G services cannot be reconciledTV episodes to our own internal records for the reasons discussed under “— China Mobile and China Unicom 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 telecom operators’ internal records. Rather, we can only seek consultations with the telecom operators to discuss the reasons for any discrepancies.

With respect to our 2.5G services, the telecom 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 telecom 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 telecom operators’ confirmations have been insignificant. Nonetheless, we are still ultimately dependent on the ability of the telecom operators’ systems to accurately collect and analyze the relevant transmission and payment data regarding our services.

Because of the dominant market position of these telecom operators, we have limited leverage in challenging any discrepancies between their monthly statements and 2.5G system information, on the one hand,users will be adversely impacted, and our ~~own records, on the other hand. Our profitability~~user acquisition and ~~the market price of our ADSs~~retention could be adversely ~~affected if~~impacted. During the course of our license relationship, various issues can arise. To the extent that we are unable to resolve any of these ~~telecom operators miscalculate~~issues in an amicable manner, our relationship with the ~~revenues generated from~~studios and distributors or our ~~services and our portion of those revenues.~~access to content may be adversely impacted.

~~Our dependence on~~Moreover, the ~~billing records~~market prices for professionally produced content, especially popular movies and television serial dramas, have increased significantly in China during the past few years. Due to the improving monetization prospects of ~~China Mobile~~online video advertising, online video websites are generating more revenues and ~~China Unicom~~are competing aggressively to license popular television serial dramas and movies, and the increasingly intense content bidding process has in turn led to increases in license fees of professionally produced content in general. As the market develops, the expectations of copyright owners, distributors and industry associations may ~~adversely affect our ability~~continue to ~~record, process, summarize~~rise, and ~~report~~as such they may demand higher licensing fees for professionally produced content. In addition, we have started to explore a revenue sharing license model with content owners. Under this model, we generally obtain titles for low initial cost in exchange for a commitment to share a percentage of the advertising revenues generated by us from such titles, for a defined period of time. The initial cost may be in the form of an upfront non refundable payment and ~~other information regarding our WVAS. Any inaccuracies~~may also be in ~~our records~~the form of a prepayment of future revenue sharing obligations. The terms of some revenue sharing agreements may obligate us to make minimum revenue sharing payments for certain titles. If we are unable to generate sufficient revenues to outpace the increase in market prices for professionally produced content, we may incur more losses and ~~public reports could adversely affect our ability to effectively manage~~ our business, financial condition and results of operations may be adversely affected. In addition, the ~~market price~~terms of our ~~ADSs.~~

~~We maintain controls~~licenses for professionally produced content generally range from one to three years for movies 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 Mobile and China Unicom and have only limited means to independently verify information provided by them.television serial dramas. 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 WVAS. Moreover, it is possible that, if information provided to us by the telecom operators were not correct or complete, our public reports could also be deficient, which could adversely affect the market price of our ADSs.

~~We recognize revenue for a portion of our 2G services on an accrual basis, 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 telecom operators before we finalize our financial statements, which could in turn require~~professionally produced content on terms that are commerically attractive to us ~~to make adjustments to our financial statements.~~

~~Our financial statements through December 31, 2003 reflected our actual revenues as they appear on the telecom operators’ statements. However, starting from 2004, we recognized revenue~~ for a ~~portion~~longer period, we may not be able to maintain and grow our user base and may lose our market position.

We generate substantially all of our ~~2G services (as well~~revenues from online advertising, as ~~for~~ a ~~smaller portion~~result of our ~~2.5G services) on an accrual basis~~acquisition of Ku6 in January 2010 and ~~plan~~the disposal of our wireless value-added services and recorded music businesses in August 2010. If we fail to ~~do so in the future as necessary in order~~retain existing advertisers or attract new advertisers to ~~report our quarterly earnings on a timely basis. This involves the use of estimates of monthly revenues based~~advertise on our ~~internal records for the month and prior monthly confirmation rates with the telecom operators in prior months~~website or if we are unable to ~~obtain actual figures~~collect accounts receivable from the ~~telecom operators before we finalize~~advertisers or advertising agencies in a timely manner, our financial ~~statements. We expect the effect of these estimates on our financial results will be more significant on our quarterly~~condition, results of operations ~~than on our annual results, as we are less likely to receive confirmation on~~and prospects may be materially and adversely affected.

We generate substantially all of our 2G revenues ~~before we disclose~~from online advertising. The online advertising market is new and rapidly evolving, particularly in China. As a result, many of our ~~quarterly results. To~~current and potential advertising clients have limited experience using the ~~extent that our revenues~~Internet for advertising purposes and historically have not ~~been confirmed~~devoted a significant portion of their advertising budget to Internet-based advertising. Moreover, changes in government policy could restrict or curtail our online advertising services. For example, in 2006 and 2007, the PRC government enacted a series of regulations, administrative instructions and policies to restrict online medical advertising.

We retain existing advertisers and attract new advertisers by ~~the telecom operators for any reporting period, we will need~~maximizing return on their investment. If, however, our advertisers determine that their expenditures on online video websites do not generate expected returns, they may allocate a portion or all of their advertising budgets to ~~adjust~~other advertising channels such as television, newspapers and magazines and reduce or discontinue business with us. Since most of our ~~revenues in the subsequent periods in which these revenues~~advertisers are ~~confirmed. Actual revenues~~not bound by long-term contracts, they may ~~differ from prior estimates when unexpected variations in billing~~amend or terminate advertising arrangements with us easily without incurring liabilities. Failure to retain existing advertisers or attract new advertisers to advertise on our website may materially and transmission failures occur. Recognizing revenues on an accrual basis could potentially require us to later make adjustments to our financial statements if the telecom operators’ billing statements and cash payments are different from our estimates, which could adversely affect our ~~reputation~~business, financial condition, results of operations and ~~the market price~~prospects.

A majority of our ~~ADSs.~~

~~Our revenues~~online advertising agreements are entered into with various third-party advertising agencies. We rely on third-party advertising agencies for sales to, and ~~cost~~collection of ~~revenues~~payment from, our advertisers. In consideration for 2Gthe third-party advertising agencies’ services, we pay them cash incentives based on the volume of business they bring to us. The financial soundness of our advertisers and advertising agencies may affect our collection of accounts receivable. We make a credit assessment of the advertiser and advertising agency to ~~a lesser degree 2.5G services,~~evaluate the collectibility of the advertising service fees before entering into an advertising contract. However, we cannot assure you that we are ~~affected by billing~~or will be able to accurately assess the creditworthiness of each advertiser or advertising agency, and ~~transmission failures and other discrepancies which are often beyond our control.~~

~~We do not collect fees for our services from China Mobile and China Unicom~~any inability of advertisers or advertising agencies to pay us in a ~~number of circumstances, including if:~~

~~the delivery of~~timely manner may adversely affect our service to a customer is prevented because his or her phone is turned off for an extended period of time, the customer’s prepaid phone card has run out of value or the customer has ceased to be a customer of the applicable mobile operator;

~~China Unicom or China Mobile experiences technical problems with its network, which prevent the delivery of our services to the customer;~~

~~we experience technical problems with our technology platform that prevents delivery of our services; or~~

~~the customer refuses to pay for our services due to quality or other problems.~~

~~These situations are known in the industry as billing~~liquidity 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 telecom operators, and by province, and also has fluctuated significantly in the past, ranging on a monthly basis from 0.0% to 9.8% of the total billable messages which are reflected in our internal records during 2007.

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 telecom 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 telecom operators register new users and manage their internal billing reconciliation process.cash flows.

We are also required to pay some of our content providers a percentage of the revenues received from or confirmed by the telecom 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 Mobile and China Unicom~~ do not ~~supply us~~have long-term cooperation agreements or exclusive arrangements with ~~detailed information on billing~~these agencies and ~~transmission failures, revenues, service and network fees or~~they may elect to direct business opportunities to 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~~advertising service providers, including our ~~company, regarding~~competitors. If we fail to retain and enhance the business relationships with third-party advertising agencies, we may suffer from a loss of advertisers and our business, financial condition, results of operations and prospects may be materially and adversely affected. In addition, there has been some consolidation in China’s online advertising market. If this trend continues, a small number of large advertising agencies may be in a position to demand higher rebate for advertising agency services, ~~provided through their networks currently~~which could reduce our gross margin.

We depend on a limited number of advertising customers, which include both advertisers and advertising agencies, for a significant portion of our revenues. Failure to maintain relationships with these advertising customers may cause significant fluctuations or declines in our revenues.

We depend on a limited number of advertising customers for a significant portion of our revenues. We generally do not ~~contain information about billing~~maintain long-term contracts with advertising customers. Most of our advertising agreements are short-term contracts. We cannot assure you that we will be able to maintain our relationships with them or renew our spot and ~~transmission failures, revenues, service~~short-term contracts. In addition, sales to these advertising customers are typically made through non-exclusive arrangements, and ~~network fees or other charges or detailed information~~competition for these customers is intense. We anticipate that our dependence on a ~~service-by-service basis, particularly~~limited number of advertising customers will continue in the foreseeable future. Consequently, our failure to maintain relationships with ~~respect~~these advertising customers could materially and adversely affect our business, financial condition, results of operations and prospects.

If we fail to continue to anticipate user preferences and provide products and services to attract and retain users, we may not be able to generate sufficient user traffic to remain competitive.

Our success depends on our ability to generate sufficient user traffic through provision of attractive products and services. To attract and retain users and compete against our competitors, we must continue to offer high-quality content that provides our users with a satisfactory online video experience. To this end, we must continue to source new, professionally produced content, produce new in-house content or encourage more user-generated content, while balancing the value of each type of content to our 2Gadvertising services. ~~While the telecom operators allow third party service providers~~For example, with professionally produced content, we attract a majority of our user traffic. Our advertisers can place targeted advertisements focusing on certain user demographics. With user-generated content, users can upload and share their own videos and spend a longer time on our website, and a “community-like” environment enhances users’ loyalty to our website and such network effect broadens advertisers’ reach of audience; and with our in-house productions, we tailor such content to users’ preferences based on our industry experience and combine these productions with targeted advertising services such as product placements, which benefits both the users and our ~~company~~advertisers.

Based on the feedback on our website design and our statistics regarding users’ watching behavior, we keep developing new website features that appeal 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 Mobile and China Unicom 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 telecom 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,users, such as ~~average revenues per-user by service~~designing more user-friendly content searching tools, creating additional interactive social functions or offering better website compatibility with new Internet-enabled devices. Due to our leading market position, we maintain a large content library to serve our users, which in turn leads to our continued need to license more content covering a wider range of genres from the licensors of professionally produced content. We must continue to grow our platform and ~~total revenues per-user by service,~~content demand to keep our key customer status in order to maintain good relationships with current licensors of professionally produced content to renew our current licenses 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~~license new content from them. We need to ~~specific services~~continuously anticipate user preferences and industry changes and respond to ~~avoid inadvertent violations of the telecom operators’ customer service policies.~~

~~The services we offer and the prices we charge are subject to approval by China Mobile and China Unicom, and if requested approvals are not granted~~such changes 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 Mobile~~effective manner. If we fail to cater to the needs and ~~China Unicom 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~~preferences of our ~~existing services must~~users and, as a result, fail to deliver satisfactory user experience, we may suffer from reduced user traffic and our business and results of operations may be ~~approved in advance by these operators.~~ materially and adversely affected.

There can be no assurance that ~~such approvals~~we will ~~be granted in a timely manner or at all. Failure~~fully develop an ability 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 Mobile and China Unicom could result in heightened scrutiny of our existing or proposed services and pricing by the telecom operators. This could, in turn, result in delays in their approving new services, our failurerespond to obtain approval for new services or suspensions 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.

~~Risks Related to Our Music Business~~

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

~~In order~~preferences, to ~~implement~~effectively adjust our ~~strategy~~product mix, service offerings and marketing initiatives, or to ~~enter the music development, production~~selectively develop and ~~distribution~~maintain strategic alliances for products and ~~concert promotion industries, we formed a new affiliated Chinese entity, Hurray! Digital Music Technology Co., Ltd.~~services that meet and anticipate advances 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 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 productiontechnology 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 Beijing New Run Entertainment Development Co., Ltd. (“New Run”), and in March 2007, Hurray! Digital Media agreed to acquire 65% of the equity interest in Guangzhou Hurray! Secular Bird Culture Communication Co., Ltd. (“Secular Bird”). In April 2007, Freeland Music acquired a 51% equity interest in Beijing Hurray! Fly Songs International Culture Co., Ltd. (“Fly Songs”). These five companies, which we refer to as our affiliated music companies, were either successful top-tier domestic independent record companies in China, which engage in artist development, music production and music distribution, or, in the case of Fly Songs, a successful concert promotion company.market trends.

~~Each music recording and concert performance is an individual artistic work.~~ The commercial success of a music product or concert depends on consumer taste, the quality and acceptance of competing offerings or events 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~~business depends on ~~their~~our ability to ~~continue~~maintain and enhance our brand.

We believe that maintaining and enhancing our Ku6 (CHINESE CHARACTER)

brand is of significant importance to ~~develop recorded music~~the success of our business. Since the online video market is highly competitive, a well-recognized brand is critical to increasing our user base and, ~~organize concerts~~in turn, enhancing our attractiveness to advertisers. We believe that ~~are interesting~~the importance of brand recognition will increase as the number of Internet users in China grows. In order to attract and ~~engaging~~retain Internet users and advertisers, we may need to substantially increase our expenditures for creating and maintaining brand loyalty. Our success in promoting and enhancing our brand, as well as our ability to remain competitive, will also depend on our success in offering high-quality content, features and functionality. If we fail to promote our brand successfully or if visitors to our ~~target audience, primarily~~website or advertisers do not perceive our content and services to be of high quality, we may not be able to continue growing our business and attracting users ~~of the Internet~~ and ~~WVAS in the case of our recorded music. If our audience determines that the content does not reflect its tastes, then our audience size could decrease,~~advertisers.

Our quarterly revenues and operating results may fluctuate, which ~~would adversely affect~~makes our results of ~~operations. The ability~~operations difficult to predict and may cause our quarterly results of ~~Freeland Music, Huayi Brothers Music, New Run~~operations to fall short of expectations.

Our quarterly revenues and ~~Secular Bird~~operating results have fluctuated in the past and may continue to ~~develop compelling content depends~~fluctuate depending upon a number of factors, many of which are out of our control. For these reasons, comparing our operating results on ~~several~~a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our quarterly and annual revenues and costs and expenses as a percentage of our revenues may be significantly different from our historical or projected rates. Our operating results in future quarters may fall below expectations. Any of these events could cause the price of our ADSs to fall. Other factors ~~including the following:~~that may affect our financial results include, among others:

~~technical expertise of their production and recording staff,~~global economic conditions;

~~popularity of the artists of~~ our ~~affiliated music companies,~~ability to maintain and increase user traffic;

~~access~~our ability to ~~songs~~attract and retain advertisers;

changes in government policies or ~~songwriters,~~regulations, or their enforcement; and

~~effectiveness~~geopolitical events or natural disasters such as war, threat of ~~online and offline marketing and promotional activities.~~war, earthquake or epidemics.

~~Furthermore, our affiliated music companies must invest significant amounts for development prior~~Our operating results tend to be seasonal. For instance, we may have slightly lower revenues during the first quarter of each year primarily due to the ~~release~~Chinese New Year holidays in that quarter. In addition, advertising spending in China has historically been cyclical, reflecting overall economic conditions as well as the budgeting and buying patterns of ~~any product or event. These costs~~our customers.

We may not be ~~recovered if~~able to manage our expansion effectively.

Ku6 experienced rapid growth after it commenced its online video business in 2006, and we have maintained such rapid growth since our acquisition of Ku6 in January 2010. To manage the ~~release is unsuccessful. There can be no assurance that such products or events~~further expansion of our business and the growth of our operations and personnel, we need to continuously expand and enhance our infrastructure and technology, and improve our operational and financial systems, procedures and controls. We also need to expand, train and manage our growing employee base. In addition, our management will be ~~successful releases or~~required to maintain and expand our relationships with content providers, advertisers, advertising agencies and other third parties. We cannot assure you that ~~any product or events will generate revenues sufficient to cover the cost of development. Because we are relatively inexperienced in the music industry, we cannot predict whether~~ our ~~efforts in this area~~current infrastructure, systems, procedures and controls will be ~~successful.~~adequate to support our expanding operations. If we fail to manage our expansion effectively, our business, results of operations and prospects may be materially and adversely affected.

Our ~~affiliated music companies~~recent restructuring of our sales department may ~~unknowingly purchase or license songs, which have already been, or may~~expose us to various risks.

On May 18, 2011, we announced that, as part of our strategies to streamline operations, manage costs and improve efficiency, we plan to restructure our sales department. After the restructuring, we expect to maintain a smaller but more efficient sales team and to adopt various measures to enhance sales performance. Such measures will include outsourcing some of our sales efforts to third-party advertising agencies and exploring more effective sales channels. The restructuring will reduce our total workforce by approximately 20% and all employees affected are from the sales department. We Company expects that a non-recurring restructuring charge will be recorded in the ~~future~~second quarter of 2011, and our revenues in short-term will be ~~sold or licensed to third parties, which could create costly legal disputes over intellectual property rights with such third parties~~negatively affected by the restructuring.

However, the restructuring’s negative impact on our revenues may be more severe and ~~the songs’ authors or composers.~~

Our affiliate music companies 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.lasts longer than we expected. As a result, ~~disputes may arise between~~ our ~~affiliated music companies, third party music companies~~business, results of operations 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, our affiliated music companies license and distribute songs to third parties such as providers of Internet and WVAS, which then distribute the music content to their customers. Such companiesprospects 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 costsmaterially and ~~business disruption.~~

Our affiliated music companies 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.adversely affected.

~~Revenue from~~We may be subject to administrative actions by PRC regulatory authorities and other liabilities because of advertisements shown on 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.~~website.

~~It can~~Under PRC advertising laws and regulations, we are obligated to monitor the advertising content shown on our website to ensure that such content is true, accurate and in full compliance with applicable laws and regulations. In addition, where a special government review is required for specific types of advertisements prior to website posting, such as advertisements relating to pharmaceuticals, medical instruments, agrochemicals and veterinary pharmaceuticals, we are obligated to confirm that such review has been performed and approval has been obtained from competent governmental authority, which is generally the local branch of the SAIC. Violation of these laws and regulations may subject us to penalties, including fines, confiscation of our advertising income, orders to cease dissemination of the advertisements and orders to publish an announcement correcting the misleading information. In circumstances involving serious violations, such as posting a pharmaceutical product advertisement without approval, or posting an advertisement for fake pharmaceutical products, PRC governmental authorities may force us to terminate our advertising operation or revoke our licenses. Furthermore, advertisers, advertising operators or advertising distributors, including us, may be ~~difficult~~subject to ~~enforce certain copyright protections~~civil liability if they infringe on the legal rights and interests of third parties.

A majority of the advertisements shown on our website are provided to us by third-party advertising agencies on behalf of advertisers. We cannot assure you that all the content contained in ~~China. In particular,~~such advertisements is true and accurate as required by the ~~music industry~~advertising laws and regulations, especially given the uncertainty in ~~China has suffered from serious piracy issues~~the application of these laws and regulations. For example, Article 38 of the Advertisement Law provides that an advertisement operator who knows or should have known the posted advertisement is false or fraudulent will be subject to joint and several liabilities. Under Article 16 of the Detailed Implementation Rules on the Administrative Regulations for ~~many years. Our management estimates~~Advertisement, a website must not post any advertisements that are untrue or lacking the requisite governmental approval if such type of advertisements is subject to special governmental review. However, for ~~every dollar~~the determination of ~~copyrighted CD sales,~~the truth and accuracy of the advertisements and the actual or constructive knowledge of the website, there are ~~approximately ten dollars~~no implementing rules or official interpretations, and such a determination is at the sole discretion of ~~pirated CD sales~~the relevant local branch of the SAIC, which results 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 companiesuncertainty in the ~~PRC. The revenue generated from our affiliated music companies may continue~~application of these laws and regulations.

If we are found to be ~~adversely affected by~~in violation of applicable PRC advertising laws and regulations in the ~~difficulty in enforcing copyrights~~future, we may be subject to penalties and ~~retaining popular artists, and therefore~~our reputation may ~~not grow as fast as anticipated.~~

~~Additional Risks Related to Our Company~~

~~Our recent acquisitions and strategic investments and any future acquisitions or investments~~be harmed, which may have ana material and adverse effect on our ~~ability to manage~~business, financial condition, results of operations and prospects.

Videos and other content displayed on our ~~business~~website may be found objectionable by PRC regulatory authorities and may subject us to ~~unforeseen liabilities.~~penalties and other administrative actions.

~~Selective acquisitions~~The PRC government has adopted regulations governing Internet access and ~~strategic investments,~~the distribution of videos and other information over the Internet. Under these regulations, Internet content providers and Internet publishers are prohibited from posting or displaying over the Internet content that, among other things, violates PRC laws and regulations, impairs the national dignity of China or the public interest, or is obscene, superstitious, fraudulent or defamatory. Furthermore, Internet content providers are also prohibited from displaying content that may be deemed by relevant government authorities as “socially destabilizing” or leaking “state secrets” of the PRC. Failure to comply with these requirements may result in the revocation of licenses to provide Internet content or other licenses, the closure of the concerned websites and reputational harm. The website operator may also be held liable for such censored information displayed on or linked to their website.

In addition to professionally produced content, we allow our users to upload videos to our website. Our users can upload all types of content including user-created and professionally produced content and can upload certain graphical files for limited purposes, such as updating user biographies. Although we have adopted internal procedures to monitor the content displayed on our ~~2007 acquisitions~~website, due to the significant amount of ~~Shanghai Saiyu~~content uploaded by our users currently amounting to an average of 30,000 files on a daily basis, we may not be able to identify all the videos or other content that may violate relevant laws and regulations. Failure to identify and prevent illegal or inappropriate content from being displayed on our website may subject us to liability. In addition, these laws and regulations are subject to interpretation by the relevant authorities, and it may not be possible to determine in all cases the types of content that could result in our liability as a website operator. For a detailed discussion, see “Item 4.B Business Overview—Government Regulation—Regulations on Internet Content Services” and “—Regulations on Information ~~Technology Co., Ltd. (“Shanghai Saiyu”), Henan Yinshan Digital Network Technology Co., Ltd. (“Henan Yinshan”)~~Security.”

To the extent that PRC regulatory authorities find any content displayed on our website objectionable, they may require us to limit or eliminate the dissemination of such content on our website in the form of take-down orders or otherwise. In the past, we have from time to time received phone calls and ~~Fly Songs as described~~written notices from the relevant PRC regulatory authorities requesting us to delete certain content that the government deemed inappropriate or sensitive. In addition, regulatory authorities may impose penalties on us based on content displayed on or linked to our websites in ~~Item 4. “Information About~~cases of material violations, including a revocation of our operating licenses or a suspension or shutdown of our online operations. Moreover, the ~~Company—History and Development~~costs of ~~the Company,” form~~compliance with these regulations may continue to increase because of more content uploaded by our increasing number of users.

We may need to record impairment charges to earnings if our acquisition goodwill or acquired intangible assets are determined to be impaired, which would adversely affect our results of operations.

As part of our expansion and diversification strategy, we may acquire or invest in companies in the same or related industries in which we operate. We record acquisition goodwill and acquired intangible assets on our balance sheet in connection with such acquisitions and investments arrangements, respectively. We are required to ~~further expand~~review our ~~business. Such companies~~acquisition goodwill for impairment at least annually and review our acquired intangible assets for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable, including a decline in stock price and market capitalization and a slow down in our industry, which may result from the recent global economic slowdown. If the carrying value of our acquisition goodwill or acquired intangible assets were determined to be impaired, we would be required to write down the carrying value or to record charges to earnings in our financial statements during the period in which our acquisition goodwill or acquired intangible assets is determined to be impaired, which would adversely affect our results of operations. During the years ended December 31, 2008, 2009 and 2010, we recorded impairment of $2.7 million, $3.6 million and nil, respectively, for our acquisition goodwill related to discontinued business, and impairment of $2.9 million, $3.5 million and nil, respectively, for our acquired intangible assets related to discontinued business.

We may need to write-down the unamortized balance of licensed video copyright to estimated net realizable value and record the write-down as ~~successful~~expenses, which would adversely affect our results of operations.

We mainly relied on licensing professionally produced content to increase our user traffic and we pay licensing fees to copyright owners or distributors or licensors for such professional produced content. Such licensing fees are carried at the lower of the unamortized balance or estimated net realizable value. Under the net realizable value approach, we determine the expected cash inflows that are directly attributed to the premium content licensed on a quarterly basis, which equal the expected revenues directly attributable to the content less the direct costs to deliver the content, to derive the net realizable value of the asset. We write down the carrying value of the licensed content if the estimated net future direct cash inflows from the licensed video copyrights over the licensing period are lower than the carrying amount. During the years ended December 31 2010, we recorded $7.7 million of write-down for our licensed video copyrights. As of December 31, 2010, the carrying value of our licensed video copyrights was written down to zero.

Disruption or failure of our systems could impair our users’ online video experience and adversely affect our reputation.

Our ability to provide users with a high-quality online video experience depends on the continuous and reliable operation of our systems. We cannot assure you that we will be able to procure sufficient bandwidth in a timely manner or on acceptable terms or at all. Failure to do so may significantly impair user experience on our website and decrease the overall effectiveness of our website to both users and advertisers. Disruptions, failures, unscheduled service interruptions or a decrease in connection speeds could hurt user experience and our reputation, causing our users and advertisers to switch to our competitors’ websites. Our systems and proprietary video content delivery network, or CDN, are vulnerable to damage or interruption as ~~they~~a result of fires, floods, earthquakes, power losses, telecommunications failures, undetected errors in software, computer viruses, hacking and other attempts to harm our systems. We have ~~been~~experienced service interruptions 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 relationshipswhich typically were caused by (i) overload of our ~~newly acquired wireless value-added~~servers; (ii) unexpected overflow of user traffic; and/or (iii) service ~~companies with the telecom operators are not disrupted by the acquisitions. In addition, our management must also devote significant resources to enhancing its knowledge~~malfunction of the ~~music development, production and distribution business~~telecommunications operators, such as power outage of Internet data centers or network transmission congestion. We may continue to experience similar interruptions in ~~China, with which~~the future despite our continuous efforts to improve our systems. Since we ~~have limited experience. Future acquisitions will also likely present similar challenges.~~host our servers at third-party Internet data centers, any natural disaster or unexpected closure of Internet data centers operated by third-party providers may result in lengthy service interruptions.

~~The diversion~~
If we experience frequent or persistent service disruptions, whether caused by failures of our ~~management’s attention~~own systems or those of third-party service providers, our users’ experience with us may be negatively affected, which in turn, may have a material 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~~reputation. We cannot assure you that we will be successful in minimizing the ~~assimilation~~frequency or duration 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.service interruptions.
~~We face intense competition,~~Undetected programming errors could adversely affect user experience and the market acceptance of our video programs, which ~~could cause us to lose market share~~may materially and ~~materially~~ adversely affect our business and results of operations.
The ~~Chinese market for WVAS~~video programs, including advertising video programs, on our website may contain programming errors that may only become apparent after their release. We receive user feedback in connection with programming errors affecting their user experience from time to time, and such errors may also come to our attention during our monitoring process. We generally have been able to resolve such programming errors in a timely manner. However, we cannot assure you that we will be able to detect and resolve all these programming errors effectively. Undetected audio or video programming errors or defects may adversely affect user experience and cause our advertisers to reduce their use of our services, any of which could materially and adversely affect our business and results of operations.
Our operations depend on the performance of the Internet infrastructure and telecommunications networks in China and the third-party service providers. We may fail to establish and maintain relationships with technology providers.
Our products and services depend on the ability of our users to access the Internet. Therefore, the successful operation of our business depends on the performance of the Internet infrastructure and telecommunications networks in China. Almost all access to the Internet is ~~changing rapidly~~maintained through state-owned telecommunications operators under the administrative control and ~~is intensely competitive. We compete principally~~regulatory supervision of China’s Ministry of Industry and Information Technology, or the MIIT. Moreover, we have entered into contracts with ~~four groups~~various subsidiaries of ~~2G and 2.5G~~a limited number of telecommunications service providers in ~~China, which include companies that focus primarily~~each province and rely on them to provide us with data communications capacity through local telecommunications lines and Internet data centers to host our servers. We have limited access to alternative networks or ~~entirely on these markets, major Internet portal operators in China, niche service providers and the telecom operators.~~
~~There are low barriers to entry for new competitors~~services in the 2Gevent of disruptions, failures or other problems with China’s Internet infrastructure or the telecommunications networks provided by telecommunications service providers. Our Ku6.com and ~~2.5G services market~~juchang.com websites regularly serve a large number of users and ~~many~~advertisers. With the expansion of our ~~competitors~~business, we may be required to upgrade our technology and infrastructure to keep up with the increasing traffic on our websites. However, we 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. Recently, certainno control over the costs of the ~~telecom operators have begun offering WVAS directly to their customers. See “—Our revenue from WVAS~~services provided by telecommunications service providers. If the prices we pay for telecommunications and Internet services rise significantly, our results of operations may be materially and adversely ~~affected by China Unicom~~affected. If Internet access fees or China Mobile providing their own full portfolio of 2G and 2.5G services that compete with our services” above. 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~~other charges 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 WVAS 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 WVAS providers that focus on music-related products and have extended upstream to establish their own music production businesses in China. See Item 4.B. “Business Overview—Competition.”
12

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

We began commercially offering WVAS in China in 2001, and since that time, the technologies and services used in the WVAS 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:

~~attract and retain~~ users ~~for our 2G and 2.5G services,~~

~~expand the services that we offer,~~

~~respond effectively to rapidly evolving competitive and market dynamics and address the effects of mergers and acquisitions among our competitors,~~

~~effectively manage our new music businesses and leverage our music library,~~

~~continue to develop reliable, state-of-the-art mobile service provisioning and management software for telecom operators,~~

~~maintain, expand and enhance our relationships with telecom operators so that they will allow us to offer our 2G and 2.5G services over their networks, and~~

~~increase awareness of our brand and user loyalty.~~

~~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~~user traffic 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, namely, Qindai Wang, our chairman and chief executive officer, Shaojian (Sean) Wang, our president and chief operating officer since May 2006 and acting chief financial officer since June 2007, Yuqi Shi, our vice president in charge of WVAS business since 2007, and Feng Wu, our vice president in charge of music companies since 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,decline and our business may be ~~severely disrupted. In addition, if any~~hurt. Our servers, which are partly hosted at third-party Internet data centers, are vulnerable to break-ins, sabotage and vandalism. The occurrence of ~~these key executives~~a natural disaster or ~~employees joins~~ a ~~competitor or forms~~closure of an Internet data center by a ~~competing company,~~third-party provider without adequate notice could result in lengthy service interruptions. Moreover, the agreements we ~~could lose customers and suppliers and incur additional expenses to recruit and train personnel. Each of our executive officers has~~have entered into ~~an employment agreement~~with domestic telecommunications carriers to host our servers typically have terms of approximately one year 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~~are renewable subject to sustain the growth we want to achieve. If the user base of our WVAS increases or our affiliated 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.early termination. If we are ~~unable~~not able to ~~manage our growth~~renew such hosting services agreements with the telecommunications carriers when they expire and ~~expansion effectively,~~are not able to enter into agreements with alternative carriers at commercially reasonable terms or at all, the quality and stability of our services may be adversely affected. In addition, our domain names are resolved into Internet protocol (IP) addresses by systems of third-party domain name registrars 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~~registries. Any interruptions or ~~China Netcom to cease offering our services over their networks. Our future success will depend on, among other things, our ability to:~~

~~develop and quickly introduce new WVAS, adapt our existing services and maintain and improve the quality of all of our services, particularly as the market for 2.5G services evolves and matures,~~

effectively maintain our relationships with China Mobile and China Unicom, enhance our relationships with China Telecom and China Netcom and establish new relationships with any other recipients of mobile licenses in China so that we are able to offer WVAS over their networks,

~~attract and retain popular artists for our music businesses,~~

~~continue training, motivating and retaining our existing employees, including our senior management, and attract and integrate new employees,~~

~~develop and improve our operational, financial, accounting and other internal systems and controls, and~~

~~maintain adequate controls and procedures to ensure that our periodic public disclosure under applicable laws, including U.S. securities laws, is complete and accurate.~~

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

~~Our WVAS~~those service providers’ systems, which 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 telecom operators’ networks and the performance and reliability of China’s Internet infrastructure are critical to our ability to attract and retain users. 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 outsidebeyond our control, ~~that~~ could ~~result in a sustained shutdown of all or a material portion of the mobile networks, the Internet or~~significantly disrupt 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 agreements with affiliated companies incorporated in China (which we refer to as our affiliated Chinese entities), including Hurray! Solutions Ltd. (“Hurray! Solutions”), Beijing Cool Young Information Technology Co., Ltd. (“Beijing Cool Young”), Beijing WVAS Solutions Ltd. (“WVAS Solutions”), Beijing Enterprise Network Technology Co., Ltd. (“Beijing Network”), Beijing Palmsky Technology Co., Ltd. (“Beijing Palmsky”), Beijing Hutong Wuxian Technology Co., Ltd. (“Beijing Hutong”), Shanghai Magma Digital Technology Co., Ltd. (“Shanghai Magma”), Beijing Hengji Weiye Electronic Commerce Co., Ltd. (“Hengji Weiye”), Shanghai Saiyu and Henan Yinshan 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 Media 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, Beijing Hurray! Times Technology Co., Ltd. (“Beijing 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, Beijing 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, Beijing 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:

~~levying fines,~~

~~confiscating the incomes of any of our company, Beijing Hurray! Times or our affiliated Chinese entities,~~

~~revoking the business licenses of any of our company, Beijing Hurray! Times or our affiliated Chinese entities,~~

~~shutting down servers or blocking websites maintained by any of our company, Beijing Hurray! Times or our affiliated Chinese entities,~~

~~restricting or prohibiting our use of our financial assets to finance our business and operations in China,~~

~~requiring any of us, Beijing Hurray! Times or our affiliated Chinese entities to restructure our ownership structure or operations, and/or~~

~~requiring any of us, Beijing Hurray! Times or our affiliated Chinese entities to discontinue any portion of or all of their WVAS.~~

~~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.~~own services.

~~We depend upon agreements with~~If we experience frequent or persistent system failures on our ~~affiliated Chinese entities for the success~~websites, whether due to interruptions and failures of our ~~business. These agreements~~own information technology and communications systems or those of third-party service providers we rely upon, our reputation and brand could be permanently harmed. The steps we take to increase the reliability and redundancy of our systems are expensive, may reduce our operating margin and may not be ~~as effective~~successful in ~~providing operational control~~reducing the frequency or duration of service interruptions.

We also depend significantly on relationships with leading technology providers and the licenses that the technology providers have granted to us. Our competitors may establish the same relationships 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~~which may adversely affect us. We may not be ~~as effective in providing control over our telecommunications~~able to maintain these relationships or ~~Internet operations as direct ownership of these businesses. For example, our affiliated Chinese entities could fail~~replace them on commercially attractive terms.

We have been and expect we will continue to ~~take actions required~~be exposed to ~~operate our business, such as renewing their business licenses or services permits or entering into service contracts with China Unicom, China Mobile~~intellectual property infringement and other ~~telecom operators. Moreover, the fees for~~claims, including claims based on content posted on our ~~services are paid by the telecom operators directly~~website, which could be time-consuming and costly to defend and may result in substantial damage awards and/or court orders that may prevent us from continuing to provide certain of our affiliated Chinese entities, which are then obligated at our request to transfer substantially all of such fees to our wholly owned subsidiary, Beijing 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 environmentexisting services.

Our success depends, 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 effectlarge part, on our ability to operate our business without infringing third-party rights, including third-party intellectual property rights. Internet companies, technology and media industries own, and are seeking to obtain, a large number of patents, copyrights, trademarks and trade secrets, and they are frequently involved in litigation based on allegations of infringement or other violations of intellectual property rights or other related legal rights. There may be patents issued or pending that are held by others that cover significant aspects of our technologies, products, business methods or services.

We have been and may continue to be subject to claims for defamation, negligence, infringement of third-party copyright and other rights, such as privacy and image rights, or other claims based on the nature or content of videos or other information provided by Ku6 or our users on our ~~financial condition.~~

~~We generate~~websites. Such claims, with or without merit, may cause us to incur significant costs and liabilities and could materially and adversely affect our ~~internal funds almost exclusively from Beijing Hurray! Times. If that company is restricted from paying dividends to us, we may lose almost all~~business, and also result in diversion of the attention of our ~~internal source~~management and our financial resources and negative publicity on our brand and reputation. Ku6 recorded expenses relating to such claims of ~~funds.~~

~~Except~~$1.6 million and $0.4 million during the years ended December 31, 2008 and 2009, respectively, prior to the acquisition by us. We paid about $1.0 million to settle such claims during the year ended December 31, 2010 and we had accrued liabilities for ~~a certain amount~~such claims of ~~cash held by Hurray! Holding Co., Ltd. (approximately $49~~$0.7 million as of December 31, ~~2007), we have no significant assets other than our equity interest~~2010. In addition, third parties may make claims against us for losses incurred in ~~Beijing Hurray! Times. We are a holding company, and we rely principally~~reliance on dividends from Beijing Hurray! Times and technical consulting and service fees, license fees and other fees paid to Beijing Hurray! Times by our affiliated Chinese entities for our cash requirements, including any debt we may incur. We are likely to lose all of our sources of funds if Beijing Hurray! Times is restricted from paying dividends to 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.

~~Under Chinese law, Beijing 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 Beijing Hurray! Times. The amount of reserves was nil as of December 31, 2007 since Beijing Hurray! Times incurred an operating loss in 2007. This reserve fund can only be used for specific purposes and is not distributable as cash dividends. Dividends paid to us by our subsidiaries in China will also be subject to withholding tax under the new tax laws adopted in China. See “—Recent changes in PRC tax laws could have a material adverse effectinformation on our ~~operating results.” If further restrictions~~websites. We do not carry any liability insurance covering such risks.

Due to the significant number of videos uploaded by users, which currently amounts to an average of 30,000 files on ~~payments of dividends by our subsidiary are implemented under Chinese law,~~a daily basis, we may not be able to ~~access~~identify all content that may infringe on third-party rights. Thus, our ~~internal source of funds.~~

~~Our revenues may fluctuate significantly and may adversely affect the market price of~~failure to identify unauthorized videos posted on our ~~ADSs.~~

~~Our revenues and results of operations have varied in the past~~website has subjected us to, and may continue to ~~fluctuate~~subject us to, claims of infringement on third-party intellectual property rights or other rights. In addition, we may be subject to administrative actions brought by the National Copyright Administration of the PRC or its local branches for alleged copyright infringement.

Additionally, although we have not previously been subject to legal actions for copyright infringement in jurisdictions other than the PRC, it is possible that we may be subject to such claims in the future. ~~Many of~~Such other jurisdictions may impose different protections for copyrights, and the ~~factors that cause such fluctuation~~claims may result in potentially larger damages awards than have been imposed in the PRC. For example, although our operations are ~~outside~~in the PRC and our ~~control. Steady revenues~~site is targeted at audiences in Asia, our site includes some English-language content and ~~results of operations will depend largely on our ability to:~~

~~attract and retain~~is accessible by users in the ~~increasingly competitive WVAS market~~U.S. and elsewhere. There is a risk that a U.S. court may determine that it has jurisdiction over us for claims for U.S. copyrights. Although U.S. copyright laws, including the Digital Millennium Copyright Act (17 U.S.C. § 512), or the DMCA, provide safeguards from claims for monetary relief for copyright infringement for certain entities that host user-uploaded content and that comply with specified statutory requirements, and although we have recently taken additional steps in ~~China,~~

~~maintain and grow our 2G and 2.5G market share and revenues, and when launched, successfully offer 3G services,~~

~~successfully implement our business strategies, including integrating our recent strategic acquisitions~~an effort to comply with ~~our existing core business, and~~

~~update and develop our services, technologies and content, which is highly complex.~~

~~Because~~ the WVAS 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. ItDMCA “safe harbor” requirements, it is possible that ~~future fluctuations may cause~~a U.S. court would conclude that it has jurisdiction and that we are not eligible for the safeguards provided by the DMCA for infringement claims occurring prior to the implementation of those changes. Additionally, for claims of infringement arising after our ~~results~~additional efforts to comply with the DMCA safeguards, it is nonetheless possible that a U.S. court could conclude that we have not complied with all such statutory requirements to qualify for safe harbor status. Under such circumstances, it is possible that we could be subject to claims of ~~operations to be below~~copyright infringement in the ~~expectations of market analysts and investors. This could cause the market price of our ADSs to decline.~~U.S.

In addition, although our license agreements with licensors of licensed content require that the licensors have the legal right to license to us such content, we cannot ensure each licensor has such authorization. If any purported licensor does not actually have proper authorization relating to the licensed content or right to license a work of authorship provided to us, we may be subject to claims of copyright infringement from third parties, and there is no assurance that we can be fully indemnified by the relevant licensor for all losses we may incur from such claims.

We may not be able to adequately protect our intellectual property rights, and ~~we may be exposed~~any failure to ~~infringement claims by third parties.~~protect our intellectual property rights could adversely affect our revenues and competitive position.

We believe ~~the copyrights, service marks,~~that trademarks, trade secrets, patents, copyrights and other intellectual property we use are important ~~components~~to our business. We rely on a combination of trademark, copyright, patent and trade secret protection laws in China and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our ~~WVAS.~~intellectual property and our brand. We have invested significant resources to develop our own intellectual property and acquire licenses to use and distribute the intellectual property of others for our online video site; failure to maintain or protect these rights could harm our business. In addition, ~~our affiliated music companies are substantially dependent on their ability to protect their rights over their music content. Any~~any unauthorized use of ~~such~~our intellectual property by third parties may adversely affect our current and future ~~revenue from such services~~revenues and ~~software, as well as~~ our reputation. For example, rampant piracy in China has negatively affected offline sales of CDs and tapes by our affiliated 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

The validity, enforceability and scope of protection available under intellectual property laws with respect to the Internet industry in China are uncertain and still evolving. Implementation and enforcement of PRC intellectual property-related laws have historically been deficient and ineffective. Accordingly, protection of intellectual property ~~in the Internet, wireless value-added and music industries~~rights in China ~~is uncertain and still evolving, and these laws~~ may not ~~protect intellectual property rights to the same extent~~be as ~~the laws of some other jurisdictions. In particular, the intellectual property law in China is less developed than~~effective as in the United States or other western countries. Furthermore, policing unauthorized use of proprietary technology is difficult and ~~historically, China has often not protected private parties’~~expensive, and we may need to resort to litigation to enforce or defend patents issued to us or our other intellectual property or to determine the enforceability, scope and validity of our proprietary rights ~~to the same extent as~~or those of others. Such litigation and an adverse determination in any such ~~parties might enjoy in the United States. Moreover,~~ litigation, ~~may be necessary in the future to enforce our intellectual property rights, which~~if any, could result in substantial costs and diversion of ~~our~~ resources and management attention.

Moreover, pirated copies of copyrighted video works, including movies and TV drama series, that are licensed to us are often posted on third-party websites. The availability of unauthorized and pirated copies of such copyrighted content can reduce our user traffic and our advertising revenues. There can be no assurance that our efforts to enforce our rights in such content will be successful in preventing content piracy.

Changes in government policies or regulations may have a material and adverse effect on our business, financial condition, results of operations and cash flows.

Our online video business is subject to strict government regulations in the PRC. Under the current PRC regulatory scheme, a number of regulatory agencies, including the State Administration of Radio, Film, and Television, or SARFT, the Ministry of Culture, the Ministry of Industry and Information Technology, or MIIT, the General Administration of Press and Publication, or GAPP, and the State Council Information Office, or SCIO, jointly regulate all major aspects of the Internet industry, including the online video industry. Operators must obtain various government approvals and licenses, including an Internet content provider license, or ICP license, and an Internet audio/video program transmission license, prior to the commencement of online video operations. We have obtained the licenses and permits essential for our business operations. We have obtained the ICP license, the Internet audio/video program transmission license (currently covering the Internet user uploaded audio/video program service) and a permit from the Beijing Drug Administration to post approved non-prescription drug advertisement on our website. We are in the process of upgrading our Internet audio/video program transmission license and preparing to apply for the approval from the SCIO to publish news on our website or disseminate news through the Internet. We currently operate a current events channel on our website, which includes audio/video content relating to current topics and social events. Before obtaining the drug information permit, there were a small

number of advertisements for non-prescription drugs shown on our website, which may not have been in compliance with the Administration Measures on Internet Drug Information Services and may subject us to administrative warnings, termination of any Internet drug advertisements on our website and other penalties which are not clearly defined in the measures. We are now qualified to post approved non-prescription drug advertisements on our website pursuant to the drug information permit, and we believe the risk of any penalties imposed on our past conduct is low. If the PRC government finds that we were operating without the proper licenses or approvals, promulgates new laws and regulations that require additional licenses or imposes additional restrictions on the operation of online video businesses and/or wireless and web-based subscription services, the PRC government has the power to, among other things, levy fines, confiscate our income or the income of our affiliates, revoke our business licenses or the business licenses of our affiliates, and require us to discontinue or impose restrictions on the affected portion or our business. Any of these actions by the PRC government may have a material and adverse effect on our results of operations. In addition, the PRC government may promulgate regulations restricting the types and content of advertisements that may be transmitted online, which could have a direct adverse impact on our business.

Any lack of requisite permits for any of our online video content may expose us to regulatory sanctions.

SARFT released a Notice on Strengthening the Administration of Online Audio/Video Content (the “Notice”) in March 2009. The Notice reiterated, among other things, that all movies and television shows released or published online must be in compliance with relevant regulations on the administration of radio, film and television. In other words, these movies and television shows, whether produced in the PRC or overseas, must be pre approved by SARFT and distributors of these movies and television shows must obtain an applicable permit before releasing any movie or television show.

We rely on written representations from the content providers regarding the SARFT approval status of the content licensed to us. Under our content licensing agreements, the content providers generally represent and warrant that (i) the content they provide has legitimate copyright or authorization, and they are entitled to grant us the rights of communication through information networks; (ii) the content itself as well as the authorization or rights granted to us neither breach any applicable laws, regulations or public morals, nor impair any third party rights; and (iii) that they will indemnify us for any loss resulting from both the non compliance of such content with the law and claims from third parties. However, we cannot guarantee that the remedies provided by these content providers, if any, will be sufficient to compensate us for potential regulatory sanctions imposed by SARFT due to violations of the approval and permit requirements. Nor can we ensure that any such sanctions will not adversely affect either the general availability of video content on our website or our reputation. In addition, such risks may persist due to ambiguities and uncertainties relating to the implementation and enforcement of the Notice.

Our ability to operate effectively could be impaired if we fail to attract and retain our executive officers.

Our success depends, in part, upon the continuing contributions of our executive officers. Although we have employment agreements with our executive officers, except Mr. Haifa Zhu, we cannot assure you that we will be able to retain our executive officers. The loss of the services of any of our executive officers or the failure to attract other executive officers could 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~~or our WVAS, 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. While the vast majority of claims that have been asserted against us in the past have not developed beyond the demand letter stage and do not ultimately result in liability to us, we may also incur significant costs in investigating and defending such claims. We have not purchased liability insurance for these risks.business prospects.

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

~~The insurance industry in China is still at an early stage of development.~~ Insurance companies in China currently do not offer ~~limited business~~as extensive an array of insurance products ~~and~~as insurance companies do ~~not, to our knowledge, offer business liability insurance. As a result, we~~in more developed economies. We do not have any business liability or disruption insurance ~~coverage for~~to cover our operations. ~~Moreover, while business disruption insurance is available, we~~We have determined that the costs of insuring for these risks ~~of disruption~~ and ~~cost~~the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured occurrence of ~~the insurance are such that we do not require it at this time. Any~~ business disruption ~~litigation or natural disaster might~~may result in our incurring substantial costs and the diversion of resources, ~~particularly if~~which could have an adverse effect on our results of operations and financial condition.

Regulation and censorship of information disseminated over the Internet in China may adversely affect our business and subject us to liability for information displayed on or linked to our websites.

The PRC government has adopted regulations governing Internet access and the distribution of news and other information over the Internet. Under these regulations, Internet content providers and Internet publishers are prohibited from posting or displaying over the Internet content that, among other things, violates PRC laws and regulations, impairs the national dignity of China, or is reactionary, obscene, superstitious, fraudulent or defamatory. Failure to comply with these requirements may result in the revocation of licenses to provide Internet content and other licenses and the closure of the concerned websites. In the past, failure to comply with such requirements has resulted in the closure of certain websites. The website operator may also be held liable for such censored information displayed on or linked to the website.

In addition, the MIIT has published regulations that subject website operators to potential liability for content displayed on their websites and the actions of users and others using their systems, including liability for violations of PRC laws and regulations prohibiting the dissemination of content deemed to be socially destabilizing. The Ministry of Public Security has the authority to order any local Internet service provider to block any Internet website at its sole discretion. From time to time, the Ministry of Public Security has stopped the dissemination over the Internet of information that it ~~affects~~believes to be socially destabilizing. The State Secrecy Bureau is also authorized to block any website it deems to be leaking State secrets or failing to meet the relevant regulations relating to the protection of State secrets in the dissemination of online information. Furthermore, we are required to report any suspicious content to relevant governmental authorities, and to undergo computer security inspections. If we fail to implement the relevant safeguards against security breaches, our ~~technology platform which~~websites may be shut down and our business and ICP licenses may be revoked.

Although we ~~depend~~attempt to monitor the content in our websites, we are not able to control or restrict the content of other Internet content providers linked to or accessible through our websites, or content generated or placed on our websites by our users. To the extent that PRC regulatory authorities find any content displayed on our websites objectionable, they may require us to limit or eliminate the dissemination of such information on our websites. If third-party websites linked to or accessible through our website operate unlawful activities such as online gambling on their websites, PRC regulatory authorities may require us to report such unlawful activities to relevant authorities and to remove the links to such websites, or they may suspend or shut down the operation of such websites. PRC regulatory authorities may also temporarily block access to certain websites for ~~delivery~~a period of time for reasons beyond our control. Any of these actions may reduce our user traffic and adversely affect our business. In addition, we may be subject to penalties for violations of those regulations arising from information displayed on or linked to our websites, including a suspension or shutdown of our ~~WVAS.~~online operations.

Our management conducted an evaluation of the effectiveness of our internal control over financial reporting and concluded that our internal control over financial reporting was not effective as of December 31, 2010. Our independent registered public accounting firm audited the effectiveness of our internal control and reported that our internal control over financial reporting was not effective as of December 31, 2010. If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud.

We are subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring every public company to include a management report on the effectiveness of such company’s internal control over financial reporting in its annual report. Effective internal control over financial reporting is necessary for us to provide reliable financial reports, effectively prevent fraud and operate as a public company.

Our management conducted an evaluation of the effectiveness of our internal control over financial reporting and concluded that our internal control over financial reporting was not effective as of December 31, 2010 as a result of one identified material weakness in our internal control over financial reporting. Our independent registered public accounting firm audited the effectiveness of our internal control and reported that our internal control over financial reporting was not effective as of December 31, 2010 as a result of the material weakness identified. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of our company’s financial statements will not be prevented, or detected and corrected on a timely basis. The material weakness identified relates to the lack of sufficient competent accounting personnel with appropriate levels of accounting knowledge and experiences to address complex U.S. GAAP accounting issues and prepare financial statements and related disclosures under U.S. GAAP. Further, our management concluded that, as of December 31, 2010, our disclosure controls and procedures were not effective because of this identified material weakness in our internal control over financial reporting. See “Item 15. Controls and Procedures.”

We will take initiatives to improve our internal control over financial reporting and disclosure controls. For details on these initiatives, please see “Item 15. Controls and Procedures— Management’s Plan for Remediation of Material Weakness.” However, the implementation of these initiatives may not fully address the material weakness in our internal control over financial reporting. In addition, the process of designing and implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that satisfies our reporting obligations. Our failure to remediate the material weakness or our failure to discover and address any other material weaknesses or deficiencies may result in inaccuracies in our financial statements, delay in the preparation of our financial statements, and the loss of investor confidence in the reliability of our financial statements, which in turn could negatively influence the trading price of our ADSs. Ineffective internal control over financial reporting could also expose us to increased risk of fraud or misappropriations of corporate assets and subject us to potential delisting from the stock exchange on which our ADSs are listed, regulatory investigations or civil or criminal sanctions. As a result, our business, financial condition, results of operations and prospects may be materially and adversely affected.

We believe that we were a passive foreign investment company (“PFIC”) for taxable years 2006, 2007, 2008 and ~~2007~~2009, and ~~are likely~~although we believe we were not a PFIC for taxable year 2010, we may be a PFIC for the ~~current~~ taxable ~~year of 2008,~~years ending after 2010, which could result in adverse U.S. federal income tax consequences to U.S. investors.

We will be ~~classified as~~ a PFIC for U.S. tax purposes for a taxable year if either (a) 75% or more of our gross income for such taxable year is passive income or (b) 50% or more of the average ~~percentage~~quarterly value of our assets during such taxable year consists of assets that either produce passive income or are held for the production of passive income. For such purposes, if we directly or indirectly own 25% or more of the shares of another corporation, we generally 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. ~~The determination of whether or not we are a PFIC is made on an annual basis and depends on the composition of our income and assets, including goodwill, from time to time.~~ We believe that we were a PFIC for taxable years 2006, 2007, 2008 and 2009 and we may be a PFIC for taxable years ending after 2010.If we were a PFIC for 2006, 2007, 2008 and ~~are likely~~2009 and you held ordinary shares or ADSs during such taxable years, we would continue to be ~~classified~~treated as a PFIC with respect to those ordinary shares or ADSs for ~~the current~~all succeeding years during which you hold them. Because our PFIC status for any taxable year ~~of 2008, although such determination cannot~~will not be ~~made with certainty~~determinable until after the end of the taxable year and will depend on the composition of our income and assets and the market value of our assets for such taxable year, which may be, in part, based on the market price of our ordinary shares or ADSs (which may be especially volatile), there can be no assurance we will not be a PFIC for any taxable year. Such characterization could result in adverse U.S. federal income tax consequences to a U.S. investor. ~~For example,~~In general, if we are a PFIC, then “excess distributions” to a U.S. investor and any gain realized by a U.S. investor on the sale or other disposition of our ordinary shares or ADSs will be allocated ratably over the U.S investor’s holding period for the ~~ADSs,~~ordinary shares or ADSs; the amount allocated to the current taxable year and any year prior to our becoming a PFIC will be taxed as ordinary income; and ~~(iii)~~ the amount allocated to each ~~of the~~ other taxable ~~years~~year will be subject to tax at the highest rate ~~of tax~~ in effect for the applicable class of taxpayer for that year. Additionally, an interest charge ~~for the deemed deferral benefit~~ will be imposed with respect to the resulting tax attributable to each such other taxable year and the U.S. investor will be subject to U.S. tax reporting requirements. ~~Some of these adverse tax consequences may be avoided~~Alternatively, if ~~the~~we are a PFIC and if our ADSs are “regularly traded” on a “qualified exchange,” a U.S. investor ~~makes~~could make a ~~“mark-to-market”~~mark-to-market election that would result in tax treatment different from the general tax treatment for ~~the ADSs.~~PFICs described above.

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~~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 the U.S. federal, state and local and other tax consequences of our status as a PFIC in light of ~~the~~their particular circumstances, ~~applicable to such U.S. investor,~~ as well as the availability of and procedures for making a mark-to-market or other available election. For further discussion of the adverse U.S. federal income tax consequences of our classification as a PFIC, see ~~“Taxation”~~“Taxation—United States Federal Income Taxation” below.

~~Anti-takeover provisions~~We may be deemed a PRC resident enterprise under the New EIT Law and be subject to PRC taxation on our worldwide income.

The PRCEnterprise Income Tax Law,or the New EIT Law, includes a provision specifying that legal entities organized outside China will be considered residents for Chinese income tax purposes if their place of effective management or control is within China. If legal entities organized outside China were considered residents for Chinese income tax purposes, they would be subject to the 25% enterprise income tax imposed by the New EIT Law on their worldwide income. The implementation rules to the New EIT Law provide that non resident legal entities will be considered China residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. reside within China. Although substantially all of our operational management is currently based in the PRC, it is uncertain whether we would be deemed a PRC tax resident enterprises under the New EIT Law and other related PRC laws and regulations. If we are deemed to be a PRC tax resident enterprise, our global income will be subject to PRC enterprise income tax at the rate of 25%, which would have a material adverse effect on our financial condition and results of operations.

Dividends we receive from our operating subsidiary located in the PRC may be subject to PRC withholding tax.

In accordance with the New EIT Law and its implementation rules, dividends which arise from profits of foreign invested enterprises (“FIEs”) earned after January 1, 2008, are subject to a 10% withholding tax. In addition, under the tax treaty between the PRC and Hong Kong, if a foreign investor is incorporated in Hong Kong and qualifies as a Hong Kong tax resident, the applicable withholding tax rate is reduced to 5% if the investor holds at least a 25% interest in the FIE, or to 10% if the investor holds less than a 25% interest in the FIE. There are no undistributed earnings of our subsidiaries located in the PRC that are available for distribution as of December 31, 2010. In addition, we (i) do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future and (ii) intend to retain most of our available funds and any future earnings for use in the operation and expansion of our business in the PRC. Accordingly, no provision has been made for the Chinese dividend withholding taxes that would be payable upon distributions to us.

Dividends payable by us to our foreign investors may be subject to PRC withholding tax; and gain on the sale of our ADSs or ordinary shares may become subject to taxes under PRC tax laws.

Under the New EIT Law and implementation regulations issued by the State Council, PRC withholding tax at the rate of 10% is applicable to dividends payable to investors that are “non resident enterprises,” which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends have their sources within the PRC.

Similarly, any gain realized on the transfer of ADSs or shares by such investors is also subject to 10% PRC income tax if such gain is regarded as income derived from sources within the PRC. The implementation regulations of the New EIT Law set forth that, (i) if the enterprise that distributes dividends is domiciled in the PRC or (ii) if gains are realized from transferring equity interest of enterprises domiciled in the PRC, then such dividends or capital gains are treated as China-sourced income. It is not clear how “domicile” may be interpreted under the New EIT Law, and it may be interpreted as the jurisdiction where the enterprise is a tax resident. Therefore, if we are considered a PRC “resident enterprise,” the dividends we pay with respect to our ordinary shares or ADSs may be treated as income derived from sources within the PRC and be subject to PRC withholding tax at a rate of 10%, and the gain you may realize from the transfer of our ordinary shares or ADSs may also be subject to PRC income taxes.

Furthermore, it is unclear in these circumstances whether holders of our ordinary shares or ADSs would be able to claim the benefit of income tax treaties entered into between China and other countries or regions. If we are required under the New EIT Law to withhold PRC income tax on dividends payable to our non-PRC investors that are “non resident enterprises,” or if you are required to pay PRC income tax on the transfer of our ordinary shares or ADSs, the value of your investment in our ~~charter documents~~ordinary shares or ADSs may be materially and adversely affected.

All participants of our existing equity compensation plans who are PRC citizens are required to register with the State Administration of Foreign Exchange of the PRC, or SAFE, and the failure to so comply could subject us and such participants to penalties.

On March 28, 2007, SAFE issued the Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of an Overseas Listed Company, or Circular 78. On May 29, 2007, SAFE issued the Notice on Printing and Distributing the Operating Rules for the Notice of the State Administration of Foreign Exchange on the Relevant Issues about Foreign Exchange Control over the Financing and Return Investment of Domestic Residents through Overseas Special Purpose Companies, or Circular 106. According to these regulations, PRC citizens who participate in an employee stock ownership plan or a stock option plan in an overseas, publicly listed company are required to register with the SAFE and complete certain other procedures. These participants should retain a PRC agent, which can be a subsidiary of the overseas listed company in China to handle various foreign exchange matters associated with these plans. In the case of an employee stock ownership plan, an overseas custodian bank should be retained by the PRC agent to hold in trusteeship all overseas assets held by such participants under the employee stock ownership plan. In the case of a stock option plan, a financial institution with stock brokerage qualification in the jurisdiction where the overseas publicly-listed company is listed or a qualified institution designated by the overseas, publicly listed company is required to be retained by the PRC agent to handle matters in connection with the exercise or sale of stock options for the stock option plan participants. The PRC agents or employers should, on behalf of the PRC citizens, apply annually to the SAFE or its competent local branches for a quota for the conversion and/or payment of foreign currencies in connection with the PRC citizens’ exercise of the employee stock options. The foreign exchange proceeds received by the PRC citizens from sale of shares under the stock option plans granted by the overseas listed companies must be remitted into the bank accounts in China opened by their employers or PRC agents. We and our PRC citizen employees who participate in the employee stock ownership plan or a stock option plan have not yet completed the required registration with SAFE. Any failure to comply with such regulations 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.

Risks Related to Our Corporate Structure

If the PRC government finds that the agreements that establish the structure for operating our businesses in China do not comply with PRC governmental restrictions on foreign investment in Internet business, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

Current PRC laws and regulations place certain restrictions on foreign ownership of companies that engage in Internet business, including the provision of online video and online advertising services. Specifically, foreign ownership in an Internet content provider or other value-added telecommunication service providers may not exceed 50%. We conduct our operations in China principally through contractual arrangements among our wholly owned PRC subsidiaries, Ku6 (Beijing) Technology Co.,Ltd. and WeiMoSanYi (Tianjin) Technology Co., Ltd., and four consolidated affiliated entities in the PRC, namely, Ku6 (Beijing) Information Technology Co., Ltd. (“Ku6 Information Technology”), Tianjin Ku6 Zheng Yuan Information Technology Co., Ltd. (“Tianjin Ku6”), Ku6 (Beijing) Cultural Media Co., Ltd. (“Ku6 Cultural”) and Shanghai Yisheng Network Technology Co., Ltd. (“Yisheng”), and their respective shareholders. Tianjin Ku6 is wholly owned by Ku6 Information Technology. Yisheng has a 70%-owned subsidiary, Shanghai Ran Ya Information Technology Co., Ltd. (“Ran Ya”). Ku6 Information Technology holds the licenses and permits necessary to conduct our online video, online advertising and related businesses in China. Our contractual arrangements with Ku6 Information Technology, Tianjin Ku6, Ku6 Cultural, Yisheng and their respective shareholders enable us to exercise effective control over these entities and hence treat them as our consolidated affiliated entities and consolidate their results. For a detailed discussion of these contractual arrangements, see Item 4.C. “Information on the Company—Organizational Structure.”

Although we believe we are in compliance with current PRC regulations, we cannot assure you that the PRC government would hold the same view with us or these contractual arrangements comply with regulations or policies that may be amended or adopted in the future. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations. If the PRC government determines that we do not comply with applicable laws and regulations, it could revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, block our website, require us to restructure our operations, impose additional conditions or requirements with which we may not be able to comply, or take other regulatory or enforcement actions against us that could be harmful to our business. The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business.

We rely on contractual arrangements with our consolidated affiliated entities in China and their shareholders for our operations, which may not be as effective as direct ownership in providing operational control.

Since PRC laws restrict foreign equity ownership in companies engaged in online video and advertising businesses in China, we rely on contractual arrangements with our consolidated affiliated entities and their respective shareholders to operate our business in China. If we had direct ownership of Ku6 Information Technology, Tianjin Ku6, Ku6 Cultural and Yisheng, we would be able to: (i) exercise our rights as a shareholder to effect changes in the board of directors of these entities, which in turn could effect changes at the management level, subject to any applicable fiduciary obligations, and (ii) derive economic benefits from the operations of these entities by causing them to declare and pay dividends. However, under the current contractual arrangements, we rely on our consolidated affiliated entities and their respective shareholders’ performance of their contractual obligations to exercise effective control. In general, neither our consolidated affiliated entities nor their respective shareholders may terminate the contracts prior to the expiration date. However, the shareholders of Ku6 Information Technology, Tianjin Ku6, Ku6 Cultural or Yisheng may not act in the best interests of our company or may not perform their obligations under these contracts, including the obligation to renew these contracts when their initial terms expire. Such risks exist throughout the period in which we intend to operate our business through the contractual arrangements with our consolidated affiliated entities. However, if any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC law and courts and therefore will be subject to uncertainties in the PRC legal system. See “Risk Factors—Risks Related to Our Corporate Structure—Any failure by our consolidated affiliated entities or their respective shareholders to perform their obligations under our contractual arrangements with them may have a material adverse effect on our business.” Therefore, these contractual arrangements may not be as effective as direct ownership in providing us with control over these consolidated affiliated entities.

Any failure by our consolidated affiliated entities or their respective shareholders to perform their obligations under our contractual arrangements with them may have a material adverse effect on our business.

Our consolidated affiliated entities and their respective shareholders may fail to take certain actions required for our business or follow our instructions despite their contractual obligations to do so. If they fail to perform their obligations under their respective agreements with us, we may have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, which may not be effective.

All of our contractual arrangements with them are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in certain other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements, which may make it difficult to exert effective control over our consolidated affiliated entities, and our ability to conduct our business may be adversely affected.

Contractual arrangements with our consolidated affiliated entities may result in adverse tax consequences to us.

Under applicable PRC tax laws and regulations, arrangements and transactions among related parties may be subject to audit or scrutiny by the PRC tax authorities within ten years after the taxable year when the arrangements or transactions are conducted. We could face material and adverse tax consequences if the PRC tax authorities were to determine that the contractual arrangements among Beijing WOFE and Tianjin WOFE, our wholly owned subsidiaries in China, our consolidated affiliated entities in China and their respective shareholders were not entered into on an ~~acquisition~~arm’s-length basis and therefore constituted unfavorable transfer pricing arrangements. Unfavorable transfer pricing arrangements could, among other things, result in an upward adjustment to our tax liability. In addition, the PRC tax authorities may impose interest on late payments on our consolidated affiliated entities for the adjusted but unpaid taxes. Our results of operations may be materially and adversely affected if our consolidated affiliated entities’ tax liabilities increase significantly or if they are required to pay interest on late payments.

The shareholders of our consolidated affiliated entities may have potential conflicts of interest with us, which may materially and adversely affect our business.

Mr. Shanyou Li and Mr. Hailong Han are the shareholders of Ku6 Information Technology. Ku6 Information Technology and Ms. Dongxu Wang are the shareholders of Yisheng. Mr. Shanyou Li and Ms. Xingye Zeng are the shareholders of Ku6 Cultural. We provide no incentives to Mr. Shanyou Li, Mr. Hailong Han, Ms. Dongxu Wang and Ms. Xingye Zeng for the purpose of encouraging them to act in our best interests in their capacity as the shareholders of our consolidated affiliated entities. We cannot assure you that when conflicts arise, Mr. Shanyou Li, Mr. Hailong Han, Ms. Dongxu Wang and Ms. Xingye Zeng will act in the best interests of our company or that conflicts will be resolved in our favor. If we cannot resolve any conflicts of interest or disputes between us and Mr. Shanyou Li, Mr. Hailong Han, Ms. Dongxu Wang and Ms. Xingye Zeng, we would have to rely on legal proceedings, which may be expensive, time-consuming and disruptive to our operations. There is also substantial uncertainty as to the outcome of any such legal proceedings.

We may rely principally on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have. Any limitation on the ability of our PRC subsidiaries to pay dividends to us could have a material adverse effect on our ability to conduct our business.

Both Ku6 Media Co., Ltd. and Ku6 Holding Limited are holding companies, and we rely principally on dividends and other distributions on equity paid by our wholly owned PRC subsidiaries, Beijing WOFE and Tianjin WOFE, for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. If Beijing WOFE or Tianjin WOFE, as the case may be, incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements Beijing WOFE and Tianjin WOFE currently have in place with our consolidated affiliated entities in a manner that would materially and adversely affect their ability to pay dividends and other distributions to us.

Under PRC laws and regulations, Beijing WOFE and Tianjin WOFE, as wholly foreign-owned enterprises in the PRC, may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned enterprises such as Beijing WOFE and Tianjin WOFE are required to set aside at least 10% of their accumulated after-tax profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of their respective registered capital. At their discretion, they may allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends. As of December 31, 2010, the registered capital of Beijing WOFE and Tianjin WOFE was US$11,700,000 and US$60,000,000, respectively. As Beijing WOFE and Tianjin WOFE have not made any profits to date, they have not been subject to the statutory reserve fund requirements and have not set aside any money to fund the statutory reserve funds or staff welfare and bonus funds. Our PRC subsidiaries have not and will not be able to pay dividends to our offshore entities until they generate accumulated profits and meet the requirements for statutory reserve funds.

Any limitation on the ability of Beijing WOFE and Tianjin WOFE to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our ~~shareholders, more difficult~~business, pay dividends, or otherwise fund and conduct our business.

Restrictions on currency exchange may ~~prevent attempts by~~limit our ~~shareholders~~ability to ~~replace or remove~~utilize our ~~current management.~~revenues effectively.

Most of our revenues and operating expenses are denominated in Renminbi. The Renminbi is currently freely convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans.

Under existing PRC foreign exchange regulations, payments of current account items, including payment of dividends, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval by complying with certain procedural requirements. Our ~~amended~~PRC subsidiaries may also retain foreign exchange in its current account, subject to a ceiling approved by SAFE, to satisfy foreign exchange liabilities or to pay dividends. However, we cannot assure you that the relevant PRC governmental authorities will not limit or eliminate our ability to purchase and ~~restated articles~~retain foreign currencies in the future.

Since a significant amount of ~~association include two provisions,~~our future revenues will be denominated in Renminbi, the existing and any future restrictions on currency exchange may limit our ability to utilize revenues generated in Renminbi to fund our business activities outside China, if any, or expenditures denominated in foreign currencies.

Foreign exchange transactions under the capital account are subject to limitations and require registration with or approval by the relevant PRC governmental authorities. In particular, if we finance our PRC subsidiaries by means of foreign currency loans, those loans cannot exceed certain statutory limits and must be registered with SAFE, and if we finance our PRC subsidiaries by means of capital contributions, those capital contributions must be approved by the MOFCOM. Our ability to use the U.S. dollar proceeds of the sale of our equity or debt to finance our business activities conducted through our PRC subsidiaries will depend on our ability to obtain these governmental registrations or approvals. In addition, because of the regulatory issues related to foreign currency loans to, and foreign investment in, domestic PRC enterprises, we may not be able to finance our PRC operating companies’ operations by loans or capital contributions. We cannot assure you that we can obtain these governmental registrations or approvals on a timely basis, if at all.

We may be unable to collect long-term loans extended to the shareholders of our consolidated affiliated entities.

As of December 31, 2010, we made long-term, interest-free loans in an aggregate principal amount of RMB 37.89 million (equivalent to US$5.74 million) to the shareholders of our consolidated affiliated entities to enable them to fund the initial capitalization and the subsequent financial requirements of our consolidated affiliated entities. The initial term for such loans is 10 years and can be extended upon written agreement. We may in the future make additional loans to the shareholders of our consolidated affiliated entities in China in connection with any increase in the capitalization or financial requirements of these entities to the extent necessary and permissible under applicable PRC laws and regulations. Our ability to collect these long-term loans will depend on the profitability and results of operations of these consolidated affiliated entities, which ~~could make an acquisition~~are uncertain.

The new PRC Property Rights Law may affect the perfection of ~~us more difficult~~the pledge in our equity pledge agreements with our consolidated affiliated entities and their individual shareholders.

Under the equity pledge agreements among Beijing WOFE, Tianjin WOFE and some of our VIEs and their respective individual shareholders, the individual shareholders of these VIEs have pledged all of their equity interests therein to Beijing WOFE or Tianjin WOFE by recording the pledge on the shareholder registers of the respective entities. However, according to the PRC Property Rights Law, which became effective as of October 1, 2007, a pledge is not effective without being registered with the relevant local administration for industry and commerce. The State Administration for Industry and Commerce, or SAIC, and many of its local counterparts, including Shanghai Administration for Industry and Commerce and Tianjin Administration for Industry and Commerce, have adopted registration procedures with respect to the registration of equity interest pledge according to the Property Rights Law. These VIEs are in the process of registering the equity pledge with the Beijing/Tianjin Administration for Industry and Commerce. We cannot assure you that they will be able to register the pledges. If they are unable to do so, the pledges may ~~prevent attempts by~~be deemed ineffective under the PRC Property Rights Law. If any individual shareholder of our ~~shareholders~~VIEs breaches his or her obligations under the agreement with Beijing WOFE and Tianjin WOFE, there is a risk that Beijing WOFE and Tianjin WOFE may not be able to ~~replace or remove our current management. First, our amended~~successfully enforce the pledge and ~~restated articles~~would need to resort to legal proceedings to enforce their contractual rights.

We may have conflicts of ~~association provide for a classified board~~interest with Shanda Interactive. Because 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’sShanda Interactive’s controlling ownership interest in our company, ~~effectively preventing acquisitions~~we may not be able to resolve such conflicts on terms favorable to us.

As of December 31, 2010, Shanda Interactive beneficially owned approximately 51.44% of our outstanding equity interests. On April 1, 2011, we entered into agreements with Shanda Media Group Limited, or Shanda Media, a wholly owned subsidiary of Shanda Interactive, pursuant to which we agreed to issue to Shanda Media 1,538,461,538 ordinary shares, at a per share price of US$0.0325 (or US$3.25 per ADS) and $50,000,000 aggregate principal amount of senior convertible bond. Beginning six months after issuance and at any time before maturity, the bond will be convertible into ordinary shares of Ku6 at a price of US$0.03925 per ordinary share (or US$3.925 per ADS).

Conflicts of interest may arise between Shanda Interactive and us in a number of areas relating to our past and ongoing relationships. In addition to the conflicts of interests we have discussed in other risk factors, potential conflicts of interest that we have identified include the following:

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Our board members or executive officers may have conflicts of interest.Mr. Tianqiao Chen, Ms. Grace Wu and Mr. Danian Chen, who are our directors, currently also serve as members of the board of directors of Shanda Interactive. Some of our directors also own shares and/or options to purchase shares in Shanda Interactive. Shanda Interactive may continue to grant incentive share compensation to our board members from time to time. These relationships could create perceived or actual conflicts of interest when these persons are faced with decisions with potentially different implications for Shanda Interactive and us.

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Potential competition with Shanda Interactive.Shanda Interactive may engage in certain transactions or businesses that directly or indirectly compete with our online video and audio businesses.

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Business opportunities. Business opportunities may arise that both we and Shanda Interactive find attractive, and which would complement our respective businesses. Due to the controlling interest of Shanda Interactive and its leading market position and brand in China, we may not be able to pursue these business opportunities effectively if Shanda Interactive decides to take advantage of such opportunities itself.

•

Developing business relationships with Shanda Interactive’s competitors.So long as Shanda Interactive remains our controlling shareholder, we may be limited in our ability to do business with its competitors, such as other interactive entertainment media companies in China.

Although our company is a stand-alone entity, we expect to operate, for as long as Shanda Interactive is our controlling shareholder, as a part of the Shanda Group. Shanda Interactive may from time to time make strategic decisions that it believes are in the best interests of Shanda Group as a whole. These decisions may be different from the decisions that we would have made on our own. Shanda Interactive’s decisions with respect to us or our business may be resolved in ways that favor Shanda Interactive and therefore Shanda Interactive’s own shareholders, which may not coincide with the interests of our other shareholders. We may not be able to resolve any potential conflicts, and even if we do so, the resolution may be less favorable to us than if we were dealing with an unaffiliated shareholder. Even if both parties seek to transact business on terms intended to approximate those that could have been achieved among unaffiliated parties, this may not succeed in practice.

Risks Related to Doing Business in China

Substantially all of our assets are located in China and substantially all of our revenues are derived from our operations in China. Accordingly, our business, financial condition, results of operations and prospects are subject, to a significant extent, to economic, political and legal conditions and developments in China.

The Chinese legal system embodies uncertainties which could limit the legal protections available to you and could also adversely affect our ability to operate our business.

The Chinese legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. Although legislation in China over the past 20 years has significantly improved the protection afforded to various forms of foreign investment and contractual arrangements in China, these laws, regulations and legal requirements are relatively new and their interpretation and enforcement involve uncertainties, which could limit the legal protection available to us, and foreign investors, including you. In addition, the Chinese government may enact new laws or amend current laws that may be detrimental to our current contractual arrangements with our Chinese affiliates, which may in turn have a material adverse effect on our ability to operate our business.

Any occurrence of pandemic avian influenza or other widespread public health problem, or any recurrence of severe acute respiratory syndrome, or SARS, could adversely affect our business and results of operations.

An outbreak of pandemic avian influenza or other widespread public health problem, or a renewed outbreak of SARS in China, where most of our revenues are derived, and in Beijing, where our operations are headquartered, could have a negative effect on our operations.

Our operations may be affected by a number of health-related factors, including the following:

quarantines or closures of some of our offices which would severely disrupt our operations,

the sickness or death of our key officers and employees, and

a general slowdown in the Chinese economy caused by any public health problems.

Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our business and results of operations.

PRC regulations relating to the establishment of offshore special purpose vehicles, or SPVs, by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.

In October 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fundraising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, which became effective as of November 1, 2005, and which was supplemented by an implementing notice issued on November 24, 2005. We refer to them collectively as Notice 75. Under Notice 75, PRC residents and citizens must register with the relevant local SAFE branch prior to their establishment or control of an offshore entity established for the purpose of an overseas equity financing involving onshore assets or equity interests held by them, and must also make filings with SAFE thereafter upon the occurrence of certain material capital changes. The registration and filing procedures under Notice 75 are prerequisites for other approval and registration procedures necessary for capital inflow from the offshore entity, such as inbound investments or shareholders’ loans, or capital outflow to the offshore entity, such as the payment of profits or dividends, liquidating distributions, equity sale proceeds or the return of funds upon a capital reduction. Notice 75 also requires that if a PRC resident has established or gained control of an SPV and completed the return investment prior to the implementation of this Notice 75 but failed to complete the foreign exchange registration in relation with its overseas investment, it shall carry out such registrations with the local branch of SAFE in accordance with this Notice 75 by March 31, 2006. After the PRC resident has retroactively completed the foreign exchange registration in relation with its overseas investment, the local branch of SAFE may process the registration pertaining to foreign investment and foreign debt for the relevant PRC enterprises.

The failure or inability of our shareholders who are PRC citizens or PRC residents to comply with the registration procedures set forth in these regulations may subject us to fines or legal sanctions, restrictions on our cross-border investment activities or our PRC subsidiaries’ ability to distribute dividends to, or obtain foreign-exchange-dominated loans from, our company, or prevent us from making distributions or paying dividends. As a result, our business operations and our ability to make distributions to you could be materially and adversely affected.

The failure to comply with the regulations regarding the use of the foreign currency registered capital may subject us to severe monetary or other penalties.

On August 29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency registered capital into Renminbi by restricting how the converted Renminbi may be used. SAFE Circular 142 provides that the Renminbi capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC, unless it is provided for otherwise. In addition, SAFE strengthened its oversight of the flow and use of the Renminbi capital converted from foreign currency registered capital of a foreign-invested company. The use of such Renminbi capital may not be altered without SAFE approval, and such Renminbi capital may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been ~~approved by our board~~used. Failure to comply with SAFE Circular 142 could result in liabilities for such PRC subsidiaries under PRC laws for evasion of ~~directors.~~applicable foreign exchange restrictions, including (i) being required to take appropriate remedial action, confiscation of any illegal income and imposition of a fine of up to 30% of the illegal amount involved and (2) in circumstances involving serious violations, a fine of between 30% and 100% of the illegal amount involved shall be imposed on the organization or individual concerned. If we are found to violate the SAFE Circular 142 or other laws in relation with foreign exchange, we may be subject to severe monetary or other penalties.

~~Shareholder rights~~We may incur substantial increases in labor cost due to the promulgation of the new labor contract law.

The PRC National People’s Congress promulgated the Labor Contract Law, which became effective on January 1, 2008. Compared to previous labor laws, the Labor Contract Law provides stronger protection for employees and imposes more obligations on employers. According to the Labor Contract Law, employers have the obligation to enter into written labor contracts with employees to specify the key terms of the employment relationship. The law also stipulates, among other things, (i) that all written labor contracts shall contain certain requisite terms; (ii) that the length of trial employment periods must be in proportion to the terms of the relevant labor contracts, which in any event shall be no longer than six months; (iii) that in certain circumstances, a labor contract shall be deemed to be without a fixed term and thus an employee can only be terminated with cause; and (iv) that there shall be certain restrictions on the circumstances under ~~Cayman Islands~~which employers may terminate labor contracts as well as the economic compensations to employees upon termination of the employee’s employment.

In addition, some of our employees are contracted through a third-party human resource agency that is responsible for managing, among others, payrolls, social insurance contributions and local residency permits of these employees. We may be held jointly liable if the third-party agency fails to pay such employees their wages and other benefits or otherwise become liable to these employees for labor law violations. In order to fully comply with the legal requirements under the Labor Contract Law and other related laws, we may ~~differ~~incur substantial increases in labor cost.

Our failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.

We are required by PRC laws and regulations to participate in various government-sponsored employee benefit plans, including social insurance funds (namely a pension contribution plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan) and a housing provident fund and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local government from time to time at locations where we operate our businesses. Employers who fail to report and pay social insurance funds in accordance with the relevant rules may be ordered to rectify the problem and pay the social insurance funds within a stipulated deadline. According to the Interim Regulation on the Collection and Payment of Social Insurance Premiums, if payment of certain social insurance funds is not made by the stipulated deadline, the relevant authority can charge a late fee payment of 0.2% per day from the original due date and fine the responsible persons of the employer up to RMB10,000. If an employer is found to be concealing the actual number of employees or the total amount of salaries from competent social insurance authorities, the employer may be subject to penalties. According to relevant PRC laws, for the failure to register or open housing provident fund accounts for employees, the employer may be required to rectify such breach within certain period and if such breach persists after such period, the employer may be subject to a fine ranging from RMB10,000 to RMB50,000. For the failure of payment of housing provident fund and failure to rectify such breach within certain period prescribed by the relevant authorities, the relevant housing provident fund authorities may apply for a court order requiring employers to make such payment.

Currently we are paying social insurance funds and house provident fund for and on behalf of our employees. However, we did not pay social insurance for some employees before 2009 and did not pay the house provident fund prior to May 2010, we had accrued the related benefit and are in the process of settling the amount. We may be subject to fines or other penalties if we fail to make adequate contributions to employee benefit plans, and we may be required to make up for the historical insurance funds and house provident fund that we should have paid for and on behalf of our employees.

A slowdown of the Chinese economy may adversely affect our business, results of operations and financial condition.

Since we generate substantially all of our revenue from online advertising, a slowdown of the Chinese economy could cause decreases or delays in advertising spending, a reduction in our revenue and a negative impact on our ability to grow our revenue. Further, any decreased collectability of accounts receivable or early termination of advertising agreements as a result of adverse economic conditions could negatively impact our results of operations.

Changes in China’s political and economic policies could harm our business.

The economy of China has historically been a planned economy subject to governmental plans and quotas and has, in certain aspects, been transitioning to a more market-oriented economy. Although we believe that the economic reform and the macroeconomic measures adopted by the Chinese government have had a positive effect on the economic development of China, we cannot predict the future direction of these economic reforms or the effects these measures may have on our business, financial position or results of operations. In addition, the Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, or OECD. These differences include:

economic structure;

level of government involvement in the economy;

level of development;

level of capital reinvestment;

control of foreign exchange;

methods of allocating resources; and

balance of payments position.

As a result of these differences, our business may not develop in the same way or at the same rate as might be expected if the Chinese economy were similar to those of the OECD member countries.

Governmental control of currency conversion may affect the value of our ordinary shares and ADSs.

The PRC government imposes controls on currency conversion between Renminbi and foreign currencies and, in certain cases, the remittance of currency out of and into China. We receive substantially all of our revenue in Renminbi, which is currently not a freely convertible currency. Under our current corporate structure, the income of our company will be primarily derived from dividend payments from Beijing WOFE and Tianjin WOFE. Shortages in the availability of foreign currency may restrict the ability of Beijing WOFE and Tianjin WOFE to remit sufficient foreign currency to pay dividends to us, or otherwise satisfy its foreign currency-dominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, in most cases, particularly payments of capital accounts items, approval from appropriate governmental authorities is required where (i) Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of offshore bank loans denominated in foreign currencies or (ii) any foreign currency is to be converted into Renminbi for investment in China. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from converting Renminbi into foreign currencies or vice versa, and obtaining sufficient Renminbi or foreign currency to satisfy our currency demands, our ability to transfer Renminbi to fund our business operations in China or to pay dividends in foreign currencies to our shareholders may be adversely affected.

Inflation in China and measures to contain inflation could negatively affect our profitability and growth.

While the PRC economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products and services rise at a rate that is insufficient to compensate for the rise in our costs, our business may be materially ~~from shareholder rights~~and adversely affected. In order to control inflation in the past, the PRC government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. Such austerity measures can lead to a slowing of economic growth. A slowdown in the PRC economy could also materially and adversely affect our business and prospects.

Our shareholders may face difficulties in effecting service of process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us or our management.

We conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, all of our directors and executive officers reside within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon some of our directors and senior executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, the PRC does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts.

Risks Related to Our ADSs

The price of our ADSs has been volatile historically and may continue to be volatile, which may make it difficult for holders to resell the ADSs when desired or at attractive prices.

The trading price of our ADSs has been and may continue to be subject to wide fluctuations. Since we completed our initial public offering on January 13, 2005, the sale prices of our ADSs on the NASDAQ Global Market ranged from US$0.93 to US$11.80 per ADS and the last reported sale price on March 10, 2011 was US$3.06.

Our ADS price may fluctuate in response to a number of events and factors, including among other factors:

announcements of technological or competitive developments;

regulatory developments in our target markets affecting us, our customers or our competitors;

announcements regarding intellectual property rights litigation;

actual or anticipated fluctuations in our quarterly operating results;

changes in financial estimates by securities research analysts;

changes in the economic performance or market valuations of our products;

addition or departure of our executive officers and key research personnel; and

sales or perceived sales of additional ordinary shares or ADSs.

In addition, the financial markets in general, and the market prices for Internet-related companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our ADSs, regardless of our operating performance.

Future sales or issuances, or perceived future sales or issuances, of substantial amounts of our ordinary shares or ADSs could adversely affect the ~~ability~~price of our ADSs.

If our existing shareholders sell, or are perceived as intending to sell, substantial amounts of our ordinary shares or ADSs, including those issued upon the exercise of our outstanding stock options, following this offering, the market price of our ADSs could fall. Such sales, or perceived potential sales, by our existing shareholders might make it more difficult for us to issue new equity or equity-related securities in the future at a time and place we deem appropriate. The ADSs offered in this offering will be eligible for immediate resale in the public market without restrictions, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions contained in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. If any existing shareholder or shareholders sell a substantial amount of ordinary shares after the expiration of the lock-up period, the prevailing market price for our ADSs could be adversely affected.

As a foreign private issuer with ADSs listed on the NASDAQ Global Market, we follow certain home country corporate governance practices instead of certain NASDAQ requirements.

As a foreign private issuer whose ADSs are listed on the NASDAQ Global Market, we are permitted to follow certain home country corporate governance practices instead of certain NASDAQ requirements. A foreign private issuer that elects to follow its home country practice must submit to the NASDAQ Stock Market LLC a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the SEC each NASDAQ requirement with which it does not comply followed by a description of its applicable home country practice.

As a company incorporated in the Cayman Islands with ADSs listed on the NASDAQ Global Select Market, we intend to follow our home country practice instead of NASDAQ requirements that mandate that:

our board of directors be comprised of a majority of independent directors;

our directors be selected or nominated by a majority of the independent directors or a nomination committee comprised solely of independent directors;

our board adopt a formal written charter or board resolution addressing the director nominations process and such related matters as may be required under the U.S. federal securities laws;

the compensation of our executive officers be determined or recommended by a majority of the independent directors or a compensation committee comprised solely of independent directors; and

issuances of securities in connection with equity-based compensation of officers, directors, employees or consultants be approved by shareholders.

As we are a Cayman Islands company, our shareholders may face difficulties in protecting their interests, and our ~~shareholders~~ability to protect our ~~and their interests.~~rights through the U.S. federal courts may be limited.

Our corporate affairs are governed by our amended and restated memorandum and articles of association, by the Cayman Companies Law ~~(2007 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 actions before the federal courts of the United States.

In addition, most of our directors and officers are nationals and residents of countries other than the United States. Substantially all of our assets and a substantial portion of the assets of these persons are located outside the United States. There is some uncertainty as to the enforcement in the Cayman Islands, in original actions or in actions for enforcement of judgments of United States courts, of liabilities predicated upon United States federal securities laws.

A final and conclusive judgmentin personamof a competent foreign court against our company based upon the agreements under which a definite sum of money is payable (not being a sum payable in respect of taxes or other charges of a like nature of, in respect of a fine or other similar penalty), may be the subject of enforcement proceedings in the Grand Court of the Cayman Islands under the common law doctrine of obligation by action on the debt evidenced by the judgment of such competent foreign court.

A final opinion as to the availability of this remedy should be sought when the facts surrounding the foreign court’s judgment are known, but, on general principles, it would be expected that such proceedings be successful provided that (a) the court which gave the judgment was competent to hear the action in accordance with private international law principles as applied in the Cayman Islands and (b) the judgment is not contrary to public policy in Cayman Islands, has not been obtained by fraud or in proceedings contrary to natural justice and is not based on an error in Cayman Islands law.

As a result of all of the above, our ~~public~~ shareholders may ~~face different considerations~~have more difficulties in protecting their interests in the face of actions ~~against the~~by our management, directors or ~~our~~ controlling shareholders than would shareholders of a ~~corporation~~public company incorporated in a jurisdiction in the United ~~States, and~~States.

In addition, Cayman Islands companies may not have standing to sue before the federal courts of the United States. As a result, 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.~~court may be limited.

~~All participants~~Our shareholders may have difficulties in enforcing judgments obtained against us.

We are a Cayman Islands company and substantially all of our ~~existing equity compensation plans who~~assets are ~~PRC citizens may be required to register with the State Administration of Foreign Exchange~~located outside of the ~~PRC, or~~United States. Substantially all of our current operations are conducted in the ~~SAFE. We may also face regulatory uncertainties that could restrict our ability to adopt additional equity compensation plans for~~PRC. In addition, most of our directors and ~~employees~~officers are nationals and residents of countries other ~~parties under~~than the United States. A substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult for our shareholders to effect service of process within the United States upon these persons. It may also be difficult for our shareholders to enforce judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC ~~law.~~would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state due to the lack of reciprocal treaty in the Cayman Islands or the PRC providing statutory recognition of judgments obtained in the United States. Furthermore, it is uncertain whether such Cayman Islands or PRC courts would be competent to hear original actions brought in the Cayman Islands or the PRC against us or such persons who reside outside the United States predicated upon the securities laws of the United States or any state.

Anti-takeover provisions in our organizational documents may discourage our acquisition by a third party, which could limit your opportunity to sell your shares at a premium.

~~On April 6, 2007,~~Our amended and restated memorandum and articles of association include provisions that could limit the ~~capital account department~~ability of others to acquire control of us, modify our structure or cause us to engage in change of control transactions, including, among other things, provisions that authorize our board of directors, without action by our shareholders, to issue preferred shares and to issue additional ordinary shares, including ordinary shares represented by ADSs.

These provisions could have the effect of depriving you of an opportunity to sell your ADSs at a premium over prevailing market prices by discouraging third parties from seeking to acquire control of us in a tender offer or similar transactions.

The voting rights of holders of ADSs are limited by the terms of the ~~SAFE issued~~deposit agreement.

A holder of our ADSs may only exercise the~~Operating Procedures for Administration~~ voting rights with respect to the underlying ordinary shares in accordance with the provisions of ~~Domestic Individuals Participating~~the deposit agreement. Upon receipt of voting instructions of a holder of ADSs in the ~~Employee Stock Option Plan or Stock Option Plan of an Overseas Listed Company~~, 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 participationmanner set forth in the ~~plan.~~deposit agreement, the depositary will endeavor to vote the underlying ordinary shares in accordance with these instructions. Under our amended and restated memorandum and articles of association and Cayman Islands law, the minimum notice period required for convening a general meeting is five days. When a general meeting is convened, you may not receive sufficient notice of a general meeting to permit you to withdraw your ordinary shares to allow you to cast your vote with respect to any specific matter. In addition, ~~Circular 78 also requires PRC citizens~~the depositary and its agents may not be able to ~~register with SAFE~~send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. Furthermore, the depositary 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. In May 29, 2007, the General Affairs Department of the SAFE issued the~~Notice on Printing and Distributing the Operating Rules~~its agents will not be responsible for the Notice of the State Administration of Foreign Exchange on the Relevant Issues about Foreign Exchange Control over the Financing and Return Investment of Domestic Residents through Overseas Special Purpose Companies, or Circular 106. This notice also requires PRC citizens who hold stock options pursuant to a company’s equity incentive plan to register with the SAFE. We submitted the required registration on behalf of our stock option holders who are PRC citizens with the SAFE in December 2007 and such registration is currently pending approval. Although Circular 78 has not yet been made publicly available nor has it been formally promulgated by the SAFE, and we have submitted the registration with the SAFE on behalf of our stock option holdings who are PRC citizens stock option holders pursuant to Circular 106, any failure to ~~comply with~~carry out any instructions to vote, for the manner in which any vote is cast, or for the effect of any such ~~provisions~~vote. As a result, you 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~~not be able to ~~grant equity compensation~~exercise your right to ~~our personnel which is currently a significant component of the compensation of many of our PRC employees,~~vote and you may lack recourse if your ordinary shares are not voted as ~~a result of which our business operations may be adversely affected.~~you requested.

1732

~~Recent changes in~~We may be required to withhold PRC income tax ~~laws could have a material adverse effect~~ on the dividends we pay you (if any), and any gain you realize on the transfer of our ~~operating results.~~ordinary shares and/or ADSs may also be subject to PRC tax.

~~In March 2007, the National People’s Congress of China enacted a new Enterprise Income Tax Law, or~~Pursuant to the New EIT Law, ~~which became effective on January 1, 2008. In addition, the Implementation Rules of the New Enterprise Income Tax Law, or the Implementation Rules were promulgated~~we may be treated as a PRC resident enterprise for PRC tax purposes. If we are so treated by the PRC State Council on December 6, 2007 and the Notice on Implementation of Transitional Arrangements for Preferential Policies of Enterprise Income Tax, or the Transitional Arrangements Notice, was promulgated by the PRC State Council on December 26, 2007. Under the New EIT system, a unified enterprise income tax ~~rate of 25% and unified tax deduction standards will~~authorities, we would be ~~applied equally~~obligated to both domestic-invested enterprises and foreign-invested enterprises. Enterprises established prior to March 16, 2007 eligible for preferential tax rate of 15% according to the then effective PRC Enterprise Income to Law for Foreign-Invested Enterprise and Foreign Enterprise tax laws and administrative regulations shall be subject to transitional rules as stipulated in the Transitional Arrangements Notice. In addition, certain qualified high and new technology enterprises strongly supported by the state may still benefit from a preferential tax rate of 15% under the New EIT Law if they meet the definition of “qualified high and new technology enterprise” strongly supported by the state set out in the Implementation Rules which refers to companies hold independent ownership of core intellectual properties and simultaneously meet a list of other criteria as stipulated. As a result, if our PRC subsidiaries qualify as qualified high and new technology enterprises strongly supported by the state under the new EIT Law, they will continue to benefit from a preferential tax rate of 15%. Otherwise, the applicable tax rate of our PRC subsidiaries may be subject towithhold PRC income tax ~~at a rate~~ of ~~25% starting from 2008 under the New EIT system. We have used the new standard rates for calculation~~up to 5.0% on payments of ~~deferred taxes until the necessary approvals~~dividends on our shares and/or ADSs to investors that are ~~obtained.~~

~~Under the new Enterprise Income Tax law effective on January 1, 2008, the rules for determining whether an entity is~~non resident inenterprises of the PRC ~~for tax purposes have changed~~located in Hong Kong and ~~the determination~~10.0% on payments of ~~residence depends amongst other things~~dividends on ~~the “place~~our ordinary shares and/or ADSs to investors that are non resident enterprises of ~~actual management.” If Hurray! Holding Co., Ltd., or our non-PRC subsidiaries, were to be determined to be a PRC resident for tax purposes, it or they, would be subject to tax in~~ the PRC located outside Hong Kong, if the dividends payable on our ~~worldwide income including the income arising in jurisdictions outside~~ordinary shares and/or ADSs are considered derived from sources within the PRC. ~~We have evaluated~~In addition, any gain realized by non resident investors from the transfer of our ~~resident status under~~ordinary shares and/or ADSs could be regarded as being derived from sources within the ~~new law~~PRC and ~~related guidance and believes Hurray! Holding Co., Ltd. would not be a PRC resident for PRC income tax purposes.~~

~~As Hurray! Holding Co., Ltd. would be non-resident for PRC tax purposes, dividends paid to it out of profits earned after January 1, 2008 from its PRC subsidiaries would~~ be subject to a ~~withholding tax of~~ 10%.

~~Aggregate undistributed earnings of our subsidiaries and affiliates located in the~~ PRC that are available for distribution to the Company at December 31, 2007 are considered to be indefinitely reinvested under APB opinion No. 23, “Accounting for Income Taxes — Special Areas,” and accordingly, no provision has been made for the PRC dividend withholding taxes that would be payable upon the distribution of those amounts to Hurray! Holding Co., Ltd.. Thetax. Such PRC tax ~~authorities have also clarified that distributions made out of retained earnings accumulated prior to January 1, 2008 are not subject to the withholding tax.~~

~~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 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 WVAS, such as our services related to short messaging service (“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 affiliated Chinese entities. Many providers of 2G and 2.5G services have obtained various value-added telecommunication services licenses.

Certain of our affiliated Chinese entities, Hurray! Solutions, Beijing Palmsky, Beijing Network, Hengji Weiye, Beijing Hutong, Shanghai Magma, Shanghai Saiyu, and Henan Yinshan, have been granted an inter-provincial value-added telecommunication license by the MII that permits it to conduct inter-provincial operations. Our affiliated Chinese entity, 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 serviceswould reduce your investment return 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 subsidiaries 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:

~~levy fines,~~

~~confiscate our income or the income of our affiliates,~~

~~revoke our business license or the business license of our affiliates,~~

~~shut down our servers or the servers of our affiliates and/or blocking any Web or WAP sites that we operate, and~~

~~require us to discontinue any portion or all of our 2G and 2.5G services business.~~

The regulation of Internet website operators is also new and subject to interpretation in China, and our business could be adversely affected if we are deemed to have violated applicable laws and regulations.

Our affiliate, Hurray! Solutions, and some of our other affiliated Chinese entities operate Internet websites in China, which are one of the channels through which our services are offered. The interpretation and application of existing Chinese laws and regulations, the stated positions of the main governing authority, the MII, 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 with Internet operations, including ours. In particular, the MII has stated that the activities of Internet content providers are subject to regulation by various Chinese government authorities, depending on the specific activities conducted by the Internet content provider. We cannot be certain that the commercial Internet content provider license issued by the relevant government agencies overseeing the telecommunications industry or any value-added telecommunication license held by Hurray! Solutions or our other affiliated Chinese entities will satisfy these requirements. Our failure to comply with applicable Chinese Internet regulations could subject us to severe penalties as noted in the prior risk factor.

In particular, regulatory and policy changes by MII and the telecom operators can be unpredictable and have caused operating channels to become increasingly unavailable for marketing and promotion. As a result, we have diversified our marketing and promotion channels and developed direct media advertising, Internet marketing alliances, handset vendor partnerships, as well as offline channels such as record stores and convenient stores. These new marketing and promotion methods can be costly and may not be entirely effective in developing new business, which in turn, may adversely affect our customer base and revenues.

~~RISKS RELATED TO DOING BUSINESS IN CHINA~~

~~A slowdown in the Chinese economy may slow down our growth and profitability.~~

The growth of the Chinese economy has been uneven across geographic regions and economic sectors. There can be no assurance that growth of the Chinese economy will be steady or that any slowdown will not have a negative effect on our business. The Chinese government has, in the past, used macroeconomic tools and regulations to slow the rate of growth of the Chinese economy and may take similar measures in the future, the results of which are difficult to predict. The Chinese economy overall affects our profitability as expenditures for wireless value-added and music content services may decrease due to slowing domestic demand. More specifically, increased penetration of WVAS in the less economically developed central and western provinces of China will depend on their achieving certain income levels so that mobile handsets and related services become affordable to a significant portion of the population. Moreover, sales of music content are substantially dependent on the level of discretionary consumer spending in China.

~~The Chinese legal system embodies uncertainties which could limit the legal protections available to you and could also adversely affect our ability to operate our business.~~

An outbreak of pandemic avian influenza or other widespread public health problem, or a renewed outbreak of SARS in China, where all of our revenues are derived, and in Beijing, where our operations are headquartered, could have a negative effect on our operations. Our operations may be affected by a number of health-related factors, including the following:

~~quarantines or closures of some of our offices which would severely disrupt our operations,~~

~~the sickness or death of our key officers and employees, and~~

~~a general slowdown in the Chinese economy.~~

~~Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our business and results of operations.~~

~~Changes in China’s political and economic policies could harm our business.~~

~~economic structure,~~

~~level of government involvement in the economy,~~

~~level of development,~~

~~level of capital reinvestment,~~

~~control of foreign exchange,~~

~~methods of allocating resources, and~~

~~balance of payments position.~~

~~As a result of these differences, our business may not develop in the same way or at the same rate as might be expected if the Chinese economy were similar to those of the OECD member countries.~~

~~Restrictions on currency exchange may limit our ability to receive and use our cash resources effectively.~~

Because almost all of our future revenues may be in the form of Renminbi, any future restrictions on currency exchanges may limit our ability to use revenues generated in Renminbi to fund our business activities outside China or to make dividend or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the Renminbi for current account transactions, significant restrictions still remain, including primarily the restriction that foreign invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents. In addition, conversion of Renminbi for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items.

The PRC government also imposes controls on the convertibility of foreign currencies into Renminbi and, in certain cases, the remittance of foreign currency into China. Under existing PRC foreign exchange regulations, approval from appropriate government authorities is required where foreign currency is to be converted into Renminbi and remitted into China to pay capital expenses, such as payments denominated in Renminbi for acquisitions. Shortages in the availability of Renminbi may limit the ability of our PRC subsidiaries and affiliates to remit sufficient Renminbi to fund our business activities including future acquisitions in China. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the Renminbi and foreign currencies, especially with respect to foreign exchange transactions.

~~The value of~~ our ordinary shares and/or ADSs and ~~ADSs will be affected by the foreign exchange rate between U.S. dollars and Renminbi.~~

The change in value of the Renminbi against the U.S. dollar, Euro and other currencies is affected by, among other things, changes in China’s political and economic conditions. On July 21, 2005, the PRC government changed its decade-old 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 foreign currencies. Since the adoption of this new policy, the value of the Renminbi against the U.S. dollar has fluctuated daily within a narrow band, but overall has appreciated significantly against the U.S. dollar. While the international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant fluctuation of the Renminbi against the U.S. dollar. To the extent that we need to convert U.S. dollars into Renminbi for our operational needs and should the Renminbi appreciate against the U.S. dollar at that time, our financial position andmay also adversely affect the price of our ordinary shares ~~and ADSs~~and/or ADSs. See “—Risks Related to Our Business—We may be ~~adversely affected. Conversely,~~deemed a PRC resident enterprise under the New EIT Law and be subject to PRC taxation on our worldwide income.”

You may be subject to limitations on transfer of your ADSs.

Your ADSs represented by American Depositary Receipts are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer, or register transfers of our ADSs generally when our books or the books of the depositary are closed, or at any time if we ~~decide~~or the depositary thinks it is advisable to ~~convert our Renminbi into U.S. dollars for~~do so because of any requirement of law or any government or governmental body, or under any provision of the ~~purpose of declaring dividends on our ordinary shares~~deposit agreement, or for any other ~~business purposes~~reason.

Your right as a holder of ADSs to participate in any future rights offerings may be limited, which may cause dilution to your holdings.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to our ADS holders in the United States unless we register the rights and the ~~U.S. dollar appreciates against~~securities to which the ~~Renminbi,~~rights relate under the ~~U.S. dollar equivalent~~Securities Act or an exemption from the registration requirements is available. In addition, the deposit agreement provides that the depositary bank will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective nor is it our ~~earnings~~current intention to do so. Moreover, we may not be able to rely on an exemption from ~~our subsidiary~~registration under the Securities Act. Accordingly, ADS holders may be unable to participate in ~~China would be reduced.~~a future rights offerings, if any, and may experience dilution in their holdings. In addition, if the depositary is unable to sell rights that are not exercised or not distributed or if the sale is not lawful or reasonably practicable, it will allow the rights to lapse, in which case you will receive no value for these rights.

Item 4. Information Onon the Company

A. History and Development of the Company

We became an independent company in September 1999 when we were spun-off from UT Starcom Inc., a Nasdaq-listed company that manufactures telecommunication equipment in China. At that time, we focused on developing billing software and providing system integration services for telecommunications network operators in their fixed-line Internet infrastructure build-outs. In June 2001, members of our current management team conducted a management buy-in by purchasing a substantial equity interest in our company, at which time the team assumed management control of us with the purpose of developing products and services for 2.5G mobile networks. Prior to the management buy-in, a majority of the new management team had previously worked together in senior management positions at AsiaInfo, a Nasdaq-listed company and a leading provider of telecommunications software and system integration services in China.

In April 2002, we established a new holding company, Hurray! Holding Co., Ltd., in the Cayman Islands. We currently conduct our business in China through our wholly owned subsidiary, Beijing Hurray! Times. To comply with ownership requirements under Chinese law which imposes certain restrictions on foreign companies from investing in certain industries such as value-added telecommunication and Internet services, we have entered into a series of agreements with our ten affiliated Chinese entities and their respective shareholders. We hold no ownership interest in any such affiliated Chinese entities. See Item 7.B. “Related Party Transactions,” and Item 4.C. “Information About the Company — Organizational Structure.”

As part of our strategy to enhance our growth through opportunistic acquisitions and strategic investments and streamline our business focus through certain divestments, we have completed the following in the past year:

In April 2007, we acquired Shanghai Saiyu, which provides WAP, multimedia messaging service (“MMS”), IVR and SMS services on the China Mobile network throughout China, in exchange for $3.2 million in cash.

In April 2007, we completed our acquisition of a 30% equity interest in New Run, which is a leading record label in China. We paid a total of $2.45 million in cash for such interest, which consideration is subject to adjustments based on the financial performance of New Run’s business in the one-year period following the closing of the acquisition.

In April 2007, Freeland Music acquired a 51% equity interest in Fly Songs, a well known performance and concert promotion company in Beijing, in exchange for $0.2 million in cash. Our management believes that Fly Songs has established key relationships with leading domestic and international music companies and music industry participants, which has enabled it to organize various concerts and performances for leading artists. In November 2007, for example, Fly Songs organized the financially successful “The Year of Jacky Cheung World Tour 2007” in Mianyang, a city located in Sichuan Province, China.

In June 2007, we completed our acquisition of a 65% equity interest in Secular Bird, which is a record label in China. We paid a total of $0.4 million in cash for this interest, which is subject to adjustments based on the financial performance of Secular Bird during the one-year period following the closing of the acquisition.

~~In April 2007, we acquired Henan Yinshan, which provides SMS services through China Mobile and China Unicom, in exchange for $0.9 million in cash.~~

In 2007, we ~~signed~~entered into an agreement to sell our software and systems integration (“SSI”) business ~~unit, Hurray! Times Communications (Beijing) Co., Ltd. (“ Hurray! Times Communications”),~~ to ~~a subsidiary of~~ Taiwan Mobile, a leading telecomunications service provider in Taiwan. With this sale we were able to focus on our music and other entertainment services. We disposed the SSI business unit on August 1, 2007, when Taiwan Mobilewhich assumed control over the management and assumed the risks of ~~this business. The consideration we are to receive for the sale is approximately $4.8 million, of which a certain amount is contingent upon the collection of accounts receivable of~~our SSI business in August 2007. We completed the remaining closing procedures in April 2008. This divestment enabled us to focus on our strategy of becoming a leading entertainment content production and distribution house in China. Before August 17, 2010, we conducted our wireless value-added services (“WVAS”) business in China and music development, production and distribution and artist development business in China and Taiwan. From 2007 to 2010, we expanded our wireless value-added services (“WVAS”) and recorded music businesses organically and through a series of acquisitions of controlling stakes in independent recorded music companies.

In June 2009, we entered into a tender offer agreement with Shanda Interactive under which Shanda Interactive commenced a tender offer to acquire 51% of our outstanding asordinary shares. The tender offer was successfully completed in July 2009. As of ~~August~~March 1, ~~2008.~~2011, Shanda Interactive owned approximately 51.60% of our outstanding equity interests.

In November ~~2007,~~2009, we ~~announced~~entered into a definitive share purchase agreement to acquire Ku6 Holding Limited and completed the ~~signing~~acquisition in January 2010 by issuing an aggregate of 723,684,204 ordinary shares.

On May 28, 2010, we sold all of our 51% interest in Beijing Huayi Brothers Music Co., Ltd. (“Huayi Music”) to Huayi Brothers Media Corporation (“Huayi Media”) for an aggregate consideration of RMB34,450,000 (equilvent to US$5.0 million).

On August 17, 2010, we sold our wireless value-added services and recorded music businesses to Shanda Interactive for $37,243,904 in cash, pursuant to the Master Transaction Agreement entered into between us and Shanda Interactive on June 1, 2010. Concurrently, we acquired 75% of an ~~agreement~~online audio business from Shanda Interactive in exchange for 415,384,615 newly issued ordinary shares and the remaining 25% from a non-controlling shareholder in exchange for 138,461,539 newly issued ordinary shares.

On August 17, 2010, we changed our name from Hurray! Holding Co., Ltd. to ~~merge with Enlight~~Ku6 Media Co., Ltd.

Our principal executive offices are located at c/o Ku6 Media Co., Ltd., ~~a private entertainment content and distribution company~~Building 6, Zhengtongchuangyi Centre, No. 18, Xibahe Xili, Chaoyang District, Beijing 100020, PRC. Our telephone number is +86 10 5758-6813. Our agent for service of process in China, in an all stock transaction. That agreement was subsequently terminated in March 2008 due to a divergence in business strategies and a mutual determination that a combination would not be in our mutual interests.

the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011.

B. Business Overview

Introduction

We are a leading online ~~distributor of music~~video company in China. Through our two online brands Ku6 and ~~music-related products such as ringtones, ringbacktones (“RBT”),~~Ku6 Theatre, and ~~truetones~~online video websites, www.ku6.com and www.juchang.com, we provide video information services and entertainment to ~~mobile users~~viewers in ~~China through the full range of WVAS platforms over mobile networks~~China. As an online video portal, www.ku6.com offers news, reports, interactive entertainment programs, and ~~through the Internet. Our company~~ also provides a ~~wide range~~video platform for sharing and watching user-generated content. Our juchang.com website offers an array of ~~other WVAS to mobile users in China, including games, pictures and animation, community,~~copyrighted content, such as movies, television series and other ~~media and entertainment services.~~video programs sourced from our global content partners. We ~~are~~ also ~~a leader in artist development, music production and offline distribution~~provide online audio advertising service in China through our ~~affiliated~~controlled affiliate Yisheng. In 2010, we made the strategic decision to divest our wireless value-added services and recorded music ~~companies Huayi Brothers Music, Freeland Music, New Run, Secular Bird~~businesses to focus on our online video business. We completed the disposal of our wireless value-added services and ~~Fly Songs.~~

Traditionally, we focused on marketing directly through mobile operator’s provided services such as SMS and WAP. Due to regulatory and policy changes by the MII and the telecom operators, operator channels have become increasingly unavailable and subject to sudden changesrecorded music businesses in ~~policies by the telecom operators. Since 2005,~~August 2010. Consequently, we have ~~diversified~~classified the results of operations of our ~~marketing~~wireless value-added services and ~~promotion channels and developed direct media advertising, Internet marketing alliances; and handset vendor partnerships,~~recorded music businesses as ~~well as offline channels such as record stores and convenient stores.~~discontinued operations for all periods presented. See Note 2(1) to our consolidated financial statements.

We ~~have restructured~~believe that our business into four main business lines in an effort to better align our corporate strategies and objectives. The four major business lines are WVAS, E-Marketing, Offline Channel and Digital Media. Since we only begancontinuous focus on offering our E-Marketing services in early 2008 and our Offline Channel business line is still under development, both lines of business are included under our WVAS segment in our financial statements included in this annual report. The business line of Digital Media is under the ~~segment of Recorded Music in our financial statements included in this annual report.~~

~~Our WVAS Services~~

~~We derive most of our revenues from WVAS, which includes 2G services such as SMS, IVR and RBT, and 2.5G services such as WAP, MMS, and Java™.~~

~~Our WVAS business line consists mainly of the following product lines:~~

~~SMS Services~~. SMS is the largest and most mature wireless value-added service in China. It is the most basic form of mobile messaging service and is supported by substantially all mobile phone models currently sold. We have focused our activities in SMS on our strongest core services to maximize our revenues. These core services include chat and other community services, interactive television entertainment, quizzes and games. Users can purchase our SMS services through the networks of China Mobile and China Unicom by responding to our broadcast messages advertising our services, or sending us a request via SMS using a specific code.

~~IVR Services~~. IVR services are available on the networks of China Mobile, China Unicom, China Telecom and China Netcom, and include chat services whereby users can chat with each other live over their mobile handsets in wireless public chat rooms. We believe this service is attractive to young mobile users in China as a cost-effective way to speak with their friends and to make new friends, although it may be less useful for business purposes because conversations in these chat rooms are open to anyone. Users can also utilize our IVR services to access music, greetings from famous Chinese celebrities, jokes and serial stories, such as detective stories, from their mobile phones or send this content to the mobile phones of their friends or others.

~~RBT Services~~. We offer RBT services on the networks of China Mobile, China Unicom and China Telecom. RBT services allow a mobile phone user to customize the ringtone that callers hear when calling the user’s mobile phone. We offer a variety of entertaining content including pre-recorded messages, movie dialogues and soundtracksfinest online video viewing platform and a ~~wide range of classical and popular music. RBT services are currently available on all 2G mobile phones. They are also~~superior user experience has enabled us to become one of the ~~most effective platforms for mobile music products, which have become one~~largest online video companies in China and elevated our Ku6 brand to a level of ~~our strategic focuses. Accordingly, we believe that they present significant growth potential.~~high recognition.

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~~WAP Services.~~~~We offer~~Our mission is to become a central source of news and entertainment for China’s online video viewers, who may access our ~~WAP~~products and services through ~~China Mobile’s~~any Internet-enabled device. We provide a comprehensive selection of unique and ~~China Unicom’s networks. WAP~~differentiated, premium licensed content, in-house developed content and user-generated content, or UGC, on our websites. Our broad selection of online video content includes entertainment, sports, finance, fashion, technology, automobile, education and others. We also provide an online platform that allows users to ~~browse~~share comments on videos, ensuring that our users enjoy a highly engaging and interactive experience on our websites. As of December 31, 2010, our content library had more than 60 million video clips. The volume of high-quality and differentiated content available on our website has allowed us to establish a valuable user base in China, consisting primarily of young urban educated users between the ages of 18 and 35, a particularly attractive demographic to advertisers.

We currently derive substantially all of our revenues from online advertising services. Our advertising solutions present brand advertisers with attractive opportunities to combine the visual impact and engagement of traditional television-like multimedia advertisements with the interactivity and precise targeting capabilities of the Internet. Our online advertising customers include some of the world’s well-known brands. Our online advertising services include in-video, display, sponsorship and other forms. We sell our advertising services primarily through third-party advertising agencies.

Due to PRC legal restrictions on foreign ownership and investment in value-added telecommunications services and advertising businesses in China, we operate our business primarily through our consolidated affiliated entities in China. We do not hold equity interests in our consolidated affiliated entities. However, through a series of contractual arrangements with these consolidated affiliated entities and their ~~mobile phones~~respective shareholders, we effectively control, and are able to derive substantially all of the economic benefits from, these consolidated affiliated entities.

Our Video Platform

Our Websites

Since our acquisition of Ku6 in January 2010, we have been expanding our services available to Internet users. In March 2010, we launched our juchang.com website to implement our content strategy of dividing our video content into long-clip videos and short-clip videos. Users can access our juchang.com website for long-clip videos, including movies, TV series and other entertainment programs, all of which are copyrighted content that we have licensed from the content owners. Our ku6.com website provides users access to short-clip videos, including news and reports, which can be either in-house produced or provided by our content partners, such as television stations, and varieties of UGC.

Our website has a series of user-friendly functions such as search tools and recommendations. We also help users navigate our database and find videos of interest by creating popularity ranking indices and interest-based video channels, such as ent.ku6.com for entertainment and sports.ku6.com for sports. We provide social features, such as community webpages and video sharing and commenting tools. We also offer a search history list for frequent visitors to help them quickly locate recently viewed video clips. We present a chat box alongside videos so that users viewing the same video at the same time can ~~request and receive information in~~have live, online chats. Users may create a manner similar to accessing information on Internet web sites through personal computers. The majority of our 2.5G services are WAP services and include ringtone downloads, picture downloads, community services, games, pop culture, news and finance and personal information management services.

~~MMS Services~~. We offer MMS services on China Mobile’s and China Unicom’s networks. MMS is a messaging service that allows multimedia content such as ringtones and pictures to be transmitted in a single message, compared to simple text via SMS. MMS can be downloaded on many 2.5G mobile phones in China, and is an effective way for mobile users to send and receive messages that contain sizeable multimedia content such as ringtones, pictures and animation.

~~Java™ Games.~~~~We offer a range of in-house developed games~~playlist based on ~~the Java~~^™ ~~platform, which offers an effective way to create sophisticated 2.5G games. In April 2004, we launched our first Java~~^™ ~~game through China Mobile’s WAP portal. Our affiliated Chinese entity, Shanghai Magma, is a top tier Java~~^™ ~~game developer and publisher in China with over 200 titles of Java~~^™ ~~games and a large pipeline of new games under development. We anticipate~~their preferences so that the ~~popularity~~requested video will be broadcast continuously. Registered visitors may upload video clips easily to our website and comment under each video clip to share their opinions. We believe all these features help provide an enhanced user experience and reinforce user loyalty.

In addition, users can download our proprietary P2P software “Fast Ku6” and install a Ku6 interface on their computer desktops, which allows users with limited bandwidth Internet connection to improve their viewing experience. As of ~~Java~~^™~~games will accelerate in the next several years, especially after the launch of~~December 31, 2010, “Fast Ku6” has been downloaded approximately 120 million times.

Mobile Platform

Users can now watch ku6.com and juchang.com videos on their 3G ~~services. In 2007, we launched 53 new titles~~mobile phones. We have entered into agreements on ~~China Mobile’s game portal, including “Speed Race Go-Kart,” “Magma Millionaire Shanghai Tour,” and “Extreme Speed.”~~

~~Our E-Marketing Services~~

~~Beginning in January, 2008, we began providing customized Internet and~~a non exclusive basis with major mobile phone ~~solutions~~manufacturers to develop and ~~support to assist businesses~~pre install Ku6 software client on a variety of major 3G mobile phones. We also provide free software clients on our website, in Apple’s App Store, Google’s Android Market and governmental institutions in interacting with, managing, and marketing to their target customers and constituents through the Internet. Such services include performance-based Internet and mobile phone advertising solutions, search, corporate email, Internet and mobile phone customer relations management, interactive sales, classified marketing, e-advertising and product marketing. We assistNokia’s Ovi Store, for our clients in identifying a targeted customer or user base, devise a customized Internet and mobile phone based strategies for reaching that base and implement such strategies by drawing upon our knowledge of internet and mobile phone technologies, internally developed Internet applications and existing relationships with various Internet based distribution and on-line marketing channels.

~~Our Offline Channel Business~~

Our offline channel business line is a new business and strategic initiative that we are undertaking with the aim of further expanding the methods by which our customers can directly access our products, such as our digital music, games, pictures, and other interactive media and entertainment services. Through our offline channel business, we have internally developed distribution software which will enable mobile phone users to download ~~various digital entertainment services through offline channels, such as record stores~~ and ~~convenience stores. Our offline channel business will enable us to sell our products without relying~~install on ~~the telecom operators for delivery, billing and collection. Furthermore, this business line will not be regulated by the policies and guidelines~~their smart phones. As of ~~the telecom operators or subject to their fees. We believe this strategic initiative is an important part~~December 31, 2010, there have been more than 7 million downloads of our ~~efforts~~Symbian version application and close to ~~continue growing~~1 million downloads of our ~~WVAS business over the long term. Our offline channel business is currently under development.~~

~~Our Digital Media Business~~

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. Consequently, the industry is relatively small and fragmented, with over one hundred record companies of various sizes in China. Our management further estimates that major international record companies such as Warner Music, Universal, EMI and Sony BMG account for approximately 30% of the market in China in terms of revenues in recent years, approximately one dozen Hong Kong- and Taiwan- based independent labels such as Empire International, Rock Music, Linfair, H.I.M and Ocean Butterfly account for approximately 20% of the market, six top tier domestic independent labels such as Taihe Rye, Huayi Brothers Music, the Freeland Group, Zhushu and New Run account for approximately 20% of the market, and approximately eighty second or third tier domestic independent labels account for the remaining 30% of the market. Due to piracy issues, record companies in China have traditionally relied on revenues not only from CD sales, but also from concert tours and corporate sponsorship.

Record companies in China began in 2005 to experience a rapid increase in revenues from sales of digital and mobile music rights to wireless value-added service providers (such as our company) and Internet music website operators. This music content can be used in such services as ringtones, RBT, and truetone downloads and playbacks over mobile and Internet platforms. To capture more of this market opportunity, many record companies in China are increasingly focused on building their wireless and Internet distribution channels, including by offering their own WVAS or working directly with telecom operators.iPhone version application.

Because music-related products are representing an increasingly significant portion of our total WVAS revenues and we have been licensing more and more music rights from record companies in China, we determined to become the first wireless value-added service provider to make a significant upstream investment in the music business by acquiring controlling or significant stakes in top tier local independent record companies in China. We have acquired a number of music companies with diverse and complementary strengths. For example, Freeland Music is a pioneer in China in developing Internet-based singing talent and distributing their music through offline CD distribution as well as through Internet and mobile distribution. Huayi Brothers Music is well known in China for music production. New Run is well known for finding and developing new artists and music in China. Secular Bird has a relatively short history but has been successful in identifying and developing promising artists and producing top hit music. Our newest acquisition, Fly Songs, is well known for organizing various concerts and performances for top artists.

The acquisition of local independent record labels is an important part of our strategy to focus on building digital and mobile music production and distribution expertise and capabilities. We further estimate that Hurray! Digital Media accounts for approximately 15% of the market in China among domestic competitors in terms of revenues following our acquisition of equity interests in such first tier domestic music companies.

~~Network Service Agreements with Telecom Operators~~

~~General~~

China Mobile and China Unicom are the predominant telecom operators. Given their market presence, our negotiating leverage with these telecom operators is limited, and our business is dependent on maintaining our relationships with them. See Item 3. “Risk Factors — Risks Related to Our Company— We depend on China Mobile, China Unicom and China Telecom, three of the four major telecommunications network operators in China, for the major portion of our revenue, and any loss or deterioration of our relationship with China Mobile, China Unicom and China Telecom, due to expected government imposed restructurings or otherwise, may result in severe disruptions to our business operations and the loss of a major portion of our revenue” and “— The termination or alteration of our various agreements with China Unicom, China Mobile and their provincial affiliates would materially and adversely impact our revenue and profitability.” Our affiliated Chinese entities have entered into network service agreements with the national and certain provincial offices of China Mobile and China Unicom to offer our various services through their networks. More recently, our affiliated Chinese entities have also entered into various agreements with China Telecom and China Netcom for the provision of certain of our services over their limited mobility networks in China. Each of these agreements with each mobile operator covers a specific geographic area and/or service type without overlaps.

~~For 2007, we derived approximately 60%, 26%, 10% and 1% of our total revenues from customers through China Mobile, China Unicom, China Telecom and China Netcom, respectively.~~

The following is a summary of the material features of our contractual relationships with China Mobile, China Unicom and China Telecom, the telecom operators from whom we derive most of our WVAS revenues.

~~Fee Arrangements and Other Payment Considerations~~

Our network service agreements with China Mobile permit China Mobile to deduct a service fee ranging from 9% to 30%, varying from province to province, from the amounts China Mobile receives from customers for our services. China Mobile relies solely on its records for calculating the amounts of these service fees. We also pay China Mobile a network fee to the extent that the number of SMS messages sent by us over China Mobile’s network exceeds the number of messages our customers send to us. The network fee is on average RMB0.05 ($0.006) per message. In some provinces, the amount of network fees may vary according to the volume of the net balance of such incoming and outgoing messages.

Our network service agreements with China Unicom provide that China Unicom directly bill customers who use our services and, for collecting these fees and for their network services, deduct a service fee from the aggregate amounts paid by customers for our services. These service fees range from 12% to 50% of gross revenue for amounts received by provincial operators of China Unicom and vary from province to province. If there is a discrepancy between our billing records and China Unicom’s billing records and the discrepancy is 5% or less of total amounts billable to our customers, the calculation of service fees is based on China Unicom’s billing records. If the discrepancy exceeds 5%, the agreements provide that we and China Unicom reconcile our records to address the discrepancy.

Our network service agreements with China Telecom permit it to deduct a service fee between 15% to 50% of gross revenue, depending on the type of service, from the amounts it receives from customers for our services.

~~Obligations with Respect to Our Services~~

We must obtain the approval of China Unicom, China Mobile, or China Telecom for our services and their pricing before these services can be offered on their network. Our contracts with China Mobile, China Unicom and China Telecom vary in the specific obligations they impose, but they generally require, among other things, that the telecom operators maintain records regarding transmission and billing matters, collect fees from their customers and remit amounts owed to us and notify us of any customer complaints unrelated to network problems. In turn, we must provide prompt customer support, handle any complaints which are unrelated to the operator’s network and ensure that our content complies with applicable laws and regulations and the policies of the operators and that we have appropriate licenses. For some contracts, we must satisfy operational or financial performance criteria which are established by the mobile operator and modified from time to time.

~~Term and Termination and Other Material Provisions~~

The term of our contracts with China Mobile, China Unicom, and China Telecom is generally one or two years. We typically renew these contracts or enter into new ones when the prior contracts expire, but on occasion, the renewal or new contract can be delayed by periods of one month or more. The agreements can also be terminated in advance for a variety of reasons which vary among the individual contracts with the operators, including, for example, when we breach our obligations under the contract, 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 operator.

Generally, our contracts with the telecom operators are silent on the arrangements relating to payment from the operators in the event such contracts are not renewed. Payment and billing disputes, if any, will therefore be resolved in accordance with the provision in the contracts that the parties resolve disagreements through amicable negotiation (where such provision survives the termination of the respective agreements) or through court proceedings if amicable resolution cannot be reached.

~~Music Copyright Agreement with Telecom Operators and Service Providers~~

~~General~~

Our affiliated music companies have entered into music copyright agreements with the national and certain provincial offices of certain telecom operators, as well as various domestic service providers such as Kongzhong, Sina and Sohu, to authorize telecom operators and service providers to use music copyrights of our affiliated music companies and distribute music from our artists through the portals, websites or platforms of the various telecom operators and service providers to allow end users to download the music. The following is a summary of the material features of our contractual relationships with the national and certain provincial offices of telecom operators and service providers.

~~Fee Arrangements~~

Our music copyright agreements with telecom operators and service providers are usually copyright purchase and use authorization agreements. Telecom operators and service providers will pay service fees ranging from 50% to 60% of gross revenue for amounts received by distributing the music through their network. In some agreements, the amount of service fees may vary according to the popularity and commercial success of a music product and other various tangible and intangible factors.

~~Term and Termination and Other Material Provisions~~

The terms of our music copyright agreements with telecom operators and service providers are generally one or two years. We typically renew these contracts or enter into new ones when the prior contracts expire, but on occasion, the renewal or new contract can be delayed by periods of one month or more. The agreements can also be terminated in advance for a variety of reasons which vary among the individual agreements, including, for example, when certain obligations are breached under the agreements.

Payment and billing disputes are resolved in accordance with the provision in the agreements that the parties resolve disagreements through amicable negotiation or through court proceedings if amicable resolution cannot be reached.

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~~Product and~~Our Content ~~Development~~

~~Wireless Value-Added Services~~

We ~~develop most~~have a large and comprehensive video content library consisting primarily of third-party, professionally produced content including television programs and movies, and to a lesser extent in-house productions and user-generated content. We currently focus on further expanding our collection of third-party, professionally produced content, particularly popular and in-season television serial dramas, movies and variety shows, and enhancing our in-house production offerings.

Premium Licensed Content

A majority of our user traffic is attributable to professionally produced content that we license from the content owners, either directly or through third-party copyright distributors. Our licensed content mainly includes the following four genres: television serial dramas, movies, current event live broadcasting and ~~applications~~variety shows. As of December 31, 2010, our video content library contained about 1,700 movie titles, 1,800 television series titles and 288 variety shows. We license video content typically at fixed rates for ~~WVAS in-house through our approximately 100-member product development team. Our product development team focuses primarily on developing new services~~a specified term. In 2011, we also started exploring alternative licensing models, such as ~~WAP services and Java™ games, as well as developing 3G-compatible services.~~

~~In addition to in-house developed~~revenue sharing, with certain content we also acquire rights to certain copyrighted content such as music, pictures, games, news and other information from a large number of content providers such as record companies, traditional media companies and original providers of news and information services. With the exception of music, content from international and domestic content providers has not contributed a significant portionowners. The terms of our 2Glicenses for professionally produced content generally range from one to three years for movies and ~~2.5G services revenues~~television serial dramas. Payments of licensing fees are generally made in installments throughout the duration of the licenses. Our licenses with the content owners are typically in three forms: (i) non exclusive webcasting rights, (ii) non exclusive webcasting rights with a guarantee that certain competitors will not receive the same license or (iii) webcasting rights with a limited exclusive period. We are generally not allowed to ~~date,~~alter or distort the licensed content without the licensors’ prior consent. Content usually may only be webcasted in mainland China. The content provider must ensure that it has the right to, or the license of, the content they provide to our site and ensure that such content will not infringe third-parties’ rights. In 2010, we do not expect it to do so for the foreseeable future. Nonetheless, we will continue to seek out content relationships with leading international and domestic content providers to further increase the variety of our services. Under our agreements with these content providers, we pay them aprimarily paid fixed licensing ~~fee or~~fees for premium licensed content. Since 2011, we started to explore a revenue sharing model with content owners. Under this model, we generally obtain titles for low initial cost in exchange for a commitment to share a percentage of the advertising revenues generated by us from such titles, for a defined period of time. The initial cost may be in the form of an upfront non refundable payment and may also be in the form of a prepayment of future revenue sharing obligations. The terms of some revenue sharing agreements may obligate us to make minimum revenue sharing payments for our services, which we receive from the telecom operators after deducting service and network fees. For most of our agreements, the content providers receive 40% of such net amount, but in a few cases the providers receive between 40% and 50%.

We license music rights from international record companies such as Universal Music and from domestic record companies such as Taihe Rye and Ocean Butterfly. In addition, some music content that we use in our services is provided by our affiliated music companies.

~~Music Production and Concert Promotion~~

We engage in music production through our affiliated music companies, Freeland Music, Huayi Brothers Music, New Run and Secular Bird. These companies are domestic record labels with an aggregate of approximately 173 employees specializing in artist development, music production and music distribution. In addition, Freeland Music, Huayi Brothers Music, New Run and Secular Bird currently have a total of 50 artists under contract.certain titles.

Our ~~affiliated music~~content partners include leading media companies ~~are pioneers in developing music artists and producing and distributing their songs~~ in China. Together, their portfolio of artists includes some of the most popular singers in China, such as Xiangxiang from Freeland Music, Jane Zhang and Kun Yang from Huayi Brothers, Nan He Wen Dou from New Run, and Jing Han from Secular Bird. Many songs produced by our affiliated music companies are top hits in ringtones, ringbacktones and digital downloads on mobile phones and the Internet in China as measured by the number of downloads on both China Mobile’s music portal and the music search platform of Baidu.com, Inc.In 2010, pursuant to agreements with CCTV International Network Co., an online search platform in China. For example, “If This Love Continues” (Ru Guo Ai Xia Qu) by Jane Zhang, “White Fox” (Bai Hu) by Rui Chen, as well as “Autumn Is Not Coming Back” (Qiu Tian Bu Hui Lai) by Qiang Wang were among the most popular songs on those services when they were released.

Many songs and albums produced by our affiliated music companies have also been honored in various music award ceremonies in Asia. For example “This Love” (Zhe Gai Si De Ai) by Jane Zhang was named a “Top 10 Golden Song” by the 2007 Hong Kong TVB8 Annual Awards and “Under the Starlight of Van Gogh” (Zai Fan Gao De Xing Kong Xia) by Wenjie Shang was named “Best Album of The Year” by Beijing Youth Weekly Magazine (BQ) in December 2007.

In addition, Hurray! partnered with the Internet Society of China and successfully launched the “Passion for Internet” Theme Song at a charity event in January, 2008 dedicated to promoting the popularization of Internet usage in certain economically disadvantaged areas in western China. This charity event was the first of its kind for the Chinese Internet industry. Our senior management and artists participated in the charity alongside the senior management of well-known Chinese web portal companies, such as Tencent, Sina, Sohu and Shanda, generating substantial exposure for our company and our artists.

~~Pursuant to certain contractual arrangements, Hurray! Digital Media has~~Ltd. (CCTV Network), we gained the exclusive right among Chinese video websites to broadcast within mainland China, live on the Internet, the 2010 FIFA World Cup and the Guangzhou Asian Games. In addition, we entered into agreements with Sony Pictures Television and Warner Brothers International Brand in 2010, becoming the first online video company in China to license copyrighted content from major Hollywood studios. Several hundreds of Hollywood movies and ~~distribute via digital channels, including wireless~~TV series episodes are now featured in the VIP channel on Ku6.com and ~~Internet-based platforms, all music~~our juchang.com website.

Our content acquisition and licensing strategy focuses on content that is appealing to Internet users between the ages of ~~Freeland Music worldwide~~18 and all music content of Huayi Brothers Music, New Run and Secular Bird in mainland China. We have also agreed to allow Freeland Music, Huayi Brothers Music, New Run and Secular Bird to directly distribute their respective music content via digital channels, in order to maximize the value35, as we believe this demographic typically commands higher advertising value. As part of our ~~affiliated music companies’ record labels.~~

~~If Hurray! Digital Media licenses~~content procurement strategy, we strive to optimize the ~~music~~return on our licensing costs. Before making a decision on content ~~of our affiliated music companies to any other third party, then our affiliated music companies are entitled to receive a license fee from Hurray! Digital Media, which is equal to~~procurement, we will analyze the ~~amounts paid~~prospective user traffic and adverting opportunities presented by the ~~third party~~content versus the licensing cost.

In-house Developed Content

Our objective is to ~~Hurray! Digital Media, less any taxes payable~~build Ku6 into not only a leading video content aggregator but also a leading media company in China. In 2008, we obtained the “License for Audio-Visual Programs of Information Online Communication” issued by the State Administration of Radio, Film and Television. We develop and offer our viewers original in-house produced news reports surrounding significant domestic and international events, such as the 2010 FIFA World Cup, the Shanghai World Expo and the 16^th Asian Games in Guangzhou, and also in-house produced online talk shows, celebrity interviews and reality shows. For instance, in 2010, we produced two live broadcast Internet reality shows,Crazy Soccer FansandModern Girls, both of which were well received by our viewers and advertisers. Our co-produced web serial dramaLove Finallywas one of China’s most viewed Internet hits in 2010. In November 2010, working with Yintai Group, a leading retailer in China, we launchedGirls Love Makeup, a variety show series. On each episode of the show, we invite celebrities and popular models to show how to apply makeup and offer makeup tips. The makeup products and accessories demonstrated on ~~such amount by Hurray! Digital Media~~the show are available for viewers to review and ~~a 10% to 20% service fee which Hurray! Digital Media retains.~~purchase from Yintai’s B2C ecommerce website.

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We determine the types of content to be produced generally based on our assessment of users’ preferences and trends information gathered by us from analyzing user data collected through our video platform.

We possess in-house capabilities for substantially all video production processes including concept generation, scriptwriting, casting, filming and editing. As part of our video program production strategy, we focus on controlling key aspects of the production process, such as scriptwriting, director and actor selection, content and project management. Meanwhile, we typically outsource other parts of our in-house production process to take advantage of talents of local production teams and their relatively low production costs. We also believe that our in-house developed content provides us with an attractive return on content production as some of this content can achieve a large number of clip views at lower costs. We believe the success of our in-house developed programs will further differentiate us from our competitors.

UGC (User-generated Content)

Our website allows Internet users to easily upload, watch and share UGC video clips. We offer creative talents, particularly the younger Chinese generation, outlets for artistic expression outside the traditional mainstream content formats such as television. Our UGC has experienced rapid growth in terms of not only the number of users who upload video clips produced or aggregated by themselves, but also the number and varieties of video clips uploaded every day and the number of daily video views. In ~~addition, Freeland Music~~2010, we delivered an average of over 30,000 new user-generated video clips each day covering a wide range of subject matters from entertainment to sports, finance, fashion and beyond. UGC is well embraced by Internet users, particularly young Internet users, given its sharing and interactive qualities. In order to encourage more users to upload UGC to our website, we have also purchased the licensing rights to popular UGC or share advertising revenues with individual producer or independent studios who produce and upload such UGC to our website.

Ku6 VIP

We launched the beta version of our subscription-based premium content service, “Ku6 VIP,” in November, 2010. Under this service, users can watch high-definition Hollywood movies such as Sony’s2012and Warner Brother’sHarry Porterseries, by paying RMB2 to 5 per view. Users can also pay a monthly subscription fee of RMB30 to watch some of the titles. Currently, we provide more than 100 titles of high-definition Hollywood movies to our users. Currently, revenue from this service is still insignificant.

Our Online Audio Business

We also provide an online audio advertising service through Yisheng, one of the leading online audio service operators in China. Yisheng provides comprehensive Internet audio solutions, including online radio channels, built-in radio for online games and other services to its customers. Currently, Yisheng has ~~entered into~~set up about 20 built-in radio channels for online games, covering more than 80% of the popular online games in China.

Our Users

We have an ~~agreement~~extensive user base for our video platform. Most users visit our website from direct navigation, with the ~~affiliates of the Freeland Group pursuant~~remainder from organic search results or third-party website links connecting to which such affiliates have the exclusive right to publish and sell music tapes, records and CDs of Freeland Music in mainland China. The price paid by the affiliates of the Freeland Group is determined by Freeland Music, unless the affiliates disagree with such price in which case the price will be highest retail price for the products obtainable in the market. The Freeland Group affiliates have the right to determine the prices at which they sell the products to their customers, but they are required to provide Freeland Music information regarding sales prices, customer data and other sales related information. Huayi Brothers Music, New Run and Secular Bird handle the off-line distribution of their music content themselves.

us. Our affiliated music companies enter into contracts with their artists which generally provide that the companies produce and publish a minimum number of albums and that the artist agree to certain advertising, promotional and public performance activities.

~~In April 2007, Freeland Music acquired a 51% equity interest in Fly Songs, a well known performance and concert promotion company in Beijing.~~

~~Sales and Marketing~~

~~Wireless Value-Added Services~~

We market and promote our WVAS and music-related products online and offline through channels controlled by the telecom operators in China as well as through non-operator channels such as direct media advertising, Internet marketing alliances, and handset vendor partnerships. We also sell and market our services through offline channels such as retail chains, convenience stores, newsstands, and large consumer goods outlets.

~~In addition, maintaining and expanding our relationships with China Mobile, China Unicom, China Telecom and China Netcom is central~~user base has increased significantly primarily due to our ~~sales and marketing activities. Our management team utilizes its extensive experience in China~~ability to develop close ties with the key personnel of the telecom operators at the central and provincial levels. As of December 31, 2007, we had 63 sales and marketing professionals strategically located in 25 provinces and municipalities concentrated in the eastern and southern regions of China to work closely with the telecom operators at the provincial level, where pricing and important marketing and operational decisions are made. Our sales and marketing professionals also oversee our sales and marketing activities, which are conducted separately from the telecom operators. These highly motivated professionals, whose bonuses are tied to the revenues each member generates and collects, are supervised by eight regional centers which each have their own sales, marketing, operations and customer service personnel toconsistently provide ~~prompt and responsive service~~appealing video content to users and ~~telecom operators.~~our enhanced brand awareness. As the number of our users grows, the resulting network effect in turn attracts more users to join our established user community.

We believe that our user base consists primarily of young urban educated users, between ages 18 and 35, which is a particularly attractive demographic to advertisers. Online viewers in China also represent a more affluent and better-educated segment of the population in China. We have tracked and maintained extensive user data, including their viewing history and information voluntarily provided by registered users. We use sophisticated statistical tools to analyze user data, to better understand users’ viewing preference and habits. This greatly facilitates our prediction of user demand for video clips, which helps guide our copyright procurement and in-house content production efforts. We are constantly improving the content and presentation of our programming, utilizing user preference and trend information we gathered from analyzing user data collected through our video platform.

~~Online Sales~~Advertising Services and ~~Marketing~~Customers

Our Advertising Services

Our online ~~sales~~advertising services include in-video, display, sponsorship and ~~marketing activities include:~~other forms of advertisements. In-video advertisements appear at certain times during the playback of a video. These video advertisements can be pre-roll, post-roll, mid-roll or pause advertisements. Display advertisements can be delivered alongside a video and may take the form of graphic banners or text hyperlinks. Other forms of advertisements include product placements in our in-house produced web video series or sponsored live events.

Advertisers are increasingly seeking measurable results to maximize their return on investment. Our advertising solutions present brand advertisers with attractive opportunities to combine the visual impact and engagement of traditional television-like multimedia formats with the interactivity and precise targeting capabilities of the Internet.

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~~Internet Marketing Alliances.~~Innovative Targeting. Some targeting solutions are unique to the online video platform and cannot be transplanted into other media platforms. We ~~began creating Internet marketing alliances in 2005. Through these alliances, we work with tens~~are able to track and monitor an advertiser’s campaign on a real-time basis and can make adjustments to enhance its efficacy within parameters specified by the advertiser upfront. Our targeting strategies enable advertisers to reach targeted users based on any or a combination of thousands of small, niche or vertical websites in China to market, promote and distribute our WVAS products and content, particularly our music-related products, to Internet and mobile users. We share a portionstandards, including the demographic information about the user, the nature of the ~~revenues generated~~video’s content, the geographic location of the user, the time of day at which a video is being watched, or the keywords associated with the ~~operators~~video. Our video channels also help segregate videos based on users’ interested content, which allows us to deliver advertisements tailored to the viewers of ~~these websites when their users access to our website~~different channels; and ~~subscribe for our services.~~

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~~Handset Manufacturers Partnerships~~Product Placements. ~~Starting in 2005,~~As an online video provider with a permit for radio and television program production and operation, we ~~began partnering with major handset manufacturers~~are able to embed our services and service links into mobile handsets, which enables mobile users to directly access our services without having to go through the service portals operated by the telecom operators. We work with major global and domestic handset manufacturersproduce web-based content, such as ~~Motorola, Sony Ericsson, LG, Legend, TCL~~web serial dramas, interviews and ~~Konka.~~variety shows, with embedded product placements. If a program’s storyline is consistent with a brand’s or product’s marketing initiatives, a product placement can have strong branding effects on viewers.

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~~Bundling of Products~~. We bundle certain of our products, primarily 2.5G products, together for a single fixed fee that is lower than what would be payable if the user had ordered those products separately. We often use bundled products together with a free trial period to attract new users by giving them a free or low-cost 2.5G experience. We also use bundled products to attract users that are price sensitive. In addition, bundling can be an effective way to maintain user interest in our services because they can choose from a number of services without incurring additional incremental cost and also to expose users to the wide range of quality services that we offer. Because the content coverage and product quality of individual products are better than those of the bundled products, we have not experienced migration of high-use customers from individual services to the bundled products.

The list prices of our advertising services depend on various factors, including the form of advertising, specific targeting requirements, duration of the time slot purchased and popularity of the content that the advertisements would be associated with. Prices for the aggregate time slots purchased by each advertiser or advertising agency are fixed under sales contracts, typically at a discount to our list prices. We review the list prices quarterly. In addition, we employ a cost per 1,000 impressions (CPM)-based model for our in-video advertisements. This approach is similar to that of traditional television in that the advertisements are priced based in part on the user reach and viewing frequency. It allows advertisers to better compare the online and offline advertising services at their disposal. It also enables us to better monetize our growing user base and provide measurable results to our advertisers.

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~~Cross-selling~~. We cross-sell among our various 2G and 2.5G services. Specific cross-selling activities include placing a tool bar on the first page of all our games. This enables users to easily try our other games without needing to return to the main China Unicom WAP portal, as well as promoting our website to potential users as a fun, easy-to-access place to learn about and request our wireless content and applications. We also focus on cross-selling to users of our 2G services to migrate them to our subscription-based, premium 2.5G services.

We have an advertising tracking system which records and maintains the traffic statistics and other data relating to the effectiveness of advertisements. After the broadcasting of a customer’s advertisement, we will provide them with a report of advertising effectiveness either prepared in-house or by an independent research firm upon their request.

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~~Offline Sales and Marketing~~Our Advertising Customers

We ~~also focus~~serve a broad base of advertisers consisting of leading international and domestic companies. The number of our advertisers has increased from 116 in 2008, to 186 in 2009 and to 341 in 2010. They operate in a variety of industries, including fast moving consumer goods, information technology services, automobile, pharmaceuticals, manufacturing, electronics, telecommunications, financial services, e-commerce and online games. A majority of our advertisers purchase our online advertising services through third-party advertising agencies. We strive to create and maintain a healthy advertising environment on ~~offline~~our website to attract mainstream brand advertisers in part by selectively screening advertisers.

In 2010, the top five industries based on the revenues derived from companies in these industries advertising on our platform were fast moving consumer goods, information technology products, automobile, e-commerce and pharmaceuticals.

Advertising Sales

We sell our advertising services primarily through third-party advertising agencies, including members of 4As and leading Chinese advertising agencies. As a relatively young media company, we intend to leverage advertising agencies’ existing long-term relationships and network resources to increase our sales and expand our customer base.

The compensation for our salespeople is based in part on the sales revenues they achieve. We provide regular in-house education and training to our sales team to help them provide current and prospective advertisers with comprehensive information about our services and the advantages of using our advertising solutions. Our performance-linked compensation structure and career-oriented training help motivate our salespeople.

Marketing and Brand Promotion

We have initiated various marketing activities ~~such as:~~to further promote our brand awareness among existing and potential users and customers, which include:

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Direct Advertising. ~~Starting~~We engage in ~~2005, we began to increase our spending on~~ direct advertising in print, radio and TV media to market and promote our ~~WVAS and music-related~~online video products. We believe that direct advertising is one of the most effective ways to market and promote our services to ~~mobile~~Internet users.

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Online Advertising.We engage in online advertising on other websites with user bases similar to our own or likely to watch online videos.

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Sales Co-promotion.We develop integrated sales campaigns with traditional media companies and multinational corporations. For example, in March 2010, we co-sponsored, along with Shanda Interactive and five other companies, the “Go Campus Angels!” beauty contest which sought to find the most beautiful, talented and energetic college students in China.

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Promotional Events.We ~~maintain important marketing relationships with China Mobile~~organize and ~~China Unicom, through which~~run a ~~major portion~~number of ~~our services is provided. We host~~online promotional events ~~throughout China featuring our pop singers or latest releases with the telecom operators. At these events,~~which we believe help create brand awareness by ~~interacting~~associating the Ku6 brand with ~~consumers to educate them about our mobile music services. In addition, our promotion of our innovative services, such as our “mobile novels” which feature various popular PRC titles~~well-known and respected organizations and events in ~~electronic format that are delivered to the mobile phones of subscribers in installments, which service we believe was the first of its kind in China, has resulted in significant media attention.~~China.

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~~Sales Co-promotion.~~We also focus on expanding our sales channels by developing integrated sales campaigns with traditional media companies and multinational corporations such as R.A. Baileys & Co., a beverage company best known for its liqueur, Bailey’s Irish Cream.

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~~Retail Promotion.~~We have also entered into partnerships with retailers of mobile handsets in some provinces, whereby the retailers’ sales staff introduces our services to buyers of new handsets and offers them a free trial. In some cases, we share the revenues generated through such promotions with the retailer.

~~Our Music Business~~

~~Record companies~~We also market our products and services by displaying our name and logo in China have traditionally generated revenues from offline CD distribution, concert tours and corporate sponsorship. Starting in 2005, record companies began to see rapid growth of a new revenue stream: music rights sales to Internet and WVAS providers for music-related products such as ringtones, ringbacktones, and MP3-quality truetone downloads or playbacks. In addition to marketing campaigns associated with major album or song releases,Ku6 media player screens when users embed our ~~affiliated music companies, Freeland Music, Huayi Brothers Music, New Run and Secular Bird, focus their sales and marketing activities in the following four areas:~~

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~~Online and mobile distribution.~~Our affiliated music companies have built dedicated teams to focus on licensing music rights to Internet and mobile services providers. Such licensing agreements typically involve an upfront minimum license fee, plus royalties paid to the record companies by the services provider based on usage. With the recent significant growth in the distribution of music via the Internet and WVAS and the increased attention by the Chinese government and business community to intellectual property protection, we believe that this new sales channel represents the largest growth potential for our affiliated music companies.

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~~Concert tours.~~Record companies routinely organize concert tours from time to time for their major artists, either independently or together with partners or corporate sponsors. This is not only an effective way to raise the profile of our artists nationwide, but also to generate revenues from concert ticket sales and corporate sponsorship. We believe that we have enhanced our capacity to organize concert tours through our acquisition of Fly Songs, a well known performance and concert promotion company in Beijing that has successfully organized various concerts and performances for leading artists including the “The Year of Jacky Cheung World Tour 2007.”

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~~Corporate sponsorship.~~Frequently, the artists of our affiliated music companies appear in commercial advertising or serve as corporate image ambassadors on behalf of consumer products and services companies. Our affiliated music companies proactively seek out such opportunities to promote our artists and generate revenues from such corporate sponsorship.

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~~Offline CD distribution.~~Upon launching a new album, our affiliated music companies will distribute the album in CD format through traditional offline channels, which primarily consists of the tens of thousands of retail stores in China specializing in audio and video media products. As is customary in the industry, our affiliated music companies enter into distribution agreements with major offline distributors or retail chains. Such agreements typically include an upfront minimum license fee, plus royalties paid to the record companies based on sales. Offline CD distribution channels in China have been seriously affected, however, by piracy issues, and we believe that only a small portion of all CD sales in China are from copyrighted sales which generate royalty payments for the record companies.

content on third-party websites.

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~~Customer Service~~Technology and Infrastructure

We ~~work~~believe our proprietary technologies and infrastructure are critical to ~~provide~~our success. We have made significant investments in developing a proprietary, scalable technology platform that differentiates our online video distribution system.

Architecture

Since 2008, we have invested significantly in CDN construction to support faster delivery of our online video content. As a pioneer in implementing this technology, we have established a more stable infrastructure and gained valuable CDN operations experience. While we rely mainly on CDN technology, our self-developed, proprietary downloadable software client, “Fast Ku6,” which is built on P2P technology, also facilitates content delivery to users.

CDN Technology. CDN technology utilizes additional data storage to maintain copies of popular content at the “edge” of the Internet, which enables end-users to more quickly access that content. CDN technology facilitates faster responses to users’ requests for content, avoids buffering and associated delays caused by low bandwidth and user congestion, and is therefore critical to the success of online video providers.

By hosting our Internet data centers along the major nodes of the transmission backbones operated by the local subsidiaries of China’s telecommunications carriers, we seek to maintain high standards in terms of delivery quality ~~customer service. This~~and speed as video content is ~~an important factor for maintaining~~transmitted from our ~~relationships with the telecom operators in China as discussed above in “— Network Service Agreements with Operators.” Our dedicated customer service center in Beijing provides our~~servers to users ~~real-time support and employed 33 customer service representatives~~throughout China. We had established approximately 2,500 servers nationwide as of December 31, ~~2007. We strive~~2010, which contribute significantly to ~~achieve the fastest response times~~our fast streaming speeds and ~~highest customer satisfaction levels in the industry.~~reliable viewing experience. Our ~~centralized customer~~servers are located at service ~~center is supported by our local customer service teams located in our four regional offices. We also maintain a dedicated billing and collection center, which works with the various offices~~sites of the ~~telecom operators to ensure that we receive the correct fees for our services provided over their networks.~~

~~Infrastructure and Technology~~

~~We have developed a reliable, flexible and scalable platform with open and adaptive technology through which we:~~

	•		~~develop and deliver our 2G and 2.5G services which are provided through networks of China Mobile, China Unicom, China Telecom and China Netcom, and~~

	•		~~maintain our internal billing and transmission records.~~

Our platform supports multiple protocols, networks and billing solutions, with high scalability, load balancing, intelligent session management, and performance measurement. It also allows us to monitor our services and their delivery to the telecom operators’ networks on a real-time basis, which allows us to optimize the efficiency of our system and quickly address any problems. The platform is equipped with an open application interface for rapid connectivity by third party content providers and access to multiple channels for SMS, IVR, RBT, WAP, MMS, Java™ and Web connectivity.

Our user database, which operates on our proprietary software and is an integral part of our platform, allows us to store, analyze, retrieve and compare various statistical information and to identify relevant trends. This database also supports our customer service activities by providing our service professionals with real-time user data and information regarding service delivery and billing. In addition, our platform can rapidly schedule, deploy and manage WAP pushes and SMS pushes to promote our services.

Our website and services are made available primarily through network servers located in the facilities of China Telecom, China Netcom, China Unicom, and China Mobile. Such network servers run on either Unix^™~~, Windows~~^™~~, or Linux~~^™~~-based operating systems.~~

~~Competition~~

~~Wireless Value-Added Services~~

The market for WVAS in China is highly fragmented with more than 1,000 service providers. Wireless service providers in China can be principally categorized into four groups. The first group is comprised of companies like ours, which focus primarily or entirely on this market and offer a wide range of 2G and/or 2.5G services. These include companies such as Tom Online, KongZhong, and Linktone. This group of competitors is generally characterized by strong market knowledge and, in some cases, well developed relationships with the telecom operators on a provincial and national basis. Companies in this category also tend to focus on entertainment-related services.

~~The second group is comprised~~local subsidiaries of the major domestic telecommunications carriers, which provide a stable power supply and maintenance for our servers.

P2P Technology. P2P is an alternative Internet ~~portal operators~~content delivery technology. We incorporated P2P technology into “Fast Ku6,” our self-developed, proprietary software client, as a supplement to our CDN transmission infrastructure, which allows users with limited bandwidth Internet connection to improve their viewing experience. As of December 31, 2010, “Fast Ku6” has been downloaded approximately 120 million times. P2P technology allows content sharing among all the users in the network, and every personal computer in the P2P network benefits from other users by obtaining content directly from the virtual community instead of from the central server.

Advertising Management Systems

Our advertising management system tracks the reach, delivery duration and frequency, targeting and quantity of advertisements delivered. Our system supports third-party monitoring of our advertising efforts by enabling retrieval of real-time advertisement delivery data using certain system application interfaces. We have also introduced an advertising results forecasting system that is utilized in an increasing number of large advertising campaigns on our website. This system is designed to help optimize our advertisers’ strategy by forecasting the results of a given campaign, factoring in the covered audience and the frequency and reach of such campaign.

Content Monitoring and Copyright Protection

We are committed to the protection of third-party copyrights. The online video industry in China ~~including publicly-listed companies~~suffers from copyright infringement issues and online content providers are frequently involved in litigation based on allegations of infringement or other violations of copyrights. We have invested significantly in copyright protection technologies. We have a content screening team of over 40 contract employees dedicated to screening and monitoring the content uploaded on our website to help ensure that no content that may be deemed to be prohibited by government rules and regulations is posted and to promptly remove any allegedly infringing content once we receive proper notification from the legitimate copyright owner. We provide training to these employees and supervise and monitor their work. After a user registers and before each upload, we require the user to click a check box to confirm that the content to be uploaded is in compliance with the terms and conditions set forth in the user agreement, to guarantee that he or she is the copyright owner or has obtained all necessary consents and authorizations for such ~~as SINA, Sohu~~content and ~~Tencent. The Internet portals leverage their strong brand names and their existing strength in aggregating~~he or she is responsible for such content. Pursuant to the user agreement, each user agrees to indemnify us for all damages arising from third-party claims against us caused by violating or infringing content ~~marketing and cross-selling wireless services to their established Internet user base.~~

~~The third group is comprised of smaller service providers such as privately owned Rock Mobile and A8, who like us are focused on music-related products.~~

The fourth group is comprised of the telecom operators. In 2006, China Mobile began operating its own music WAP portal and procuring music content direct from music companies. This development has made China Mobile a competitor for offering music content through WAP services. Some of this competitive effect, however, has been mitigateduploaded or linked by the ~~fact that China Mobile~~user. If we find a user has ~~purchased music from our affiliated music companies. China Mobile also began~~violated the ~~practice of only including links to its own WVAS offerings on~~user agreement, applicable laws or regulations or other parties’ legal rights, we may terminate the embedded menus of mobile handsets with customized software for China Mobile users while excluding links to products from third party WVAS service providers like us. Such practices have adversely affected our revenues. Our business would likely be adversely affected ifuser account and block the telecom operators decide to directly provide additional WVAS 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 the networks of these telecom operators which would adversely affect our revenue from WVAS.user’s future uploads without prior notice.

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We implemented monitoring procedures to remove infringing content, and such procedures include: (i) technology screening, where a video fingerprint system developed by us compares newly uploaded videos with fingerprint trails of copyrighted videos in our system and screens out those that have piracy issues, a text filtering system screens content based on pre-set key words, and another filtering system automatically screens out pornographic and obscene content based on colors and images; (ii) manual review, where the content that passes the technology screening is reviewed by the content screening team on a 24-hour, 7-day basis, and the flagged content identified by our technology is reviewed and confirmed that it can be released; and (iii) back-office professional supervision, where certain professional content providers who we grant access to our back-office database can directly flag the infringing content for removal. Other content on our website are also monitored. For example, user-posted comments are typically screened by the text filtering system and are monitored by our screening team. Substantially all of the videos uploaded on our website are manually screened by our contract employees. All of the other content, primarily consisting of comments posted by users, are first screened by our filtering systems and the content containing prohibitive words or images is manually screened by our contract employees.

Intellectual Property

We rely primarily on intellectual property laws and our contractual arrangements with our employees, clients, business partners and others to protect our intellectual property rights. We require our employees to enter into agreements requiring them to keep confidential all information relating to our customers, methods, business and trade secrets during and after their employment with us. Our ~~Music Business~~employees are required to acknowledge and recognize that all inventions, trade secrets, works of authorship, developments and other processes, whether or not patentable or copyrightable, made by them during their employment are our property. They also sign agreements to substantiate our sole and exclusive right to those works and to transfer any ownership that they may claim in those works to us. We have registered our domain names, including ku6.com, juchang.com and juchang.cn.

~~In our music business, we~~Competition

The online video industry in China is rapidly evolving and highly competitive. We believe the key competitive factors in the online video industry in China include brand recognition, demographic composition of users, robust technology platform, ability to acquire popular premium licensed content at a reasonable cost and create differentiated content in-house, ability to source creative UGC, ability to provide innovative advertising services to customers, relationships with advertising customers, advertising prices, as well as the range of services provided to advertising customers.

We face ~~significant~~ competition from ~~two groups of competitors. The first group includes traditional record companies, which are extending downstream to establish their own WVAS~~other major online video companies. Among the independent or ~~Internet services companies~~“pure-play” online video sites, our major competitors in ~~China. These companies~~China include ~~international record~~Youku.com and Tudou.com. Several large Chinese Internet companies, such as ~~Warner Music, Universal, EMI and Sony BMG and independent labels based in Hong Kong, Taiwan, and mainland China~~SINA Corporation, Baidu, Inc., Sohu.com Inc., Tencent Holdings Limited, NetEase.com, Inc. and/or their affiliates, have launched online video websites. In addition, some of China’s TV networks, such as ~~Taihe Rye, Rock Music, Ocean Butterfly,~~CCTV, Phoenix Satellite TV and ~~Zhushu. In comparison~~Hunan Satellite TV, have launched their own video broadcasting websites. We also face competition from Internet video streaming platforms based on the P2P technology, such as PPS and PPTV.

Certain international online video sites, such as YouTube and Hulu, have large content portfolios and high brand recognition, particularly among users outside China. Currently, YouTube is not accessible by viewers in China. If China lifts the restrictions, YouTube may become our major competitor in China. Other international online video sites such as Hulu mainly target English-speaking viewers and not Chinese-speaking viewers. If such international online video sites begin targeting Chinese-speaking viewers, we will face increased competition.

We also compete with traditional advertising media, such as television, radio, newspapers and magazines, and major out-of-home media, such as billboards, for advertisers’ advertising budgets. Large enterprises currently spend a relatively small percentage of their advertising budgets on online advertising as compared to the percentage they spend on traditional advertising media, but we expect the percentage spent on online advertising to increase in the future.

Seasonality

We experience seasonality in our ~~affiliated music companies, many of these competitors have longer operating histories~~online advertising business. Historically, in the China market, the fourth calendar quarter represents the best season for the general advertising market. This is followed by the third and second calendar quarters. The first calendar quarter is usually the worst season in China ~~and have accumulated larger libraries of songs and pools of popular artists. They also generally have more experience, expertise, resources and management capacity than us in~~due to the ~~artist development and music production field.~~Chinese New Year holidays.

The second group of competitors includes WVAS providers such as Rock Mobile, a subsidiary of Rock Music, and A8, which have recently focused on music-related products and extended upstream to establish their own music production businesses in China. We believe that both Rock Mobile and A8 have recently acquired additional capital to accelerate the implementation of their music strategies, and may pose a significant competitive challenge to us in the long-run.

Government Regulation

The following is a summary of the principal governmental laws and regulations that are or may be applicable to companies such as ours in China. The scope and enforcement of many of the laws and regulations described below are uncertain. We cannot predict the effect of further developments in the Chinese legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement of ~~laws, particularly with regard to 2G and 2.5G services, which is an emerging industry in China.~~laws. For a description of the regulatory risks related to our business, please see Item 3.D. “Risk ~~Factors —~~ Factors—Risks Related to Our Business—Changes in government policies or regulations may have a material and adverse effect on our business, financial condition and results of operations;” “—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 future. If we are found to be in violation of current or future Chinese laws or regulations, we could be subject to severe penalties;” “— Legal Risks Related to Wireless and Internet Services — Services—The regulation of Internet website operators is also new and subject to interpretation in China, and our business could be adversely affected if we are deemed to have violated applicable laws and regulations;” and “—Risks Related to Our Company — Additional Risks Related to Our Company — 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.Corporate Structure.”

~~Regulation of Telecommunication~~Regulations on Value-Added Telecommunications Services

~~The telecommunications industry, including certain 2G and 2.5G services, is highly regulated in China. Regulations issued or implemented by~~On September 25, 2000, the State Council promulgated the Telecommunications Regulations, or the Telecom Regulations. The Telecom Regulations draw a distinction between “basic telecommunication services” and “value-added telecommunication services.” Internet content provision services, or ICP services, is a subcategory of ~~China,~~value-added telecommunications businesses. Under the ~~MII and other~~Telecom Regulations, commercial operators of value-added telecommunications services must first obtain an operating license from the MIIT or its provincial level counterparts.

On September 25, 2000, the State Council issued the Administrative Measures on Internet Information Services, or the Internet Measures. According to the Internet Measures, commercial ICP service operators must obtain an ICP license from the relevant government authorities ~~cover many aspects~~before engaging in any commercial ICP operations within the PRC. In November 2000, the MIIT promulgated the Administrative Measures on Internet Electronic Messaging Services, or the BBS Measures. BBS services include electronic bulletin boards, electronic forums, message boards and chat rooms.

On December 26, 2001, the MIIT promulgated the Administrative Measures on Telecommunications Business Operating License, or the Telecom License Measures. On March 1, 2009, the MIIT issued revised Telecom License Measures, which took effect on April 10, 2009. The Telecom License Measures set forth the types of licenses required to operate value-added telecommunications ~~network operation, including entry into~~services and the ~~telecommunications industry,~~qualifications and procedures for obtaining such licenses. For example, an ICP operator providing value-added services in multiple provinces is required to obtain an inter-regional license, whereas an ICP operator providing the ~~scope of permissible business activities, interconnection and transmission line arrangements, tariff policy and foreign investment.~~

~~The principal regulations governing the telecommunication~~same services ~~we provide~~ in ~~China include:~~

	•		~~Telecommunications Regulations~~~~(2000), or the Telecom Regulations, and the~~~~Administrative Measures for Telecommunications Business Operating License~~(2002), or the Telecom License Measures. The Telecom Regulations categorize all telecommunication services businesses in China as either infrastructure telecommunication services businesses or value-added telecommunication services businesses. The latter category includes WAP, SMS and other 2G and 2.5G services. Under the Telecom Regulations, certain services, including online data processing and transaction processing, call centers and Internet access, are classified as being of a value-added nature and require a commercial mobile operator to obtain an operating license in order to provide such services. The Telecom Regulations also set forth extensive guidelines with respect to different aspects of telecommunications operations in China. Under the Telecom License Measures, an approved value-added telecommunication services provider must conduct its business in accordance with the specifications recorded on its value-added telecommunication services operatingone province is required to obtain a local license. Certain of our affiliates, Hurray! Solutions, Beijing Palmsky, Beijing Network, Beijing Hengji Weiye, Beijing Hutong, Shanghai Magma, Shanghai Saiyu and Henan Yinshan, have been granted an inter-provincial value-added telecommunication services operating license for mobile information services (excluding fixed line information and Internet information services) by the MII that permits it to conduct nation-wide operations. Our affiliate, WVAS Solutions, has been granted a value-added telecommunication services operating 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 a national basis.

	•		~~Regulations for the Administration of Foreign-Invested Telecommunications Enterprises~~ (2002), or the FI Telecom Regulations. The FI Telecom Regulations set forth detailed requirements with respect to capitalization, investor qualifications and application procedures in connection with the establishment of a foreign-invested telecom enterprise. Under the FI Telecom Regulations, a foreign entity is prohibited from owning more than 50% of the total equity in any value-added telecommunication services business in China. To comply with these restrictions, we have entered into a series of agreements with each of our affiliated Chinese entities and their respective shareholders. We hold no ownership interest in any such affiliated Chinese entities.

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	•		~~Notice on Intensifying the Administration of Foreign Investment in Value-added Telecommunications Services~~(2006). Under this notice, an operating company holding a value-added telecommunications license (and not its shareholders) must own all related Internet domain names and registered trademarks. In addition, such company’s business site and equipment should comply with its approved licenses, and the company should establish and audit its internal Internet and information security policies and standards and emergency management procedures.

	•		~~Notice Concerning Short Message Services~~(2004), Under this Notice, telecom operators may only cooperate with licensed information service providers for SMS. This Notice sets forth requirements for provision of SMS by information service providers with respect to pricing, content and method of service provision. Certain types of SMS require customer’s explicit confirmation on acceptance of charges before such services could be billed for. This Notice also sets forth a high standard for customer services provided by information service providers and requires the service providers to provide an easy and clear cancellation mechanism for their customers to cancel subscribed services.

	•		~~Notice Concerning the Pricing and Billing of Mobile Information Services~~(2006). Under this notice, the pricing and billing of WVAS must be accurate, clear and fair. In addition, a wireless value-added service provider cannot charge a customer unless the customer responds to two customer requests, and it must maintain detailed invoices for each customer for more than five months. In turn, the telecom operators are required to first deal with customer complaints, requests for refunds and related matters.

	•		~~Notice Concerning the Billing of Telecommunications Services~~(2007). Under this notice, no telecommunication enterprise may activate any service or function directly connected to their platforms, such as call reminder and voice inbox functions, unless the customer affirmatively consents to subscribing to them. For any free trial service subscribed by the mobile phone user, upon expiration of the free trial period, service providers may not charge the mobile phone user any fee for such service or function until the user re-confirms that it wishes to continue such service or function. When a customer calls the customer support line of a service provider, the service provider is prohibited from charging the customer a fee for such call unless the customer expressly confirms its consent to such charge regardless of whether automated or live support is provided. If automated support is provided, the customer is required to be furnished with pricing and billing information through a free voice notice.

Regulations on Internet Content Services

National security considerations are an important factor in the regulation of Internet content in China. The National People’s Congress, the PRC’s national legislature, has enacted laws with respect to maintaining the security of Internet operation and Internet content. According to these laws, as well as the Internet Measures, violators may be subject to penalties, including criminal sanctions, for Internet content that:

opposes the fundamental principles stated in the PRC constitution;

compromises national security, divulges state secrets, subverts state power or damages national unity;

harms the dignity or interests of the state;

incites ethnic hatred or racial discrimination or damages inter-ethnic unity;

undermines the PRC’s religious policy or propagates heretical teachings or feudal superstitions;

disseminates rumors, disturbs social order or disrupts social stability;

disseminates obscenity or pornography, encourages gambling, violence, murder or fear or incites the commission of a crime;

insults or slanders a third party or infringes upon the lawful rights and interests of a third party; or

is otherwise prohibited by law or administrative regulations.

ICP operators are required to monitor their websites. They may not post or disseminate any content that falls within these prohibited categories and must remove any such content from their websites. The PRC government may shut down the websites of ICP license holders that violate any of the above-mentioned content restrictions, order them to suspend their operations, or revoke their ICP licenses.

Restrictions on Foreign Ownership in Value-Added Telecommunications Services

According to the Provisions on Administration of Foreign Invested Telecommunications Enterprises, or the FITE Provisions, promulgated by the State Council on December 11, 2001 and amended on September 10, 2008, the ultimate foreign equity ownership in a value-added telecommunications services provider must not exceed 50%. Moreover, for a foreign investor to acquire any equity interest in a value-added telecommunication business in China, it must demonstrate a good track record and experience in operating value-added telecommunications services. Foreign investors that meet these requirements must obtain approvals from the MIIT and the MOFCOM or its authorized local branches, and the relevant approval application process usually takes six to nine months. We believe that it would be impracticable for us to acquire any equity interest in our Chinese affiliates without diverting management attention and resources. In addition, we believe that our contractual arrangements with these entities and their respective individual shareholders provide us with sufficient and effective control over these entities. Accordingly, we currently do not plan to ~~regulations~~acquire any equity interest in any of these entities.

On July 13, 2006, the MIIT issued the Notice of the MIIT on Intensifying the Administration of Foreign Investment in Value-added Telecommunications Services. This notice prohibits domestic telecommunication services providers from leasing, transferring or selling telecommunications business operating licenses to any foreign investor in any form, or providing any resources, sites or facilities to any foreign investor for their illegal operation of a telecommunications business in China. According to this notice, either the holder of a value-added telecommunication business operating license or its shareholders must legally own the domain names and trademarks used by such license holders in their provision of value-added telecommunication services. The notice further requires each license holder to have the necessary facilities, including servers, for its approved business operations and to maintain such facilities in the regions covered by its license. In addition, all value-added telecommunication service providers are required to maintain network and Internet security in accordance with the standards set forth in relevant PRC regulations. If a license holder fails to comply with the requirements in the notice and cure such non compliance, the MIIT or its local counterparts have the discretion to take measures against such license holders, including revoking their valued-added telecommunication business operating licenses.

Regulations on Broadcasting Audio/Video Programs through the Internet

On July 6, 2004, the SARFT promulgated at the ~~national level~~Rules for the Administration of Broadcasting of Audio/Video Programs through the Internet and Other Information Networks, or the Audio/Video Broadcasting Rules. The Audio/Video Broadcasting Rules apply to the launch, broadcasting, aggregation, transmission or download of audio/video programs via the Internet and other information networks. Anyone who wishes to engage in Internet broadcasting activities must first obtain an audio/video program transmission license, with a term of two years, issued by the ~~Chinese government, several provincial governments have~~SARFT and operate pursuant to the scope as provided in such license. Foreign invested enterprises are not allowed to engage in the above business.

On April 13, 2005, the State Council announced Several Decisions on Investment by Non-state-owned Companies in Culture-related Business in China. These decisions encourage and support non-state-owned companies to enter certain culture-related business in China, subject to restrictions and prohibitions for investment in audio/video broadcasting, website news and certain other businesses by non-state-owned companies. These decisions authorize the SARFT, the Ministry of Culture and the GAPP to adopt detailed implementing rules according to these decisions.

On December 20, 2007, the SARFT and the MIIT jointly issued ~~provisional regulations requiring SMS~~the Rules for the Administration of Internet Audio and Video Program Services, commonly known as Circular 56, which came into effect as of January 31, 2008. Circular 56 reiterates the requirement set forth in the Audio/Video Broadcasting Rules that online audio/video service providers must obtain a license from the SARFT. Furthermore, Circular 56 requires all online audio/video service providers to ~~obtain licenses~~be either wholly state-owned or state controlled. According to relevant official answers to press questions published on the SARFT’s website dated February 3, 2008, officials from the SARFT and the MIIT clarified that online audio/video service providers that already had been operating lawfully prior to the issuance of Circular 56 may re-register and continue to operate without becoming state-owned or ~~register~~controlled, provided that such providers have not engaged in any unlawful activities. This exemption will not be granted to online audio/video service providers established after Circular 56 was issued. Such policies have been reflected in the Application Procedure for Audio/Video Program Transmission License. We have obtained an audio/video program transmission license, which is valid from June 2008 to June 2011.

On March 31, 2009, SARFT released a Notice on Strengthening the Administration of Online Audio/Video Content (the “Notice”). The Notice reiterated, among other things, that all movies and television shows released or published online must be in compliance with ~~Telecommunications Administration Bureau at~~relevant regulations on the ~~provincial level before providing SMS service within the province.~~

~~Regulation for Internet Publication.~~~~The State News~~administration of radio, film and ~~Publications Agency of~~television. In other words, these movies and television shows, whether produced in the PRC or overseas, must be pre approved by SARFT and distributors of these movies and television shows must obtain an applicable permit before releasing any movie or television show.

On April 1, 2010, the ~~SNPA,~~SARFT issued the Internet Audio/Video Program Services Categories (Provisional), or the Provisional Categories, which classified Internet audio/video programs into four categories. Category I is only open to state-owned broadcast media companies operating in the television section, and the other three categories are open to privately held entities.

Regulations on Internet News Publication

Publishing and disseminating news through the Internet are highly regulated in the PRC. On November 6, 2000, the SCIO and the MIIT jointly promulgated the Provisional Measures for Administrating Internet Websites Carrying on the News Publication Business, or Internet News Measures. These measures require an ICP operator (other than a government ~~agency~~authorized news unit) to obtain the approval from SCIO to publish news on its website or disseminate news through the Internet. Furthermore, any disseminated news is required to be obtained from government-approved sources based on contracts between the ICP operator and these sources. The copies of such contracts must be filed with relevant government authorities.

On September 25, 2005, the SCIO and the MIIT jointly issued the Provisions on the Administration of Internet News Information Services, requiring Internet news information service organizations to provide services as approved by the SCIO, subject to annual inspection under the new provisions. These Provisions also provide that no Internet news information service organizations may take the form of a foreign-invested enterprise, whether jointly or wholly owned by the foreign investment, and no cooperation between Internet news information service organizations and foreign-invested enterprise is allowed before the SCIO completes the security evaluation.

SCIO requires organizations operating Internet news services apply for and obtain the “Internet News Information Service Permit” from it. To our knowledge, in practice SCIO does not accept such application at present and we will submit an application once SCIO starts to accept. Currently in cooperation with some media companies and news agencies, we operate a current events channel on our website, which includes audio/video contents relating to current topics and social events.

Regulations for Internet Publication

The GAPP is responsible for ~~regulating~~nationwide supervision and administration of publishing activities in China. On June 27, 2002, the ~~MII~~GAPP and the ~~SNPA~~MIIT jointly promulgated theInternet Publication Tentative Administrative Measures,, or the Internet Publication Measures, which took effect on August 1, 2002. ~~The~~Pursuant to the Internet Publication Measures, ~~require~~any entity engaged in Internet ~~publishers to secure approval~~publishing activities must obtain the Internet Publication License from the ~~SNPA to conduct~~GAPP before conducting any Internet publication activities.

The term “Internet publication” is defined as ~~an act of online dissemination where~~Internet transmission activity by which Internet information service providers select, edit and process works created by themselves or others (including content from books, newspapers, periodicals, audio and video products, electronic publications, and other sources that have already been formally published or works that have been made public in other media) which they then postpublish on the Internet or transmit to ~~users~~end-users via the Internet works that they or others have created, after selection and editing, for browsing, reading, use or downloading by the general public. ~~We currently do~~The works in question primarily include (i) content that has already been published formally, such as books, newspapers, periodicals, audio/video products and electronic publications, or that has been made public via other media; and (ii) edited works of literature and art or works concerning natural science, social science, engineering or other topics.

However, the Internet Publication Measures were promulgated in June 2002, which is approximately three years prior to the establishment of China’s first group of online audio/video websites. At the time of promulgation, these Measures were intended to regulate the traditional audio/video products and online gaming and did not ~~conduct~~consider the issues directly relevant to online audio/video business. Furthermore, the definition of “Internet publication” under these Measures is very broad and the GAPP has not provided any implementation rule or official interpretation as to the applicability of the Internet Publication Measures to a website such as Ku6.com that exclusively distributes audio/video content. To our knowledge, in practice no website exclusively providing online audio or video content has obtained an Internet publication ~~business. The SNPA and the MII have not specified whether the approval required by the Internet Publishing Measures is applicable to the dissemination of works through SMS, WAP, Java~~^™~~, IVR or other wireless technologies. If,~~license in the future, the SNPA and the MII confirm that the Internet Publishing Measures apply to wireless value-added telecommunication services operators or issue new regulations or rules regulating publishing through SMS, WAP, Java^™~~, IVR or other wireless technologies, we~~China. Ku6 Information may ~~need to~~ apply for ~~a license or permit from relevant governmental agencies in charge of publishing. We cannot assure you that such application would be approved by the relevant governmental agencies.~~an Internet Publication License once this issue is clarified and confirmed officially.

~~Regulation for~~Regulations on Internet ~~News Dissemination.~~~~On November 7, 2000, the State Council News Office~~Medical and the MII promulgated the Internet News Measures, under which websites established by non-news organizations may only publish news released by certain official news agencies. In order to disseminate news, such websites must satisfy the relevant requirements and have acquired the requisite governmental approval. We currently do not conduct any online news dissemination business. The State Council News Office and the MII have not specified whether the Internet News Measures apply to the dissemination of news through SMS, WAP, Java^™, IVR or other wireless technologies. If, in the future, the State Council News Office and the MII clarify that the Internet News Measures apply to wireless value-added telecommunication services operators or issue regulations or rules regulating wireless news dissemination, we may need to apply for a license or permit from governmental agencies in charge of news dissemination. We cannot assure you that such application would be approved by the relevant governmental agencies.Health Information Services

~~Regulation for Internet Games and Culture Activities.~~On May ~~10, 2003,~~1, 2009, the Ministry of ~~Culture of~~Health promulgated the ~~PRC, or the MCC, promulgated the~~revised Internet ~~Culture Administration Tentative Measures~~~~, or the Internet Culture~~Medical Information Measures, which ~~came into effect as of~~became effective on July 1, ~~2003. Pursuant~~2009. The revised Internet Medical Information Measures require an ICP operator engaging in providing medical and health information to Internet users (which, among others, includes the ~~Internet Culture Measures, if an Internet content provider engages in “Internet culture activities,” which include, among other things, online dissemination~~provision of ~~“Internet cultural products”~~ such ~~as gaming products,~~information through the ~~provider is required~~health channel on the operator’s website) to obtain a ~~license for Internet Culture Business Operations~~permit from the MCC in accordance with the procedures set forth in the Internet Culture Measures. Hurray! Solutions and Beijing Hutong were granted such a license in August 2004 and December 2007, which license permits them to conduct an Internet games business.

~~Regulation of Music Production~~

The music industry, including the traditional record companies and the more recent digital music providers, is highly regulated in China. Laws and regulations issued or implemented by the NPC; the State Council of China; the National Copyright Administration of China, or the NCAC; the MCC, the MII; and other relevant ~~government authorities cover many aspects~~provincial counterpart of the ~~industry, including entry into~~Ministry of Health. We obtained the ~~market, scope~~Certificate of ~~permissible business activities, interconnection and transmission line arrangements, tariff policy and foreign investment.~~Internet Medical Information Service from the Beijing Drug Administration on June 2, 2008.

~~The principal laws and regulations governing the music business in China include:~~

~~Copyrights.~~Under the PRC’s Copyright Law (1990), as revised in 2001, and its related Implementing Regulations (2002), creators of protected works enjoy personal and property rights with respect to publication, identification, alteration, reproduction, distribution, exhibition, performance, transmission, broadcasting and related activities. The term of a copyright is life plus 50 years for individual authors and 50 years for corporations. In consideration of the social benefits and costs of copyrights, China balances copyright protections with limitations that permit certain uses, such as for private study, research, personal entertainment and teaching, without compensation to the author or prior authorization. Section 2, “Performance,” and Section 3, “Phonogram,” of Chapter IV of the Copyright Law cover major aspects of our business related to both online and offline music distribution. These provisions grant performers and record production companies personal and property rights (neighboring rights), including the right to fair compensation for the use of originals or copies of their works. In addition, authors of lyrics and music composers have separate and independent rights with respect to any particular song. The term of the copyright is 50 years after the first performance or authorized publication.

~~In addition, arrangements for the compulsory collection of license fees and the allocation of such fees were standardized by two interim provisions in the NCAC’s~~~~Interim Provisions on Compulsory License of Performance~~and Phonogram (1993). In response to the changes posed by digital media, and in coordination with international treaties and agreements, the NPC took further action by amending the 1990 Copyright Law to specifically protect the online transmission of music (which is part of our music business). The newly added “digital” rights and responsibilities include a notice-and-takedown procedure for Internet service providers and certain anti-circumvention provisions. In combination, the Copyright Law, the Implementing Regulations, several administrative regulations and judicial interpretations constitute a relatively comprehensive legal framework for copyrights in China, although enforcement of such rights remains difficult. TheRegulations on ~~Protection of Information Network Transmission Right~~Advertisements(July 1, 2006) stipulate that the digital transmission of copyrightable works by Internet or wireless means, including by making them available via interactive on-demand or similar services, is subject to the regulations described above. In addition, the Chinese National Standing Committee voted to enter into the framework of the World Intellectual Property Organization’s World Copyright Treaty and World Performance and Phonogram Treaty in 2006.

~~Certification and Licensing System.~~The music industry is administered by specific ministries or agencies in China. A set of rules and regulations has been established for nearly every aspect of the traditional music business, from market entry to daily operation. In particular, our distribution of music through traditional physical channels (e.g., retail stores or chain stores) requires a license under the~~Regulations of the Phonographic Products and the Measures on Wholesaling, Retailing and Renting of the Phonographic Products~~(2002), while distribution through digital means (e.g., Internet or wireless means) requires official approval or record-keeping of music and its permissible content transmitted within the PRC by MCC according to the~~Opinions on Regulation and Development of Music Transmitted via Network(2006). In addition, the~~~~Regulations on the Commercial Performance and its Implementing Provisions (2004) and Measures on the Professional Intermediaries~~(1998, revised) require professional performers and managers to obtain a license. The public performance of music also requires a license. These regulations are designed to enable the government to monitor the production, reproduction and publication of music, as well as the operations of record companies.

~~Failure to comply with the foregoing legal requirements could subject our affiliated music companies to civil, administrative and criminal penalties.~~

~~Other Laws and their Application~~

~~Regulation of Internet content services.~~We do not operate a significant Internet portal business, which typically requires the provision of extensive Internet content services, including Chinese language Web navigational and search capabilities, content channels, web-based communications and community services and a platform for e-commerce, such as auction houses.

~~For the limited Internet content services we provide, we are prohibited from posting or displaying any content that:~~

	•		~~opposes the fundamental principles determined in China’s Constitution;~~

	•		~~compromises state security, divulges state secrets, subverts state power or damages national unity;~~

	•		~~harms the dignity or interests of the state;~~

	•		~~incites ethnic hatred or racial discrimination or damages inter-ethnic unity;~~

	•		~~sabotages China’s religious policy or propagates heretical teachings or feudal superstitions;~~

	•		~~disseminates rumors, disturbs social order or disrupts social stability;~~

	•		~~propagates obscenity, pornography, gambling, violence, murder or fear or incites the commission of crimes;~~

	•		~~insults or slanders a third party or infringes upon the lawful rights and interests of a third party; or~~

	•		~~includes other content prohibited by laws or administrative regulations.~~

Failure to comply with these prohibitions may result in the closing of our websites. In addition, the Supreme Court of China and the Supreme People’s Procuratorate of China have issued quantitative guidance to the courts in China regarding when criminal penalties should be imposed on persons who distribute or assist in the distribution of obscene content through the Internet or wireless services.

~~Regulation of advertisements.~~~~The State Administration of Industry and Commerce, or the~~ SAIC is the government agency responsible for regulating advertising activities in China. One provisional regulation issued by Shanghai municipal government prohibits service providers from sending SMS advertisements without the client’s consent.

On November 30, 2004, the SAIC issued the Administrative Regulations for Advertising Operation Licenses, taking effect as of January 1, 2005, granting a general exemption to enterprises (other than radio stations, television stations, newspapers and magazines, non-corporate entities and other entities specified in laws or administrative regulations) from the previous requirement to obtain an advertising operation license in addition to a business license. We conduct our online advertising business through Ku6 Information and Tianjin Ku6, each of which holds a business license that includes advertising in its business scope.

On January 26, 2005, the SAIC and the ~~MII~~MIIT jointly promulgated a Circular Regarding the Prohibition of Advertisements for Voice Messages, SMS and other Information Services Which Contain Unhealthy Content, or the SMS Advertising ~~Circular .~~Circular. The SMS Advertising Circular prohibits advertisement of information services with pornographic, obscene, superstitious and other unhealthy content, or advertisements that are misleading in pricing and payment terms of information services. The SMS Advertising Circular further provides that information service providers and advertising companies involved in the dissemination of advertisements for information services with pornographic, obscene, superstitious and other unhealthy content, or advertisements that are misleading in pricing and payment terms of information services will be subject to penalties by relevant authorities pursuant to PRC advertising regulations, and that information service providers providing unhealthy ~~contents~~content will be subject to administrative and other measures by telecommunications authorities, the public security authorities and national security authorities in accordance with Telecommunications Regulations (2000) and other applicable laws and regulations.

~~As part~~Advertisers, advertising operators and advertising distributors are required by PRC advertising laws and regulations to ensure that the contents of ~~our non-mobile operator marketing activities, we have developed integrated marketing campaigns~~the advertisements they prepare or distribute are true and in full compliance with ~~traditional media companies~~applicable laws and ~~multinational corporations through~~regulations. In addition, where a special government review is required for certain ~~cross-selling efforts with companies such as R.A. Baileys & Co. If~~categories of advertisements before publishing, the ~~SAIC were~~advertisers, advertising operators and advertising distributors are obligated to treat our integrated marketing campaigns or other activities as being advertising activities, we would need to apply to the local SAIC for an advertising license to conduct wireless advertising business (through SMS, for example). We cannot assure youconfirm that such ~~application would be approved by the SAIC. Failure to obtain such~~review has been performed and that relevant approval ~~could~~has been obtained. Violation of these regulations may result in penalties, including ~~being banned from~~fines, confiscation of advertising income, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving serious violations, the State Administration for Industry and Commerce or its local branches may force the violator to terminate its advertising operation or even revoke its business license. Furthermore, advertisers, advertising operators or advertising distributors may be subject to civil liability if they infringe on the legal rights and interests of third parties.

Regulations on foreign ownership in advertising business

The principal regulations governing foreign ownership in advertising businesses in China include:

The Foreign Investment Industrial Guidance Catalog;

The Administrative Regulations on Foreign-invested Advertising Enterprises; and

The Circular Regarding Investment in the Advertising Industry by Foreign Investors through Equity Acquisition.

These regulations require foreign entities that directly invest in the PRC advertising industry to have at least a two-year track record with a principal business in the advertising industry outside China. Since December 2005, foreign investors have been permitted to directly own a 100% interest in advertising companies in China, but such foreign investors are also required to have at least a three-year track record with a principal business in the advertising industry outside China. PRC laws, rules and regulations do not permit the transfer of any approvals or licenses, including business licenses containing a scope of business that permits engagement in the advertising business.

As a result of current PRC laws, rules and regulations that impose substantial restrictions on foreign investment in the Internet and advertising businesses in China, we conduct this portion of our operations through a series of contractual arrangements among our PRC subsidiaries and our consolidated controlled entities. See “C. Organizational Structure.”

Regulations on Internet Culture Activities

On May 10, 2003, the Ministry of Culture promulgated the Internet Culture Administration Tentative Measures, or the Internet Culture Measures, which was revised on July 1, 2004. The Internet Culture Measures require ICP operators engaging in “Internet culture activities” to obtain a permit from the Ministry of Culture. The term “Internet culture activities” includes, among other things, online ~~advertising activities, confiscation~~dissemination of ~~illegal earnings~~Internet cultural products (such as audio-video products, gaming products, performances of plays or programs, works of art and ~~fines.~~cartoons) and the production, reproduction, importation, sale (wholesale or retail), leasing and broadcasting of Internet cultural products. We obtained the permit on June 20, 2009.

On November 20, 2006, the Ministry of Culture issued Several Suggestions of the Ministry of Culture on the Development and Administration of the Internet Music, or the Suggestions, which became effective on November 20, 2006. The Suggestions, among other things, reiterate the requirement for the Internet service provider to obtain an Internet culture business permit to carry on any business relating to Internet music products. In addition, foreign investors are prohibited from operating Internet culture businesses. However, the laws and regulations on Internet music products are still evolving, and there have not been any provisions stipulating whether or how music video will be regulated by the Suggestions.

On August 18, 2009, the Ministry of Culture promulgated the Notice on Strengthening and Improving the Content Review of Online Music. According to this notice, only “Internet culture operating entities” approved by the Ministry of Culture may engage in the production, release, dissemination (including providing direct links to music products) and importation of online music products. The content of online music shall be reviewed by or filed with the Ministry of Culture. Internet culture operating entities should establish a strict self-monitoring system of online music content and set up a special department in charge of such monitoring.

To comply with these laws and regulations, our content examination team reviews the music videos on our website as well as certain other content.

Regulations on Producing Audio/Video Programs

On July 19, 2004, the SARFT promulgated the Administrative Measures on the Production and Operation of Radio and Television Programs, effective as of August 20, 2004. These Measures provide that anyone who wishes to produce or operate radio or television programs must first obtain an operating permit. Applicants for this permit must meet several criteria, including having a minimum registered capital of RMB3 million. Our current permit has expired and we are in the process of applying for a new one.

Regulations on Software Products

On October 27, 2000, the MIIT issued the Administrative Measures on Software Products, or the Software Measures, to strengthen the regulation of software products and to encourage the development of the PRC software industry. On March 1, 2009, the MIIT issued amended Software Measures, which became effective on April 10, 2009. The Software Measures provide a registration and filing system with respect to software products made in or imported into China. These software products may be registered with the competent local authorities in charge of software industry administration. Registered software products may enjoy preferential treatment status granted by relevant software industry regulations. Software products can be registered for five years, and the registration is renewable upon expiration.

In order to further implement the Computer Software Protection Regulations promulgated by the State Council on December 20, 2001, the National Copyright Administration of the PRC issued the Computer Software Copyright Registration Procedures on February 20, 2002, which apply to software copyright registration, license contract registration and transfer contract registration. We have obtained and maintain four software copyright registrations.

Regulations on Intellectual Property Rights

China has adopted legislation governing intellectual property rights, including trademarks, patents and copyrights. China is a signatory to the main international conventions on intellectual property rights and became a member of the Agreement on Trade Related Aspects of Intellectual Property Rights upon its accession to the World Trade Organization in December 2001.

Patent. The National People’s Congress adopted the Patent Law in 1984, and amended it in 1992, 2000 and 2008. The purpose of the Patent Law is to protect lawful interests of patent holders, encourage invention, foster applications of invention, enhance innovative capabilities and promote the development of science and technology. To be patentable, invention or utility models must meet three conditions: novelty, inventiveness and practical applicability. Patents cannot be granted for scientific discoveries, rules and methods for intellectual activities, methods used to diagnose or treat diseases, animal and plant breeds, substances obtained by means of nuclear transformation or a design which has major marking effect on the patterns or colors of graphic print products or a combination of both patterns and colors. The Patent Office under the State Intellectual Property Office is responsible for receiving, examining and approving patent applications. A patent is valid for a term of twenty years in the case of an invention and a term of ten years in the case of utility models and designs. A third-party user must obtain consent or a proper license from the patent owner to use the patent. Otherwise, the use constitutes an infringement of patent rights.

Copyright. The National People’s Congress adopted the Copyright Law in 1990 and amended it in 2001 and 2010, respectively. The amended Copyright Law extends copyright protection to Internet activities, products disseminated over the Internet and software products. In addition, there is a voluntary registration system administered by the China Copyright Protection Center. The amended Copyright Law also requires registration of a copyright pledge.

To address copyright issues relating to the Internet, the PRC Supreme People’s Court on December 19, 2000 adopted the Interpretations on Some Issues Concerning Applicable Laws for Trial of Disputes over Internet Copyright, or the Interpretations, which were subsequently amended on January 2, 2004 and November 22, 2006. The Interpretations establish joint liability for ICP operators if they participate in, assist in or incite infringing activities or fail to remove infringing content from their websites after knowing the infringement of copyrights conducted by Internet users through the Internet or receiving notice from the rights holder. In addition, ICP operators shall be liable for knowingly uploading, disseminating or providing any measures, facilities or materials intended to bypass circumvention technologies designed to protect copyrights. Upon request, the ICP operators must provide the rights holder with registration information of the alleged violator, provided that such rights holder has produced relevant identification, copyright certificate and evidence of infringement. A court shall not uphold the alleged infringer’s claim against an ICP operator for breach of contract if the ICP operator removes the alleged infringing content after receiving the rights holder’s notice accompanied with proper evidence.

To address the problem of copyright infringement related to the content posted or transmitted over the Internet, the National Copyright Administration and the MIIT jointly promulgated the Measures for Administrative Protection of Copyright Related to Internet on April 29, 2005. This measure became effective on May 30, 2005.

This measure applies to situations where an ICP operator (i) allows another person to post or store any works, recordings, audio or video programs on the websites operated by such ICP operator or (ii) provides links to, or search results for, the works, recordings, audio or video programs posted or transmitted by such person, without editing, revising or selecting the content of such material. Upon receipt of an infringement notice from a legitimate copyright holder, an ICP operator must take remedial actions immediately by removing or disabling access to the infringing content. If an ICP operator knowingly transmits infringing content or fails to take remedial actions after receipt of a notice of infringement harming public interest, the ICP operator could be subject to administrative penalties, including: cessation of infringement activities; confiscation by the authorities of all income derived from the infringement activities; and payment of a fine of up to three times the unlawful income or, in cases where the amount of unlawful income cannot be determined, a fine of up to RMB100,000. An ICP operator is also required to retain all infringement notices for a minimum of six months and to record the content, display time and IP addresses or the domain names related to the infringement for a minimum of 60 days. Failure to comply with this requirement could result in an administrative warning and a fine of up to RMB30,000.

On May 18, 2006, the State Council promulgated the Protection of the Right of Communication through Information Networks, which became effective on July 1, 2006. Under this regulation, with respect to any information storage space, search or link services provided by an Internet service provider, if the legitimate right owner believes that the works, performance or sound or video recordings pertaining to that service infringe his or her rights of communication, the right owner may give the Internet service provider a written notice containing the relevant information along with preliminary materials proving that an infringement has occurred, and requesting that the Internet service provider delete, or disconnect the links to, such works or recordings. The right owner will be responsible for the truthfulness of the content of the notice.

Upon receipt of the notice, the Internet service provider must delete or disconnect the links to the infringing content immediately and forward the notice to the user that provided the infringing works or recordings. If the written notice cannot be sent to the user due to the unknown IP address, the contents of the notice shall be publicized via information networks. If the user believes that the subject works or recordings have not infringed others’ rights, the user may submit to the Internet service provider a written explanation with preliminary materials proving non-infringement, and a request for the restoration of the deleted works or recordings. The Internet service provider should then immediately restore the deleted or disconnected content and forward the user’s written statement to the right owner.

An Internet service provider that provides information storage space to users through which users may provide works, performance or sound or video recordings to the public will be exempted from liability for compensation to right owners where the following conditions apply: (i) the Internet service provider has clearly indicated that the information storage space is provided to users, and published the name, contact person and IP address of the network service provider; (ii) it has not altered the works or recordings provided by users; (iii) it did not know, or could not reasonably have been expected to know, that the content provided by users infringed other’s rights; (iv) it has not received any direct financial gain from the users’ provision of the content; and (v) it deletes the allegedly infringing content upon receiving written notice from the rights owners. An Internet service provider that provides users with search or link services will be exempted from liability for compensation to right owner if the Internet service provider promptly disconnects the link to the infringing content after receiving the right owner’s notice. This exemption is not valid however if the Internet service provider knew or should know that the linked content infringed another’s rights; in that scenario, it will be jointly liable with the user who provided the content.

Since 2005, the National Copyright Administration, or the NCA, together with certain other PRC governmental authorities, have jointly launched annual campaigns specifically aimed to crack down on Internet copyright infringement and piracy in China, which normally last for three to four months every year. According to theNotice of 2010 Campaign to Crack Down on Internet Infringement and Piracypromulgated by the NCA, the Ministry of Public Security and MIIT on July 19, 2010, one of the main targets, among others, of the 2010 campaign is Internet audio and video programs. Since the 2010 campaign commenced in late July, the local branches of NCA have been focusing on popular movies and television series, newly published books, online games and animation, music and software and illegal uploading or transmission of a third party’s works without proper license or permission, sales of pirated audio/video and software through e-commerce platforms, providing search links, information storage, web hosting or Internet access services for third parties engaging in copyright infringement or piracy and the infringement by use of mobile media. In serious cases, the operating permits of the websites engaging in illegal activities may be revoked, and such websites may be ordered to shut down.

We have adopted measures to mitigate copyright infringement risks. For example, our policy is to remove links to web pages if we know these web pages contain materials that infringe third-party rights or if we are notified by the legitimate copyright holder of the infringement with proper evidence.

On December 26, 2009, the Standing Committee of the National People’s Congress adopted the Torts Liability Law, which became effective on July 1, 2010. Under this new law, both Internet users and Internet service providers may be liable for the wrongful acts of users who infringe the lawful rights of other parties. If an Internet user utilizes Internet services to commit a tortious act, the party whose rights are infringed may request the Internet service provider to take measures, such as removing or blocking the content, or disabling the links thereto, to prevent or stop the infringement. If the Internet service provider does not take necessary measures after receiving such notice, it shall be jointly liable for any further damages suffered by the rights holder. Furthermore, if an Internet service provider fails to take necessary measures when it knows that an Internet user utilizes its Internet services to infringe the lawful rights and interests of other parties, it shall be jointly liable with the Internet user for damages resulting from the infringement.

Trademark. The PRC Trademark Law, adopted in 1982 and revised respectively in 1993 and 2001, protects registered trademarks. The Trademark Office under the SAIC handles trademark registrations and grants a term of ten years to registered trademarks. Trademark license agreements must be filed with the Trademark Office for the record.

Domain Name. In September 2002, the CNNIC issued the Implementing Rules for Domain Name Registration setting forth detailed rules for registration of domain names. On November 5, 2004, the MIIT promulgated the Measures for Administration of Domain Names for the Chinese Internet, or Domain Name Measures. The Domain Name Measures regulate the registration of domain names, such as the first tier domain name “.cn.” In February 2006, CNNIC issued the Measures on Domain Name Disputes Resolution and its implementing rules, pursuant to which CNNIC can authorize a domain name dispute resolution institution to decide disputes.

Regulations on Information Security

The National People’s Congress has enacted legislation that prohibits use of the Internet that breaches the public security, disseminates socially destabilizing content or leaks state secrets. Breach of public security includes breach of national security and infringement on legal rights and interests of the state, society or citizens. Socially destabilizing content includes any content that incites defiance or violations of PRC laws or regulations or subversion of the PRC government or its political system, spreads socially disruptive rumors or involves cult activities, superstition, obscenities, pornography, gambling or violence. State secrets are defined broadly to include information concerning PRC national defense, state affairs and other matters as determined by the PRC authorities.

According to other relevant regulations, ICP operators must complete mandatory security filing procedures and regularly update information security and censorship systems for their websites with local public security authorities, and must also report any public dissemination of prohibited content.

In addition, the State Secrecy Bureau has issued provisions authorizing the blocking of access to any website it deems to be leaking state secrets or failing to comply with the relevant legislation regarding the protection of state secrets during online information distribution.

On January 13, 2006, the Ministry of Public Security promulgated Provisions on Technological Measures for Internet Security Protection, or Internet Protection Measures. The Internet Protection Measures require all ICP operators to keep records of certain information about its users (including user registration information, log-in and log-out time, IP address, content and time of posts by users) for at least 60 days and submit the above information as required by laws and regulations.

As an ICP operator, we are subject to the regulations relating to information security. We have taken measures to comply with such regulations. We are registered with the relevant government authority in accordance with the mandatory registration requirement. Our policy is to remove links to web pages and any content which to its knowledge contain information that would be in violation of PRC laws or regulations. In addition, we monitor our websites to ensure our compliance with such laws and regulations.

Regulations on Internet Privacy

The PRC Constitution states that PRC law protects the freedom and privacy of communications of citizens and prohibits infringement of such rights. In recent years, PRC government authorities have enacted legislation on Internet use to protect personal information from any unauthorized disclosure. The Internet Measures prohibit an ICP operator from insulting or slandering a third party or infringing the lawful rights and interests of a third party. Pursuant to the BBS Measures, ICP operators that provide electronic messaging services must keep users’ personal information confidential and must not disclose such personal information to any third party without the users’ consent or unless required by law. The regulations further authorize the relevant telecommunications authorities to order ICP operators to rectify unauthorized disclosure. ICP operators are subject to legal liability if the unauthorized disclosure results in damages or losses to users. The PRC government, however, has the power and authority to order ICP operators to turn over personal information if an Internet user posts any prohibited content or engages in illegal activities on the Internet.

Foreign ~~exchange controls.~~Exchange Controls

For information regarding relevant foreign exchange controls, please refer to Item 10.D. “Exchange Controls.”

~~Intellectual Property~~Dividend Distribution

The principal regulations governing dividend distributions by wholly foreign-owned enterprises and ~~Proprietary Rights~~Sino-foreign equity joint ventures include the:

~~We rely primarily~~Wholly Foreign Owned Enterprise Law (1986), as amended;

Wholly Foreign Owned Enterprise Law Implementing Rules (1990), as amended;

Sino-foreign Equity Joint Venture Enterprise Law (1979), as amended;

Sino-foreign Equity Joint Venture Enterprise Law Implementing Rules (1983), as amended;

The Companies Law (2005);

The Notice on ~~intellectual property laws~~Implementation of Enterprise Income Tax Transition Preferential Policy under the PRC Enterprise Income Tax Law (2007);

PRC Enterprise Income Tax Law (2007); and ~~our contractual arrangements~~

Implementation Rules of the PRC Enterprise Income Tax Law (2007).

Under these regulations, wholly foreign-owned enterprises and Sino-foreign equity joint ventures in the PRC may pay dividends only out of their accumulated profits, if any, as determined in accordance with ~~our employees, clients, business partners~~PRC accounting standards and others to protect our intellectual property rights. We require our employees to enter into agreements requiring them to keep confidential all information relating to our customers, methods, business and trade secrets during and after their employment with us. Our employeesregulations. Additionally, these foreign-invested enterprises are required to ~~acknowledge~~set aside certain amounts of their accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends.

Regulations on Employee Stock Options Plan

In December 2006, the People’s Bank of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, setting forth the respective requirements for foreign exchange transactions by individuals (both PRC or non-PRC citizens) under either the current account or the capital account. In January 2007, the SAFE issued implementing rules for the Administrative Measures of Foreign Exchange Matters for Individuals, which, among other things, specified approval requirements for certain capital account transactions, such as a PRC citizen’s participation in employee stock ownership plans or share option plans of an overseas, publicly listed company. On March 28, 2007, the State Administration of Foreign Exchange promulgated the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plan or Stock Option Plan of Overseas Listed Company, or the Stock Option Rules. The purpose of the Stock Option Rules is to regulate the foreign exchange administration of PRC domestic individuals who participate in employee stock holding plans and ~~recognize that all inventions, trade secrets, works~~share option plans of ~~authorship, developments~~overseas listed companies.

According to the Stock Option Rules, if a PRC domestic individual participates in any employee stock ownership plan or share option plan of an overseas listed company, a PRC domestic qualified agent or the PRC subsidiary of such overseas listed company must, among other things, file, on behalf of such individual, an application with the SAFE or its local counterpart to obtain approval for an annual allowance with respect to the purchase of foreign exchange in connection with stock holding or share option exercises as PRC domestic individuals may not directly use overseas funds to purchase shares or exercise share options. Concurrent with the filing of such application with the SAFE or its local counterpart, the PRC domestic qualified agent or the PRC subsidiary shall obtain approval from the SAFE or its local counterpart to open a special foreign exchange account at a PRC domestic bank to hold the funds required in connection with the stock purchase or option exercise, any returned principal or profits upon sales of shares, any dividends issued on the stock and any other ~~processes, whether~~income or ~~not patentable~~expenditures approved by the SAFE or ~~copyrightable, made by them during their employment are our property. They~~its local counterpart. The PRC domestic qualified agent or the PRC subsidiary is also ~~sign agreements~~required to ~~substantiate our sole and exclusive right~~obtain approval from the SAFE or its local counterpart to ~~those works and~~open an overseas special foreign exchange account at an overseas trust bank with custody qualifications to ~~transfer~~hold overseas funds used in connection with any ~~ownership that they may claim in those works to us.~~shares purchase.

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~~While we actively take steps~~Under the Foreign Currency Administration Rules, as amended in 2008, the foreign exchange proceeds of domestic entities and individuals can be remitted into China or deposited abroad, subject to ~~protect our proprietary rights,~~the terms and conditions to be issued by the SAFE. However, the implementing rules in respect of depositing the foreign exchange proceeds abroad have not been issued by the SAFE. The foreign exchange proceeds from the sales of shares can be converted into RMB or transferred to such ~~steps may not be adequate~~individuals’ foreign exchange savings account after the proceeds have been remitted back to ~~prevent~~ the ~~infringement or misappropriation of our intellectual property. This is particularly~~special foreign exchange account opened at the ~~case~~PRC domestic bank. If share options are exercised in ~~China where~~a cashless exercise, the ~~laws may not protect our proprietary rights as fully as in~~PRC domestic individuals are required to remit the ~~United States. Infringement or misappropriation of our intellectual property could materially harm our business. We have registered a number of domain names including but not limit to:~~~~Hurray.com; Hurray.net.cn; Hurray.com.cn; Hawa.cn; Hawa.com.cn; M2me.com; M2me.com.cn; 5200.cn; Icu.com.cn; Icu.net.cn; sooglemusic.com; and hdmcms.com,.~~

~~We have registered one trademark with China’s Trademark Office relating~~proceeds to our company logo, two trademarks relating to our website of Hawa and two trademarks relating to Palmsky. We are in the process of applying for two additional trademarks in China. China’s trademark law adopts a “first-to-file” system for obtaining trademark rights. As a result, the first applicant to file an application for registration of a mark will preempt all other applicants. Prior use of unregistered marks, except “well known” marks, is generally not a basis for legal action in China. We may not be able to successfully defend or claim any legal rights in that trademark for which application has been made but for which the Trademark Office has not issued a registration certificate.special foreign exchange accounts.

Many parties are actively developing and seeking patent protection for wireless services-related technologies. We expect these parties to continue to take steps to protect these technologies, including seeking patent protection. There may be patents issued or pending that are held by others and that cover significant parts of our technology, business methods or services. Disputes over rights to these technologies are likely to arise in the future. We cannot be certain that our products and services do not or will not infringe valid patents, copyrights or other intellectual property rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others, as discussed in “Risk Factors — Additional Risks Related to Our Company — We may not be able to adequately protect our intellectual property, and we may be exposed to infringement claims by third parties.”

~~With respect to our music business, our affiliated companies, Freeland Music, Huayi Brothers Music, New Run and Secular Bird, have retained recording and publishing rights~~issues with respect to the ~~songs~~Stock Option Rules require further interpretation. We and our PRC employees who have participated in ~~their music libraries. They also own~~an employee stock ownership plan or share option plan are subject to the ~~applicable copyrights~~Stock Option Rules. If we or our PRC employees fail to comply with ~~respect~~the Stock Option Rules, we and our PRC employees may face sanctions imposed by the PRC foreign exchange authority or any other PRC government authorities, including restriction on foreign currency conversions and additional capital contribution to ~~songs written and produced by their respective in-house artists.~~ our PRC subsidiaries.

In addition, the State Administration of Taxation has issued a few circulars concerning employee share options. Under these circulars, our ~~affiliated music companies~~employees working in China who exercise share options will be subject to PRC individual income tax. Our PRC subsidiaries have ~~either retained licenses~~obligations to ~~use~~file documents related to employee share options with relevant tax authorities and withhold the individual income taxes of employees who exercise their share options. If our employees fail to pay and we fail to withhold their income taxes, we may face sanctions imposed by tax authorities or ~~purchased~~any other PRC government authorities.

Labor Laws and Social Insurance

Pursuant to the ~~applicable copyrights~~PRC Labor Law and the PRC Labor Contract Law, employers must execute written labor contracts with ~~respect~~fulltime employees. All employers must compensate their employees with wages equal to ~~songs written~~at least the local minimum wage standards. All employers are required to establish a system for labor safety and ~~produced~~sanitation, strictly abide by ~~independent artists.~~state rules and standards and provide employees with workplace safety training. Violations of the PRC Labor Contract Law and the PRC Labor Law may result in the imposition of fines and other administrative liabilities. Criminal liability may arise for serious violations.

In addition, employers in China are obliged to provide employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance, work-related injury insurance, medical insurance and housing funds.

To comply with these laws and regulations, we have caused all of our full-time employees to enter into labor contracts and provide our employees with the proper welfare and employment benefits.

Regulations on Concentration in Merger and Acquisition Transactions

The M&A Rule established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. These rules require, among other things, that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor will take control of a PRC domestic enterprise or a foreign company with substantial PRC operations, if certain thresholds under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings issued by the State Council on August 3, 2008 are triggered. Complying with these requirements could affect our ability to expand our business or maintain our market share.

C. Organizational Structure

We ~~currently~~ conduct our ~~business~~operations in China principally through contractual arrangements among our wholly owned ~~subsidiary, Beijing Hurray! Times. To comply with ownership requirements under Chinese laws, which impose certain restrictions on foreign companies such as us, from investing~~PRC subsidiaries, Ku6 (Beijing) Technology Co., Ltd. and WeiMoSanYi (Tianjin) Technology Co., Ltd. and four consolidated affiliated entities in ~~certain industries such as value-added telecommunication and Internet services, we have entered into a series of agreements with ten affiliated Chinese entities~~the PRC, namely, Ku6 (Beijing) Information Technology Co., Ltd. (“Ku6 Information”), Tianjin Ku6 Zheng Yuan Information Technology Co., Ltd. (“Tianjin Ku6”), Ku6 (Beijing) Cultural Media Co., Ltd. (“Ku6 Cultural”), Shanghai Yisheng Network Technology Co., Ltd. (“Yisheng”) and their respective shareholders. Yisheng has a 70%-owned subsidiary, Shanghai Ran Ya Information Technology Co., Ltd. (“Ran Ya”). We hold no ownership interest in any such ~~affiliated Chinese entities,~~VIEs, which are discussed below:

	1.		~~Hurray! Solutions is 85% and 15% owned by our chairman and chief executive officer, Qindai Wang, and one of our shareholders, Songzuo Xiang, respectively.~~

	2.		~~Beijing Cool Young is 95% owned by Hurray! Solutions and 5% owned by Qindai Wang.~~

~~Beijing Network is 50% owned by each of Li Xun and Hongmei Peng, two individuals in China.~~

~~WVAS Solutions is 99% owned by Beijing Network, with the remaining 1% equally owned by Hao Sun and Xiaoping Wang.~~

~~Beijing Palmsky is 50% and 50% owned by two individuals in China, Hong Liu and Haoyu Yang.~~

~~Beijing Hutong is 50% and 50% owned by two individuals in China, Wenqian Xu and Yi Cai.~~

~~Shanghai Magma is 50% and 50% owned by two individuals in China, Yi Zhang and Aiqin Shang.~~

~~Hengji Weiye is 50% and 50% owned by two individuals in China, Hong Pan and Xiaoqing Guo.~~

~~Shanghai Saiyu is 50% and 50% owned by two individuals in China, Liang Ruan and Yuqi Shi.~~

~~10.~~

~~Henan Yinshan is 50% and 50% owned by two individuals in China, Hua Wei and Yidan Jiang.~~

~~In addition, Hurray! Digital Media~~1. Ku6 Information is ~~50%~~98% owned by ~~Hurray! Solutions, 25%~~Mr. Shanyou Li and 2% owned by ~~Beijing Network,~~Mr. Hailong Han.

2. Tianjin Ku6 is 100% owned by Ku6 Information.

3. Ku6 Cultural is 98% owned by Mr. Shanyou Li and 2% owned by Ms. Xingye Zeng.

4. Yisheng is 75% owned by Ms. Dongxu Wang and 25% owned by Beijing Hutong. In turn, Hurray! Digital Media holds a 51% equity interest in Huayi Brothers Music, a 60% equity interest in Freeland Music, a 30% equity interest in New Run, a 65% equity interest in Secular Bird and Freeland Music owns a 51% equity interest in Fly Songs.Ku6 Information.

Through our agreements with these Chinese affiliates, we have the power to vote all shares of all the shareholders of those companies on their matters, through ~~the general manager of Beijing Hurray! Times,~~our wholly owned PRC subsidiaries, as well as the right to enjoy the economic benefits of those companies and the exclusive right to purchase equity interests from the shareholders of those companies to the extent permitted by Chinese laws. For a detailed description of the regulatory environment that necessitates the adoption of our corporate structure, see Item 4.B. “Information on the Company—Business Overview—Government Regulation.” For a detailed description of the risks associated with our corporate structure and the contractual arrangements that support our corporate structure, see Item 3.D. “Risk Factors—Risks Related to Our Corporate Structure.”

Under ~~Financial Accounting Standards Board (“FASB”) Interpretation No. 46(revised), or FIN 46(R),~~the guidance relating to the consolidation of VIEs, we are the primary beneficiary of the economic benefits of our variable interest entities, Hurray! Solutions, WVAS Solutions, Beijing Cool Young, Beijing Palmsky, Beijing Network, Beijing Hutong, Hengji Weiye, Shanghai Magma, Hurray! Digital Media, Shanghai Saiyu, Henan Yinshan, Huayi Brothers Music, Freeland Music, Secular Bird, New RunVIEs and ~~Fly Songs. Accordingly, these entities are consolidated into our financial statements or, in the case of New Run, accounted for on the equity basis from~~their subsidiaries, Ku6 Information, Tianjin Ku6, Ku6 Cultural and ~~after the date we became the primary beneficiary of each such entity.~~Yisheng. Transactions among the consolidated entities and our company and subsidiaries are eliminated in consolidation.

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The following diagram illustrates our corporate structure showing our principal subsidiaries and VIEs as of ~~May 30, 2008.~~June 1, 2011.

D. Property, Plant and Equipment

~~Our company and certain of our non-music affiliates currently~~We lease an approximate total of ~~4,805~~10,045.847 square meters of office space in Beijing, ~~through various lease agreements. The aggregate monthly rent of such lease agreements is approximately $116,265, with effect from August 2006. We also have branches~~Shanghai, Guangzhou, Tianjin and ~~representative offices in Beijing, Shandong, Heilongjiang, Guangdong, Zhejiang, Liaoning, Chongqing, Shanghai, Henan and Sichuan.~~

Freeland Music, Huayi Brothers Music and New Run lease an approximate total of 2,612 square meters of office space in Beijing. Secular Bird leases an approximate total of 141 square meters of office space in Guangzhou. We believe that we and our affiliated companies will be able to obtain adequate facilities, principally through the leasing of appropriate properties, to accommodate our future expansion plans.Xi’an.

Item 4A. Unresolved Staff Comments

Not Applicable.

Item 5. Operating and Financial Review and Prospects

The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated financial statements and their related notes included elsewhere in this ~~annual report on~~ Form 20-F. This ~~report~~discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect,” “anticipate,” “intend,” ~~“believe,”~~“believe” or similar language. All forward-looking statements included in this ~~annual report~~prospectus are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information provided under the caption “Risk ~~Factors” in this annual report on Form 20-F.~~Factors.” We caution you that our businesses and financial performance are subject to substantial risks and uncertainties.

A. OPERATING RESULTS

Overview

We entered into the online video business through the acquisition of Ku6 Holding Limited in January 2010.

In May 2010, we sold all of our 51% interest in Huayi Music to Huayi Brothers Media Corporation.

In August 2010, we completed the disposal of our wireless value-added services (WVAS) and recorded music businesses to Shanda Interactive. We also completed the acquisition of the control of Yisheng, an online radio business, from Shanda Interactive in August 2010. These transactions are considered as transactions between entities under common control. Therefore the transactions are recorded at carryover basis and any difference between the carrying value and the amount received or paid are recorded in shareholders’ equity. The accompanying consolidated financial statements have been prepared as if the acquisition of Yisheng had been in effect since the inception of common control, which is August 31, 2009, the date on which the financial results of us was consolidated into Shanda Interactive’s consolidated financial statement and the operating results of WVAS and recorded music were presented as discontinued operations in the income statements for all periods presented. See Note 2(1) to our consolidated financial statements.

We currently operate our business as a ~~leading~~single segment. We derive substantially all of our revenues from online ~~distributor~~advertising services. For the year ended 2010, our revenues and net loss were $16.6 million and $51.5 million, respectively.

As of ~~music~~December 31, 2010, we had cash and ~~music-related products~~cash equivalents of approximately $27.3 million and working capital of approximately $8.4 million. On April 1, 2011, we entered into agreements with Shanda Media Group Limited, or Shanda Media, a wholly owned subsidiary of Shanda Interactive, pursuant to which we agreed to issue to Shanda Media $50,000,000 of our ordinary shares at a per share price of $0.0325 (or $3.25 per ADS), and $50,000,000 aggregate principal amount of senior convertible bond at face value. The bond will mature in three years after issuance and will bear an interest of 3% per annum. The bond will be convertible into our ordinary shares at a price of $0.03925 per ordinary share (or $3.925 per ADS). The bond is convertible beginning six months following its issuance. We believe that the new investment by Shanda Media provide sufficient capital for the next twelve months. Accordingly, our consolidated financial statements have been prepared on a going-concern basis.

Discontinued Operations

Historically, we derived most of our revenues from wireless value-added services, which includes 2G services such as ~~ringtones, ringbacktones,~~short message service, interactive voice response and ~~truetones to mobile users in China through the full range~~ring back tone, and 2.5G services such as WAP, MMS, and Java™, each of ~~WVAS platforms over mobile networks and through the Internet.~~

We also provide a wide range of other WVAS to mobile users in China, including games, pictures and animation, community, and other media and entertainment services. Our services are offered through the various service platformswhich is available on the ~~2G and 2.5G~~ networks ~~operated by the mobile telecommunication network operators in China, principally~~of China Mobile, China Unicom and ~~increasingly,~~ China Telecom. ~~Many of~~We also had a recorded music business, which involves discovering, developing and representing recording artists and promoting, selling and licensing their works through designated third parties. In 2010, we made the strategic decision to divest our wireless value-added services are also available to users in China through our website. We are also a leader in artist development, music production and offline distribution in China through our affiliated music companies, Huayi Brothers Music, Freeland Music, New Run, and Secular Bird.

Our 2G services revenues are derived from our SMS, IVR services and RBT services. Our 2.5G services revenues are derived to a substantial extent from WAP services, the predominant 2.5G service available in China, and to a lesser extent from Java™ games and MMS. Users pay for our services by monthly subscription and/or on a per-use basis. We receive payments for these services principally in the form of payments from the telecom operators after the users have paid for our services and the operators have deducted their service and network fees.

We recorded a net loss of $42.0 million for 2007 and net income of $5.8 million for 2006 and $18.6 million for 2005. For 2007, we generated $60.5 million in total revenues, compared to $68.7 million and $56.1 million for 2006 and 2005, respectively, representing a decline of 11.9 % and an increase of 8.0 %, respectively. For 2007, WVAS revenue and recorded music businesses to focus on our online video business.

On May 28, 2010, we sold all of our 51% interest in Huayi Music to Huayi Brothers Media Corporation and recognized gain of $4,486,786 from disposal of discontinued operations.

On August 17, 2010, we sold our wireless value-added services and recorded music businesses to Shanda Interactive. As the transaction was considered as a transaction between entities under common control, no gain or loss was recognized. The difference of $13,561,087 between the consideration received of $37,243,904 and the carrying amount of the assets and liabilities of WVAS and recorded music business of $23,682,817 and the corresponding cumulative translation difference of $10,344,330 were accounted for ~~82.7% and 17.3% of our revenues, respectively, compared to 91.0% and 9.0%~~as contribution by Shanda Interactive in ~~2006 and 100% and nil~~additional paid-in capital in 2005. The decrease in total revenues was driven by a significant decrease in demand for WVAS in 2007. The 2007 decrease in revenue from WVAS was offset in part by an increase in recorded music revenues.

~~We had an accumulated deficit of $2.8 million as of December 31, 2007, and retained earnings of $40.0 million and $34.6 million as of December 31, 2006 and 2005, respectively.~~

~~We had statutory reserves of $6.5 million, $5.7 million and $5.3 million as of December 31, 2007, 2006 and 2005, respectively.~~2010.

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According to ASC 205, the effect of discontinued operations of WVAS and recorded music businesses for the years ended December 31, 2008, 2009 and eight months period ended August 31, 2010 has been accounted for retroactively in the consolidated statement of operations for all the periods presented. Results from these discontinued operations, net of tax, in 2010, 2009 and 2008 were income of $1,104,348 (including gain of $4,486,786 from the disposal of our 51% interest in Beijing Huayi Brothers Music Co., Ltd. ), losses of $21,556,275 and losses of $7,330,754, respectively.

Acquisition of Online Audio Business from Shanda Interactive

The acquisition of Yisheng’s online audio business from Shanda Interactive was accounted for as a common control transaction as we were considered to be under the control of Shanda Interactive at the time of the acquisition. Accordingly, the accompanying consolidated financial statements have been prepared as if the acquisition of Yisheng had been in effect since August 31, 2009, the date of inception of common control, which is the date on which we were consolidated into Shanda Interactive’s consolidated financial statement. Therefore total assets and liabilities as well as the non-controlling interests of Yisheng were recorded at the carrying amount as capital contribution from Shanda Interactive in the consolidated statements of changes in equity. The effect of accounting for the acquisition under common control has increased the net loss for the year ended December 31, 2009 by $736,969, which represents the net loss of this business from August 31, 2009 through December 31, 2009. The $12,461,538 fair value of the 415,384,615 ordinary shares that we issued to Shanda Interactive was recorded through equity as a deemed distribution to Shanda Interactive in 2010.

The issuance of 138,461,539 ordinary shares to the 25% non-controlling shareholders of Yisheng in August 2010 was accounted for as an equity transaction in 2010 and the difference between fair value of the ordinary shares issued and carrying amount of the non-controlling interest was recognized as a decrease in additional paid-in capital attributable to us in accordance ASC 810.

Factors Affecting Our Results of Operations ~~and Financial Condition~~

~~The major factors affecting our~~Our business, financial condition and results of operations have been and will continue to be subject to general conditions affecting the online video and online advertising industries in China. These conditions, among others, include the stability and growth of China’s economy, the growth of the Internet penetration rate in China, and the increasing acceptance of online video advertising by the advertisers. In addition, our business, financial condition ~~include:~~and results of operations are affected by a number of company-specific factors including our ability to:

	•		~~Growth of the WVAS Market in China and Changes in Mobile Operator Policies.~~Our financial results have been, and we expect them to continue to be, largely dependent on growth in the WVAS market in China. Historically, 2G services, such as SMS, have represented the predominant portion of the WVAS market in China and of our revenues. Our 2G services, represented 75.9% of our total WVAS revenues in 2003, all of which were derived from our SMS services. We commercially launched 2.5G services in September 2002 and began billing users for these services at the beginning of 2003. Since the launch of these 2G and 2.5G services, we have experienced significant growth in revenues from these services followed by a significant decline in revenues for these services in 2006 and 2007. The single most important factor causing this decline is the changes in mobile operator policies or the manner in which they are enforced. Such policy changes and their manner of enforcement have been frequent and unpredictable for the past three years and have caused our revenues to be volatile. See Item 3. “Risk Factors — Risks Related to Our Company— Unilateral changes in the policies of the MII, 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 telecom operators, and further changes could materially and adversely impact our revenue and profitability in the future.” Although, we have been adversely affected by recent changes in mobile operator policies and the delay in the launch of 3G networks, we continue to believe that our financial success in the near-term will depend on the growth of the market for our 2G and 2.5G services, especially services utilizing music content, where we have a leading position and, in the longer-term, on our ability to offer popular services on any new wireless technologies that are introduced in China such as 3G.

	•		~~Positioning of Our Services on the WAP Portals of China Mobile and China Unicom.~~A key component of our revenue growth is our ability to not only maintain access to China Unicom’s and China Mobile’s networks, but also our ability to secure prominent positioning for our services at the top of the menu of services for each major service category on the telecom operators’ WAP portals so that users see our services first when opening the service menus. However, Beijing Network, one of our affiliated operating companies providing WAP services through China Mobile, was issued a sanction by China Mobile in January 2006 for improper promotion of one of its WAP services. As part of the sanction, China Mobile downgraded all of Beijing Network’s WAP services to the bottom of the menu and temporarily suspended the approval of new service applications on all platforms by Beijing Network and joint promotions with Beijing Network. The sanction relating to downgrading Beijing Network’s WAP services to the bottom of China Mobile’s menus is no longer in effect.

	•		~~Network Service Agreements with China Mobile, China Unicom and China Telecom.~~Our results of operations are dependent on the terms of network service agreements with China Mobile, China Unicom and China Telecom and the manner in which the telecom operators implement these agreements. Each of these agreements is non-exclusive, and has a limited term, generally one or two years. Renewal of them on favorable terms depends on our relationship with these telecom operators at both the national and provincial level, the popularity of our services and our ability to maintain adequate levels of performance. Any mobile operator could alter any of these terms or terminate the contracts for a variety of reasons in the future, including, for example, to increase their own service or network fees in order to enhance their profitability at the expense of service providers.

	•		~~Taxes.~~Certain of our subsidiaries and affiliated Chinese entities enjoy tax exemptions and reduced tax rates. See “— Taxation” below. Such tax treatment increases our net income. Our future results could be materially adversely affected if we are not able to maintain similar tax treatment, particularly as a result of the recently adopted revisions to PRC income tax laws which became effective on January 1, 2008.

	•		~~Billing and Transmission Failures~~. We do not recognize any revenues for services that are characterized as billing and transmission failures. These failures occur when we do not collect fees for our 2G services from mobile operators in a number of circumstances, including when the delivery of our services to a customer is prevented because the customer’s phone is off, the customer’s prepaid phone card has run out of value or a telecom operator experiences technical problems with its network. These situations are known in the industry as billing and transmission failures. The level of billing and transmission failures significantly affects revenues we record. The failure rate for 2G services has fluctuated significantly in the past, ranging on a monthly basis from 0.0% to 9.8% of the total billable messages which are reflected in our internal records during 2007. Although we do not experience the same type of billing and transmission errors 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 that we receive from the telecom operators. This difference has historically averaged approximately 2% per month and relates to services that are provided but for a variety of reasons are not billed to the user due to the manner in which the telecom operators register new users or manage their internal billing reconciliation process.

maintain and expand our user base;

obtain and produce popular video content cost-effectively;

procure Internet bandwidth cost-effectively;

provide effective advertising services;

control sales and marketing expenses; and

maintain leading brand and market position.

Description of Certain Statement of Operations Items

Net Revenues

We currently derive substantially all of our net revenues from online advertising services. Advertisers purchase our online advertising services primarily through third-party advertising agencies. As is customary in the advertising industry in China, we use cash incentives in the form of rebates to third-party advertising agencies and recognize revenues net of these rebates. We expect that our advertising service revenues will continue to be the primary source of our revenues for the foreseeable future. The cash incentives to third-party advertising agencies in the year ended December 31, 2010 was $5.4 million.

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We believe the most significant factors that directly or indirectly affect our advertising service revenues include the following:

the number of advertising customers;

the number of users visiting our website and the amount of time they spend on our website;

the list prices of our advertising services and the discount we offer to customers;

the commissions earned by third-party advertising agencies; and

the perceived effectiveness of online video advertising as compared to advertising in more traditional media, particularly television.

The number of advertising customers during any period is affected by our services, our sales and marketing efforts and influenced by our market position and advertisers’ perception of the effectiveness of our online advertising services. The size of our advertising customer base is also driven by customer-specific factors such as the timing of the introduction of new advertising campaigns, our ability to maintain favorable demographic user base, seasonality of advertising customers’ operations and growth of business sectors in which our advertising customers operate.

We believe our revenues from online advertising services are subject to seasonal fluctuations. For example, revenues of China-based online advertising companies like us are usually lower during the Chinese New Year period in the first quarter when advertising customers tend to place fewer orders for online advertising. Our relatively stronger performance in the fourth quarter has been largely due to the year-end promotion and sales campaign of our advertising customers.

Cost of Revenues

Our cost of revenues consist of Internet bandwidth leasing costs, amortization and impairment write-down of licensed video copyright, payroll costs associated with the platform operation and content, in-house developed content costs, depreciation expenses, and other costs. Our total cost of revenues amounted to $40.4 million for the year ended 2010.

Year ended December 31,
2008 2009 2010
(in thousands of U.S. dollars)
Internet bandwidth costs $ — $ 534 $ 10,279
Amortization of purchased video copyright cost — — 8,012
Impairment write-down of purchased video copyright cost — — 7,740
Payroll cost — — 6,167
In-house developed content costs — — 1,596
Depreciation of servers and other equipments — — 2,503
Other costs(1) — 23 4,162

Total costs $ — $ 557 $ 40,459

	•		~~Acquisitions and Strategic Investments.~~~~Selective acquisitions and strategic investments, such as the ones described~~in Item 4.A. “History and Development of the Company” above, form part of our strategy to further expand our business. These acquisitions and investments may not produce the results that our management and board of directors anticipate, and may subject our company to unforeseen liabilities. In particular, our future revenue growth will depend on our ability to successfully operate our music development, production and distribution business, with which we have relatively limited experience.

	•(1)		~~Developing Artists, Sustaining a Pipeline of New Song Releases~~Include primarily advertisement production costs and ~~Keeping up with Consumer Music Tastes.~~~~Through our acquisition of controlling~~outside service fees and minority stakes in Huayi Brothers Music, Freeland Music, New Run and Secular Bird, we have entered the business of artist development and music production. Artist development and music production is inherently a “hit” driven business, and its success depends to a large extent on our ability to maintain a large portfolio of talented singing artists and build a strong pipeline of new song releases. Further, the success of such new releases depends upon their acceptance by consumers with various and changing tastes. If our affiliated music companies fail to expand their portfolio of talented singing artists, sustain a pipeline of new releases, or keep abreast of changes in consumer music tastes, our business and financial condition may be adversely affected with respect to the financial performance of our affiliated music companies.user-generated content costs.

~~Revenues~~

Internet bandwidth costs. Internet bandwidth costs are the fees we pay to telecommunications carriers and other service providers for telecommunications services and for hosting our servers at their Internet data centers. Bandwidth is a significant component of our cost of revenues and therefore an important factor affecting our profitability. We ~~derive~~expect our ~~revenues from~~bandwidth costs to increase on an absolute basis as traffic to our ~~primary operating segments: WVAS and recorded music. Our revenues represent~~website grows. However, we expect our ~~total revenues from operations, net of certain business and value-added taxes. Our revenues from WVAS and recorded music are subject to a 3.0% and 5.0% business tax, respectively.~~

~~The following table sets forth certain historical consolidated revenues, by amount and~~bandwidth costs as a percentage of our ~~total~~net revenues ~~for the periods indicated:~~

For the Year Ended December 31,
2007 2006 2005
Percentage Percentage Percentage
Amount of revenues Amount of revenues Amount of revenues
(in thousands of U.S. dollars, except percentages)
Revenues:

Wireless value-added services $ 50,038 82.7 % $ 62,512 91 % $ 56,063 100.0 %
Recorded music 10,489 17.3 6,203 9 — —

Total revenues $ 60,527 100.0 % $ 68,715 100.0 % $ 56,063 100.0 %

~~The following tables show our WVAS revenues for 2007, 2006~~to decrease over time, consistent with historical trends of decreasing unit cost of data hosting and ~~2005 by product and mobile operator (including Personal Handy-phone System, or PHS, operators).~~

For the Year Ended December 31, 2007
China China China China
Mobile Unicom Telecom Netcom Others Total
(in millions of U.S. dollars)
SMS $ 7.0 $ 2.5 $ 0.2 $ 0.3 $ 1.0 $ 11.0
IVR 13.3 1.2 2.4 0.3 — 17.2
RBT 1.6 1.7 2.4 — — 5.7

2G Revenues 21.9 5.4 5.0 0.6 1.0 33.9

WAP 5.9 6.7 — — — 12.6
MMS 0.7 0.7 — — — 1.4
Java 1.4 — — — — 1.4

2.5G revenues 8.0 7.4 — — — 15.4

Other revenues 0.1 — — — 0.6 0.7

Total $ 30.0 $ 12.8 $ 5.0 $ 0.6 $ 1.6 $ 50.0

transmission services.

For the Year Ended December 31, 2006
China China China China
Mobile Unicom Telecom Netcom Total
(in millions of U.S. dollars)

SMS $ 11.3 $ 5.7 $ — $ 0.1 $ 17.1
IVR 5.2 2.5 2.5 0.6 10.8
RBT 2.0 1.3 1.4 — 4.7

2G Revenues 18.5 9.5 3.9 0.7 32.6

WAP 10.4 11.1 — — 21.5
MMS 3.5 0.5 — — 4.0
Java™ 4.4 — — — 4.4

2.5G revenues 18.3 11.6 — — 29.9

Total $ 36.8 $ 21.1 $ 3.9 $ 0.7 $ 62.5

For the Year Ended December 31, 2005
China China China China
Mobile Unicom Telecom Netcom Total
(in millions of U.S. dollars)

SMS $ 2.0 $ 8.6 $ — $ — $ 10.6
IVR 4.8 2.9 0.7 0.2 8.6
RBT 0.5 0.4 — — 0.9

2G Revenues 7.3 11.9 0.7 0.2 20.1

WAP 10.2 24.1 — — 34.3
MMS 1.5 0.2 — — 1.7
Java™ — — — — —

2.5G revenues 11.7 24.3 — — 36.0

Total $ 19.0 $ 36.2 $ 0.7 $ 0.2 $ 56.1

~~Wireless Value-added Services~~. Our 2G and 2.5G services revenues are derived from services that we provide to our users primarily through the networks of China Unicom, China Mobile, China Telecom and China Netcom. 2G SMS and 2.5G WAP services have historically been our primary source of revenues. Our sales in 2007 of 2G IVR and RBT increased by 59.3% and 67.6%, respectively as compared with 2006. Sales in 2007 of 2.5G WAP, MMS and JAVA™ decreased as compared to 2006 due in part to China Mobile’s new requirement that a service fee reminder be sent to users before processing their download requests.

~~Recorded Music~~. Our recorded music revenues are derived from artist development, music production, offline music distribution, and online music distribution through WVAS and the Internet, which accounted for approximately 17.3% of our total revenues in 2007.

~~Cost of Revenues~~

~~The following table sets forth certain historical consolidated cost of revenues data by amount for the periods indicated:~~

For the Year Ended December 31,
2007 2006 2005
(in thousands of U.S. dollars)

Cost of Revenues:

Wireless value-added services $ 36,394 $ 40,672 $ 28,635
Recorded music 6,233 3,553 —

Total cost of revenues $ 42,627 $ 44,225 $ 28,635

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~~Wireless value-added services.~~Amortization and write-down of licensed video copyrights.The ~~principal~~licensed video copyrights are carried at the lower of unamortized cost or net realizable value and are amortized over their respective licensing periods as there is no limit of the showings of the licensed videos and we cannot reliably estimate the future number of showings for the licensed videos. We estimate the expected cash inflows that are directly attributed to the contents licensed under the net realizable value approach. We write down the carrying value of the licensed content to net realizable value if the estimated net future direct cash inflows from the licensed video copyrights over the licensing period are lower than the carrying value. Amortization and write-down expenses for the year ended December 31, 2010 was $8,012,252 and $7,739,562, respectively. As of December 31, 2010, the carrying value of licensed video copyrights was written down to zero. Our costs of amortization and write-down of licensed video copyrights increased significantly as we built a large and comprehensive online video content library during the year 2010. We are exploring a revenue-sharing model with content owners. Under this model, we generally obtain titles for low initial cost in exchange for a commitment to share a percentage of the advertising revenues generated by us from such titles, for a defined period of time. The initial cost may be in the form of an upfront non refundable payment and may also be in the form of a prepayment of future revenue sharing obligations. The terms of some revenue-sharing agreements may obligate us to make minimum revenue-sharing payments for certain titles. We believe this new model, if successfully executed, will help us to match our content costs and revenues generated from such content better.

Payroll costs.Payroll costs consist of salaries and benefits for our ~~WVAS is~~platform operation and content personnel. We expect that our payroll costs will stay stable in absolute terms in the ~~service and network fees paid~~near term.

In-house developed content costs.In-house developed content costs represent costs related to the ~~telecom operators under~~production of our ~~network service agreements with them. The cost of revenues also includes fees~~news, reports and interactive entertainment programs, but do not include any salaries and benefits paid to our employees. Video production (which mainly include direct production costs and production overhead) costs are capitalized, if meeting the capitalization criteria. During the year ended December 31, 2010, the video production costs did not meet the criteria for capitalization and as a result all the video production costs have been expensed as incurred. We expect our in-house developed content ~~providers~~costs continue to increase as we further implement our online media strategy.

Depreciation of servers and ~~marketing partners, maintenance costs~~other equipment.We include depreciation expense for servers and other equipment that are directly related to ~~equipment used~~our business operations and technical support in our cost of revenues. Although our depreciation expenses were inconsequential in 2009, our depreciation expense increased significantly in the year ended December 31, 2010 to ~~provide the services, bandwidth leasing charges~~$2.5 million, as we made substantial investments in building up our CDN infrastructure in 2010 after our acquisition of Ku6. We expect our depreciation expense to increase on an absolute basis as we continue to invest in additional servers and ~~data center services, alternative channels, media and related Internet costs, operator imposed penalty charges, and certain distribution costs.~~

~~Recorded Music. Cost of revenues for~~other equipment. However, we expect our ~~recorded music includes producing CD masters, artist and songwriter royalties, advertising and royalties payable to other parties for the use of their work.~~

~~Gross Profit Margin~~

~~The following table sets forth the historical consolidated gross profits and gross profit margin~~depreciation expense as a percentage of our ~~business activities for the periods indicated:~~

For the Year Ended December 31,
2007 2006 2005
(in thousands of
U.S. dollars, except percentages)

Gross Profits:

Wireless value-added services $ 13,644 $ 21,840 $ 27,428
Recorded music 4,256 2,650 —

Total gross profits $ 17,900 $ 24,490 $ 27,428

For the Year Ended December 31,
2007 2006 2005

Gross Profit Margin:

Wireless value-added services 27.3 % 34.9 % 48.9 %

Recorded music 40.6 42.7 —

Total gross profit margin 29.6 % 35.6 % 48.9 %

~~The gross profit margins for~~net revenues to decrease over time since we made substantial upfront capital expenditures at an early stage of our ~~WVAS declined in 2007 compared~~development that are not expected to 2006 due to sharply decreased revenues due to the challenging wireless services operating environment and stricter policies and regulations announced by the MII and the telecom operators and increased enforcement of those policies and regulations. The gross profit margins forincrease as quickly as our ~~recorded music declined in 2007 compared to 2006 due to the increased cost of revenues caused by increases in the cost of producing CD masters.~~net revenues.

Operating Expenses

The following table sets forth certain historical consolidated operating expenses data, in terms of amount and as a percentage of our total revenues, for the periods indicated:

For the Year Ended December 31,
2007 2006 2005
Percentage Percentage Percentage
Amount of revenues Amount of revenues Amount of revenues
(in thousands of U.S. dollars, except percentages)
Operating Expenses:

Product development expenses (including stock-based compensation expense of $1, $80 and $5 for the years ended December 31, 2007, 2006 and 2005, respectively) $ 2,028 3.0 % $ 2,169 3.2 % $ 1,852 3.3 %
Selling and marketing expenses (including stock-based compensation expense of $287, $346 and $10 for the years ended December 31, 2007, 2006 and 2005, respectively) 11,514 16.8 11,014 16.0 8,982 16.0
General and administrative expenses (including stock-based compensation expense of $155, $118 and $23 for the years ended December 31, 2007, 2006 and 2005, respectively) 9,141 13.3 6,699 9.7 3,443 6.1
Provision for goodwill impairment 38,779 56.4 — — — —

Total operating expenses $ 61,462 89.4 % $ 19,882 28.9 % $ 14,277 25.5 %

Year Ended December 31,
2008 2009 2010
(in thousands of U.S. dollars)
Operating Expenses

Product development $ 105 $ — $ —
Selling and marketing 623 665 16,196
General and administrative 1,673 6,465 13,507

Total operating expenses $ 2,401 $ 7,130 $ 29,703

Product Development Expenses.Product development expenses consist primarily of salaries and benefits for product development personnel, including share-based compensation costs.

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~~Product Development Expenses~~. Product development expenses primarily consist of research and development staff costs. Most of our product development expenses relate to enhancing our portfolio of 2G and 2.5G services and improving and updating our services provisioning and management software prior to our sale of the SSI business. Product development expenses also include depreciation and amortization of computers and software related to the activities of our product development teams. We depreciate our computer equipment, software and other assets on a straight-line basis over their estimated useful lives, which is three to five years.

Selling and Marketing ~~Expenses~~Expenses.. Selling and marketing expenses primarily consist of staff costs related to managing the development of our service offerings. These expenses also include advertising, sales and marketing expenses, such as expenses associated with sponsoring promotional events, salaries and benefits for our direct sales force, free trial services we offer through, for example, certain retailers of mobile phones in China. We expect that our selling and marketing expenses will continue to increase in future periods as we expand our music business and increasingly use stock-based compensation to reward our sales and marketing ~~personnel.~~personnel, including share-based compensation costs, sales commission paid to our sales team and advertising and marketing expenses.

General and Administrative ~~Expenses~~Expenses.. General and administrative expenses consist primarily ~~consist~~ of ~~stock-based compensation~~salary and benefits for our management, salaries for our finance and administrative personnel, professional service fees, lease expenses, other office expenses, expenses related to depreciation of equipment for general corporate purposes and expenses related to amortization of intangible assets from our acquisition.

~~We lease bandwidth from telecom operators’ provincial offices. Bandwidth and server custody fees, office rentals and depreciation charges allocated to our~~ general management, finance and administrative personnel, ~~are also included in general~~bad debt provision, depreciation, amortization and ~~administrative expenses.~~

~~We depreciate leasehold improvements, which are recorded as general and administrative expenses on a straight-line basis over the relevant lease term.~~

~~We expect our general and administrative expenses to increase as we add personnel in response to the expansion~~impairment of our business in future periods and incur additional administrative expenses from our newly acquired companies, New Run, Shanghai Saiyu, Secular Bird, Henan Yinshan and Fly Songs. We also expect general and administrative expenses to increase as we incurintangible assets, professional service fees, ~~such as for legal and accounting services.~~

~~Stock-based Compensation.~~We grant equity incentive awards to our employees and certain non-employees. Until February 2006 when we commenced granting nonvested shares, all of our equity incentive grants were in the form of stock options. Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123(R) using the modified prospective transition method. Under this method, stock-basedshare-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 accordance with SFAS 123, “Accounting for Stock-based Compensation,” and (b) compensation expense for all stock-based compensation awards granted on or subsequent to January 1, 2006, based on grant date fair value estimated in accordance with the provisions of SFAS 123(R). In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the SEC’s interpretation of SFAS 123(R) and the valuation of stock-based payments for public companies. We have applied SAB 107 in our adoption of SFAS 123(R). We recognize stock-based compensation costs on a straight-line basis over the requisite service period of the award, which is generally the vesting period of the award.

Prior to the adoption of SFAS 123(R), we recognized stock-based compensation expense in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and had adopted the disclosure-only alternative of SFAS 123 and SFAS No. 148, “Accounting for Stock-based Compensation — Transition and Disclosure.” In accordance with APB 25 and related interpretations, stock-based compensation expense was not recorded in connection with share-based payment awards granted with exercise prices equal to or greater than the fair market value of the underlying shares on the date of grant.

Share-based payment transactions with non-employees are accounted for as share based compensation expenses in accordance with EITF 96-18 “Accounting for Equity Instruments that Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services.”

On December 20, 2005, we accelerated the vesting of all outstanding stock options that would otherwise have been unvested at December 31, 2005. We implemented this acceleration in order to reduce the stock-based compensation expense that would have been incurred by our company if such options continued to vest after January 1, 2006, which is the date that the SFAS 123(R) became effective. This accounting standard requires that all share-based payments to employees, including grants of stock options, be recognized in our financial statements based on their fair values. In connection with the acceleration of such options, we recorded compensation expense of approximately $17,000 which was included in the 2005 total stock-based compensation cost.

On February 7, 2006, Hurray! granted awards of 330,000 ADSs, equal to 33,000,000 ordinary shares that vest over a period of time (which we refer to herein as “nonvested shares”) to certain employees pursuant to its 2004 Share Incentive Plan (the “2004 Plan”). This resulted in stock-based compensation expense of $1.6 million to be recognized over the applicable vesting period. These nonvested shares vest on an annual basis equally over three years.

On June 20, 2006, Hurray! granted 75,000 ADSs, equal to 7,500,000 nonvested shares to certain employees which resulted in stock-based compensation expense of $0.3 million to be recognized over the applicable vesting period. These nonvested shares vest on an annual basis equally over 33 months.

On March 14, 2007, Hurray! granted 20,000,000 nonvested shares to its employees which resulted in stock-based compensation expense of $0.6 million to be recognized over the applicable vesting period. These nonvested shares vest over three years on an annual basis equally.

On November 23, 2007, Hurray! granted 19,500,000 nonvested shares to its employees which resulted in stock-based compensation expense of $0.4 million to be recognized over the applicable vesting period. These nonvested shares vest over three years on an annual basis equally.

~~The stock-based compensation expense was $0.4 million in 2007 and $0.5 million in 2006.~~

~~Provision for impairment of goodwill and intangible assets.~~In the second quarter of 2007, the telecom operators introduced various new policies that adversely impacted our WVAS business and introduced further uncertainties in our operating environment. By September 30, 2007, our market capitalization was lower than our net book value, thus indicating impairment of our long-lived assets. As of that date, we tested the carrying value of goodwill and acquired intangible assets and recorded a goodwill impairment charge of $9.6 million and an impairment charge to acquired intangibles of $0.6 million. In view of the further decline of Hurray’s market capitalization as of December 31, 2007 and continued difficult operating conditions, we recorded an additional goodwill impairment charge of $29.2 million and an additional impairment charge to acquired intangible assets of $1.9 million. The impairment charges of acquired intangibles are included in operating expenses according to their nature. The valuation of goodwill and other intangible assets was arrived at after using a combination of a market value approach (with comparisons to selected publicly traded companies operating in the same industry) and an income approach (discounted cash flows). Any continued adverse changes in the telecom operators’ policies or in the competitive environment could lead to additional impairment charges.expenses.

Critical Accounting Policies

The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We have summarized our accounting policies below that we believe are both important to an understanding of our financial results and involve the need to make estimates about the effect of matters that are inherently uncertain. We also have other policies that we consider to be key accounting policies. However, these policies do not meet the definition of critical accounting policies because they do not generally require us to make estimates or judgments that are difficult or subjective.

~~Revenue Recognition~~Business Combinations and Non-controlling Interests

~~Wireless value-added services.~~We ~~contract with~~account for our business combinations using the ~~telecom operators for~~purchase method of accounting. This method requires that the ~~transmission~~acquisition cost to be allocated to the assets, including separately identifiable intangible assets, and liabilities we acquired based on their estimated fair values. Any non-controlling interest was reflected at historical cost. Where the consideration in an acquisition includes contingent consideration the payment of ~~wireless services~~which depends on the achievement of certain specified conditions post-acquisition, contingent consideration was not recorded until the contingency was resolved.

From January 1, 2009, we adopted ASC 805 (formerly referred to as SFAS No. 141 (revised 2007), “Business combinations”). Following this adoption, the cost of an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as ~~for billing~~the contingent considerations and collection services. The telecom operators provide us with a monthly statement that represents the principal evidence that service has been delivered and triggers revenue recognition for a substantial portion of our revenue. In certain instances, when a statement is not received within a reasonable period of time, we make an estimateall contractual contingencies as of the ~~revenues~~acquisition date. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total of cost of ~~services earned during~~acquisition, fair value of the ~~period covered by~~non-controlling interests and acquisition date fair value of any previously held equity interest in the ~~statement~~acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement.

The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed is based on ~~its internally generated information, historical experience and/or other~~various assumptions ~~that~~and valuation methodologies requiring considerable management judgment. The most significant variables in these valuations are ~~believed~~discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. We determine discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of assets and forecasted life cycle and forecasted cash flows over that period. Although we believe that the assumptions applied in the determination are reasonable ~~under~~based on information available at the ~~circumstances.~~date of acquisition, actual results may differ from the forecasted amounts and the difference could be material.

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~~WVAS~~From January 1, 2009, following the adoption of the authoritative guidance on non-controlling interests, previously issued as SFAS No.160, “Non-controlling Interests in Consolidated Financial Statements-an amendment of ARB No.51.”), now codified as ASC 810, “Consolidation,” we also renamed minority interests to non-controlling interests and reclassified it on the consolidated balance sheet from the mezzanine section between liabilities and equity to a separate line item in equity except for the redeemable securities that are subject to the guidance in ASC 268 (formerly referred to as EITF Topic D-98, “Classification and Measurement of Redeemable Securities”). We also expanded disclosures in the consolidated financial statements to clearly identify and distinguish the interests of us from the interests of the non-controlling owners of our subsidiaries. Consolidated net income is adjusted to include net income attributed to the non-controlling interest and consolidated comprehensive income is adjusted to include comprehensive income attributed to the non-controlling interest. We have applied the presentation and disclosure requirements retrospectively for all periods presented.

Revenue Recognition

In accordance with ASC 605, “Revenue Recognition,” we recognize revenues when the following criteria are met: persuasive evidence of an arrangement exists, the sales price is fixed or determinable, delivery has occurred and collectability is reasonably assured. Revenues are recorded net of sales taxes.

Our revenues are derived principally from ~~providing personalized media, games, entertainment and communication services~~online brand advertising arrangements, where the advertisers pay to ~~mobile phone customers of the various subsidiaries of four major telecom operators, China Mobile, China Unicom, China Telecom and China Netcom. Fees for these services, which~~place their advertisements on our online video platform in different formats. Such formats generally include banners, buttons, links, pre-roll or post-roll video advertisements.

Advertisements on our online video platform are ~~negotiated in network service agreements with the telecom operators and indicated in the message received~~charged either based on the ~~mobile phone, are charged on a per-use basis~~number of clicks per day over the agreed period or on a ~~monthly subscription basis, and vary according to~~per day basis. In the ~~type~~first case, the delivery of services delivered. We recognized WVAS revenues in the period in which the services are performed net of business taxes of $1.5 million, $1.7 million, and $1.4 million for 2007, 2006 and 2005, respectively.

~~We measure our revenues based~~service occurs when users click on the total amount paid by mobile phone customers, for which the Telecom Operators bill and collect on our behalf. Accordingly, the service fee paid to the Telecom Operators is included in the cost of revenues. In addition, in respect of 2G services, the Telecom Operators charge us a network fee based on a per message fee, which varies depending on the volume of messages sent in the relevant month, multiplied by the excess of messages sent over messages received. These network fees are likewise retained by the Telecom Operators and are reflected as cost of revenues. The cost of revenues also includes fees paid to our content providers and marketing partners, maintenance costs related to equipment used to provide the services, bandwidth leasing charges and data center services, alternative channels, media and related Internet costs, operator imposed penalty charges, and certain distribution costs.

We evaluate the criteria outlined in Emerging Issues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as Principal Versus Net as an Agent,” in determining whether it is appropriate to record the gross amount of revenues and related costs or the net amount earned after deducting the fees charged by the Telecom Operators. We record the gross amounts billed to its customers based on the following facts: (i) it is the primary obligor in these transactions, (ii) it has latitude in establishing prices and selecting suppliers and (iii) it is involved in the determination of the service specifications.

~~Recorded Music~~. Through the acquisition of Huayi Brothers Music, Freeland Music, Secular Bird and New Run beginning in 2005, we entered the business of artist development, music production, offline music distribution and online distribution through WVAS and the Internet. Recorded music revenues are derived from live performances, corporate sponsorship and advertising, online and wireless sales, and offline CD sales.

We generate revenues from the sale of CDs either by providing the CD master to a distributor or by directly arranging for the volume production and subsequent wholesale of the CDs. In the former case, we receive a fixed fee, have no further obligations and recognize the fee as revenue when the master CD is provided.designated videos clips. In the latter case, ~~we ship~~ the ~~produced CDs~~delivery is not linked to ~~retail distributors and recognize wholesale revenues at~~displays, but occurs as the ~~time~~advertisement is hosted each day.

All our revenue arrangements involve multiple element deliverables that may include placements of ~~shipment less a provision~~different types of advertisements, which are accounted for ~~future estimated returns. In 2007,~~using the ~~estimated sales returns rate was approximately 18% based on past experience.~~guidance under ASC 605-25 “Multiple Element Arrangements.”

We ~~recognize artist performance fees~~sell the advertising services over a broad price range and ~~corporate sponsorship or marketing event fees once the performance or the service has been completed. Where we act as the primary obligor~~there is a lack of objective and reliable evidence of fair value for each deliverable included in the ~~transaction,~~arrangement. Therefore for the arrangements that all the elements are not delivered in a uniform pattern over the agreement period, we treat all elements of advertising contracts as a single unit of accounting for revenue recognition purposes and recognizes the revenues on the completion of delivery of all the elements involved in the arrangements. When all of the elements within an arrangement are delivered uniformly over the agreement period, the revenues are ~~recorded on a gross basis. Where we are considered an agent or where~~recognized ratably over the ~~artists separately~~ contract ~~with the event organizer, revenues are recorded on a net basis.~~period.

We ~~license our music to third parties for guaranteed minimum royalty payments, normally received upfront and typically non-refundable. In such cases we recognize such fees as revenue on~~make a ~~straight-line basis over the life~~credit assessment of the ~~license and unrecognized revenues are included in liabilities. When~~customer to assess the collectability of the contract ~~provides~~amounts prior to entering into contracts. For those contracts for ~~additional payments if revenues exceed~~which the ~~minimum amount guaranteed, such amounts are included in revenues when~~collectability was assessed as not reasonably assured, we ~~are notified of our entitlement to additional payments.~~

We incur costs in producing CD masters, volume CD production, artist and songwriter royalties, and royalties payable to other parties for the use of their work. The cost of record masters and volume CD productions, and royalties paid in advance are recorded in prepaid expenses and other current assetsrecognizes revenue only when the ~~sales~~cash was received and all revenue recognition criteria were met.

The majority of the ~~recording~~revenue arrangements are ~~expected to recover the cost~~contracted with advertising agencies and amortized as cost of revenues over the revenue generating period, typically within one year. The decision to capitalize an advance to an artist, songwriter or other party requires significant judgment as to the recoverability of these advances. Advances for royalties and other capitalized costs are assessed for recoverability continuously.

~~Stock-based Compensation Cost~~

~~We grant equity incentive awards to our employees and certain non-employees. Until February 2006 when~~ we ~~commenced granting nonvested shares, all of our equity incentive grants were~~provide cash incentives in the form of ~~stock options.~~rebates to these advertising agencies based on volume and performance, and account for such incentives as a reduction of revenue in accordance with ASC 605-50-25 (Formerly referred to as EITF 01-9, “Accounting for Consideration Given by a Vendor to a Customer”). The cash incentives to third party advertising agencies in the year ended December 31, 2010 was $5.4 million.

Allowances for Doubtful Accounts

We determine the allowance for doubtful accounts when facts and circumstances indicate that the receivable is unlikely to be collected by taking into account of an aging analysis of the accounts receivable balances, historical bad debt records, repayment patterns in the prior year and other factors such as the policies of operators and financial condition of the customer. During the years ended December 31, 2008, 2009 and 2010, we recorded allowances for doubtful accounts of $1.0 million, $3.8 million and $1.5 million, respectively. As of December 31, 2010, our allowance for doubtful accounts was $2.4 million.

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~~Effective January 1, 2006,~~Video Production and Acquisition Costs

Following the guidance under ASC 926-20-25, video production (which mainly include direct production costs and production overhead) and acquisition costs are capitalized, if meeting the capitalization criteria, and stated at the lower of unamortized cost or estimated fair value.

With respect to production and acquisition costs, until we ~~adopted~~can establish estimates of secondary market revenues, capitalized costs for each video produced are limited to the ~~fair value recognition provisions~~amount of ~~SFAS 123(R), using the modified prospective transition method~~revenues contracted for that video. The costs in excess of revenues contracted for that video are expensed as incurred on an actual basis, and ~~therefore has~~are not ~~restated results for prior~~restored as assets in subsequent periods. Under this transition 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 asOnce we can establish estimates of ~~January 1, 2006 based on the fair~~secondary market ~~value as of the grant date, measured~~revenues in accordance with ~~SFAS 123,~~ASC 926-20-35-5(b), we capitalize subsequent film costs.

Capitalized video production and ~~(b) compensation expense for all stock-based compensation awards granted on or subsequent to January 1, 2006, based on grant-date fair value estimated~~acquisition costs are amortized in accordance with the ~~provisions~~guidance in ASC 926-20-35-1 using the individual-film-forecast-computation method, based on the proportion of ~~SFAS 123(R).~~the revenues earned in a period to the estimated remaining unrecognized ultimate revenues as of the beginning of that period. We ~~recognize stock-based compensation~~estimate total revenues to be earned (“ultimate revenues”) throughout the life of a video. Ultimate revenue estimates for the produced videos are periodically reviewed and adjustments, if any, will result in changes to amortization rates. Estimates used in calculating the fair value of the self-produced content are based upon assumptions about future demand and market conditions. The capitalized costs onare subject to assessment for impairment in accordance with ASC 926-20-35-12 to 35-18, if an event or change in circumstances indicates that the fair value is less than its unamortized costs. During the year ended December 31, 2010, video production and acquisition costs did not meet the criteria for capitalization and as a ~~straight-line basis~~result all the video production costs have been expensed as incurred.

Licensed Video Copyrights

The licensed video copyrights are amortized over ~~the requisite service~~their respective licensing periods. The amortization period of the ~~award,~~licensed video copyrights mainly range from 1 to 3 years during the year ended December 31, 2010.

The licensed video copyrights are carried at the lower of unamortized cost or net realizable value. Under the net realizable value approach, we determine the expected cash inflows that are directly attributed to the premium content licensed, which ~~is generally~~equals the ~~vesting period~~expected revenues directly attributable to the content less the direct costs to deliver the content to derive the net realizable value of the ~~award. Prior to~~asset. We write down the ~~adoption~~carrying value of ~~SFAS 123(R), we recognized stock-based compensation~~the licensed content if the estimated net future direct cash inflows from the licensed video copyrights over the licensing period are lower than the carrying amount. During the year ended December 31, 2010, the amortization and write-down expense ~~in accordance with APB 25. In March 2005, the SEC issued SAB 107 regarding the SEC’s interpretation of SFAS 123(R)~~for licensed video copyrights was $8.0 million and ~~the valuation of stock-based payments for public companies. We have applied the provisions of SAB 107 in the adoption of SFAS 123(R).~~$7.7 million respectively.

Goodwill and Intangible Assets Impairment

We test goodwill for impairment by reporting unit on an annual basis or more frequently if an event occurs or circumstances change that could more likely than not reduce the fair value of the goodwill below their carrying amount. We perform a two-step goodwill impairment test. The first step compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of the affected reporting unit’s goodwill to the carrying value of ~~a reporting unit’s~~that goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. ~~The impairment of goodwill is determined by us estimating~~When available, we use observable market data, including pricing on recent closed market transactions, to determine the fair value ~~based upon~~of the ~~present~~reporting units and compare with carrying amount of the reporting units to assess any goodwill impairment. The fair value of ~~future cash flows. In estimating~~reporting units was determined based on the ~~future cash flows~~market capitalization of the respective entities as of the valuation date. When there is little or no observable market data, we measure the fair value of each reporting unit primarily using the income approach and using the market approach as a validation of the value derived from income approach. The market approach includes using financial metrics and ratios of comparable public companies. When the goodwill was determined to be impaired, we ~~have taken into consideration~~use income approach including discounted cash flow model for each reporting unit and unobservable inputs including assumptions of projected revenue, expenses, capital spending and other costs, as well as a discount rate calculated based on the ~~overall and~~risk profile of the relating industry ~~economic conditions and trends, market risk~~to determine the amount of ~~our company and historical information.~~any impairment.

We measure impairment of intangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be ~~recoverable~~recoverable. When these events occur, we assess impairment by comparing the carrying value of the ~~long-lived~~intangible assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, we would recognize an impairment loss based on the fair value of the intangible assets. We measure the fair value of intangible assets based on an in-use premise using the discounted cash flow model and unobservable inputs including assumptions of projected revenue, expenses, capital spending and other costs, as well as a discount rate calculated based on the risk profile of the relating industry. If different estimates or judgments are utilized, the timing or the amount of the impairment charges could be different.

During the third quarter of 2008, we performed impairment testing for the music business due to the continued challenging business conditions and reduction in number of concerts and other music events because of the focus on the Olympic Games in Beijing coupled with the decline in the market price of our common stock. This resulted in an impairment for acquired intangible assets of $2.5 million and goodwill of $1.7 million. We again performed impairment testing on December 31, 2008 and recorded a further impairment charge for acquired intangible assets of $0.4 million and goodwill of $0.5 million allocated to recorded music segment. During the annual goodwill impairment test on December 31, 2008, we also determined that our WVAS segment was impaired due to the continued operation losses, thus necessitating a charge of $0.5 million. The impairment provided in 2008 relating to WVAS and recorded music businesses have been included in the discontinued operations.

During the second quarter of 2009, we performed impairment testing for the music business due to significantly lower than expected performance as a result of the continued challenging business conditions, reduction in number of concerts and other music events. This resulted in an impairment charge for acquired intangible assets of $3.5 million and goodwill of $3.0 million. During the annual goodwill impairment test on December 31, 2009, we also determined that our music segment was impaired due to the continued operation losses, thus necessitating a charge of $0.6 million. The impairment provided in 2009 relating to recorded music businesses have been included in the discontinued operations.

During the annual goodwill impairment test on December 31, 2010, we performed an impairment test at reporting unit level relating to goodwill from acquisitions and concluded that there was no impairment as to the carrying value of goodwill as of December 31, 2010.

Business Tax and Related Surcharges

Our subsidiaries and VIE affiliates are subject to business tax and related surcharges and value-added tax on the revenues earned for services provided in the PRC. The applicable business tax rate for advertising business is 5% based on the gross advertising revenue before deducting the advertising agencies rebate. In the accompanying consolidated statements of operations, business tax and related surcharges for advertising revenues are deducted from gross revenues to arrive at net revenues when incurred.

Share-based Compensation

We adopted ASC 718 “Stock Compensation” (formerly referred to as Statement of Financial Accounting Standard 123(R) (“SFAS123(R)”), which requires all share-based payments to employees and directors, including grants of employee stock options and restricted shares, to be recognized as compensation expense in the financial statements over the vesting period of the award based on the fair value of the award determined at the grant date. The valuation provisions of ASC 718 apply to new awards, to awards granted to employees and directors before the adoption of ASC 718 whose related requisite services had not been provided, and to awards which were subsequently modified or cancelled. Under ASC 718, the number of share-based awards for which the service is not expected to be rendered for the requisite period should be estimated, and the related compensation cost not recorded for that number of awards.

In accordance with ASC 718, we have recognized share-based compensation expenses, net of a forfeiture rate, using the straight-line method for awards with graded vesting features and service conditions only and using the graded-vesting attribution method for awards with graded vesting features and performance conditions.

We grant equity incentive awards to our employees. We recorded share-based compensation expenses of $1.9 million in 2010. The share based compensation expenses in 2010 included one-time compensation expenses of $1.3 million relating to incremental value of the ordinary shares issued by us to replace the options issued by Ku6 before its acquisition by us. Our share-based compensation expenses are included in our operating expenses as well as cost of revenue.

Income Taxes and Valuation allowances

Current income taxes are provided for on the taxable income of each subsidiary on the separate tax return basis in accordance with the relevant tax laws.

Deferred income taxes are provided using the liability method in accordance with ASC 740 (formerly referred to as SFAS No. 109, “Income Taxes

~~Deferred~~”). Under this method, deferred income taxes are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, net operating loss carry forwards and credits by applying enacted statutory tax rates applicable to future years. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. The effect on deferred taxes of a change in tax rates is recognized in income in the period of change. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. ~~Current~~

ASC 740-10-25 (formerly referred to as Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”) prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The adoption of ASC 740-10-25 did not result in a cumulative adjustment to the opening balance of retained earnings as of January 1, 2007. We did not incur any interest or penalties related to potential underpaid income ~~taxes~~tax expenses, and also does not have unrecognized tax benefits as of December 31, 2010.

Contingency

We are ~~provided~~subject to contingencies, such as legal proceedings and claims arising out of its business that cover a wide range of matters in the normal course of our business. Liabilities for ~~in accordance with~~such contingencies are recorded when it is probable that a liability has been incurred and the ~~laws~~amount of the ~~relevant taxing authorities.~~assessment can be reasonably estimated by us. As of December 31, 2010, we estimated and accrued $0.7 million for liabilities arising from alleged copyright infringements.

~~In March 2007, the National People’s Congress~~Going Concern

On April 1, 2011, we entered into agreements with Shanda Media Group Limited, or Shanda Media, a wholly owned subsidiary of ~~China enacted a new Enterprise Income Tax Law, or the New EIT Law,~~Shanda Interactive, pursuant to which became effective on January 1, 2008. In addition, the Implementation Rules of the New Enterprise Income Tax Law, or the Implementation Rules were promulgated by the PRC State Council on December 6, 2007 and the Notice on Implementation of Transitional Arrangements for Preferential Policies of Enterprise Income Tax, or the Transitional Arrangements Notice, was promulgated by the PRC State Council on December 26, 2007. Under the New EIT system, a unified enterprise income tax rate of 25% and unified tax deduction standards will be applied equallywe agreed to ~~both domestic-invested enterprises and foreign-invested enterprises. Enterprises established prior~~issue to March 16, 2007 eligible for preferential tax rate of 15% according to the then effective PRC Enterprise Income tax Law for Foreign-Invested Enterprise and Foreign Enterprise tax laws and administrative regulations shall be subject to transitional rules as stipulated in the Transitional Arrangements Notice. In addition, certain qualified high and new technology enterprises strongly supported by the state may still benefit from a preferential tax rate of 15% under the New EIT Law if they meet the definition of “qualified high and new technology enterprise” strongly supported by the state set out in the Implementation Rules which refers to companies hold independent ownership of core intellectual properties and simultaneously meet a list of other criteria as stipulated. As a result, if our PRC subsidiaries and VIEs qualify as qualified high and new technology enterprises strongly supported by the state under the new EIT Law, they will continue to benefit from a preferential tax rate of 15%. Otherwise, the applicable tax rateShanda Media $50,000,000 of our ~~PRC subsidiaries may be subject to PRC income tax~~ordinary shares at a per share price of $0.0325 (or $3.25 per ADS), and $50,000,000 aggregate principal amount of senior convertible bond at face value. The bond will mature in three years after issuance and will bear interest at a rate of ~~25% starting from 2008 under~~3% per annum. The bond will be convertible into our ordinary shares at a price of $0.03925 per ordinary share (or $3.925 per ADS). The issuance of the ~~New EIT system. Hurray!~~ordinary shares and the convertible bond has ~~used~~been approved by our independent directors and shareholders. We believe that the new ~~standard rates~~investment by Shanda Media provide sufficient cash to fund operations and capital expenditures for ~~calculation of deferred taxes until~~at least the ~~necessary approvals are obtained.~~next twelve months. Accordingly, our consolidated financial statements have been prepared on a going-concern basis.

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Results of Operations

As mentioned above in the section of “Critical Accounting Policies,” the financial statements have been prepared as if the acquisition of Yisheng had been in effect since the inception of common control and the operating results of WVAS and recorded music were presented as “Results of Discontinued Operations” in the income statements for the years ended December 31, 2008, 2009 and 2010.

The following discussion of our results of operations for the years ended December 31, ~~2005, 2006~~2008, 2009 and ~~2007~~2010 is based upon our audited consolidated financial statements included elsewhere in this annual report on Form 20-F.

~~Year Ended December 31, 2007 Compared to Year Ended December 31, 2006~~

~~Our~~ However, since the results ~~of operations~~ for the year ended December 31, ~~2007 compared to~~2008 do not include any of the results of our continuing operations, the results for the year ended December 31, ~~2006 were impacted by~~2009 do not include the ~~inclusion~~results of our online video business and include only the results of our online audio business from August 31, 2009 to December 31, 2009, and the results for the year ended December 31, 2010 include the results of our audio business for the full year and the results of our online video business from January 18, 2010 to December 31, 2010, the following discussion may not be meaningful for you to understand the trends of our continuing operations. See “—Unaudited Consolidated Pro Forma Statements of Operations” for a supplemental comparison of 2010 and 2009 results on a pro-forma basis.

Year Ended December 31, 2010 versus Year Ended December 31, 2009

Net Revenues.We had net revenues of $16.6 million in 2010 and $1.0 million in 2009. The increase in revenues was largely attributable to our acquisition of the ~~operating results~~online video business of Ku6 in January 2010. Revenues for ~~2007 of Shanghai Saiyu, Henan Yinshan, Secular Bird~~the year ended December 31, 2010 included revenues generated by our online video business since January 2010 and ~~Fly Songs, which were acquired in 2007.~~

~~Revenues.~~~~Our~~ revenues ~~declined 11.9% to $60.5 million in 2007 from $68.7 million in 2006. This decrease was primarily due to a decline in demand~~generated by our online audio business for ~~WVAS in 2007.~~

~~Wireless Value-added Services~~.the entire year. Revenues ~~from~~for the year ended December 31, 2009 included revenues generated by our WVAS declined 20.0% to $50.0 million for 2007 from $62.5 million for 2006, primarily due to the decline in the market for SMS and WAP services. SMS revenues were $11.0 million in 2007, a decline of 35.7% from $17.1 million for 2006. WAP revenues were $12.6 million in 2007, a decline of 41.4% from $21.5 million for 2006. IVR and RBT revenues were $17.2 million and $5.7 million in 2007, an increase of 59.3% and 21.3% from $10.8 million and $4.7 million for 2006, respectively.

~~Recorded Music.~~~~Recorded music revenues became a new~~online audio business line for us in 2006. We expanded our recorded music segment by acquiring 65% of Secular Bird, an independent record label in China, and through Freeland Music, 51% of Fly Songs, a performance and concert organizer. Revenue from recorded music was $10.5 million in 2007, an increase of 69.1% from $6.2 million for 2006. We expect to derive an increasing amount of our total revenues from recorded music in the coming year.since August 31, 2009.

Cost of Revenues.Our cost of revenues ~~declined 3.6%~~increased to ~~$42.6~~$40.5 million in ~~2007~~2010 from ~~$44.2~~$0.5 million in ~~2006 due~~2009, primarily ~~to decreased costs for~~as a result of our ~~WVAS as our WVAS revenues declined. Our decrease in~~acquisition of Ku6. The cost of ~~revenue was partly offset by increased costs~~revenues in 2010 consisted primarily of ~~our recorded music business as that business grew organically and through acquisition.~~

~~Wireless value-added Services~~~~. Our~~Internet bandwidth cost of ~~WVAS declined 10.5%~~$10.3 million, amortization and write-down of licensed video copyright of $15.6 million, depreciation of server and computer equipments of $2.5 million, payroll cost relating to ~~$36.4~~platform operation and content of $6.2 million. The cost of revenues in 2009 consisted mainly of Internet bandwidth cost.

Gross Loss.We had a gross loss of $23.9 million ~~for 2007 from $40.7~~in 2010, as compared with a gross profit of $0.5 million ~~for 2006.~~in 2009. This ~~decrease resulted primarily from decreased promotion costs~~shift to a significant gross loss was largely due to the ~~market.~~

~~Recorded Music.~~~~Our~~significant cost ~~of recorded music increased 75.4% to $6.2 million~~incurred for ~~2007 from $3.6 million for 2006. This increase resulted primarily from increased commercial development and artists’ performance cost~~the Internet bandwidth, server depreciation, licensed video copyrights as well as ~~from our music company acquisitions~~associated payroll cost as a result of the acquisition of Ku6 in ~~2007.~~

~~Gross Profits.~~Our gross profits decreased 26.9% to $17.9 million for 2007 from $24.5 million for 2006, mainly due to the decreased profits from WVAS. Our gross profit margins decreased to 29.6% for 2007 from 35.6% for 2006, due primarily to decreased margins for WVAS, which mainly resulted from increased marketing, promotion and distributions costs related to SMS and WAP services.January 2010.

Operating ~~Expenses.~~Expenses. Operating expenses ~~sharply increased by 209.1% to $61.5~~were $29.7 million in 2010, representing an increase of 316.6% from $7.1 million in 2009. Operating expenses for ~~2007 from $19.9 million for 2006, due primarily to impairment charges amounting to $38.8 million for our WVAS business and additional~~the year ended December 31, 2010 included expenses associated with our ~~new acquisitions in 2007.~~

~~Product Development Expenses.~~~~Our product development expenses decreased slightly to $2.0 million in 2007 from $2.2 million in 2006.~~

~~Selling~~online video business since January 2010 and ~~Marketing Expenses~~~~. Our selling and marketing expenses slightly increased by 4.5% to $11.5 million in 2007 from $11.0 million in 2006.~~

~~General and Administrative Expenses~~~~. Our general and administrative expenses increased 36.4% to $9.1 million in 2007 from $6.7 million in 2006. This increase was mainly due to the increased professional service fees and additional~~ expenses associated with our ~~new acquisitions and to a lesser extent, increased bad debt expense and amortization expense of intangible assets.~~online audio business for the entire year. Operating expenses for the year ended December 31, 2009 included expenses associated with our online audio business since August 31, 2009.

~~Provision for Impairment of Goodwill and Intangible Assets.~~~~We tested the carrying value of goodwill and acquired intangible assets and recorded an impairment charge of $41.3 million in 2007.~~
• Selling and Marketing Expenses. Our selling and marketing expenses increased to $16.2 million in 2010 from $0.7 million in 2009. The increase of the selling and marketing expenses were the result of Ku6’s higher advertising and marketing expenses, the salary and benefits of sales and marketing staff and the sales commission to the sales team as well as travelling and entertainment expenses.

•

General and Administrative Expenses. Our general and administrative expenses increased to $13.5 million in 2010 from $6.4 million in 2009. The increase was mainly caused by the increase of $1.5 million in share-based compensation expenses including one-time compensation expenses of $1.3 million relating to incremental value of the ordinary shares issued by us to replace the options issued by Ku6 before its acquisition by us, $1.6 million increase in bad debt provision due to the expansion of our advertising business as the result of our acquisition of Ku6, $1.7 million increase in the amortization of intangible assets arising from the acquisition of Ku6, $1.6 million business tax for the intercompany transactions, $1.0 million increase in payroll expenses and $1.1 million increase in rental fees, partially offset by the consulting and legal expenses of $2.5 million incurred in 2009 for the Shanda Interactive tender offer.

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•

Operating loss from Continuing Operations.As a result of the foregoing, operating loss from continuing operations was $53.6 million for 2010 compared to $6.6 million for 2009.

~~(Loss)~~ Loss from Continuing Operations attributable to Ku6 Media Co., Ltd.Net loss from continuing operations attributable to Ku6 Media Co., Ltd. was $52.9 million for 2010 compared with a net loss of $6.0 million for 2009.

Income (loss) from Discontinued Operations attributable to Ku6 Media Co., Ltd.We had an income from discontinued operations of $1.3 million in the year ended December 31, 2010 due to the disposal gain of Huayi Music of $4.5 million offset by the loss from operations of $3.4 million from our WVAS and recorded music business for the eight months ended August 31, 2010, after giving effect to the loss attributable to the non-controlling and redeemable non-controlling interests of $0.2 million for 2010. The loss from discontinued operations attributable to us in the year ended December 31, 2009 was $17.4 million mainly due to loss from operations of $21.8 million from the WVAS and recorded music businesses, of which $4.2 million was attributable to the non-controlling and redeemable non-controlling interests.

Year Ended December 31, 2009 versus Year Ended December 31, 2008

Net Revenues.Our net revenues were $1.0 million and nil for the year ended December 31, 2009 and 2008, respectively.

Cost of Revenues.Our cost of revenues was $0.5 million and nil for the year ended December 31, 2009 and 2008, respectively.

Gross Profit.Our gross profits were $0.5 million and nil for the year ended December 31, 2009 and 2008, respectively.

Operating Expenses. Operating expenses were $7.1 million for 2009, representing an increase of 197.0% from $2.4 million for 2008. Operating expenses in 2009 included one-time expenses such as (i) the consulting and legal expenses $2.5 million relating to the tender offer by Shanda Interactive and (ii) severance pay of $0.4 million to our former CEO and CFO. Operating expenses in 2009 also incuded operating expenses associated with our online audio business for the last four months of 2009.

•

General and Administrative Expenses. Our general and administrative expenses increased to $6.5 million in 2009 from $1.7 million in 2008. Our general and administrative expenses in 2009 included one-time expenses such as (i) the consulting and legal expenses $2.5 million incurred in connection with the Shanda Interactive tender offer through which Shanda Interactive acquired 51% of our outstanding shares and (ii) severance pay of $0.4 million to our former CEO and CFO.

•

Selling and Marketing Expenses. Our selling and marketing expenses increased to $0.7 million in 2009 from $0.6 million in 2008. Selling and marketing expenses in 2009 included expenses associated with our online audio business for the last four months of 2009.

•

Product Development Expenses.Our product development expenses were nil in 2009 and $0.1 million in 2008. The small amount of expenses in 2008 represented share-based compensation to our product development staff.

Operating Loss from Continuing Operations.As a result of the foregoing, operating loss from operations was ~~$43.6~~$6.6 million for ~~2007~~2009, which included the operating loss of Yisheng for the last four months of 2009 when it began to be consolidated in the financial statements from September 2009, compared to ~~income of $4.6~~$2.4 million for ~~2006.~~2008.

~~Interest Income~~Foreign Exchange Loss.We recorded no foreign exchange loss in 2009, but recorded a foreign exchange loss of $9.0 in 2008. We had $4.5 million of foreign exchange loss in the third quarter of 2008 and ~~Expense. Interest income~~recorded a further exchange loss in the fourth quarter of 2008 in the amount of $4.5 million. Our foreign exchange loss in 2008 was ~~$2.3 million for 2007, compared~~due to ~~$2.5 million for 2006. Interest expense increased~~the drop in the value of the Euro against the U.S. dollars. Earlier in the year of 2008 we converted a substantial amount of our U.S. dollar cash balances into Euro term deposits to ~~$0.2 million for 2007~~improve yield as well as to protect against further weakening of the U.S. dollars. The highly volatile markets in 2008 had seen the U.S. dollar strengthen as investors and financial institutions de-leveraged. Currently we hold substantially all of our non-Renminbi cash balances in U.S. dollars.

Loss from ~~$0.05~~Continuing Operations attributable to Ku6 Media Co., Ltd.Loss from continuing operations attributable to us was $6.0 million in ~~2006. This increase related~~2009, which included the net loss of Yisheng for the last four months of 2009, compared with a net loss of $5.0 million in 2008.

Loss from Discontinued Operations attributable to Ku6 Media Co., Ltd.Loss from discontinued operations attributable to us was $17.4 million and $7.0 million in 2009 and 2008, respectively, representing the loss arising from the disposed WVAS and recorded music business of $21.6 million and $7.3 million in 2009 and 2008 after excluding the loss attributable to the ~~acquisition payables for Shanghai Magma.~~

~~Other Income~~~~. Other income, primarily government tax subsidies, was $0.5~~non-controlling interests and redeemable non-controlling interests of $4.2 million and $0.3 million in ~~2007~~2009 and ~~2006,~~2008, respectively.

~~Income Taxes.~~~~Income taxes were a benefit~~Unaudited Consolidated Pro Forma Statements of ~~$0.2 million in 2007~~Operations

The unaudited consolidated pro forma statements of operations for the years ended December 31, 2009 and ~~an expense~~December 31, 2010 present our consolidated results of ~~$0.2 million in 2006.~~

~~Equity in Losses~~operations giving pro forma effect to the Ku6 and Yisheng acquisitions as if such transactions occurred on January 1, 2009, and after giving effect to purchase accounting adjustments. The unaudited consolidated pro forma financial information is included for informational purposes only and should not be relied upon as being indicative of ~~Affiliate. In April 2007, we acquired a 30% interest in New Run, an independent record label in China,~~our results of operations or financial condition had the Ku6 and ~~it has been accounted for~~Yisheng acquisitions occurred on the ~~equity basis from April 1, 2007.~~date assumed. The ~~equity in~~unaudited consolidated pro forma financial information also does not project the ~~losses~~results of ~~New Run was $0.06 million in 2007.~~operations or financial position for any future period or date.

~~Net (Loss) Income from Continuing Operations.~~~~Net loss from continuing operations was $41.5 million for 2007 compared to income of $6.6 million for 2006.~~

~~Net Loss from Discontinued Operations.~~ Effective August 1, 2007, we accounted for our SSI Business as a discontinued operation. Net loss from discontinued operations was reduced from $0.8 million in 2006, a full year’s operations, to $0.4 million in 2007, which includedThe following table shows the ~~benefit of income of $0.2 million representing the gain recognized on the sale of the SSI Business.~~

~~Net (Loss) Income~~. As a result of the foregoing, net loss was $42.0 million due to an impairment charge of $41.3 million for 2007 compared to net income of $5.8 million for 2006. Our net loss in 2007 was offset by net income of approximately $0.6 million derived from our new acquisitions, mainly Shanghai Saiyu.

~~Year Ended December 31, 2006 Compared to Year Ended December 31, 2005~~

~~Our results~~pro forma statements of operations for the year ended December 31, ~~2006~~2009 and 2010:


	For the Year Ended December 31, 2009
							Shanghai
	Ku6 Media Co.,			Ku6 Holding			Yisheng Network			Pro Forma			Pro Forma
	Ltd.			Ltd.			(2)			Adjustments (1)			Consolidation
	(in thousands of U.S. dollars, except for share and per share data)
Total net revenues	$	1,037		$	6,225		$	985		$	—		$	8,247
Total cost of revenues		(557	)		(10,018	)		(428	)		—			(11,003	)

Gross profit (loss)		480			(3,793	)		557			—			(2,756	)
Total operating expenses		(7,130	)		(6,374	)		(1,203	)		(1,962	)		(16,669	)

Operating loss from continuing operations		(6,650	)		(10,167	)		(646	)		(1,962	)		(19,425	)
Interest income		356			8			—			—			364
Interest expense		—			(40	)		(1	)		—			(41	)
Other income, net		2			2			39			—			43
Foreigin exchange loss		—			—			—			—			—
Fair value changes in warrant liabilities		—			186			—			—			186

Loss before income tax benefit from continuing operations		(6,292	)		(10,011	)		(608	)		(1,962	)		(18,873	)
Income tax benefit		14			—			—			—			14

Loss from continuing operations, net of tax		(6,278	)		(10,011	)		(608	)		(1,962	)		(18,859	)

Discontinued operations:
Loss from operations of discontinued operations, net of tax		(21,778	)		—			—			—			(21,778	)
Gain from disposal of discontinued operations		222			—			—			—			222

Loss from discontinued operations, net of tax		(21,556	)		—			—			—			(21,556	)

Loss from continuing and discontinued operations, net of tax		(27,834	)		(10,011	)		(608	)		(1,962	)		(40,415	)

Less: Net loss attributable to the non-controlling interests from continuing operations		256			—			—			—			256
Less: Net loss attributable to the non-controlling interests and redeemable non-controlling interests from discontinued operations		4,183			—			—			—			4,183

Net loss attributable to Ku6 Media Co., Ltd.		(23,395	)		(10,011	)		(608	)		(1,962	)		(35,976	)

Loss from continuing operations, net of tax, attributable to Ku6 Media Co., Ltd.		(6,022	)		(10,011	)		(608	)		(1,962	)		(18,603	)
Loss from discontinued operations, net of tax, attributable to Ku6 Media Co., Ltd.		(17,373	)		—			—			—			(17,373	)

Net loss attributable to Ku6 Media Co., Ltd.		(23,395	)		(10,011	)		(608	)		(1,962	)		(35,976	)


(1)		Represents the incremental amortization expense for the intangible assets resulting from the Ku6 and Yisheng acquisition.

(2)		The financial information reflects the operation results for the period from January 1, 2009 to August 31, 2009 since the operations from September 1, 2009 have already been included in the consolidate results of Ku6 Media Co., Ltd.


	For the Year Ended December 31, 2010
							Pro Forma			Pro Forma
	Ku6 Media Co., Ltd.			Ku6 Holding Ltd.⁽²⁾			Adjustments⁽¹⁾			Consolidation
Total net revenues	$	16,556		$	232		$	—		$	16,788
Total cost of revenues		(40,459	)		(3,956	)		—			(44,415	)

Gross loss		(23,903	)		(3,724	)		—			(27,627	)
Total operating expenses		(29,703	)		(641	)		(154	)		(30,498	)

Operating loss from continuing operations		(53,606	)		(4,365	)		(154	)		(58,125	)
Interest income		57			—			—			57
Interest expense		(31	)		—			—			(31	)
Other income, net		—			—			—			—
Foreigin exchange loss		—			(4	)		—			(4	)
Fair value changes in warrant liabilities		—			—			—			—

Loss before income tax benefit from continuing operations		(53,580	)		(4,369	)		(154	)		(58,103	)
Income tax benefit		41			—			—			41

Loss from continuing operations, net of tax		(53,539	)		(4,369	)		(154	)		(58,062	)
Discontinued operations:
Loss from operations of discontinued operations, net of tax		(3,382	)		—			—			(3,382	)
Gain from disposal of discontinued operations		4,486			—			—			4,486

Loss from discontinued operations, net of tax		1,104			—			—			1,104


Loss from continuing and discontinued operations, net of tax		(52,435	)		(4,369	)		(154	)		(58,062	)
Less: Net loss attributable to the non-controlling interests from continuing operations		681			—			—			681
Less: Net loss attributable to the non-controlling interests and redeemable non-controlling interests from discontinued operations		244			—			—			244

Net loss attributable to Ku6 Media Co., Ltd.		(51,510	)		(4,369	)		(154	)		(56,033	)

Loss from continuing operations, net of tax, attributable to Ku6 Media Co., Ltd.		(52,858	)		(4,369	)		(154	)		(57,381	)
Loss from discontinued operations, net of tax, attributable to Ku6 Media Co., Ltd.		1,348			—			—			1,348

Net loss attributable to Ku6 Media Co., Ltd.		(51,510	)		(4,369	)		(154	)		(56,033	)


(1)		Represents the incremental amortization expense for the intangible assets resulting from the Ku6 acquisition.

(2)		The financial information reflects the operation results for the month ended January 31, 2010, as the Ku6 acquisition was completed on January 18, 2010.

Year Ended December 31, 2010 (pro forma) versus Year Ended December 31, 2009 (pro forma)

Net Revenues.Our pro forma net revenues increased 104% to $16.8 million in 2010 from $8.2 million in 2009. The increase in pro forma net revenues was largely attributable to the growth of our advertising business in 2010, as a result of our marketing efforts, including offering a variety of integrated marketing package to brand advertisers, with the continuous expansion of user base.

Cost of Revenues.Our pro forma cost of revenues increased to $44.4 million in 2010 from $11.0 million in 2009.


	Year ended December 31, 2009						Year ended December 31, 2010
	(in thousands)						(in thousands)
			Pro forma						Pro forma
	Actual		adjustments		Pro forma		Actual		adjustments		Pro forma
Internet bandwidth costs	$	534	$	4,137	$	4,671	$	10,279	$	497	$	10,776
Amortization and impairment write-down of purchased video copyright cost		—		1,747		1,747		15,619		2,852		18,471
Payroll cost		—		2,506		2,506		6,167		350		6,517
In-house developed content costs		—		—		—		1,596		—		1,596
Depreciation of servers and other equipments		—		1,278		1,278		2,503		109		2,612
Other costs(1)		23		778		801		4,295		148		4,443

Total costs	$	557	$	10,446	$	11,003	$	40,459	$	3,956	$	44,415


(1)		Includes primarily advertisement production costs and outside service fees and user-generated content costs.

The $33.4 million increase in our pro forma cost of revenues from 2009 to 2010 was mainly due to (i) an increase from $1.7 million in 2009 to $18.5 million in 2010 of amortization and impairment write-down of purchased video copyright costs, as a result of our significantly increased investment in professional content in 2010 compared to 2009, including licensed video copyrights related to the ~~year ended~~2010 FIFA World Cup, the 2010 Asian Games and movies, TV series and other entertainment programs. As of December 31, ~~2005 were impacted by~~2010, the ~~inclusion~~carrying value of ~~the operating results for 2006 of Shanghai Magma and Freeland Music, which were acquired in 2006 and the results of Huayi Brothers Music which had been acquired on December 31, 2005.~~

~~Revenues.~~~~Our revenues~~our licensed video copyrights was written down to zero. Also, our pro forma bandwidth costs increased ~~22.6% to $68.7~~154% from $4.2 million in ~~2006 from $56.1~~2009 to $10.8 million in ~~2005. This increase was primarily due to an increase in revenues from our 2G services and revenues from the affiliated music companies,which were consolidated into our financial statements in 2006.~~

~~Wireless Value-Added Services~~~~. Revenues from our WVAS increased 11.5% to $62.5 million for 2006 from $56.1 million for 2005, primarily~~2010, due to the growth in ~~the market for 2G services, especially for SMS. SMS revenues were $17.1~~our traffic volume as a result of our large content library established in 2010.

Gross Loss.We had a pro forma gross loss of $27.6 million in ~~2006, an~~2010, compared to a pro forma gross loss of $2.8 million in 2009. This increase of 61.2% from $10.6 million for 2005. Following the first quarter of 2004 and continuing through 2005, our SMS revenues were negatively affected by new billing systems of China Mobile and China Unicom and other changes in their policies and the enforcement of their policies. We did, however, relaunch our SMS services in the second half of 2005 through various marketing and promotional activities that were independent of the telecom operators which contributedgross loss was largely due to our ~~increased SMS revenues~~increases in ~~2006. IVR revenues were $10.8 million in 2006, an increase~~costs related to both platform operation and content, including Internet bandwidth leasing costs, depreciation expenses, amortization and write-down of ~~25.9% from $8.6 million for 2005. RBT revenues were $3.4 million in 2006, a significant increase over $0.9 million for 2005.~~

~~Recorded Music.~~~~Recorded music revenues, which became a new business line for us in 2006, were $6.2 million in 2006, accounting for 9.0% of total revenues in 2006.~~

~~Cost of Revenues.~~~~Our cost of revenues increased 54.4% to $44.2 million in 2006 from $28.6 million in 2005 due primarily to increased~~licensed video copyrights, in-house developed conent costs ~~for 2G services~~ and ~~to a lesser extent, increased costs for our 2.5G services and our new recorded music business.~~

~~Wireless Value-Added Services~~. Our cost of WVAS increased 42.0% to $40.7 million for 2006 from $28.6 million for 2005. This increase resulted primarily from increased costs incurred to promote our services through channels which are independent of the telecom operators, including mobile handset partnerships, internet marketing alliances and direct advertising. It also resulted from increased levels of service and network fees corresponding to the growth in sales of 2G services in 2006 compared to 2005, a RMB5.7 million ($0.7 million) fine imposed on Hurray! Solutions by China Unicom for improper delivery of one of its SMS services to users and a RMB3.0 million ($0.4 million) fine imposed on Beijing Hutong by China Unicom for violating a China Unicom billing policy by one of its WAP services. In addition, the increase reflects, to a lesser extent, the cost of purchasing content for our IVR services.related employee costs.

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~~Gross Profits.~~Operating Expenses~~Our gross profits decreased 10.7% to $24.5~~. Pro forma operating expenses were $30.5 million ~~for 2006~~in 2010, representing an increase of 82.6% from ~~$27.4~~$16.7 million for 2005, mainly due to the decreased profits from 2.5G services. Our gross profit margins decreased to 35.6% for 2006 from 48.9% for 2005, due primarily to decreased margins for 2.5G services, which mainly resulted from new policies mandating free trial periods and double confirmation reminders for subscription based services and increased marketing, promotion and distributions costs related to WAP services.in 2009.

•

Selling and Marketing Expenses. Our pro forma selling and marketing expenses increased to $16.8 million in 2010 from $5.0 million in 2009. The increase in pro forma selling and marketing expenses was the result of higher sales commissions to our sales team tied to sales performance and more marketing promotion activities in 2010 to enhance the reputation of our Ku6.com website.

•

General and Administrative Expenses. Our pro forma general and administrative expenses increased to $13.7 million in 2010 from $11.6 million in 2009 mainly due to the increase of $1.4 million in share-based compensation expenses including one-time compensation expenses of $1.3 million relating to the fair value of ordinary shares issued by us to replace the options issued by Ku6 over the acquisition date fair value of those options attributable to the pre-combination portion in connection with the acquisition of Ku6. Also the increase of bad debt expenses of $1.6 million due to expansion of our advertising business, business tax of $1.7 million for the intercomany transactions within the group and rental and management expenses of $0.6 million due to relocation and expansion of our office building, was partially offset by the decrease of the consulting and legal expenses for the Shanda tender offer of $2.5 million.

Operating ~~Expenses.~~~~Operating expenses increased 39.3% to $19.9 million for 2006~~Loss from ~~$14.3 million for 2005, due primarily to the additional expenses associated with our newly acquired companies, Huayi Brothers Music, Freeland Music and Shanghai Magma.~~

~~Product Development Expenses.~~~~Our product development expenses increased slightly to $2.2 million in 2006 from $1.9 million in 2005.~~

~~Selling and Marketing Expenses~~. Our selling and marketing expenses increased 22.6% to $11.0 million in 2006 from $9.0 million in 2005. This increase was primarily due to the additional expenses associated with our newly acquired companies, Huayi Brothers Music, Freeland Music and Shanghai Magma and increased use of stock-based compensation in 2006 to reward our sales and marketing personnel, which created stock-based compensation expense allocable to selling and marketing expenses.

~~General and Administrative Expenses~~. Our general and administrative expenses increased 94.6% to $6.7 million in 2006 from $3.4 million in 2005. This increase was mainly due to the additional expenses associated with our newly acquired companies, Huayi Brothers Music, Freeland Music and Shanghai Magma and to lesser extent, increased rental expenses, bad debt expenses and amortization expenses of intangible assets

~~Income from~~Continuing Operations.As a result of the foregoing, ~~income~~pro forma operating loss from operations ~~decreased to $4.6~~was $58.1 million for ~~2006 from $13.2~~the year ended December 31, 2010 compared to $19.4 million for ~~2005.~~the year ended December 31, 2009.

~~Interest Income and Expense~~Loss from Continuing Operations attributable to Ku6 Media Co., Ltd.~~. Interest income~~Loss from continuing operations attributable to Ku6 Media Co., Ltd. was ~~$2.5~~$57.4 million for ~~2006,~~2010 compared to ~~$1.4~~a net loss of $18.6 million for ~~2005. This increase~~2009.

Income (Loss) from Discontinued Operations attributable to Ku6 Meida Co., Ltd.Income from discontinued operations attributable to us was $1.3 million for 2010 due to a gain of $4.5 million from the disposal of Huayi Music, offset by a loss of $3.4 million from operations of our WVAS and recorded music businesses for the eight months ended August 31, 2010, after giving effect to the loss attributable to the non-controlling and redeemable non-controlling interests of $0.2 million for 2010. Loss from discontinued operations attributable to us was $17.4 million for 2009 mainly due to ~~the interest rates increase in 2006 and increased collections from our customers. Interest expense increased to $45,000 for 2006 from $27,000 in 2005.~~

~~Other Income~~~~. Other income, primarily government tax subsidies, was $0.3 million in 2006 and 2005, respectively.~~

~~Income Taxes.~~~~Income taxes were $0.2 million in 2006 and $0.3 million in 2005 resulting from the lower level of profitability in 2006 compared to 2005.~~

~~Net Income from Continuing Operations.~~~~Net income from continuing operations was $6.6 million for 2006 compared to income of $14.5 million for 2005.~~

~~Net (Loss) Income from Discontinued Operations.~~ ~~The SSI Business generated a~~ loss of ~~$0.8~~$21.8 million ~~in 2006 as business declined significantly as~~from operations of our WVAS and recorded music businesses for the ~~telecom operators awaited~~full year of 2009, of which $4.2 million was attributable to the ~~issue of 3G licenses, therefore delaying the build out of their networks~~non-controlling and ~~the awarding of significant contracts. In 2005, this business had net income of $4.1 million.~~

~~Net Income~~~~. As a result of the foregoing, net income decreased 68.8% to $5.8 million for 2006 from $18.6 million for 2005.~~redeemable non-controlling interests.

B. LIQUIDITY AND CAPITAL RESOURCES

Cash Flows and Working Capital

As of December 31, 2010, we had cash and cash equivalents of approximately $27.3 million. Our principal sources of liquidity have been our cash flows from operations and financing activities. The following table sets forth our cash flows with respect to operating activities, investing activities and financing activities for the periods indicated:

For the Year Ended December 31,
2007 2006 2005
(in thousands of U.S. dollars)
Net cash (used in) provided by operating activities $ (2,055 ) $ 17,636 $ 13,980
Net cash used in investing activities (8,120 ) (15,157 ) (6,591 )
Net cash provided by (used in) financing activities 16 (4,399 ) 59,305

Net (decrease) increase in cash and cash equivalents $ (10,159 ) $ (1,920 ) $ 66,694


	Year Ended December 31,
	2008			2009			2010
	(in thousands of U.S. dollars)
Net cash used in operating activities	$	(5,553	)	$	(2,092	)	$	(29,570	)
Net cash (used in) provided by investing activities		(2,265	)		(8,931	)		2,168
Net cash provided by financing activities		2			1,448			4,616
Effect of exchange rate changes on cash and cash equivalents		1,310			(154	)		337
Net (decrease) in cash and cash equivalents	$	(6,506	)	$	(9,729	)	$	(22,449	)

Operating Activities.Our net cash used in operating activities in 2010 was $29.6 million. This was primarily attributable to (i) our net loss of $52.4 million, (ii) $8.7 million increase in the account receivables mainly due to the advertising revenue generated in the last quarter of 2010 not received, most of which is still within the normal credit terms, (iii) $1.4 million net increase in the amount due from related parties under common control of Shanda Interactive and (iv) $0.8 million increase in prepaid expenses and the other current assets mainly due to payment of rental deposit and staff advances, partialy offset by (i) non-cash charges, consisting of $15.8 million amortization and write-down of licensed video copyrights, $5.3 million in depreciation and amortization, $1.5 million in allowance for doubtful accounts, and $1.9 million in share based compensation cost, (ii) $8.8 million increase in accounts payable due to certain payables in connection with Internet bandwidth and cash incentives to advertising agencies not paid as of December 31, 2010 and (iii) $6.0 million increase in accrued expenses and other current liabilities mainly due to the business tax and salesman commission not paid as a result of the increase of the advertising revenue in 2010.

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Our net cash used in operating activities in ~~2007~~2009 was $2.1 million. This was primarily attributable to ~~our~~ net loss of ~~$41.9~~$27.8 million, ~~as adjusted~~adding back non-cash expenses of an impairment charge of $3.6 million for ~~an add-back~~goodwill, a write-down of ~~$41.3 million in loss on impairment of goodwill and other~~ intangible assets ~~and $3.7~~of $3.5 million, $3.8 million for allowance for doubtful accounts, $1.8 million in depreciation and amortization, ~~as non-cash items,~~ which was offset in part by the non-cash gain of $0.4 million from change in fair value of contingent consideration, a ~~$2.1 million increase in accounts receivable and $3.2 million increase in receivable from disposal~~reversal of ~~subsidiary. Our net cash provided by operating activities in 2006 was $17.6 million. This was primarily attributable to our net income~~deferred tax liability of ~~$5.8~~$1.4 million as ~~adjusted for an add-back~~a result of ~~$3.5 million in depreciation~~the amortization and ~~amortization as a non-cash item, $5.5~~impairment of acquired intangible assets, $5.9 million decrease in accounts receivable ~~and $3.1~~due to the proceeds received mainly from telecom operators, $2.7 million decrease in prepaid expenses and other current ~~assets.~~ assets due to the collection of miscellaneous receivables due from employees or artists and relating items expensed according to the beneficial period, an increase in accrued expenses and other current liabilities of $2.3 million due to certain accrued liabilities not paid as of December 31, 2009.

Our net cash ~~provided by~~used in operating activities in ~~2005~~2008 was ~~$14.0~~$5.6 million. This was primarily attributable to ~~our~~ net ~~income~~loss of ~~$18.6~~$12.0 million, as adjusted for an add-back of non-cash expenses of an impairment charge of $2.7 million for goodwill, an impairment charge of $1.9 million for our investment in New Run, a write-down of intangible assets of $2.9 million, $3.3 million in depreciation and amortization aspartially offset by a non-cash ~~item, which was offset in part by~~gain of $5.0 million arising from a ~~$5.8~~reduction of an acquisition payable and $1.6 million from a reduction of China Unicom liabilities, an increase in prepaid expenses and other current assets of $1.1 million due to advanced payment of music business, and a decrease in accounts ~~receivable.~~receivable of $3.5 million due to the collection from operators.

Net accounts receivable ~~declined~~decreased from ~~$18.1~~$12.7 million as of December 31, ~~2005~~2008 to ~~$13.4~~$4.1 million as of December 31, ~~2006~~2009, which included the net account receivables of the original WVAS and music business of $3.2 million and that of the acquired online audio business of $0.9 million, and then increased to ~~$14.7~~$8.5 million as of December 31, ~~2007.~~2010, which represented the net account receivables of the advertising business, due to the acquisition of Ku6. The decrease from ~~2005~~2008 to ~~2006 is~~2009 was primarily due to ~~a significant improvement in collections from~~ the ~~telecom operators, mainly from China Unicom. The increase from 2006 to 2007 is primarily due to lengthened~~subsequent collection ~~periods from the telecom operators.~~and allowance for doubtful accounts of WVAS accounts. The average collection time for our accounts receivable ~~from WVAS~~ was 8193 days in ~~2005, decreasing to 71~~2008, 84 days in ~~2006~~2009 and ~~increasing to 78~~98 days in ~~2007.~~2010.

Investing Activities.Net cash provided by investing activities was $2.2 million in 2010, of which $10.0 million was provided by collection of the proceeds due to the expiration of time deposits, $12.3 million was total proceeds from disposal of WVAS and music business net off the cash balance transferred out together with the disposed business, $4.4 million net proceeds arising from the disposal of Huayi and $0.3 million arising from the acquisition of Ku6 by issuing ordinary shares, partially offset by $15.0 million used in payment for licensed video copyrights, $6.6 million used in the purchase of property and equipment and $3.2 million loan paid to related parties under common control by Shanda.

Net cash used in investing activities was ~~$8.1~~$8.9 million in ~~2007,~~2009, of which ~~$3.2~~$10.0 million was used in short-term investments, $0.9 million was used for the purchase of fixed assets, which amounts were partially offset by the cash balance of $1.0 million arising from the acquisition of ~~equity interests in Shanghai Saiyu, Henan Yinshan, Fly Songs and Secular Bird and $2.5~~Seed Music, $0.6 million ~~was used in~~acquired from the acquisition of ~~an equity affiliate, New Run.~~ Yisheng and the proceeds from the disposal of a subsidiary of $0.3 million.

Net cash used in investing activities was ~~$15.2~~$2.3 million in ~~2006,~~2008, of which $12.6 million was used in the acquisition of equity interests in Huayi Brothers Music, Freeland Music and Shanghai Magma. Net cash used in investing activities was $6.6 million in 2005, of which $4.2$4.7 million was used for the payments made in respect of the recent acquisition of Seed Music and payments relating to the earlier acquisitions of Shanghai Magma and Henan Yinshan; $1.7 million was used for the purchase of intangible assets and ~~$1.1~~$0.3 million was ~~a prepayment~~used for the ~~acquisition~~purchase of ~~an equity interest in Freeland Music and Shanghai Magma. Our total capital expenditures for computer hardware, software and office equipment for~~fixed assets, which amounts were partially offset by the ~~years ended December 31, 2007, 2006 and 2005 were $0.9 million, $1.0 million and $1.3 million, respectively.~~proceeds from the disposal of a subsidiary of $4.5 million. Our capital divestitures are not material.

Financing Activities.Net cash provided by financing activities was ~~$16,334~~$4,616,350 for ~~2007,~~2010, including a $4,596,000 loan from related parties under common control by Shanda. Net cash provided by financing activities was $1,448,330 for 2009, including $1,445,830 capital injection into Yisheng by Shanda Interactive and Yisheng’s non-controlling shareholder, and $1,500 for 2008 resulting from the proceeds arising in connection with the exercise of stock options in 2007. Net cash used in financing activities was $4.4 million for 2006, mainly due to our repurchase and cancellation of 79,260,000 ordinary shares under our stock repurchase program in 2006 with a total cost of $5.0 million. Net cash provided by financing activities was $59.3 million for 2005, mainly reflecting the proceeds from our initial public offering.options.

We generally keep ~~almost all of~~ our cash in U.S. dollar or RMB denominated bank accounts or short-term time deposits for two principal purposes: to finance our operations and to manage the interest rate and currency risks arising from our operations. We adjust the amount of cash held in U.S. dollars and RMB from time to time to maximize our interest rate returns and to ensure that we have sufficient RMB for our operational needs, including for lease and other commitments. In the first half of 2008, we converted a significant portion of our U.S. dollar deposits into Euros, which were subsequently converted back into U.S. dollars. We have not historically used derivative instruments to hedge market risks. We recorded a foreign exchange loss of $4.5 million, arising from the decrease in the value of the Euro against the U.S. dollar in the third quarter of 2008. As a result of additional appreciation of the U.S. dollar, we recorded a further exchange loss in the fourth quarter of 2008 of $4.5 million. Currently we hold all non-Renminbi cash in U.S. dollars.

On April 1, 2011, we entered into agreements with Shanda Media Group Limited, or Shanda Media, a wholly owned subsidiary of Shanda Interactive, pursuant to which we agreed to issue to Shanda Media $50,000,000 of our ordinary shares at a per share price of $0.0325 (or $3.25 per ADS), and $50,000,000 aggregate principal amount of senior convertible bond at face value. The bond will mature in three years after issuance and will bear interest at a rate of 3% per annum. The bond will mature in three years after issuance and will bear interest at a rate of 3% per annum. The bond will be convertible into our ordinary shares at a price of $0.03925 per ordinary share (or $3.925 per ADS). The issuance of the ordinary shares and the convertible bond has been approved by our independent directors and shareholders. We believe that our current cash and cash equivalents ~~cash flow from operations and~~together with the ~~proceeds from our initial public offering~~new committed investment by Shanda Interactive in the aggregate amount of $100 million will be sufficient to meet our anticipated cash needs, including for working capital, capital expenditures and various contractual obligations, for at least the next 12 months. We ~~also believe that our recent investments in New Run, Shanghai Saiyu, Fly Songs and Secular Bird will have no material impact on our future liquidity or capital resources in the near term. We~~ may ~~however,~~ require additional cash resources due to the cost of running our online video business or due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these sources are insufficient to satisfy our cash requirements, we may seek to issue debt securities or additional equity or to obtain bank borrowings. The issue of convertible debt securities or additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financial covenants that would restrict our operations and the placement of liens over some or all of our assets. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

~~Indebtedness~~

~~As of December 31, 2007, other than~~From time to time, we evaluate possible investments, acquisitions or divestments and may, if a ~~remaining payment for the~~suitable opportunity arises, make an investment or acquisition ~~of Shanghai Magma of $6 million originally due in December 2007, we did not~~or conduct a divestment, which may have ~~any indebtedness or any~~a material debt securities or material mortgages or liens. In February 2008, we agreed with the former shareholders of Shanghai Magma to reduce this liability to $1 million, which amount has subsequently been paid. In addition, as of December 31, 2007, we did not have any material contingent liabilities. We may, however, be obligated to make certain earn-out payments in connection witheffect upon our ~~investments in New Run, Shanghai Saiyu,~~liquidity and ~~Secular Bird, as discussed under “Tabular Disclosure of Contractual Obligations” below.~~capital resources.

C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES

See Item 4.B. “Information ~~About~~on the ~~Company —~~ Company—Business ~~Overview — Product~~Overview— Technology and ~~Content Development,” “—Infrastructure and Technology,”~~Infrastructure” and “—Intellectual ~~Property~~Property.”

Our research and ~~Proprietary Rights.”~~development expenditures were nil, nil and $0.1 million in 2010, 2009 and 2008, respectively.

D. TREND INFORMATION

~~See Item 3.D. “Key Information — Risk Factors” and “—Operating and Financial Review and Prospects” above.~~Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events since January 1, 2010 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

E. OFF-BALANCE SHEET ARRANGEMENTS

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholders’ equity, or that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

F. ~~TABULAR DISCLOSURE OF~~ CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITEMENTS

The following table sets forth our contractual obligations as of December 31, ~~2007:~~2010:


	Payments Due by Period
			Less than		1-3		3-5		Payments Due by Period
	Total		1 year		years		years		Total		Less than 1 year		1-3 years		3-5 years
	(in thousands of U.S. dollars)								(in thousands of U.S. dollars)
Operating lease commitments	$	3,125	$	1,725	$	1,379	$	21	$	9,775	$	7,530	$	2,201	$	44
Other contractual commitments*		5,086		1, 974		3,112		—
Other contractual commitments⁽¹⁾										3,218		3,218		—		—

Total contractual obligations	$	8,211	$	3,699	$	4,491	$	21	$	12,993	$	10,748	$	2,201	$	44

Holding Company Structure

Interest Rate Risk

Foreign Exchange Risk

While our reporting currency is the U.S. dollar, to date, virtually all of our revenues and costs are denominated in Renminbi and substantially all of our assets (other than the proceeds from our initial public offering) and liabilities are denominated in Renminbi. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be impacted by fluctuations in the exchange rate between U.S. dollars and Renminbi. If the Renminbi depreciates against the U.S. dollar, the value of our Renminbi revenues and assets as expressed in U.S. dollars in our financial statements will decline. We may also be exposed to foreign exchange risk in the event we hold other currencies in an effort to hedge against potential depreciation of the U.S. dollar. We recorded a loss of $9.0 million in 2008 from deposits held in Euros, which were subsequently converted back into U.S dollars.

Between ~~2001~~2003 and ~~2007,~~2010, the exchange rate between Renminbi and U.S. dollars has varied by ~~less than 11.9%~~approximately 20.3%. If the Renminbi had been 1% and 5% less valuable against the U.S. dollar than the actual rate as of December 31, ~~2007~~2010 which was used in preparing ~~the Company’s~~our audited financial statements as of and for the year ended December 31, ~~2007,~~2010, our net asset value, as presented in U.S. dollars, would have been reduced by ~~$0.09~~$1.0 million and ~~$0.4~~$5.3 million, respectively. Conversely, if the Renminbi had been 1% and 5% more valuable against the U.S. dollar as of that date, then our net asset value would have increased by ~~$0.09~~$1.0 million and ~~$0.5~~$4.8 million, respectively. ~~We cannot predict at this time what will be the long-term effect of the Chinese government’s decision to tie the Renminbi to a basket of currencies, rather than just to the U.S. dollar.~~

~~Inflation~~Income Tax

Inflation has not materially impacted our results of operations in recent years. However, in 2007, China experienced significantly increased inflation, which, if it continues at that level or increases further, could have an adverse impact on our financial condition and result of operation in future periods. According to the China Statistical Bureau, China’s overall national inflation rate, as measured by the general consumer price index, was approximately 4.8%, 1.3% and 1.8% in 2007, 2006 and 2005, respectively.

~~TAXATION~~Cayman Islands Tax

~~Hurray! Holding Co., Ltd. is a tax-exempted company~~We are incorporated in the Cayman Islands. ~~Up until December 31, 2007, pursuant to~~Under the ~~Income Tax Law~~current law of the PRC Concerning Foreign Investment and Foreign Enterprises and the Tentative Regulations of the PRC on Enterprise Income Tax (the “Income Tax Laws”), our PRC subsidiaries and variable interest entities (“VIEs”) were generallyCayman Islands, we are not subject to ~~enterprise~~ income ~~tax at a statutory rate of 33%. Some of these subsidiaries and VIEs were qualified as high technology enterprises and under the Income Tax Laws, they were~~or capital gains tax. In addition, dividend payments are not subject to ~~a preferential~~withholding tax ~~rate of 15%. In addition, some of Hurray!’s subsidiaries are new-technology enterprises located~~ in ~~Beijing new-technology development zone and~~ the Income Tax Laws, they were entitled to either a three-year tax exemption followed by three years with a 50% reduction in tax rate, commencing the first operating year. During 2007, the newly acquired companies, Shanghai Saiyu and Henan Yinshan enjoyed reduced taxable income which is calculated based on 10% of the revenue and subject to an income tax rate of 33%.Cayman Islands.

These preferential tax arrangements were originally to expire at various dates between 2006 and 2010. In 2005 and 2006 a number of our VIEs became subject to a higher tax rate as tax exemptions expired or were reduced. The aggregate dollar and per share effect of the tax holidays in 2007, 2006 and 2005 were $1.9 million, $2.2 million and $5.6 million and $0.0009, $0.0010 and $0.0027 per share, respectively.PRC

In March 2007, the National People’s Congress of China enacted ~~a new~~the Enterprise Income Tax Law ~~or the New~~(the “New EIT ~~Law,~~Law”), which became effective on January 1, ~~2008. In addition,~~2008, which supersedes the ~~Implementation Rules~~previous income tax laws for foreign invested and domestic invested enterprises in China by adopting a unified tax rate of ~~the New Enterprise Income Tax Law, or the Implementation Rules were promulgated by~~25% for most enterprises. Our subsidiaries and VIEs incorporated in the PRC State Council on December 6, 2007 and the Notice on Implementation of Transitional Arrangements for Preferential Policies of Enterprise Income Tax, or the Transitional Arrangements Notice, was promulgated by the PRC State Council on December 26, 2007. Under the New EIT system,are generally subject to a ~~unified enterprise~~corporate income tax rate of 25% and unified tax deduction standards will be applied equally to both domestic-invested enterprises and foreign-invested enterprises. Enterprises established prior to March 16, 2007 eligible for preferential tax rate of 15% according to the then effective PRC Enterprise Income to Law for Foreign-Invested Enterprise and Foreign Enterprise tax laws and administrative regulations shall be subject to transitional rules as stipulated in the Transitional Arrangements Notice. In addition, certain qualified high and new technology enterprises strongly supported by the state may still benefit from a preferential tax rate of 15% under the New EIT Law if they meet the definition of “qualified high and new technology enterprise” strongly supported by the state set out in the Implementation Rules which refers to companies hold independent ownership of core intellectual properties and simultaneously meet a list of other criteria as stipulated. As a result, if our PRC subsidiaries qualify as qualified high and new technology enterprises strongly supported by the state under the newLaw.

The New EIT Law ~~they~~includes a provision specifying that legal entities organized outside China will ~~continue to benefit from a preferential tax rate of 15%. Otherwise, the applicable tax rate of our PRC subsidiaries may~~ be ~~subject to PRC~~considered residents for Chinese income tax ~~at a rate~~purposes if their place of ~~25% starting from 2008 under the New EIT system. We have used the new standard rates~~effective management or control is within China. If legal entities organized outside China were considered residents for ~~calculation of deferred taxes until the necessary approvals are obtained.~~

~~Under the new Enterprise Income Tax law effective on January 1, 2008, the rules for determining whether an entity is resident in the PRC for~~Chinese income tax purposes, have changed and the determination of residence depends amongst other things on the “place of actual management.” If Hurray! Holding Co., Ltd., or our non-PRC subsidiaries, were to be determined to be a PRC resident for tax purposes, it or they would be subject to the 25% enterprise income tax inimposed by the ~~PRC~~New EIT Law on ~~our~~their worldwide ~~income including the income arising in jurisdictions outside the PRC. We have evaluated our resident status under the new law and related guidance and believes Hurray! Holding Co., Ltd. would not~~income. Accordingly, if we are deemed to be a PRC tax resident ~~for~~enterprise, our global income will be subject to PRC enterprise income tax ~~purposes.~~

~~As Hurray! Holding Co.~~at the rate of 25%, ~~Ltd.~~which would have a material adverse effect on our financial condition and results of operations. The implementation rules to the New EIT Law provide that non-resident legal entities will be considered China residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. resides within China. Under current PRC laws and regulations, it is uncertain whether we would be ~~non-resident for~~deemed PRC tax ~~purposes,~~resident enterprises under the New EIT Law.

In accordance with the New EIT Law, dividends ~~paid to it out~~which arise from profits of ~~profits~~foreign invested enterprises (“FIEs”) earned after January 1, 2008, ~~from its PRC subsidiaries would be~~are subject to a 10% withholding tax. In addition, under the tax treaty between the PRC and Hong Kong, if a foreign investor is incorporated in Hong Kong and qualifies as a Hong Kong tax resident, the applicable withholding tax ofrate is reduced to 5%, if the investor holds at least a 25% interest in the FIE, or 10%.

~~Aggregate~~, if the investor holds less than a 25% interest in the FIE. There are no undistributed earnings of our subsidiaries ~~and affiliates~~ located in the PRC that are available for distribution ~~to the Company at~~as of December 31, ~~2007 are considered~~2009 and 2010. In addition, we (i) do not have any present plan to ~~be indefinitely reinvested under APB opinion No. 23, “Accounting~~pay any cash dividends on our ordinary shares in the foreseeable future and (ii) intend to retain most of our available funds and any future earnings for ~~Income Taxes — Special Areas,”~~use in the operation and ~~accordingly,~~expansion of our business in the PRC. Accordingly, no provision has been made for the ~~PRC~~Chinese dividend withholding taxes that would be payable upon ~~the distribution~~distributions to us.

Inflation

Since our inception, inflation in China has not materially impacted our results of ~~those amounts to Hurray! Holding Co., Ltd. The PRC tax authorities have also clarified that distributions made out of retained earnings accumulated prior to January 1, 2008 are not subject~~operations. According to the ~~withholding tax.~~

Our WVAS revenues are subject to a 3% business tax. Our recorded music services revenues are subject to a 5% business tax for royalties and advertising revenues and a 13% value-added tax for revenues fromNational Bureau of Statistics of China, the ~~sale~~change of CDs. Our software and system integration services revenues, which have been classified as a discontinued operation on their sale in August 2007, were subject to a 17% value-added tax. Companies that develop their own software and register the software with the relevant authoritiesconsumer price index in China ~~are generally entitled to a value-added tax rebate~~was 5.9%, (0.7)% and 3.3% in 2008, 2009 and 2010, respectively. Although we have not in the past been materially affected by inflation since our inception, we can provide no assurance that we will not be affected in the future by higher rates of 14%. Any service fees that Beijing Hurray! Times charges and subsequently collects pursuant to the exclusive technical and consulting service agreements with Hurray! Solutions and our other Chinese affiliates are subject to a 5% business tax.

Subject to the approval of the relevant tax authorities, Hurray! Solutions and other affiliated Chinese entities had total tax loss carryforwards of approximately $4.2 million and $3.7 million as of December 31, 2007 and 2006, respectively, for enterprise income tax purposes, which will expire by 2012. These tax loss carryforwards give rise to potential deferred tax assets totaling $1.1 million and $0.6 million as of December 31, 2007 and 2006, respectively. In 2005, we concluded that Hurray! Solutions and other affiliated Chinese entities did not record sufficient net income within the carryforward period to realize the full tax benefit of these past net losses. As a result, we established a valuation allowance for the full amount of these deferred tax assets. In 2006, we expected some of the affiliated Chinese entities would record sufficient net income within the carryforward period to realize the tax benefit of these past net losses, and the valuation allowanceinflation in ~~respect of such deferred tax assets was reduced accordingly.~~China.

Recently Issued Accounting Standards

In ~~June 2006,~~October 2009, the Financial Accounting Standards Board (“FASB”) issued ~~Interpretation No. 48~~new guidance on “revenue recognition for arrangements with multiple deliverables and certain revenue arrangements that include software elements.” By providing another alternative for determining the selling price of deliverables, the guidance for arrangements with multiple deliverables will allow companies to allocate consideration in multiple deliverable arrangements in a manner that better reflects the transaction’s economics and will often result in earlier revenue recognition. The new guidance modifies the fair value requirements of previous guidance by allowing “best estimate of selling price” in addition to vendor-specific objective evidence (“~~FIN 48”~~VSOE”)~~, “Accounting~~ and other vendor objective evidence (“VOE,” now referred to as “TPE,” standing for ~~Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” FIN 48 prescribes a recognition threshold and measurement attribute~~third-party evidence) for determining the ~~financial statement recognition and measurement~~selling price of a ~~tax position taken~~deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or ~~expected~~TPE of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted under the new guidance. The new guidance for certain revenue arrangements that include software elements removes non-software components of tangible products and certain software components of tangible products from the scope of existing software revenue guidance, resulting in the recognition of revenue similar to ~~be taken in a tax return. FIN 48~~that for other tangible products. The new guidance is effective for fiscal years beginning on or after June 15, 2010. However, companies may adopt the guidance as early as interim periods ended September 30, 2009. The guidance may be applied either prospectively from the beginning of the fiscal year for new or materially modified arrangements or retrospectively. The Company has not early adopted the new guidance and is currently evaluating the impact on its consolidated financial statements of adopting this guidance.

In December ~~15, 2006,~~2010, FASB issued revised guidance on “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with ~~early adoption permitted. We adopted FIN 48 effective January 1, 2007.~~Zero or Negative Carrying Amounts.” The revised guidance specifies that an entity with reporting units that have carrying amounts that are zero or negative is required to assess whether it is more likely than not that the reporting units’ goodwill is impaired. If the entity determines that it is more likely than not that the goodwill of one or more of its reporting units is impaired, the entity should perform Step 2 of the goodwill impairment test for those reporting unit(s). Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any goodwill impairments occurring after the initial adoption of ~~FIN 48 did not result~~the revised guidance should be included in a cumulative adjustment on January 1, 2007 and had no significant impact on our accounting for income taxes for the year ended December 31, 2007. We did not incur any interest or penalties related to potential underpaid income tax expenses, and also do not expect to have a significant increase or decrease on the unrecognized tax benefits within 12 months from December 31, 2007.

~~We are subject to taxation in PRC and other tax jurisdictions. There~~earnings as required by Section 350-20-35. The revised guidance is ~~no ongoing examination by taxing authorities at this time. Our various tax years from 2002 to 2007 are remaining open in various taxing jurisdictions.~~

Hurray Technologies (HK) Ltd., (“Hurray Technologies”), our 99% owned subsidiary, is subject to income tax in Hong Kong. Hong Kong companies are generally subject to a 17.5% corporate income tax. Hurray Technologies has not, however, paid any income taxes in Hong Kong because to date it has not received any revenues.

~~RECENTLY ISSUED ACCOUNTING STANDARDS~~

In March 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities” to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. The standard requires disclosure of fair values of derivative instruments and their gains and losses in a tabular format as well as cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. It also requires that more information be provided about an entity’s liquidity by requiring disclosure of derivative features that are credit risk-related. SFAS No.161 is effective ~~for financial statements issued~~ for fiscal years, and interim periods within those years, beginning after ~~November~~December 15, ~~2008, with early application encouraged.~~2010. Early adoption is not permitted. We ~~do not expect~~are currently evaluating the ~~adoption of SFAS No. 161 to have a material~~ impact on ~~our~~its consolidated financial ~~statements.~~statements of adopting this guidance.

In December ~~2007, the~~2010, FASB issued ~~SFAS No.141(R), “Business Combinations”, to improve reporting by creating greater consistency in~~revised guidance on the ~~accounting~~“Disclosure of Supplementary Pro Forma Information for Business Combinations.” The revised guidance specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and financial reporting of business combinations. The standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users allearnings of the ~~information they need~~combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The revised guidance also expands the supplemental pro forma disclosures to ~~evaluate and understand~~include a description of the nature and ~~financial effect~~amount of material, nonrecurring pro forma adjustments directly attributable to the business ~~combination. SFAS No. 141(R) applies~~combination included in the reported pro forma revenue and earnings. The revised guidance is effective prospectively tofor business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, ~~2008. Early adoption is prohibited.~~2010. We have not ~~yet begun~~early adopted the ~~process of assessing~~new guidance and are currently evaluating the ~~potential~~ impact ~~that the adoption of SFAS No. 141(R) may have on its consolidated financial position or results of operations.~~

In December 2007, the FASB issued SFAS No.160, “Noncontrolling Interests in Consolidated Financial Statements” to improve the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same way as required in the consolidated financial statements. Moreover, SFAS No. 160 eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. SFAS No. 160 is effective for fiscal year, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. We have not yet begun the process of assessing the potential impact that the adoption of SFAS No. 160 may have on our consolidated financial ~~position or results~~statements of ~~operations.~~adopting this guidance.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115”. SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. The standard requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS 157. We are currently evaluating whether the adoption of SFAS 159 will have a significant effect on our consolidated results of operations and financial position.

Item 6. Directors, Senior Management and Employees

A. Directors and Senior Management


Name		Age				Position		~~Class~~	~~Term of Office~~
~~Qindai Wang~~ Bruno Wu^{(2) (3)}			4344			Independent Director and Chairman of the Board ~~and Chief Executive Officer~~		~~Class I~~	~~2 years~~
~~Jesse Liu~~ Tianqiao Chen^{(1) (2)}			4537			Director		~~Class I~~	~~2 years~~
~~Robert Mao~~⁽¹⁾			64			~~Director~~		~~Class I~~	~~2 years~~
~~Alan Powrie~~Danian Chen⁽¹⁾			5732			Director
	~~Class III~~ Grace Wu^{(1) (2)}		~~1 year~~	40			Director
Haifa Zhu			38			Director and Acting Chief Executive Officer
Haibin Qu			36			Director
Shanyou Li			38			Director
~~Suberna Shringla~~Tongyu Zhou⁽¹⁾⁽³⁾			42			Independent Director
Wenwen Niu⁽³⁾		~~Class II~~	44		~~3 years~~	Independent Director
~~Songzuo Xiang~~Tony Shen			43			~~Director~~		~~Class II~~	~~3 years~~Chief Financial Officer
~~Shudan Zhang~~Feng Chen			4838			~~Director~~		~~Class III~~	~~1 year~~Chief Editor and Vice President
~~Shaojian (Sean) Wang~~Liang Zhao			4440			~~President,~~ Chief ~~Operating~~Technology Officer ~~and Acting Chief Financial Officer~~		—	—

Our Amended and Restated Memorandum and Articles of Association provide for the division of the board of directors into three classes: Class I directors (currently Qindai Wang, Jesse Liu and Robert Mao), Class II directors (currently Suberna Shringla and Songzuo Xiang) and Class III directors (currently Shudan Zhang and Alan Powrie). At each annual general meeting, directors who are elected will serve a three-year term until such director’s successor is elected and is duly qualified, or until such director’s earlier death, bankruptcy, insanity, resignation or removal. There are no family relationships among any of the directors or executive officers of our company.

Biographical Information

~~Qindai Wang.~~Bruno Wu. Mr. ~~Wang~~Wu has served as an independent director on our ~~Chief Executive Officer~~board of directors since September 1, 2009 and has been Chairman of the Board since ~~June 2001. From December 1999~~August 17, 2010. Mr. Wu also has served as a director of Shanda Interactive Entertainment Limited from October 2006 to ~~February~~August 2009. Mr. Wu is the Co-Founder and Chairman of The Sun Media Investment Holding Group of Companies, one of China’s largest privately held media groups. Mr. Wu served as Co-Chairman of SINA Corporation from 2001 ~~Mr. Wang was President~~to 2002 and as the Chief Operating Officer of AsiaInfo Technologies (China), the Chinese operating subsidiary of AsiaInfo Holdings, Inc. and a provider of telecom network integration and software solutions in China. Previously, Mr. Wang worked at Nortel Networks (China) from 1996 until 1999 as General ManagerATV, one of the ~~China Telecom account at Nortel.~~two free-to-air networks in Hong Kong, from June 1998 until February 1999. Mr. Wu received his Diploma of Studies in French civilization from the University of Savoie, France, in 1987. He ~~served as Regional Director at Lucent Technologies (China) from 1995 to 1996 and as a Senior Group Manager at AT&T China from 1989 to 1995. Mr. Wang holds~~graduated with a Bachelor of Science in Business Administration-Finance from Culver-Stockton College in Missouri in December 1990. He received his Master of Arts in International Affairs degree from Washington University, Missouri in ~~Engineering from~~1993 and a Ph.D. in the ~~Chengdu Institute~~International Politics Department of ~~Telecommunications Engineering.~~College of Law, Fudan University, Shanghai, China, in 2001.

~~Jesse Liu.~~Tianqiao Chen.Mr. ~~Liu~~Chen has served on our board of directors since ~~June 2001. From that date until June 2007, he also served as our Senior Vice President~~July 24, 2009 and ~~Chief Financial Officer. Previously, Mr. Liu~~ was Chairman of the ~~Vice President of Marketing at AsiaInfo Technologies (China)~~Board from July ~~1999~~24, 2009 to August ~~2000. He~~17, 2010. Mr. Tianqiao Chen is one of the co-founders of Shanda Interactive and has served as the ~~Business Development Director at Lucent Technologies for~~chairman of the ~~North American market from 1995 to 1999~~board of directors and the chief executive officer of Shanda Interactive since its inception in December 1999. Mr. Chen also serves as a ~~Marketing Manager at AT&T Network Systems for Greater China from 1990 to 1995.~~member of the board of directors of SinoMedia Holding Ltd., which is listed on the Hong Kong Stock Exchange, and Shanda Games Limited. Mr. ~~Liu~~Chen holds a ~~Master of Business Administration degree from Columbia University, a Master of Science~~bachelor’s degree in ~~Engineering~~economics from ~~Iowa State University and a Bachelor~~Fudan University. Mr. Tianqiao Chen is the brother of ~~Science degree in Engineering from Tongji University.~~Mr. Danian Chen, one of our directors.

~~Robert Mao.~~Danian Chen.Mr. ~~Mao~~Danian Chen has served on our board of directors since ~~March 2003. He also serves as chairman~~January 19, 2010. Mr. Danian Chen is one of the ~~board~~co-founders of ~~Augux Technology, a start up provider of high intensity LED lighting equipment and~~Shanda Interactive. Mr. Danian Chen has served in various capacities at Shanda Interactive, mostly recently as the chief operating officer beginning in April 2008. Mr. Chen is also a member of the board of ~~3Com Corporation. Mr. Mao previously~~directors of Shanda Interactive, a position which he has held ~~senior executive positions at Nortel, Alcatel and ITT. Mr. Mao holds a Master degree~~since its inception in ~~Management from the Massachusetts Institute of Technology as well as a Master of Science degree in Engineering~~1999, and a ~~Bachelor~~member of ~~Science degree in Engineering from Cornell University.~~the board of directors of Shanda Games Limited. Mr. Danian Chen is Mr. Tianqiao Chen’s brother.

~~Alan Powrie.~~Grace Wu.~~Mr. Powrie~~Ms. Wu has served on our board of directors since July 2004. Mr. Powrie was a partner with Deloitte Touche Tohmatsu, Hong Kong, until his retirement in September 2000. From October 2000 to May 2001 and again from January 2002 to May 2002, he worked as a part-time advisor to Deloitte Touche Tohmatsu China. Mr. Powrie joined Deloitte Touche Tohmatsu in 1971 and has worked with that firm in the United Kingdom, United States, Hong Kong and China. Mr. Powrie holds a Bachelor of Laws degree from the University of Edinburgh and is a member of the Institute of Chartered Accountants of Scotland and the Hong Kong Institute of Certified Public Accountants.

~~Suberna Shringla.~~~~Mr. Shringla~~24, 2009. Ms. Wu has served ~~on our board~~as Shanda’s senior vice president since ~~February 2006. Mr. Shringla is~~April 2008, chief financial officer since November 2007 and a founding partner of Team Ventures, a boutique corporate finance advisory firm focused on media and communication sectors primarily in Hong Kong, China and Korea. From August 2000 to January 2002, Mr. Shringladirector since December 2007. Ms. Wu previously served as ~~Director~~Shanda’s vice president from November 2007 to March 2008 and ~~Head~~vice president of ~~Media~~strategic investments from October 2007 to November 2007. Prior to joining Shanda, Ms. Wu spent five years with AU Optronics Corp., where she was responsible for financial planning and ~~Technology Corporate Finance for SG Cowen, a subsidiary of Banque Societe Generale.~~analysis, investor relations and capital markets activities. Prior to that, ~~Mr. Shringla served as Vice President~~Ms. Wu worked at Goldman Sachs and ~~Head of Business Development of Turner Broadcasting Services International Asia Pacific/Time Warner~~Lehman Brothers where she divided her responsibilities between the equity capital markets and ~~as a Manager of Business Development for Walt Disney Studios, Asia Pacific. Mr. Shringla~~investment banking divisions. Ms. Wu holds a ~~Masters of Business Administration~~bachelor’s degree from ~~ENPC Paris~~National Taiwan University and ~~a Bachelor of Arts degree from St. Stephens College, Delhi. He is also an investment adviser licensed with the Securities and Futures Commission in Hong Kong.~~

~~Songzuo Xiang.~~Dr. Xiang has served on our board since July 2000. He was a visiting scholar at Columbia University from May 1999 to July 2000, and at Cambridge University from October 1998 to May 1999. He previously worked at the People’s Bank of China, Shenzhen branch, as the Deputy Director of the Fund Planning Department from 1995 to 1998 and as the Director of the Non-Performing Loan Management Department from 1996 to 1998. Dr. Xiang was formerly an investment manager at Shenzhen Resources & Property Development (Group) Ltd. from 1993 to 1995. He holds a Master of International Affairs degree in international banking and finance from Columbia University, a Ph.D in Economics and a Master in Management Science degree from Renmin University of China, and a Bachelor degree in Mechanical Engineering from HuaZhong University of Science and Technology.University.

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~~Shudan Zhang.~~Haifa Zhu.Mr. ~~Zhang~~Zhu has served on our board of directors since ~~2000.~~July 24, 2009. Mr. Zhu was appointed our Acting Chief Executive Officer on March 14, 2011. Mr. Zhu has served as chief investment officer and senior vice president of Shanda since April 2008. Mr. Zhu previously served as Shanda’s assistant vice president of investments, director of platform operations, director of central user platform and deputy director of new business center. Prior to joining Shanda, Mr. Zhu was responsible for investments at Nuovo Assets Investment Ltd. from 2001 to 2004. Prior to joining Nuovo Assets Investment Ltd., Mr. Zhu worked in technology management for Shanghai Academy of Science from 1996 to 2001. Mr. Zhu holds a master’s degree in business administration and a bachelor’s degree from Fudan University.

Haibin Qu.Mr. Qu has served on our board of directors since July 24, 2009. Mr. Qu has served as Shanda’s senior executive vice president since August 2005. Mr. Qu previously served as Shanda’s senior vice president from July 2003 to August 2005, vice president from September 2002 to June 2003 and director of business development from February 2000 to August 2002. Prior to joining Shanda, Mr. Qu served as a vice president of Shanghai Fuwei Technology Development Co., Ltd. from September 1996 to December 1999. Mr. Qu holds a bachelor’s degree in mechanics from Fudan University.

Shanyou Li.Mr. Li became our Chief Executive Officer on August 17, 2010 and resigned on March 14, 2011. Mr. Li has served on our board of directors since January 19, 2010. Mr. Li is the founder of Ku6. From ~~1995~~2000 to 2006, Mr. Li served in various senior management positions with Sohu.com. Prior to that, Mr. Li worked for Motorola, Alcoa Group and Bausch & Lomb. Mr. Li holds a bachelor’s degree in mathematics from Nankai University and an EMBA from China Europe International Business School.

Tongyu Zhou.Ms. Zhou has served as an independent director on our board of directors since September 1, 2009. Ms. Zhou is the founder and Chairman of Shanghai Weida Hi-Tech Group Co., Ltd. Ms. Zhou is a member of the national committee of CPPCC and Chinese National Youth Union, vice president of the Chinese Young Entrepreneurs’ Association and Shanghai Chamber of Commerce. Ms. Zhou received a Ph.D. in economics from Fudan University in 2008 and an MBA from China Europe International Business School in 2002.

Wenwen Niu.Mr. Niu has served as an independent director on our board of directors since July 31, 2009. Mr. Niu is the publisher and creator of “The Founder” magazine and a professional industry commentator. Mr. Niu joined Economic Daily Group in 1991 and was awarded “China News Prize” three times in two consecutive years. In 1999, Mr. Niu was the editor-in-chief of China Entrepreneur Magazine and he was also a member of the jury of “Top 10 Economic Leaders” of CCTV. In addition, Mr. Niu earned his Master degree in economics and graduated from Cheung Kong Graduate School of Business (CHGSB) EMBA program.

Tony Shen. Mr. Shen has served as our Chief Financial Officer since September 27, 2010. Mr. Shen brings to Ku6 more than 15 years of experience in finance and management. Most recently, he served at China BAK Battery, Inc., as Chief Financial Officer, Treasurer, and Secretary from August 2007 to April 2010, and as Vice President of ~~Sales~~Strategic Development from May 2007 to August 2007. He was Acting Chief Financial Officer of eLong Inc., from July 2006 to April 2007. From July 2010 to June 2011, Mr. Shen was an independent director and ~~Marketing at UTStarcom. Formerly,~~chairman of the Audit Committee of the Board of Directors of China Electric Motor, Inc. He received a B.E. in Electrical Engineering from ~~1991 to 1995, he served as Vice President of Sales~~Tsinghua University and ~~Marketing at Starcom, a company which he also co-founded. Mr. Zhang holds a Bachelor of Science degree~~an M.B.A. in Finance from ~~Beijing Polytechnic University.~~Columbia Business School.

~~Shaojian (Sean) Wang.~~Feng Chen.~~Mr. Wang~~Mr.Chen has served as our Chief Editor and Vice President Since October 2009. Prior to joining us, Mr. Chen worked as a journalist for theSouthern Metropolis Dailyand an editor of theNew Beijing Dailyand served as chief editor of Hexun.com. Mr. Chen holds a bachelor’s degree in history from Wuhan University.

Liang Zhao.Mr. Zhao has served as our Chief ~~Operating~~Technology Officer since ~~May 2006 and~~April 2010. Mr. Zhao served as Chief Technology Officer of Tudou.com, from September 2007 to March 2010. Mr. Zhao holds a bachelor’s degree in physics from Peking University.

Employment Agreements

We have entered into employment agreements with each of our executive officers, except Mr. Haifa Zhu, our Acting Chief ~~Financial Officer since July 2007. Previously, Mr. Wang was Chief Operating Officer~~Executive Officer. Under the employment agreement generally entered into by us and ~~Acting Chief Financial Officer~~our executive officers, the initial term is two to three years. Under these agreements, we may terminate his or her employment for cause at ~~Opta Corporation,~~any time for certain acts of the employee. An executive officer may terminate the employment at any time upon thirty days, to six months, prior written notice.

Each executive officer has agreed to hold, both during and subsequent to the term of the employment agreement, our confidential information in strict confidence and not to disclose such information to anyone except to our other employees who have a ~~publicly listed consumer electronics company~~need to know such information in connection with our business or except as required in the ~~U.S. that is controlled~~performance of his or her duties in connection with the employment. In addition, each executive officer has agreed to be bound by ~~TCL. Prior to that, he served as Chief Financial Officer at Pacificnet Inc.,~~non competition restrictions during the term of the employment agreement and for a ~~technology investment and management company that invests in CRM solutions, mobile applications, and telecommunications in Asia. Prior to that, he served as~~certain period after the ~~managing director at Thian Bing Investments PTE, Ltd, and as a country manager at Ecolab, Inc. Mr. Wang attended Peking University, received a Bachelor~~termination of ~~Science degree in Economics from Hamline University and a Master of Business Administration from Carlson School of Management, University of Minnesota.~~his or her employment.

B. Compensation

Compensation of Directors and Executive Officers

~~In 2007,~~For the year ended December 31, 2010, we paid aggregate compensation of RMB 9.0 million ($1.4 million) to our eight executive positions and three non-executive directors, including former officers and directors who resigned in 2010. For the year ended December 31, 2010, we granted options to purchase an aggregate of ~~approximately $578,633~~221,670,000 ordinary shares with an exercise price of US$0.0568 per share and ~~$160,000 in compensation~~expiration dates at various times through 2017, to our ~~executive officers~~directors and ~~non-executive directors, respectively. In 2007, we~~officers. Following the resignation of Mr. Shanyou Li as our CEO on March 14, the options granted to him in 2010 to purchase 140,370,000 ordinary shares with an ~~aggregate~~exercise price of ~~395,000 ADSs, equal to 39,500,000 nonvested shares, in lieu of stock~~US$0.0568 per share were forfeited. Other than ordinary share options ~~to certain of our executive officers~~ and ~~senior management~~restricted share units granted under our 2004 Share Incentive Plan ~~or 2004 Plan. These nonvested shares vest on an annual basis equally over three years, or 33.33% on each anniversary of the grant dates.~~

~~Full-time employees of~~and 2010 Equity Compensation Plan, as well as fees paid to our company and our subsidiaries in China participate in a government-mandated multi-employer defined contribution plan pursuant to which pension benefits, medical care, unemployment insurance and other welfare benefits are providedindependent directors for board services rendered, we only paid compensation to those ~~employees. The total provision for such employee benefits, corresponding to the full amount of our company’s obligation in connection therewith was $2.6 million for 2007.~~

~~We have entered into indemnification agreements with each of our~~ directors ~~and~~who also served as executive officers under which we agree to indemnify each of them to the fullest extent permitted by Cayman Islands law, our articles of association and other applicable law, from and against all expenses and liabilities arising from any proceeding, to which the indemnitee is or was a party, witness or other participant. Upon the written request by a director or officer, we will, within 30 days after receipt of the request, advance funds for the payment of expenses, unless there has been a final determination that the director or officer is not entitled to indemnification for these expenses.officers. We also maintain director and executive officer insurance for our directors and executive ~~officers with limited liability of $20,000,000.~~officers.

~~Employment Agreements~~

~~We have entered into employment, invention assignment and confidentiality, and non-compete agreements with each of our executive officers as described below.~~

These employment agreements provide that our obligations to compensate each officer will terminate if that officer resigns other than for a good reason or is discharged by us for cause or gross negligence, as determined by a majority of our board of directors. However, if an officer is terminated without cause or resigns for good reason, we are obligated to provide severance compensation equivalent to six months of the officer’s annual gross base salary to that officer.

~~The term “cause” includes actions by the officer involving:~~

	•		~~dishonesty,~~

	•		~~fraud,~~

	•		~~breach of trust,~~

	•		~~physical harm to any person,~~

	•		~~breach of the employment agreement, or~~

	•		~~other similar conduct.~~

~~The term “good reason” includes:~~

	•		~~changes in the officer’s position, which materially reduce his level of responsibilities, duties or stature, or~~

	•		~~a reduction in the officer’s compensation.~~

The executive officers are also entitled to exercise their stock options, which have vested at the time of employment termination, if not for cause, for a period of thirty days thereafter (or such other period of time not exceeding three months as is determined by the board of directors).

In addition, if a change of control occurs with respect to our company and an officer is terminated without cause or resigns for good reason prior to the termination date of the officer’s employment agreement or the date on which either our company or the officer elects not to extend the agreement further by giving written notice to the other party, then we will be obligated to pay severance benefits in an amount equal to six times the monthly rate of annual gross base salary in effect immediately prior to the termination of employment.

Under the invention assignment and confidentiality agreements, each officer agrees, among other things, to assign all rights in company-related inventions to us and to keep our proprietary information confidential. The non-compete agreements prohibit each officer from being employed by, or participating in any manner in the management or operation of, any business that is or may reasonably become our competitor for a period of 12 months after termination of employment for any reason.

Summary of Stock Plans

~~2004 Share Incentive~~2010 Equity Compensation Plan

Our board of directors terminated our 2004 Share Incentive Plan and ~~shareholders~~ adopted our ~~2004~~2010 Equity Compensation Plan, or 2010 Plan, in ~~July 2004. Our board~~December 2010. A total of ~~directors initially authorized the issuance of an aggregate of up to 80,000,000 of our~~698,381,300 ordinary shares under the 2004 Plan, subject to adjustment for a share split, or any future share dividend or other similar change in our ordinary shares or our capital structure. Commencing on the first business day of each calendar year for three years beginning in 2005, the number of ordinary sharesare reserved for issuance under the 2004 Plan (including issuances as incentive stock options) will be increased annually by a number equal to the lesser of (a) 2.5% of the total number of shares outstanding as of that date, (b) 70,000,000 ordinary shares, or (c) a lesser number of shares determined by the board. Pursuant to the adjustment provisions described above, the number of ordinary shares reserved for issuance under the 2004 Plan was increased by 29,666,800 shares for an aggregate total of 109,666,800 ordinary shares in 2005. No such adjustment was made in 2006. The number of ordinary shares reserved for issuance under the 2004 Plan was further increased by 50,000,000 shares for an aggregate total of 159,666,800 ordinary shares in 2007. No adjustment was made in 2008. In addition, shares which are currently subject to awards under our 2003 Stock Option Plan or 2002 Incentive Compensation Plan (which plans are described below) that terminate or expire on or after July 1, 2004 without the issuance of such shares will become available for award grants under our 2004 Plan. As a result of such terminations and expirations of options under these plans, an additional 6,448,740 ordinary shares are available for issuance under the 20042010 Plan. A general description of the terms of the ~~2004~~2010 Plan is set forth below.

Plan Administration. Our board of directors or one or more committees appointed by our board will administer our 2010 Plan.

Types of ~~Awards.~~ Awards. The following briefly describes the principal features of the various awards that ~~can~~may be granted under ~~the 2004 Plan consist of:~~our 2010 Plan.

	•		Options. Options provide for the right to purchase our ordinary shares at a specified exercise price subject to vesting.

	•		~~options~~Share Appreciation Rights. A share appreciation right is a right to ~~purchase~~receive a payment, in cash or ordinary shares, equal to the excess of the fair market value of a specified number of our ordinary shares on the date the share appreciation right is exercised over the base price as set forth in the award document. The maximum term of a share appreciation right is six years.

	•		~~dividend equivalent rights,~~Restricted Shares.A restricted share award is the ~~value~~sale of ~~which is measured~~ordinary shares at a price determined by our board or the ~~dividends paid with respect to~~committee administering our 2010 Plan or a grant of our ordinary shares, in each case subject to restrictions on transfer and vesting terms.

	•		~~nonvested shares,~~

	•		~~stock appreciation rights~~Restricted Share Units. Restricted share units represent the ~~value of which is measured by appreciation in the value of~~right to receive our ordinary shares, ~~and~~

	•		~~any other securities~~subject to vesting. Restricted share units will be settled upon vesting, subject to the terms of the award agreement, either by our delivery to the holder of the number of ordinary shares that equals the number of the vested restricted share units or by a cash payment to the holder that equals the then fair market value of ~~which is derived from~~ the ~~value~~number of ~~our~~underlying ordinary ~~shares and which can be settled for cash, our ordinary shares or other securities or a combination of cash, our ordinary shares or other securities.~~shares.

Under the 2004 Plan, we may also grant incentive stock options (also known as ISOs) within the meaning of Section 422 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, to employees who are located in the U.S., or who are U.S. tax payers.

~~Plan Administration.~~~~Our board currently administers the 2004 Plan, and may designate a committee to administer it in the future.~~

~~Eligibility.~~Under the 2004 Plan, awards may be issued to employees, directors or consultants of our company or our subsidiaries, although ISOs may only be issued to our employees or the employees of our subsidiaries.

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~~Acceleration of~~Award Document. Awards ~~upon Corporate Transactions or Changes in Control.~~The 2004 Plan provides for acceleration of awards upon the occurrence of specified corporate transactions or changes in control. In the event of certain corporate transactions, including specified types of reorganizations and acquisition transactions, each outstanding award granted under the 2004 Plan will automatically become fully vested and exercisable and be released from any restrictions on transfer (other than transfer restrictions applicable to the award) and repurchase or forfeiture rights immediately prior to the specified effective date of the corporate transaction, unless the award is assumed or replaced by the successor company or its parent company in connection with the corporate transaction. Upon consummation of the corporate transaction, each outstanding award will terminate unless the award is assumed by the successor company or its parent company.

~~Awards.~~~~Awards under the 2004~~our 2010 Plan are evidenced by an award ~~agreement which contains, among other things, provisions concerning exercisability~~document that sets forth the terms and ~~forfeiture upon termination~~conditions applicable to each of ~~employment or consulting arrangement (by reason of death, disability or otherwise)~~these awards, as ~~have been~~ determined by our board. In addition, in the case of stock options the award agreement also specifies whether the option constitutes an ISO or a non-qualified stock option (also known as NSOs) and may, but need not, include a provision whereby a grantee at any time during his or her employment with us may exercise any part or all of the award prior to full vesting of the award.

~~Exercise or Purchase Price and Term of Awards.~~An award may be exercised when a holder delivers a notice of such exercise to us. The exercise or purchase price must be paid at the time of exercise in full by cash, check or whole ordinary shares with a fair market value at least equal to the option price (or in another appropriate manner approved by us, such as in a combination of cash and whole ordinary shares or, with respect to options, by cashless exercise through a broker-dealer).

The exercise price of ISOs cannot be less than the fair market value of our ordinary shares on the date of grant. However, in the case of an ISO granted to a grantee, who, at the time the ISO was granted, owned stock possessing more than 10.0% of the combined voting power of all classes of our share capitalboard or the ~~share capital of any parent or subsidiary of us, the option price may not be less than 110.0% of the fair market value of~~committee administering our ordinary shares on the date of grant of such ISO. The term of an ISO cannot exceed 10 years. In addition, the term of an ISO granted to a person, who, at the time of grant, owns stock possessing more than 10.0% of the combined voting power of all classes of our share capital, is limited to five years from the date of the grant of the award. To the extent that the aggregate fair market value of our ordinary shares subject to options granted as ISOs under the 2004 Plan which become exercisable for the first time by a recipient during any calendar year exceeds $100,000, then options represented by ordinary sharesequity compensation plan in ~~excess of the $100,000 limitation shall be treated as NSOs.~~

The plan administrator will determine the term and exercise or purchase price, if any, of all other awards granted under our 2004 Plan. The exercise or purchase price for the awards is specified in the award agreement.

~~Transferability.~~Under the 2004 Plan, ISOs may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised during the lifetime of the grantee only by the grantee. Other awards shall be transferable by will or by the laws of descent or distribution and to the extent provided in the award agreement. The 2004 Plan permits the designation of beneficiaries by holders of awards, including ISOs.its sole discretion.

Termination of ~~Service.~~~~The period following~~ the termination of a grantee’s employment or service with us during which the grantee can exercise his or her option, if any, will be provided in the award agreement, and it cannot end later than the last day of the original term of the award. In the event a grantee’s employment or service with us is terminated without cause (as defined in the 2004 Plan), any awards which have become exercisable prior to the time of termination will remain exercisable for three months from the date of termination. In the event a grantee’s employment or service with us is terminated for cause, the grantee’s right to exercise his or her options will terminate concurrently with the termination of the grantee’s service. If termination is causedEquity Compensation Plan. Without further action by ~~death or disability, any awards which have become exercisable prior to the time of termination, will remain exercisable for six months from the date of termination.~~

~~Amendment or Termination of 2004 Plan.~~Under the 2004 Plan, our board may at any time terminate, suspend, or amend the 2004 Plan in any respect, except that no termination, suspension or amendment will be effective without shareholder approval if such approval is required to comply with any law, regulation or stock exchange rule and no such change may adversely affect any award previously granted without the consent of the recipient. The 2004 Plan will expire on the tenth anniversary of the date that it was approved by the shareholders.

~~2003 Stock Option Plan~~

~~In September 2003,~~ our board of directors, ~~adopted~~ our 2003 Stock Option Plan, or 2003 Plan, which governs an aggregate of 41,191,000 stock option grants as of December 31, 2005. The 2003 Plan was terminated upon the adoption of the 2004 Plan. All future stock incentive awards will be granted pursuant to the 2004 Plan or other plans that are adopted from time to time. Option grants made under the 2003 Plan prior to its termination are still effective and governed by the 2003 Plan. A general description of the terms of the 2003 Plan is set forth below.

~~Types of Awards.~~~~All awards made under the 2003 Plan prior to its termination were options to purchase our ordinary shares.~~

~~Plan Administration.~~~~Same as the 2004 Plan.~~

~~Eligibility.~~~~Same as the 2004 Plan.~~

~~Acceleration of Awards upon Corporate Transactions.~~The 2003 Plan provides for acceleration of awards upon the occurrence of specified corporate transactions. In the event of certain corporate transactions, including specified types of reorganizations and acquisition transactions, each outstanding award granted under the 20032010 Plan will ~~automatically become fully vested and exercisable and be released from any restrictions on transfer (other than transfer restrictions applicable to the award) and repurchase~~terminate in December 2020. Our board of directors may amend, suspend, or forfeiture rights immediately prior to the specified effective date of the corporate transaction, unless the award is assumed or replaced by the successor company or its parent company in connection with the corporate transaction. Upon consummation of the corporate transaction, each outstanding award will terminate ~~unless the award is assumed by the successor company or its parent company.~~

~~Awards.~~~~Awards under the 2003~~our 2010 Plan are evidenced by an award agreement which contains, among other things, provisions concerning exercisability and forfeiture upon termination of employment or consulting arrangement (by reason of death, disability or otherwise) as have been determined by our board. In addition, the award agreement also specifies whether the option constitutes an ISO or a NSO and may, but need not, include a provision whereby a grantee at any ~~time during his or her employment with us may exercise any part or all of the award prior to full vesting of the award.~~

time;~~Exercise or Purchase Price and Term of Awards.~~providedAn award may be exercised when a holder delivers a notice of such exercise to us. The exercise or purchase price must be paid at the time of exercise in full by cash, check or whole ordinary shares with a fair market value at least equal to the option price (or in another appropriate manner approved by us, such as in a combination of cash and whole ordinary shares or, with respect to options, by cashless exercise through a broker-dealer). To the extent permitted by the Sarbanes-Oxley Act of 2002, the 2003 Plan also allows for the payment of the exercise price with a promissory note.

~~The exercise prices for the awards granted under the 2003 Plan are specified in the applicable award agreements.~~

,~~Transferability.~~howeverUnder the 2003 Plan, awards may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised during the lifetime of the grantee only by the grantee.

~~Termination of Service.~~The period following the termination of a grantee’s employment or service with us during which the grantee can exercise his or her option, if any, is provided in the award agreements for all outstanding option grants, and it cannot end later than the last day of the original term of the award. In the event a grantee’s employment or service with us is terminated without cause (as defined in the 2003 Plan), any awards which have become exercisable prior to the time of termination will remain exercisable for thirty days from the date of termination (unless a longer period of time not exceeding three months is determined by the plan administrator). In the event a grantee’s employment or service with us is terminated for cause, the grantee’s right to exercise his or her options will terminate concurrently with the termination of the grantee’s service. If termination is caused by death or disability, any awards which have become exercisable prior to the time of termination, will remain exercisable for six months from the date of termination.

~~2002 Incentive Compensation Plan~~

~~In July 2002,~~that our board of directors ~~adopted our 2002 Incentive Compensation Plan, or 2002 Plan, which governs an aggregate of 45,840,700 stock option grants as of December 31, 2005. The 2002 Plan was terminated upon~~must first seek the ~~adoption~~approval of the ~~2003 Plan. Option grants made under~~participants of our 2010 Plan if such amendment, suspension or termination would materially adversely affect the ~~2002 Plan prior~~rights of participants with respect to ~~its termination are still effective and governed by the 2002 Plan. The 2002 Plan is substantially identical to the 2003 Plan in all material respects.~~any of their existing awards.

C. Board Practices

~~For information regarding~~Our Board of Directors currently consists of nine members, including three independent directors who satisfy the terms of our current directors and the period during which our officers and directors have served in their respective positions, please refer to Item 6.A. “— Directors and Senior Management” above.

~~Our board of directors held 4 regular meetings and took action on 22 occasions by unanimous written consent during 2007. All~~“independence” requirements of the Nasdaq Stock Market Rules and meet the criteria for “independence” under Rule 10A-3 under the Securities Exchange Act of 1934, as amended, or the Exchange Act. This home country practice of ours was established by our Board of Directors by reference to similarly situated issuers and differs from the Nasdaq Stock Market Rules that require the board to be comprised of a majority of independent directors.

There are, however, no specific requirements under Cayman Islands law that the board must be comprised of a majority of independent directors.

We do not have regularly scheduled meetings at which only independent directors ~~who were serving in office during 2007 attended~~are present, or executive sessions. This home country practice of ours was established by our Board of Directors by reference to similarly situated issuers and differs from the Nasdaq Stock Market Rules that require the company to have regularly scheduled executive sessions at ~~least 75%~~which only independent directors are present. There are, however, no specific requirements under Cayman Islands law on executive sessions.

We have established three committees under our Board of Directors: an audit committee, a compensation and leadership development committee and a corporate development and finance committee. We have adopted a charter for each of the three committees. Each committee’s composition and functions are described below.

The members of the audit committees are Bruno Wu, Tongyu Zhou and Wenwen Niu, all of whom satisfy the ~~meetings~~“independence” requirements of the Nasdaq Stock Market Rules and meet the criteria for “independence” under Rule 10A-3 under the Exchange Act. In addition, our board of directors and its committees on which such director served after becoming a member of our board of directors. We have no specific policy with respect to director attendance at our annual general meetings of shareholders, and three of our directors attended the annual general meeting of shareholders held on August 30, 2007. Our board has determined that ~~four of our current board members, Messrs. Mao, Shringla, Powrie and Zhang, are “independent”~~Bruno Wu qualifies as ~~defined under applicable NASDAQ rules.~~

~~The board has three committees: the~~an audit committee financial expert under the ~~compensation committee~~applicable SEC rules and ~~the nominating committee.~~

~~In 2007, our~~as a financially sophisticated audit committee ~~held four formal meetings. Our~~member under Rule 5605(c)(2)(A) of the Nasdaq Stock Market Rules. The audit committee ~~charter pursuant to which the audit committee is~~will be responsible for, among other things, overseeing the accounting and financial reporting processes of our company, including the appointment, compensation and oversight of the work of our independent auditors, monitoring compliance with our accounting and financial policies and evaluating management’s procedures and policies ~~relative~~relating to the adequacy of our internal accounting ~~controls.~~controls, and overseeing the performance of our internal audit function.

~~Our~~The members of the compensation and leadership development committee ~~held two meetings in 2007.~~are Tianqiao Chen, Danian Chen and Grace Wu. The compensation ~~committee’s functions are to review~~ and ~~make~~leadership development committee is responsible for, among other things, reviewing and making recommendations to our board of directors regarding our compensation policies and all forms of compensation to be provided to our executive officers and ~~directors.~~directors, and identifying potential candidates for, and selecting members of our senior management team.

~~No interlocking relationships have existed between our board~~The members of ~~directors or compensation~~the corporate development and finance committee are Tianqiao Chen, Bruno Wu and ~~the board of directors or compensation committee of any other company.~~

~~Our nominating committee held two meetings in 2007.~~Grace Wu. The ~~nominating~~corporate development and finance committee is responsible for, among other things, reviewing and approving any proposed issues of debt including public and private debt, credit facilities with banks and others, and other credit arrangements such as capital and operating leases, and reviewing and approving any contract between us and Shanda Interactive or any affiliate of Shanda Interactive.

None of our directors have service contracts that provide for benefits upon termination of employment.

Duties of Directors

Under Cayman Islands law, our directors have a fiduciary duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise the ~~assessment~~skills they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association, as amended from time to time. A shareholder has the right to seek damages if a duty owed by our directors is breached.

The functions and powers of our Board of Directors include, among others:

convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings;

declaring dividends and distributions;

appointing officers and determining the term of office of officers;

exercising the borrowing powers of our company and mortgaging the property of our company; and

approving the transfer of shares of our company, including the registering of such shares in our share register.

Interested Transactions

A director may vote in respect of any contract or transaction in which he or she is interested,providedthat the nature of the ~~performance~~interest of ~~the board of~~any directors in such contract or transaction is disclosed by him or her at or prior to its consideration and ~~considering and making recommendations to the board of directors with respect to the nominations or elections of directors.~~

The audit, compensation and nominating committees operate under written charters setting forth the functions and responsibilities of each such committee. Copies of those charters are available on our website at~~www.hurray.com~~. The members of our audit, compensation and nominating committees are Robert Mao, Suberna Shringla and Alan Powrie, each of whom satisfies the “independence” and financial literacy requirements of the National Association of Securities Dealers’ listing standards. Our board of directors has determinedany vote in that ~~Alan Powrie is an “audit committee financial expert” as that term is defined in Item 16A of Form 20-F.~~matter.

D. Employees

As of December 31, ~~2007, 2006~~2010, 2009 and ~~2005~~2008, we had ~~444, 471~~816, 230 and ~~535~~328 full-time employees, respectively.

The following table summarizes the functional distribution of our full-time employees as of December 31, 2007 after we restructured of our business lines as described in Item 4.B. “Information About the Company—Business Overview—Introduction.”


~~Department~~	~~2007~~
~~WVAS Business Unit (Wireless Value-Added Services)~~		~~292~~
~~E-Marketing Business Unit~~		40
~~Digital Media Business Unit~~		13
~~Offline Channel Business Unit~~		16
~~Marketing and New Business Development~~		12
~~Finance and Operation Planning~~		38
~~Human Resources and Administrative~~		24
~~Legal and Corporate Development~~		5
~~Office of Chief Executive Officer~~		4

~~Total~~		~~444~~

~~In addition, our affiliated music companies (Freeland Music, Huayi Brothers Music, New Run and Secular Bird) had an aggregate of approximately 173 employees as of December 31, 2007.~~

None of our personnel are represented under collective bargaining agreements. ~~We consider our relations with our employees to be good.~~

E. Share Ownership

The following table sets forth certain information known to us with respect to the beneficial ownership as of ~~May 30, 2008~~June 1, 2011 by:

	•		~~all persons who are beneficial owners of five percent or more of our ordinary shares,~~

	•		~~our current executive officers and directors, and~~

	•		~~all current directors and executive officers as a group.~~

all persons who are beneficial owners of five percent or more of our ordinary shares;

our current executive officers and directors; and

all current directors and executive officers as a group.

As of ~~May 30, 2008, 2,186,509,840~~June 1, 2011, 3,481,336,198 of our ordinary shares were outstanding. The amounts and percentages of ordinary shares beneficially owned are reported on the basis of regulations of the USU.S. Securities and Exchange Commission, or SEC, governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares ~~“voting~~ power~~” which includes the power to vote or~~ to direct the voting ~~of such security,~~ or ~~“investment power,” which includes the power to dispose of or to direct~~ the disposition of ~~such~~the security or to receive the economic benefit of ownership of the security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. These securities, however, are not included in the computation of the percentage ownership of any other person. Under these rules, more than one person may be deemed a beneficial owner of securities as to which such person has no economic interest. Unless otherwise indicated in the footnotes that follow, the parties named below have sole voting and dispositive powers over the shares beneficially owned by them.

Number of Shares
Beneficially Owned
Name Number Percentage
5% and above Shareholders

Venrock Associates 257,377,900 11.8 %
30 Rockefeller Plaza - 5508
New York, NY 10112-0015, United States⁽¹⁾

Executive Officers and Directors⁽²⁾

Pleasant Season Ltd./Qindai Wang⁽³⁾
188,621,660 8.6 %
Jesse Liu⁽⁴⁾
80,443,560 3.7 %
Robert Mao⁽⁵⁾
2,000,000 *
Suberna Shringla — *
Xero Holdings Ltd./Songzuo Xiang⁽⁶⁾
109,510,320 5.0 %
Shudan Zhang 110,712,840 5.0 %
Alan Powrie⁽⁷⁾
600,000 *
Shaojian (Sean) Wang 9,799,900 *
All current directors and executive officers as a group (8 persons) 501,688,280 22.9 %


	Number of Shares
	Beneficially Owned
Name	Number		Percentage
5% and above Shareholders

Shanda Interactive Entertainment Limited⁽¹⁾		3,334,694,582		66.43	%
Granite Global Ventures⁽²⁾		202,047,600		5.80	%

Executive Officers and Directors
Shanyou Li⁽³⁾		274,077,076		7.87	%
Bruno Wu		*		*
Tianqiao Chen		—		—
Danian Chen		*		*
Grace Wu		*		*
Haifa Zhu		*		*
Haibin Qu		*		*
Tongyu Zhou		*		*
Wenwen Niu		*		*
Tony Shen		*		*
Feng Chen		*		*
Liang Zhao		*		*
All current directors and executive officers as a group (13 persons)		276,352,576		7.94	%


*		Upon exercise of all options, this person would beneficially own less than 1% of our outstanding ordinary shares.

(1)		~~Venrock Associates is an investment adviser. This share information is based solely on information filed~~Includes (i) 1,380,848,429 ordinary shares, including ordinary shares represented by ~~such shareholder with~~ADSs, held by Shanda Media Group Limited,a wholly owned subsidiary of Shanda Interactive, (ii) 415,384,615 ordinary shares held by Shanda Interactive, and (iii) 1,538,461,538 ordinary shares issuable to Shanda Media Group Limited, pursuant to the ~~SEC.~~Share Purchase Agreement dated as of April 1, 2011 by and between us and Shanda Media Group Limited.

(2)		~~The address of our executive officers and directors~~Granite Global Ventures is ~~c/o Hurray! Holding Co., Ltd., 15/F, Tower B, Gateway Plaza, No.18 Xia Guang Li, East Third Ring, Chaoyang District, Beijing 100027, People’s Republic of China.~~an investment advisor.

(3)		~~Represents shares beneficially owned by Mr. Wang through a revocable trust in which he retains voting and dispositive power over such shares.~~


~~(4)~~		Includes ~~39,031,780~~(i) 257,106,176 ordinary shares ~~beneficially owned~~held by ~~Mr. Liu’s spouse, Carol Ng, through an irrevocable trust in the name of Olympia Hills Ltd. Ms. Ng retains voting and dispositive power over those shares in trust.~~

~~(5)~~		~~Represents~~Kumelia Holdings Limited, (ii) 8,999,200 ordinary shares ~~issuable upon~~held by Shanyou Li, and (iii) 79,717 American Depositary Shares held by Shanyou Li, each representing 100 ordinary shares. Kumelia Holdings Limited is a British Virgin Islands company, with Li Shanyou holding approximately 88.27% of its equity interest and the other three individuals holding the remaining 11.73% of its equity interest. In addition, each of such three individual shareholders of Kumelia Holdings Limited has granted a power of attorney to the board of directors of Kumelia Holdings Limited to exercise the voting rights with respect to shares held by such individual shareholder. Shanyou Li is currently serving as the sole director on the board of ~~stock options. All~~Kumelia Holdings Limited. Therefore, Shanyou Li may be deemed to share the power to vote and dispose or direct the disposition of ~~the options have an exercise price of $0.0705 per ordinary share and an expiration date of June 30, 2013.~~

~~(6)~~		~~Represents~~257,106,176 ordinary shares ~~beneficially owned~~held by ~~Dr. Xiang through a revocable trust in which he retains voting and dispositive power over such shares.~~

~~(7)~~		~~Represents ordinary shares issuable upon the exercise of stock options. All of the options have an exercise price of $0.1025 per ordinary share and an expiration date of January 1, 2014.~~Kumelia Holdings Limited.

As of ~~May 30, 2008,~~June 1, 2011, based on public filings with the SEC, there are no major shareholders holding 5% or more of our ordinary shares or ADSs representing ordinary shares, except as described above.

As of ~~May 30, 2008,~~June 1, 2011, approximately 802,307,054,100 of our ordinary shares were held in the U.S. by ~~two~~104 holders of record, excluding shares held by our ADS depositary bank, Citibank N.A., on behalf of our ADS holders. Citibank N.A. has advised us that as of that date ~~18,588,867 ADSs,~~15,539,485ADSs, representing ~~1,858,886,700~~1,553,948,500 ordinary shares, were held of record by Cede & Co and ~~one~~103 other registered ~~shareholder.~~shareholders. We have no further information as to ordinary shares held, or beneficially owned, by U.S. persons.

Our company’s major shareholders do not have different voting rights from each other or other shareholders of our company. To our knowledge, except as disclosed above, we are not owned or controlled, directly or indirectly, by another corporation, by any foreign government or by any other natural or legal person or persons, severally or jointly. To our knowledge, there are no arrangements the operation of which may at a subsequent date result in usour undergoing a change in control.

Item 7. Major Shareholders and Related Party Transactions

A. Major Shareholders

Please refer to Item 6.E. “Directors, Senior Management and Employees—Share Ownership.”

B. Related Party Transactions

~~Related Party Transactions~~Contractual Arrangements with our VIEs and their respective shareholders

We ~~currently~~ conduct our ~~business~~operations in China principally through contractual arrangements among our ~~wholly-owned subsidiary,~~wholly owned PRC subsidiaries, Beijing ~~Hurray! Times. To comply with ownership requirements under Chinese law, which impose certain restrictions on foreign companies from investing~~WOFE and Tianjin WOFE and four consolidated affiliated entities in ~~certain industries such as value-added telecommunication~~the PRC, namely, Ku6 Information, Tianjin Ku6, Ku6 Cultural and Internet services, our former wholly-owned subsidiary, Hurray! Times Communications, entered into a series of agreements with our affiliated Chinese entities, Hurray! Solutions, Beijing Cool Young, WVAS Solutions, Beijing Network, Beijing Palmsky, Beijing Hutong, Hengji Weiye Henan Yinshan, Shanghai Saiyu, and Shanghai Magma (which are collectively referred to below as “our affiliated Chinese entities”)Yisheng, and their respective shareholders. Prior to transferring ownership of Hurray! Times Communications to TWM Holding Co. Ltd. as part of our sale of our SSI Business, we caused Hurray! Times Communications to transfer all of its agreements not pertaining to the SSI Business (including the agreements described below) to Beijing Hurray! Times. We hold no ownership interest in such affiliated Chinese entities. In addition, we control Hurray! Digital Media through three of our affiliated Chinese entities, Hurray! Solutions, Beijing Network and Beijing Hutong. See Item 4.C. “Information ~~About~~on the ~~Company —~~ Company—Organizational Structure.”

The principal terms of the agreements with our ~~affiliated Chinese entities~~VIEs and their respective shareholders are described below.

~~Powers~~Loan Agreements:Beijing WOFE has granted loans to the shareholders of ~~Attorney.~~Ku6 Information, including Mr. Shanyou Li, our director and former CEO, with the sole purpose of providing funds necessary for the capital injection of Ku6 Information. The loans to the shareholders of Ku6 Information as of December 31, 2009 and December 31, 2010 were RMB9.0 million. The loans are interest free and the initial terms are 10 years. Tianjin WOFE has granted loans to the shareholders of Ku6 Cultural, including Mr. Shanyou Li, with the sole purpose of providing funds necessary for the capital injection of Ku6 Cultural. The loans to the shareholders of Ku6 Cultural as of December 31, 2010 were RMB1.0 million.

Exclusive Business Cooperation Agreement:~~Each~~This agreement is between Beijing WOFE and Ku6 Information, pursuant to which Ku6 Information agreed to appoint Beijing WOFE as the exclusive provider of technical, consulting and other services to Ku6 Information in return for fees. Beijing WOFE is entitled to have exclusive and proprietary rights and interests in any intellectual properties arising out of or created during the performance of this agreement. The term of this agreement is 10 years. This agreement may be extended with Beijing WOFE’s written confirmation prior to the expiration date.

Exclusive Business Cooperation Agreement:This agreement is between Tianjin WOFE and Tianjin Ku6, pursuant to which Tianjin Ku6 agreed to appoint Tianjin WOFE as the exclusive provider of technical, consulting and other services to Tianjin Ku6 in return for fees. Tianjin WOFE is entitled to have exclusive and proprietary rights and interests in any intellectual properties arising out of or created during the performance of this agreement. The term of this agreement is 10 years. This agreement may be extended with Tianjin WOFE’s written confirmation prior to the expiration date.

Exclusive Consulting and Service Agreement:This agreement is between Tianjin WOFE and Ku6 Cultural. Pursuant to this agreement, Tianjin WOFE has the exclusive right to provide technology support and business consulting services to Ku6 Cultural for a fee.

Business Operation Agreement:This agreement is among Tianjin WOFE, Ku6 Cultural and the shareholders of Ku6 Cultural. This agreement sets forth the rights of Tianjin WOFE to control the actions of the shareholders of ~~our affiliated Chinese entities~~Ku6 Cultural, including Tianjin WOFE’s rights to manage Ku6 Cultural’s daily operation and appoint and remove Ku6 Cultural’s directors.

Exclusive Consulting and Service Agreement:This agreement is between Beijing WOFE and Yisheng. Pursuant to this agreement, Beijing WOFE has ~~irrevocably designated Qindai Wang, in his capacity as General Manager~~the exclusive right to provide technology support and business consulting services to Yisheng for a fee.

Business Operation Agreement:This agreement is among Beijing WOFE, Yisheng and the shareholders of Yisheng. This agreement sets forth the rights of Beijing ~~Hurray! Times,~~WOFE to control the actions of the shareholders of Yisheng including Beijing WOFE’s rights to manage Yisheng’s daily operation and appoint and remove Yisheng’s directors.

Equity Interest Pledge Agreements:The shareholders of Ku6 Information have pledged their respective equity interests in Ku6 Information to Beijing WOFE as ~~attorney-in-fact,~~collateral to secure the obligations of Ku6 Information under the exclusive business cooperation agreement between Beijing WOFE and Ku6 Information. Ms. Dongxu Wang has pledged her equity interests in Yisheng to Beijing WOFE as collateral to secure her obligations under other agreements with Beijing WOFE. The shareholders of Yisheng cannot receive any dividends with respect to their respective equity interests in Yisheng without the approval of Beijing WOFE. The shareholders of Ku6 Cultural have pledged their respective equity interests in Ku6 Cultural to Tianjin WOFE as collateral to secure their obligations under other agreements and the obligations of Ku6 Cultural under the exclusive consulting and service agreement and business operation agreement. The shareholders of Ku6 Cultural cannot receive any dividends with respect to their respective equity interests in Ku6 Cultural without the approval of Tianjin WOFE. Ku6 Information pledged its equity interests in Tianjin Ku6 to Tianjin WOFE as collateral to secure for the obligations of Tianjin Ku6 under the exclusive business cooperation agreement between Tianjin Ku6 and Tianjin WOFE.

Power of Attorney:The shareholders of Ku6 Information and Ms. Dongxu Wang irrevocably appointed Beijing WOFE to vote on their behalf ~~at shareholders meetings~~ on all matters ~~on which~~ they are entitled to vote with respect to Hurray! Solutions, Beijing Cool Young, WVAS Solutions, Beijing Network, Beijing Palmsky, Beijing Hutong, Hengji Weiye, Henan Yinshan, Shanghai Saiyu and Shanghai Magma, as the case may be,on, including matters relating to the transfer of any or all of their respective equity interests in ~~our affiliated Chinese entities~~Ku6 Information and Yisheng, as applicable, and the appointment of the directors, general managers and other senior management of ~~our affiliated Chinese entities.~~Ku6 Information and Yisheng, as applicable. The shareholders of Ku6 Cultural appointed Tianjin WOFE to vote on their behalf on all matters they are entitled to vote on, including matters relating to the transfer of any or all of their respective equity interests in Ku6 Cultural and the appointment of the directors, general managers and other senior management of Ku6 Cultural. Ku6 Information appointed Tianjin WOFE to vote on its behalf on all matters they are entitled to vote on, including matters relating to the transfer of any or all of its equity interests in Tianjin Ku6 and the appointment of the directors, general managers and other senior management of Tianjin Ku6.

Exclusive Call Option Agreements:The shareholders of Ku6 Information grant Beijing WOFE the exclusive and irrevocable right to purchase from them, to the extent permitted under PRC laws and regulations, all of the equity interest in Ku6 Information for a purchase price equal to the amount of the registered capital of Ku6 Information. Beijing WOFE may exercise such option at any time. In addition, Ku6 Information and its shareholders agree that, without Beijing WOFE’s prior written consent, they will not transfer or otherwise dispose the equity interest or declare any dividend. Ku6 Information grants Tianjin WOFE the exclusive and irrevocable right to purchase from it, to the extent permitted under PRC laws and regulations, all of the equity interest in Tianjin Ku6 for an agreed purchase price or such price as permitted under PRC laws and regulations. TianjinWOFE may exercise such option at any time. In addition, Ku6 Information and Tianjin Ku6 agree that without Tianjin WOFE’s prior written consent, they will not transfer or otherwise dispose of the equity interest or declare any dividend.

Equity Disposition Agreement:This agreement is among Beijing WOFE, Yisheng and Ms. Dongxu Wang. Pursuant to this agreement, Beijing WOFE and any third party designated by Beijing WOFE have the right, exercisable at any time during the term of ~~each~~the agreement, if and when it is legal to do so under PRC laws and regulations, to purchase from Ms. Dongxu Wang all or any part of her equity interests in Yisheng at a purchase price equal to the ~~powers~~lowest price permissible by the then-applicable PRC laws and regulations. The agreement is for an initial term of ~~attorney~~20 years and renewable upon Beijing WOFE’s request.

Equity Disposition Agreement: This agreement is ~~ten years. These powers of attorney do not extend to votes by~~among Tianjin WOFE, Ku6 Cultural and the shareholders of ~~our company~~Ku6 Cultural. Pursuant to this agreement, Tianjin WOFE and any third party designated by Tianjin WOFE have the right, exercisable at any time during the term of the agreement, if and when it is legal to do so under PRC laws and regulations, to purchase from the shareholders of Ku6 Cultural all or ~~subsidiaries.~~any part of their equity interests in Ku6 Cultural at a purchase price equal to the lowest price permissible by the then-applicable PRC laws and regulations. The agreement is for an initial term of 20 years and renewable upon Tianjin WOFE’s request.

6182

~~Each such power of attorney by its terms~~Exclusive Intellectual Property Option Agreement: This agreement is ~~valid only for so long as~~between Beijing WOFE and Ku6 Information, pursuant to which Ku6 Information grants Beijing WOFE the ~~designated attorney-in-fact remains the general manager of Beijing Hurray! Times. If the attorney-in-fact ceases~~exclusive and irrevocable right to ~~be the general manager, the power of attorney will terminate automatically and the succeeding general manager shall be designated.~~

~~Operating Agreements.~~~~Through Beijing Hurray! Times, we may provide guarantees to our affiliated Chinese entities of their contracts, agreements or transactions with third parties,~~purchase from Ku6 Information, to the extent permitted under Chinese law. In return, our affiliated Chinese entities have granted us a security interest over all of their assets, including all of their accounts receivable, which have not previously been encumbered by security interests. We also have the right of first refusal with respect to future loan guarantees.PRC laws and regulations, certain intellectual properties. In addition, ~~our affiliated Chinese entities and their shareholders have each agreed~~Ku6 Information agrees that, ~~they~~without Beijing WOFE’s prior written consent, it will not enter into any transaction, or fail to take any action, that would substantially affect their assets, rights and obligations, or business without our prior written consent. They will also appoint persons designated by Beijing Hurray! Times as the directors, officers and other senior management personnel of our affiliated Chinese entities, as well as accept the guidance of Beijing Hurray! Times regarding their day-to-day operations, financial management and the hiring and dismissal of their employees. While Beijing Hurray! Times has the right to terminate all of its agreements with our affiliated Chinese entities iftransfer any of ~~our agreements with them expires or~~such intellectual properties to any third party. The agreement is ~~terminated, our affiliated Chinese entities may not terminate the operating agreements during the term of the agreements, which is ten years.~~

~~Exclusive Technical Consulting and Services Agreements.~~Through Beijing Hurray! Times, we provide our affiliated Chinese entities with exclusive technical support and related consulting and information services. We are the exclusive provider of these services. Thefor an initial term of ~~these agreements is ten years. The service fees are~~10 years and will be automatically renewable for another 10 years unless Beijing WOFE provides written notice requesting no extension.

Our Asset Transactions with Shanda Interactive

On June 1, 2010, we (formerly called “Hurray! Holding Co., Ltd.”) and Shanda Interactive entered into a definitive agreement (the “Master Transaction Agreement”) under which we agreed to acquire certain online audio assets from Shanda Interactive in exchange for 415,384,615 newly issued ordinary shares in us and concurrently, Shanda Interactive agreed to acquire our recorded music and wireless value-added services businesses in exchange for an aggregate of US$36,944,267 in cash, subject to adjustment ~~from time to time~~ based on the May 31, 2010 cash balances of the businesses being transferred to Shanda Interactive. On August 17, 2010, we and Shanda Interactive completed the asset transactions contemplated under the Master Transaction Agreement. We issued 415,384,615 ordinary shares to Shanda Interactive in exchange for its 75% interest in an online audio business and issued 138,461,539 ordinary shares to the non-controlling shareholder in exchange for the remaining 25% interest in the online audio business. Shanda Interactive acquired our recorded music and wireless value-added services ~~provided to our affiliated Chinese entities, up to amounts equaling all~~businesses in exchange for an aggregate of ~~these entities’ revenues.~~US$37,243,904 in cash.

~~Software Transfer Agreements~~Share Purchase Agreement and ~~Software License Agreements.~~Convertible Bond Purchase Agreement with Shanda Media~~Beijing Palmsky also~~

On April 1, 2011, we entered into ~~agreements~~a Share Purchase Agreement with Shanda Media Group Limited (formerly known as Shanda Music Group Limited), or Shanda Media, a wholly owned subsidiary of Shanda Interactive, pursuant to ~~transfer~~which we agreed to ~~Beijing Hurray! Times its ownership rights~~issue 1,538,461,538 of our ordinary shares at a per share price of US$0.0325 (or US$3.25 per ADS) to Shanda Media.

On April 1, 2011, we entered into a Convertible Bond Purchase Agreement with Shanda Media, pursuant to which we agreed to sell to Shanda Media US$50,000,000 aggregate principal amount of 3% senior convertible bond at face value. The bond will mature in ~~its games software, which Beijing Hurray! Times has licensed back for Beijing Palmsky’s use~~three years after issuance and bear interest at a rate of 3% per annum, payable semi-annually in ~~its operations~~arrears on ~~a non-exclusive basis for a nominal license fee.~~

~~Contracts Relating to the Exclusive Purchase Right of Equity Interest.~~~~Under the Contracts Relating to the Exclusive Purchase Right of Equity Interest among us, our affiliated Chinese entities~~June 30 and ~~each of their shareholders, we or our designee has an exclusive option to purchase from each of their shareholders all or part~~December 31 of each ~~such shareholder’s~~year, commencing December 31, 2011. Beginning six months after issuance and at any time before maturity, the bond will be convertible into our ordinary shares at a price of US$0.03925 per ordinary share (or US$3.925 per ADS).

Proposed Acquisition of Pipi

On April 20, 2011, we entered into an Equity Purchase Agreement with the shareholders of Hangzhou Soushi Networking Co., Ltd., a limited liability company formed under the laws of the PRC (“Pipi”), and Pipi, pursuant to which we agreed to acquire the equity interests in Pipi from its current shareholders in exchange for an aggregate of 2,212,114,257 of our ordinary shares. Shanghai Shanda Networking Co., Ltd., or Shanda Networking, a company formed under the laws of the People’s Republic of China and controlled by Shanda Interactive, holds 32% of the equity interest in ~~our affiliated Chinese entities at book value,~~Pipi. Pursuant to the ~~extent permitted by Chinese law. The term of these agreements is 10 years, renewable by us for an additional 10-year term at our sole discretion.~~

Equity ~~Interests Pledge Agreements.~~Each of the shareholders of our affiliated Chinese entities pledged their respective equity interests in such entities to guarantee the payment of the service fee by our affiliated Chinese entities under the Exclusive Technical Consulting and Services Agreements described above. If any of our affiliated Chinese entities breach any of their obligations under the Equity Interests Pledge Agreements, Beijing Hurray! Times is entitled to sell the equity interests held by such shareholders and retain the proceeds of such sale or require any of themPurchase Agreement, Shanda Networking agreed to transfer ~~to us their~~its 32% equity interest in ~~the applicable affiliated entity.~~

~~We believe that the terms of these agreements are no less favorable~~Pipi to us ~~than~~or one or more of our designees, and in exchange, we ~~could obtain from disinterested parties. The material terms~~agreed to issue 707,876,562 ordinary shares to Shanda Media. However, during our adjourned extraordinary general meeting of shareholders held on June 24, 2011, our shareholders did not approve this transaction. As provided in the Equity Purchase Agreement, either Pipi or us may terminate the Equity Purchase Agreement if the closing of the acquisition is not consummated on or before June 30, 2011.

Other Related Party Transactions

In December 2010, Ku6 Information Technology borrowed RMB 20.0 million (equivalent to $3.0 million) on an unsecured basis from Shanghai Shulong Technology Co., Ltd., a company controlled by Shanda Interactive, through an entrusted loan agreement, which carries an interest rate of 5.05% per year and is due in June 2011. In February 2011, Ku6 Information Technology borrowed RMB 40.0 million (equivalent to $6.0 million) on an unsecured basis from Shanghai Shulong Technology Co., Ltd. through an entrusted loan agreement, which carries an interest rate of 5.05% per year and is due in August 2011. In June 2011, Ku6 Information Technology borrowed RMB 43.0 million (equivalent to $6.6 million) on an unsecured basis from Shanghai Shulong Technology Co., Ltd. through an entrusted loan agreement, which carries an interest rate of 6.31% per year and is due in June 2012.

In December 2010, Ku6 Media Co., Ltd. extended a $3.2 million unsecured loan to Shanda Games Limited, a company controlled by Shanda Interactive, which carries an interest rate of 0.6% per year and is due in June 2011. In January 2011, Ku6 Media Co., Ltd. extended a $6.7 million unsecured loan to Shanda Games Limited, which carries an interest rate of 0.6% per year and is due in July 2011. In June 2011, Ku6 Media Co., Ltd. extended a $7.3 million unsecured loan to Shanda Games Limited, which carries an interest rate of 1.37% per year and is due in May 2012.

In May 2010, Yisheng borrowed RMB10.0 million (equivalent to $1.5 million) from Shanda Computer (Shanghai) Co., Ltd., a company controlled by Shanda Interactive, through entrusted loan agreements, ~~among~~which carry an interest rate of 5.31% per year and were originally due in May 2011. Shanda Computer (Shanghai) Co., Ltd. has agreed to extend the due date of the loan.

Mr. Liang Zhao, our Chief Technology Officer, has entered into an employment agreement with Shengyue (Shanghai) Information Technology Co., Ltd., a company controlled by Shanda Interactive, and is seconded to us by Shengyue (Shanghai) Information Technology Co., Ltd.

In addition, we expect to enter into new agreements, or make amendments to our ~~respective affiliated Chinese entities~~existing agreements, with Shanda Interactive and/or its subsidiaries or affiliates in the ordinary course of business. For example, we have entered, and expect to enter in the future, agreements with Shanda Interactive’s subsidiaries or affiliates to purchase and sell advertising space relating to our or their ~~shareholders are substantially identical except for~~products or services. For the years ended December 31, 2009 and December 31, 2010, we received advertising revenue from companies under common control by Shanda Interactive in the amount of ~~license~~$0.3 million and $0.7 million, respectively, and paid promotion service fees ~~paid~~to companies under common control by ~~each entity. We believe that~~Shanda Interactive in the ~~individual shareholders~~amount of ~~each entity will not receive any personal benefits from these agreements, except as shareholders~~nil and $0.4 million, respectively. See note 12 to our audited consolidated financial statements.

Before we disposed of our ~~company. As a result of the foregoing contractual arrangements,~~recorded music and wireless value-added services businesses, we effectively have financial control over our affiliated Chinese entities through our security interests over their assets, our ability to receive up to all of their revenue and our other rights described above. In turn, the general manager of Beijing Hurray! Times (currently Qindai Wang), who, as a matter of Chinese law, is subject to the direction of Beijing Hurray! Times’ board of directors, maintains control over all voting matters involving our affiliated Chinese entities.

~~We have also entered into~~had certain agreements with Huayi Brothers Music and Freeland Music for online and offline distribution of music ~~content which are described under Item 4.B. “Business Overview — Product and Content Development — Music Production.”~~

content. As part of the acquisition agreements for the purchase of Huayi Brothers Music, ~~and~~ Freeland Music and New Run Entertainment, we agreed to use the existing distribution and CD manufacturing operations, where appropriate, owned by the minority shareholders, or their related parties, of these companies. In addition, these parties may use the music or artists of Huayi Brothers Music, ~~and~~ Freeland Music or New Run Entertainment and make royalty and other payments to Huayi Brothers Music, Freeland Music or Freeland Music. The term of such agreements is one year although such agreements may be extended by the mutual agreement of both parties. During 2007, we recognized revenues of $645,134 and made payments under these agreements of $96,725.New Run Entertainment. See note 12 to our audited consolidated financial statements.

6284

~~C. Interests of Experts and Counsel~~

~~Not applicable.~~

Item 8. Financial Information

A. Consolidated Statements and Other Financial Information

See Item 18. “Financial Statements” for our audited consolidated financial statements filed as part of this annual report on Form 20-F.

~~A.7~~ Legal Proceedings

From time to time, we have been involved in litigation relating to copyright infringement and other matters in the ordinary course of our business. We ~~are~~have accrued a $748,299 litigation provision in our consolidated balance sheets as of December 31, 2010. The provision was based on judgments handed down by the court and out-of-court settlements as of or after December 31, 2010 but related to alleged copyright infringement arising on or before the acquisition of Ku6, and also our best estimation according to the historical actual compensation amount per video paid by Ku6 in prior years and the advice from our PRC counsel. Our video content library may contain content in which others may claim to own copyrights or image rights or which others may claim to be defamatory or objectionable. We believe that the ongoing legal proceedings against us will not ~~currently~~result in material liability to us nor will they have a ~~party~~material adverse effect on our business, financial condition or results of operations. Regardless of the outcome, however, any litigation can result in substantial costs and diversion of management resources and attention.

Although we have implemented standard procedures to ~~any material~~delete video content, especially our user-generated content, that allegedly infringes on intellectual property rights of third parties, we have limited control over the nature or types of the content posted by our users. The infringement of intellectual property rights by our users may result in litigation against us and ~~are not aware~~harm our business and reputation. See “Risk Factors—Risks Related to Our Business—We have been and expect we will continue to be exposed to intellectual property infringement and other claims, including claims based on content posted on our website, which could be time-consuming and costly to defend and may result in substantial damage awards and/or court orders that may prevent us from continuing to provide certain of ~~any pending or threatened litigation.~~our existing services.”

~~A.8~~ Dividend Policy

We have never declared or paid any dividends on our ordinary shares. We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance operations and for the expansion of our business. Payments of dividends by our subsidiaries in China to our company are subject to restrictions including primarily the restriction that foreign invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents. There are no such similar foreign exchange restrictions in the Cayman Islands.

B. Significant Changes

See Item 5.A “Operating ~~Results — Recent Developments”~~Results—Overview,” “— Discontinued Operations,” “—Acquisition of Online Audio Business from Shanda Interactive” and Item 18 “Financial Statements” for information regarding significant changes to us since December 31, ~~2007.~~2009.

Item 9. The Offer and Listing

Not applicable except for Item 9.A.4. and Item 9.C.

American Depositary Shares, or ADSs, each representing 100 of our ordinary shares, have been listed on the Nasdaq Global Market since February 4, 2005. Our ADSs ~~trade~~were traded under the symbol ~~“HRAY.”~~“HRAY” until August 16, 2010. On August 17, 2010, we changed our name to Ku6 Media Co., Ltd., (“Ku6”) and changed our trading symbol on the Nasdaq Global Market from HRAY to KUTV.

The following table provides the high and low prices for our ADSs on the Nasdaq Global Market for (1) ~~each year since our initial public offering,~~the five most recent full financial years, (2) each quarter in the two most recent full financial years and the ~~most recent quarter~~subsequent period, and (3) each of the most recent six months.

Sales Price
High Low
Annual highs and lows
2005 (February 4, 2005 through December 31, 2005) $ 11.80 $ 7.67
2006 (January 1, 2006 through December 31, 2006) $ 9.71 $ 4.70
2007 (January 1, 2007 through December 31, 2007) $ 6.53 $ 3.05
2008 (January 1, 2008 through May 30, 2008) $ 4.21 $ 2.36

Quarterly highs and lows
First Quarter 2006 $ 9.68 $ 7.51
Second Quarter 2006 $ 9.71 $ 5.22
Third Quarter 2006 $ 6.74 $ 4.70
Fourth Quarter 2006 $ 8.28 $ 5.67
First Quarter 2007 $ 6.53 $ 4.85
Second Quarter 2007 $ 5.62 $ 4.36
Third Quarter 2007 $ 6.04 $ 3.32
Fourth Quarter 2007 $ 6.04 $ 3.05

Sales Price
High Low
First Quarter 2008 $ 4.21 $ 2.36
Second Quarter 2008 (April 1, 2008 through May 30, 2008) $ 3.10 $ 2.61

Monthly highs and lows
December 2007 $ 4.53 $ 3.46
January 2008 $ 4.21 $ 3.11
February 2008 $ 3.52 $ 3.05
March 2008 $ 3.38 $ 2.36
April 2008 $ 3.00 $ 2.61
May 2008 $ 3.10 $ 2.66


	Sales Price
	High		Low

Annual highs and lows
2006	$	9.71	$	4.70
2007	$	6.53	$	3.05
2008	$	4.21	$	1.08
2009	$	7.16	$	0.93
2010	$	8.40	$	2.22

Quarterly highs and lows
First Quarter 2009	$	4.50	$	0.93
Second Quarter 2009	$	4.00	$	0.95
Third Quarter 2009	$	3.95	$	3.25
Fourth Quarter 2009	$	7.16	$	3.85
First Quarter 2010	$	4.21	$	2.22
Second Quarter 2010	$	3.84	$	2.45
Third Quarter 2010	$	5.19	$	2.36
Fourth Quarter 2010	$	8.40	$	4.14
First Quarter 2011	$	5.25	$	2.59

Monthly highs and lows
January 2011	$	5.25	$	4.31
February 2011	$	4.70	$	3.55
March 2011	$	3.97	$	2.59
April 2011	$	8.12	$	3.75
May 2011	$	7.98	$	3.47
June 2011 (through June 24, 2011)	$	4.08	$	2.83

Item 10. Additional Information

A. Share Capital

Not applicable.

B. Memorandum and Articles of Association

~~Please see “Description~~The following are summaries of ~~Share Capital”~~material terms and provisions of our amended and restated memorandum and articles of association, as well as certain provisions of the Cayman Companies Law insofar as they relate to the material terms of our ordinary shares. This summary is not complete and some of the terms in our amended and restated memorandum and articles of association are subject to other rights, restrictions and obligations set out therein, and you should read in full our amended and restated memorandum and articles of association, which was included as Exhibit 3.1 to our registration statement on Form F-1 (Registration No. 333-121987) filed with the SEC on January 12, 2005, the amendment to our amended and restated memorandum and articles of association passed by shareholders by way of a special resolution on October 16, 2009, which was included as ~~amended,~~Exhibit 1.2 to our Form 20-F for the year ended December 31, 2009 (file No. 000-51116) filed with the ~~SEC.~~SEC on April 30, 2010, and the amendment to our amended and restated memorandum and articles of association passed by shareholders by way of a special resolution on June 24, 2011, which is included as Exhibit 1.3 to this Form 20-F.

General

We are a Cayman Islands company and our affairs are governed by our amended and restated memorandum and articles of association, the Cayman Companies Law and the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as that from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities law as compared to the United States, and provides significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in the federal courts of the United States.

The holders of ADSs will not be treated as our shareholders and will be required to surrender their ADSs for cancellation and withdrawal from the depositary facility in which the ordinary shares are held in order to exercise shareholders’ rights in respect of the ordinary shares. The depositary will agree, so far as it is practical, to vote or cause to be voted the amount of ordinary shares represented by ADSs in accordance with the non-discretionary written instructions of the holder of such ADSs.

Directors

Interested Transactions.A director may vote in respect of any contract or transaction in which he or she is interested,provided, however,that the nature of the interest of any director in any such contract or transaction shall be disclosed by him or her at or prior to its consideration and any vote on that matter. A general notice or disclosure to the directors or otherwise contained in the minutes of a meeting or a written resolution of the directors or any committee thereof that a director is a shareholder of any specified firm or company and is to be regarded as interested in any transaction with such firm or company shall be sufficient disclosure, and after such general notice it shall not be necessary to give special notice relating to any particular transaction.

Remuneration and Borrowing.The directors may determine remuneration to be paid to the directors. The directors may exercise all the powers of our company to borrow money and to mortgage or charge our undertaking, property and uncalled capital or any part thereof, and to issue debentures, debenture stock and other securities whether outright or as security for any of our debts, liabilities, or obligations or those of any third party.

Qualifications.There are no membership qualifications for directors. Further, there are no share ownership qualifications for directors unless so fixed by us in a general meeting.

Rights, Preferences and Restrictions of our Ordinary Shares

General.All of our outstanding ordinary shares are fully paid and non-assessable. Certificates representing our ordinary shares are issued in registered form. Our shareholders who are non residents of the Cayman Islands may freely hold and vote their shares.

Dividends.The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors.

Voting Rights.On a poll (if demanded), each ordinary share is entitled to one vote on all matters upon which our ordinary shares are entitled to vote, including the election of directors. Voting at any meeting of shareholders is by show of hands unless a poll is demanded. A poll may be demanded by our Chairman or any other shareholder present in person or by proxy. A quorum required for a meeting of shareholders consists of shareholders who hold at least one-third of our outstanding shares entitled to vote at the meeting present in person or by proxy.

Any ordinary resolution to be made by the shareholders requires the affirmative vote of a simple majority of the votes attaching to our ordinary shares cast in a general meeting, while a special resolution requires the affirmative vote of no less than two-thirds of the votes cast attaching to our ordinary shares. A special resolution is required for matters such as a change of name. Holders of our ordinary shares may, by ordinary resolution, among other things, elect directors, appoint auditors, and increase our authorized share capital.

Liquidation.Without prejudice to the rights of holders of our shares issued upon special terms and conditions, if in a winding up, the assets available for distribution among our shareholders are insufficient to repay all of the paid-up capital, such assets will be distributed so that, as nearly as may be, the losses are borne by our shareholders in proportion to the capital paid up, or which ought to have been paid up, at the commencement of the winding up on the shares held by them respectively. If in a winding up, the assets available for distribution among our shareholders is more than sufficient to repay all of the paid-up capital at the commencement of the winding up, the excess will be distributed among our shareholders in proportion to the capital paid up at the commencement of the winding up on our shares held by them respectively.

Calls on our Ordinary Shares and Forfeiture of our Ordinary Shares.Our board of directors may from time to time make calls upon shareholders in respect of any moneys unpaid on their ordinary shares in a notice served to such shareholders at least 14 days prior to the specified time and place of payment. Our ordinary shares that have been called upon and remain unpaid may be subject to forfeiture.

Redemption and Repurchase of our Ordinary Shares.The Cayman Companies Law provides that a company limited by shares may, if so authorized by its articles of association, issue shares which are to be redeemed or are liable to be redeemed at the option of the company or a shareholder. In addition, such a company may, if authorized to do so by its articles of association, purchase its own shares, including any redeemable shares. At no time may a company redeem or purchase its shares unless they are fully paid. A company may not redeem or purchase any of its shares if, as a result of the redemption or purchase, there would no longer be any member of the company holding shares. Under our amended and restated memorandum of association, we may issue shares that are, or at our option or at the option of the holders are, subject to redemption on such terms and in such manner as we may, before the issue of the shares, determine by special resolution. We may also purchase our own shares, including any redeemable shares, provided that the manner of purchase has been authorized in general meeting.

A Cayman Islands company may redeem or purchase its own shares out of profits, out of the proceeds of a fresh issue of shares made for the purposes of the purchase or, provided the company will remain solvent, out of capital. A payment out of capital by a company for the redemption or purchase of its own shares is not lawful unless, immediately following the date on which the payment is proposed to be made, the company shall be able to pay its debts as they fall due in the ordinary course of business. If and to the extent that a premium is to be paid on the redemption or purchase of a company’s shares, the premium must have been provided for out of the profits of the company or out of the company’s share premium account before or at the time the shares are purchased, or, subject to the same solvency test, out of capital.

Shares with Preferred Rights

Our amended and restated memorandum and articles of association provide for the authorization of issuance of shares with preferred rights. Subject to any direction that may be given by the Company in general meetings, and without prejudice to any special rights previously conferred on the holders of existing shares, the Directors may allot, issue, grant options over or otherwise dispose of shares of the Company, with or without preferred rights or restrictions, whether in regard to dividend, voting, return of capital or otherwise and to such persons, at such times and on such other terms as they think proper. We have no immediate plans to issue any shares with preferred rights. The issuance of any of our shares with preferred rights could provide needed flexibility in connection with possible acquisitions and other corporate purposes. However, the issuance could also make it more difficult for a third party to acquire a majority of our outstanding voting shares or discourage an attempt to gain control of us. In addition, the board of directors, without shareholder approval, can issue shares with preferred rights with voting and conversion rights which could adversely affect the voting power and other rights of the holders of ordinary shares. These shares with preferred rights may be used for a variety of corporate purposes, including future public offerings, to raise additional capital or to facilitate acquisitions. The listing maintenance requirements of the Nasdaq National Market, which apply so long as our ADSs are quoted on that market, require shareholder approval of certain issuances of our securities equal to or exceeding 20% of the then outstanding voting power of all our securities or the then outstanding number of our ordinary shares.

Variations of Rights of Shares

All or any of the special rights attached to any class of shares maybe varied, either with the consent in writing of the holders of three-fourths of the issued shares of that class or with the sanction of a special resolution passed at a general meeting of the holders of the shares of that class.

General Meetings of Shareholders

The directors may, whenever they think fit, and shall, on the requisition of our shareholders holding at the date of the deposit of the requisition not less than one-tenth of our paid-up capital, which as at the date of the deposit carries the right of voting at our general meetings, proceed to convene a general meeting of our Company. If the directors do not, within 21 days from the date of the deposit of the requisition, duly proceed to convene a general meeting, the requisitionists, or any of them representing more than one-half of the total voting rights of all of them, may themselves convene a general meeting, but any meeting so convened shall not be held after the expiration of three months after the expiration of such 21 days.

At least five days’ notice shall be given of an annual general meeting or other general meeting. Every notice shall be exclusive of the day on which its given, or deemed to be given, and of the day for which it is given.

Limitations on the Right to Own Shares

There are no limitations on the right to own our shares, provided that we are prohibited from making any invitation to the public in the Cayman Islands to subscribe for any of our securities.

Limitations on Transfer of Shares

There are no provisions in our amended and restated memorandum or articles of association that would have an effect of delaying, deferring or preventing a change in control and that would operate only with respect to a merger, acquisition or corporate restructuring.

Disclosure of Shareholder Ownership

There are no provisions in our amended and restated memorandum or articles of association governing the ownership threshold above which shareholder ownership must be disclosed.

Changes in Capital

We may, from time to time by ordinary resolution, increase the share capital by such sum, to be divided into shares of such amount, as the resolution shall prescribe. The new shares shall be subject to the same provisions with reference to the payment of calls, lien, transfer, transmission, forfeiture and otherwise as the shares in the original share capital. We may by ordinary resolution:

(a)

consolidate and divide all or any of our share capital into shares of larger amount than our existing shares;

(b)

subdivide our existing shares, or any of them, into shares of smaller amount than is fixed by our amended and restated memorandum of association, subject nevertheless to the provisions of Section 13 of the Cayman Companies Law; or

(c)

cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person.

We may, by special resolution, reduce our share capital and any capital redemption reserve fund in any manner authorized by the Cayman Companies Law.

Differences in Corporate Law

The company law of the Cayman Islands is historically derived, for the most part, from the laws of England, and comprises the provisions of the Cayman Companies Law (2010 Revision), many of which are drawn from pre-1948 Companies Acts of the United Kingdom. Other provisions are original Cayman Islands provisions, some of which relate to a certain class of companies, which are commonly used for the conduct of international business from the Cayman Islands. These provisions create the concept of the “exempted” company, which is a special corporate vehicle, the business and operation of which are required to be conducted mainly outside the Cayman Islands. Decisions of the superior courts of England constitute persuasive authority in the Cayman Islands courts. The Cayman Companies Law differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the United States and their shareholders.

Scheme of Arrangements and Compulsory Acquisition.

Schemes of arrangement are governed by specific statutory provisions under the Cayman Companies Law, whereby such arrangements may be approved by a majority in number representing 75% in value of members or creditors, depending on the circumstances, as are present at a meeting called for such purpose and thereafter sanctioned by the courts. While a dissenting member would have the right to express to the court his view that the transaction for which approval is being sought would not provide the members with a fair value for their shares, the courts are unlikely to disapprove the transaction on that ground alone in the absence of evidence of fraud or bad faith on behalf of management; and if the transaction were approved and consummated, the dissenting member would have no rights comparable to the appraisal rights (i.e., the right to receive payment in cash for the judicially determined value of their shares) ordinarily available, for example, to dissenting members of a United States corporation.

Where an offer is made by a company for the shares of another company and, within four months of the offer, the holders of not less than 90% of the shares which are the subject of the offer accept, the offeror may at any time within two months after the expiration of the said four months, by notice, require the dissenting members to transfer their shares on the terms of the offer. A dissenting member may apply to the court of the Cayman Islands within one month of the notice objecting to the transfer. The burden is on the dissenting member to show that the court should exercise its discretion, which it will be unlikely to do unless there is evidence of fraud or bad faith or collusion, as between the offeror and the holders of the shares who have accepted the offer as a means of unfairly forcing out minority members.

Indemnification. Cayman Islands law does not (other than as set forth hereafter) limit the extent to which a company’s organizational documents may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our amended and restated articles of association provide for indemnification of officers and directors for losses, damages, costs and expenses incurred in their capacities as such, except through their own willful neglect or default.

C. Material Contracts

We have not entered into any material contracts other than in the ordinary course of business and other than those described in Item 4., “Information ~~About~~on the Company,” and Item 7.B., “Related Party Transactions,” or elsewhere in this annual report on Form 20-F.

D. Exchange Controls

Foreign currency exchange regulation in China is primarily governed by the following rules:

Notice on Issues Relating to the Administration of Foreign Exchange in Fundraising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies;

Foreign Currency Administration Rules (1996), as amended, or the Exchange Rules;

Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules; and

the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign Invested Enterprises, or SAFE Circular 142.

	•		~~Foreign Currency Administration Rules (1996), as amended, or the Exchange Rules; and~~

	•		~~Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.~~

Under the Exchange Rules, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Conversion of Renminbi for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is subject to the approval of ~~the~~ SAFE.

Under the Administration Rules, foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from ~~the~~ SAFE. Capital investments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by the PRC Ministry of Commerce, ~~the~~ SAFE and the NDRC.

In October 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fundraising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice 75, which took effect on November 1, 2005. Notice 75 supersedes prior SAFE regulations promulgated in January and April of 2005. In May 2007, SAFE issued the Notice of the State Administration of Foreign Exchange on Operating Procedures Concerning Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice 106. Notices 75 and 106 require PRC residents to register with the relevant local SAFE branch in connection with their establishment or control of an offshore entity established for the purpose of overseas equity financing involving onshore assets or equity interests held by them and direct investment through such an offshore entity in the PRC. The term “PRC residents,” as used in Notice 75, includes not only PRC citizens but also other persons who habitually reside in the PRC for economic benefit. Such PRC residents are required to register with the relevant SAFE branch before establishing or taking control of such an offshore entity and complete amended registrations with the relevant SAFE branch upon: (i) injection of equity interests or assets of an onshore enterprise into the offshore entity; (ii) subsequent overseas equity financing by such offshore entity; or (iii) any material change in the shareholding or capital of the offshore entity, such as changes in share capital, share transfers and long-term equity or debt investments, and providing security. The PRC residents who have already incorporated or gained control of offshore entities that had completed onshore investments in the PRC before Notice 75 took effect must register with the relevant local SAFE branch on or before March 31, 2006. In addition, such PRC residents are required to repatriate into the PRC all of their dividend profits or capital gains from their shareholdings in the offshore entity within 180 days of their receipt of such profits or gains.

The registration and amendment procedures set forth by Notices 75 and 106 are prerequisites for other approval and registration procedures necessary for capital inflow from the offshore entity, such as inbound investment or shareholders’ loans, or capital outflow to the offshore entity, such as the payment of profits or dividends, liquidating distributions, equity sale proceeds or the return of funds upon a capital reduction.

A number of terms and provisions in Notices 75 and 106 remain unclear. Because of uncertainty over how Notices 75 and 106 will be interpreted and implemented, we cannot predict how they will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as remitting dividends and foreign currency-denominated borrowings, may be subject to compliance with requirements of Notices 75 and 106 by the PRC resident holders of our ordinary shares and ADSs. Despite our effort to fully comply with the SAFE regulations, we cannot assure you that we will obtain, or receive waivers from, any necessary approvals or not be found in violation of the SAFE regulations or any other related foreign exchange regulations. In particular, we cannot assure you that we will be able to cause all the present or prospective PRC resident holders of our ordinary shares or ADSs to comply with all SAFE regulations. A failure by the PRC resident holders of our ordinary shares or ADSs to comply with Notices 75 and 106 or our inability to secure required approvals or registrations may subject us to fines or legal sanctions, limit our subsidiaries’ ability to make distributions or pay dividends, restrict our overseas or cross-border investment activities or affect our ownership structure, any of which could affect our business and prospects.

On August 29, 2008, SAFE promulgated the SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency registered capital into Renminbi by restricting how the converted Renminbi may be used. SAFE Circular 142 provides that the Renminbi capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable governmental authority, and may not be used for equity investments within the PRC, unless it is provided for otherwise. In addition, SAFE strengthened its oversight of the flow and use of the Renminbi capital converted from foreign currency registered capital of a foreign-invested company. The use of such Renminbi capital may not be altered without SAFE approval, and such Renminbi capital may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been used. Failure to comply with SAFE Circular 142 could result in liabilities for such PRC subsidiaries under PRC laws for evasion of applicable foreign exchange restrictions, including: (i) being required to take appropriate remedial action, confiscation of any illegal income and being fined up to 30% of the illegal amount involved; (2) in circumstances involving serious violations, a fine of between 30% and 100% of the illegal amount involved shall be imposed on the organization or individual concerned.

E. Taxation

The following summary of the material Cayman Islands, People’s Republic of China and United States federal income tax consequences relevant to the purchase, ownership or sale of our ordinary shares or ADSs is based upon laws and relevant interpretations thereof ~~in effect~~ as of the date of this annual report ~~all of~~on Form 20-F, which are subject to change. The summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to any particular investor depending on its individual circumstances. Accordingly, ~~beneficial owners~~holders of ordinary shares or ADSs should consult their own tax advisors regarding the application of the considerations discussed below to their particular situations and the consequences of the purchase, ownership or sale of our ordinary shares or ADSs, including those arising under U.S. federal estate or gift tax laws, foreign, state, or local laws, and tax treaties.

Cayman Islands Taxation and Exchange Control

Pursuant to Section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, our company has obtained an undertaking from the Governor-in-Council:

(i)

that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciations shall apply to our company or its operations; and

(ii)

in addition, that no tax be levied on profits, income gains or appreciations or which is in the nature of estate duty or inheritance tax shall be payable by our company:

(a)

on or in respect of the shares, debentures or other obligations of our company; or

(b)

by way of withholding, in whole or in part, of any relevant payment as defined in Section 6(3) of the Tax Concessions Law (1999 Revision).

The undertaking for our company is for a period of twenty years starting from May 7, 2002.

The Cayman Islands currently ~~levy~~levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to ~~the company~~us levied by the Government of the Cayman Islands except for stamp duties, which may be applicable on ~~instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands. The Cayman Islands are not party to any double tax treaties.~~instruments. There are no exchange control regulations or currency restrictions in the Cayman Islands.

People’s Republic of China Taxation

On January 1, 2008, the New EIT Law became effective. The New EIT Law includes a provision specifying that legal entities organized outside China will be considered PRC residents for Chinese income tax purposes if their place of effective management or control is within China. If legal entities organized outside China are considered residents for Chinese income tax purposes, they will be subject to the 25% enterprise income tax imposed by the New EIT Law on their worldwide income. Accordingly, if we are deemed to be a PRC tax resident enterprise, our global income will be subject to PRC enterprise income tax at the rate of 25%, which would have a material adverse effect on our financial condition and results of operations.

6492

In addition, dividends paid by us with respect to our ordinary shares or ADS would be subject to a 10% PRC withholding tax, and gains realized by non-PRC holders on the disposition of our ordinary shares or ADSs could be subject to a 10% PRC tax. The implementation rules to the New EIT Law provide that non-resident legal entities will be considered China residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc., resides within China. Under current PRC laws and regulations, it is uncertain whether we would be deemed PRC tax resident enterprises under the New EIT Law.

United States Federal Income Taxation

The following is a summary of the material U.S. federal income tax consequences of the ownership and disposition of ordinary shares or ~~ADSs.~~ADSs by a U.S. Holder. The following ~~discussion~~summary is not exhaustive of all possible tax considerations. This summary is based upon the Internal Revenue Code of 1986, as amended (the “Code”), regulations promulgated under the Code by the U.S. Treasury Department (including proposed and temporary regulations), rulings, current administrative interpretations and official pronouncements of the Internal Revenue Service (the “IRS”), ~~and~~ judicial decisions and the double taxation treaty between the PRC and the United States (the “Treaty”), all as ~~currently in effect~~of the date hereof and all of which are subject to differing interpretations or to change, possibly with retroactive effect. Such change could materially and adversely affect the tax consequences described below. No assurance can be given that the IRS will not assert, or that a court will not sustain, a position contrary to any of the tax consequences described below.

This ~~discussion~~summary does not address state, local, or foreign tax consequences of the ownership and disposition of ordinary shares or ADSs. ~~(See “Cayman Islands Taxation” above).~~ The United States does not have an income tax treaty with the Cayman Islands.

This summary is for general information only and does not address all aspects of U.S. federal income taxation that may be important to a particular holder in light of its investment or tax circumstances or to holders subject to special tax rules, such as: ~~banks;~~certain financial institutions; insurance companies; dealers in stocks, securities, or currencies; traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; entities classified as partnerships for U.S. federal income tax purposes; tax-exempt organizations; real estate investment trusts; regulated investment companies; qualified retirement plans, individual retirement accounts, and other tax-deferred accounts; expatriates of the United States; persons subject to the alternative minimum tax; persons holding ordinary shares or ADSs as part of a straddle, hedge, conversion transaction or other integrated transaction; persons who acquired ordinary shares or ADSs pursuant to the exercise of any employee stock option or otherwise as compensation for services; persons actually or constructively holding 10% or more of our voting stock; and U.S. ~~Holders (as defined below)~~persons whose functional currency is other than the U.S. dollar.

This ~~discussion~~summary is not a comprehensive description of all of the U.S. federal tax consequences that may be relevant with respect to the ownership and disposition of ordinary shares or ADSs. We urge you to consult your own tax advisor regarding your particular circumstances and the U.S. federal income and estate tax consequences to you of owning and disposing of ordinary shares or ADSs, as well as any tax consequences arising under the laws of any state, local, or foreign or other tax jurisdiction and the possible effects of changes in U.S. federal or other tax laws.

This summary is directed solely to persons who hold their ordinary shares or ADSs as capital assets ~~within the meaning of Section 1221 of the Code,~~for U.S. federal income tax purposes, which generally means as property held for investment. For purposes of this ~~discussion,~~summary, the term “U.S. Holder” means a beneficial owner of ordinary shares or ADSs that is, ~~any~~for U.S. federal income tax purposes:

a citizen or resident of the ~~following:~~United States;

	•		~~a citizen or resident of the United States or someone treated as a U.S. citizen or resident for U.S. federal income tax purposes;~~

	•		a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof, or the District of Columbia;

	•		~~an estate, the income of which is subject to U.S. federal income taxation regardless of its source;~~

	•		~~a trust if a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons have the authority to control all substantial decisions of the trust; or~~

	•		~~a trust in existence on August 20, 1996 that has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.~~

a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or the District of Columbia; or

~~The term “Non-U.S. Holder” means a beneficial owner~~

an estate or trust, the income of ~~ordinary shares or ADSs that~~which is ~~not a~~subject to U.S. ~~Holder. As described in “Taxation~~federal income taxation regardless of ~~Non-U.S. Holders” below, the tax consequences to a Non-U.S. Holder may differ substantially from the tax consequences to a U.S. Holder.~~its source.

If a partnership (including for this purpose any entity treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of ordinary shares or ADSs, the U.S. federal income tax consequences to a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. A holder of ordinary shares or ADSs that is a partnership, and the partners in such partnership, should consult their own tax advisors regarding the U.S. federal income tax consequences of the ownership and disposition of ordinary shares or ADSs.

Passive Foreign Investment Company

If we are a PFIC for any taxable year during which a U.S. Holder holds ordinary shares or ADSs, we will generally continue to be treated as a PFIC with respect to ~~such U.S. Holder~~those ordinary shares or ADSs for all succeeding years during which such U.S. Holder holds ~~ordinary shares or ADSs.~~them, regardless of whether we actually continue to be a PFIC. Since we believe that we were a PFIC for 2006, 2007, 2008 and ~~2007,~~2009, if you held ordinary shares or ADSs ~~in 2006 or 2007,~~during those taxable years, we ~~will~~would continue to be treated as a PFIC with respect to ~~you~~those ordinary shares or ADSs for all succeeding years during which you hold ~~ordinary shares or ADSs. Even~~them. Similarly, if you ~~only began holding~~first acquired ordinary shares or ADSs in ~~the current taxable year of 2008, if it turns out that~~2010 and we ~~are~~became a PFIC ~~for 2008,~~in a subsequent year, we ~~will continue to~~would be treated as a PFIC with respect to ~~you~~those ordinary shares or ADSs for all succeeding years during which you hold ~~ordinary shares or ADSs.~~them. You may terminate this deemed PFIC status by electing to recognize gain (which will be taxed under the default ~~tax~~PFIC rules ~~of Section 1291 of the Code~~ discussed ~~above)~~below) as if your ordinary shares or ADSs had been sold on the last day of the last taxable year for which we were a PFIC.

If we are a treated as a PFIC with respect to the ordinary shares or ADSs that you hold, the U.S. federal income tax consequences to you of the ownership and disposition of ordinary shares or ADSs will depend on whether you make ~~an election to treat us as a qualified electing fund (“QEF”) under Section 1295 of the Code (a “QEF Election”) or~~ a mark-to-market ~~election under Section 1296 of the Code (a “Mark-to-Market Election”).~~election. If you owned or own ordinary shares or ADSs while we were or are a PFIC and have not made ~~either~~ a ~~QEF Election or a Mark-to-Market Election,~~mark-to-market election, you will be referred to in this summary as a “Non-Electing U.S. Holder.”

If you are a Non-Electing U.S. Holder, you will be subject to the default ~~tax~~PFIC rules ~~of Section 1291 of the Code~~ with respect to:

	•		any “excess distribution” paid on ordinary shares or ADSs (or by a Lower-tier PFIC to its shareholders that is deemed to be received by a U.S. Holder), which means the excess (if any) of the total distributions received (or deemed received) by you during the current taxable year over 125% of the average distributions received (or deemed received) by you during the three preceding taxable years (or during the portion of your holding period for the ordinary shares or ADSs prior to the current taxable year, if shorter); and

	•		~~any gain recognized on the sale or other taxable disposition (including a pledge) of ordinary shares or ADSs.~~

any gain realized on the sale or other disposition (including a pledge) of ordinary shares or ADSs (or on an indirect disposition of shares by a Lower-tier PFIC).

Under these default tax rules:

	•		~~any excess distribution or gain will be allocated ratably over your holding period for the ordinary shares or ADSs;~~

	•		any excess distribution or gain will be allocated ratably over your holding period for the ordinary shares or ADSs; the amount allocated to the current taxable year and any period prior to the first day of the first taxable year in which ~~we were a PFIC will be treated as ordinary income in the current taxable year;~~

the amount allocated to each of ~~2008, if it turns out that we are a PFIC for 2008, you~~the other years will ~~be required to file IRS Form 8621 for 2008 and for all succeeding years during which we continue to~~ be treated as ~~a PFIC with respect to you.~~ordinary income and taxed at the highest applicable tax rate in effect for that year; and

~~QEF Election~~~~. If you make a QEF Election, you generally~~

the resulting tax liability from any such prior years will ~~not~~ be subject to the ~~default rules~~interest charge applicable to underpayments of ~~Section 1291~~tax.

We do not intend to provide information necessary for U.S. Holders to make a qualified electing fund election, which, if available, could result in a different tax treatment of the ownership and disposition of ordinary shares or ADSs to an electing U.S. Holder.

If you own ordinary shares or ADSs during any year in which we are a PFIC, you must generally file an annual report with respect to us, generally with your federal income tax return for that year.

Since the PFIC rules are complex, you should consult your own tax advisor regarding ~~the availability of,~~them and ~~procedure for making, a Mark-to-Market Election.~~

~~U.S. Federal Income Tax Consequences If We Are Not Treated as a PFIC~~

~~The discussion in “Distributions on Ordinary Shares or ADSs” and “Dispositions of Ordinary Shares or ADSs” below describes~~how they may affect the ~~applicable~~ U.S. federal income tax consequences ~~to a U.S. investor in the event that that we are not treated as a PFIC for U.S. federal income tax purposes. For a discussion~~ of the ~~rules that apply if we are treated as a PFIC, see the discussion in “Passive Foreign Investment Company” above.~~ownership and disposition of ordinary shares or ADSs.

Distributions on Ordinary Shares or ADSs

~~General~~. Subject to the discussion in “Passive Foreign Investment Company” above, if you actually or constructively receive a distribution on ordinary shares or ADSs (other than certain pro rata distributions of ordinary shares), you must include the distribution in gross income as a taxable dividend on the date of your (or in the case of ADSs, the depositary’s) receipt of the distribution, but only to the extent of our current or accumulated earnings and profits, as calculated under U.S. federal income tax principles. Such amount must be included without reduction for any foreign tax withheld. Dividends paid by us ~~generally~~ will not be eligible for the dividends received deduction allowed to corporations with respect to dividends received from certain domestic ~~corporations. Dividends paid by us may~~corporations or ~~may not be eligible~~ for ~~preferential rates applicable to~~the favorable tax rate on certain qualified dividend income ~~as described below.~~received by certain non-corporate holders.

To the extent a distribution exceeds our current and accumulated earnings and profits, it will be treated first as a non-taxable return of capital to the extent of your adjusted tax basis in the ordinary shares or ADSs, and thereafter as capital gain. Preferential tax rates for long-term capital gain may be applicable to non-corporate U.S. Holders.

We do not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, you should expect that a distribution will generally be reported as a dividend, even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.

~~Qualified Dividend Income~~~~. With~~As discussed above in “People’s Republic of China Taxation,” dividends paid with respect to non-corporate U.S. Holders (i.e., individuals, trusts, and estates), for taxable years beginning before January 1, 2011, dividends that are treated as qualified dividend income (“QDI”) are taxable at a maximum tax rate of 15%. However, we believe that we are likely a PFIC for the current taxable year of 2008, and as a result, dividends paid by us will likely not be treated as QDI.

~~Foreign Currency Distributions.~~A dividend paid in foreign currency (e.g., Renminbi) must be included in your income as a U.S. dollar amount based on the exchange rate in effect on the date such dividend is received, regardless of whether the payment is in fact converted to U.S. dollars. If the dividend is converted to U.S. dollars on the date of receipt, you generally will not recognize a foreign currency gain or loss. However, if you convert the foreign currency to U.S. dollars on a later date, you must include in income any gain or loss resulting from any exchange rate fluctuations. The gain or loss will be equal to the difference between (i) the U.S. dollar value of the amount you included in income when the dividend was received and (ii) the amount that you receive on the conversion of the foreign currency to U.S. dollars. Such gain or loss will generally be ordinary income or loss and U.S. source for U.S. foreign tax credit purposes.

~~In-Kind Distributions~~~~. Distributions to you of new~~our ordinary shares or ADSs ~~or rights~~may be subject to ~~subscribe for new~~PRC withholding tax. Subject to applicable limitations, some of which vary depending upon a U.S. Holder’s circumstances and subject to the discussion above regarding concerns expressed by the U.S. Treasury, PRC income taxes withheld from dividends on ordinary shares or ADSs ~~that are received as part of~~at a ~~pro rata distribution to all of our shareholders will~~rate not ~~be subject to U.S. federal income tax. The adjusted tax basis of~~exceeding the ~~new ordinary shares or ADSs or rights so received~~rate provided by the Treaty will be ~~determined by allocating your adjusted tax basis in~~creditable against the old ordinary shares or ADSs between the old ordinary shares or ADSs and the new ordinary shares or ADSs or rights received, based on their relative fair market values on the date of distribution. However, in the case of a distribution of rights to subscribe for ordinary shares or ADSs, the adjusted tax basis of the rights will be zero if the fair market value of the rights is less than 15% of the fair market value of the old ordinary shares or ADSs on the date of distribution and you do not make an election to determine the adjusted tax basis of the rights by allocation as described above. Your holding period for the new ordinary shares or ADSs or rights will generally include the holding period for the old ordinary shares or ADSs on which the distribution was made.

~~Foreign Tax Credits.~~~~Subject to certain conditions and limitations, any foreign taxes paid on or withheld from distributions from us and not refundable to you may be credited against your~~U.S. Holder’s U.S. federal income tax ~~liability or, alternatively, may be deducted from your taxable income. This election is made on a year-by-year basis and applies to all foreign~~liability. PRC taxes ~~paid by you or~~ withheld ~~from you that year.~~

~~Distributions will constitute foreign source income for foreign tax credit limitation purposes. The foreign tax credit limitation is calculated separately with respect to two specific classes~~in excess of ~~income. For this purpose, distributions characterized as dividends distributed by us will generally constitute “passive category income” or, in~~ the ~~case of certain U.S. Holders, “general category income.” Special limitations may apply if a dividend is treated as QDI (as defined above).~~

~~Special rules may apply to electing individuals whose foreign source income during~~rate applicable under the ~~taxable year consists entirely of “qualified passive income” and whose creditable foreign taxes paid or accrued during the taxable year do not exceed $300 ($600 in the case of a joint return).~~

In certain circumstances, a U.S. Holder that (i) has held ordinary shares or ADSs for less than a specified minimum period during which it is not protected from risk of loss, (ii) is obligated to make payments related to the dividends, or (iii) holds ordinary shares or ADSs in arrangements in which the U.S. Holder’s expected economic profit, after foreign taxes, is insubstantial,Treaty will not be ~~allowed~~eligible for credit against a ~~foreign~~U.S. Holder’s federal income tax ~~credit for foreign taxes imposed on dividends paid on ordinary shares or ADSs.~~

~~Since the~~liability. The rules governing foreign tax credits are complex, ~~you~~and U.S. Holders should consult ~~your own~~their tax ~~advisor~~advisors regarding ~~the availability of foreign tax credits in your particular circumstances.~~

The U.S. Treasury has expressed concerns that parties to whom ADSs are pre-released may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. Holders of ADSs. Such actions would also be inconsistent with the claiming of the preferential tax rates applicable to QDI, as defined above. Accordingly, the creditability of foreign taxes ~~and the availability of such preferential tax rates could be affected by future actions that may be taken by the U.S. Treasury or parties to whom ADSs are pre-released.~~in their particular circumstances.

Dispositions of Ordinary Shares or ADSs

Subject to the discussion in “Passive Foreign Investment Company” above, you generally will ~~recognize~~realize taxable gain or loss ~~realized~~ on the sale or other ~~taxable~~ disposition of ordinary shares or ADSs equal to the difference between the U.S. dollar value of (i) the amount realized on the disposition (i.e., the amount of cash plus the fair market value of any property received), and (ii) your adjusted tax basis in the ordinary shares or ADSs. Such gain or loss will be capital gain or loss.

If you have held the ordinary shares or ADSs for more than one year at the time of disposition, such capital gain or loss will be long-term capital gain or loss. Preferential tax rates for long-term capital gain (currently, with a maximum rate of 15% for taxable years beginning before January 1, ~~2011)~~2013) will apply to non-corporate U.S. Holders. If you have held the ordinary shares or ADSs for one year or less, such capital gain or loss will be short-term capital gain or loss, taxable as ordinary income at your marginal income tax rate. The deductibility of capital losses is subject to limitations.

~~Generally, any~~

As discussed above in “People’s Republic of China Taxation,” gains realized on the disposition of our ordinary shares or ADSs could be subject to PRC tax. Any gain or loss recognized by a U.S. Holder on a disposition of our ordinary shares or ADSs will ~~not give rise to foreign source~~generally be treated as U.S.-source income or loss for ~~U.S.~~ foreign tax credit limitation purposes. A U.S. Holder that is eligible for the benefits of the Treaty may be able to elect to treat disposition gain that is subject to PRC taxation as foreign-source gain and claim a credit in respect of the tax. The rules governing foreign tax credits are complex, and U.S. Holders should consult their tax advisors regarding the creditability of foreign taxes in their particular circumstances.

You should consult your own tax advisor regarding the U.S. federal income tax consequences if you receive currency other than U.S. dollars upon the ~~disposition of ordinary shares or ADSs.~~

~~Since the PFIC rules are complex, you should consult your own tax advisor regarding them and how they may affect the U.S. federal income tax consequences of the ownership and~~ disposition of ordinary shares or ADSs.

Information Reporting and Backup Withholding

Generally, information reporting requirements will apply to distributions on ordinary shares or ADSs or proceeds from the disposition of ordinary shares or ADSs paid within the United States (and, in certain cases, outside the United States) to a U.S. Holder unless such U.S. Holder is an exempt ~~recipient, such as a corporation.~~recipient. Furthermore, backup withholding (currently at 28%) may apply to such amounts unless such U.S. Holder (i) is an exempt recipient that, if required, establishes its right to an exemption, or (ii) provides its taxpayer identification number, certifies that it is not currently subject to backup withholding, and complies with other applicable requirements. A U.S. Holder may generally avoid backup withholding by furnishing a properly completed IRS Form W-9.

Backup withholding is not an additional tax. ~~Rather, amounts~~Amounts withheld under the backup withholding rules may be credited against your U.S. federal income tax liability. Furthermore, you may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS and furnishing any required information in a timely manner.

~~TAXATION OF NON-U.S. HOLDERS~~

~~Distributions on Ordinary Shares or ADSs~~

~~Subject~~For taxable years beginning after March 18, 2010, new legislation requires certain U.S. Holders who are individuals to ~~the discussion in “Information Reporting and Backup Withholding” below, as~~report information relating to stock of a ~~Non-U.S. Holder, you generally will not be~~non-U.S. person, subject to ~~U.S. federal income tax, including withholding tax, on distributions received on ordinary shares or ADSs, unless the distributions are effectively connected with your conduct of a trade or business~~certain exceptions (including an exception for stock held in ~~the United States and (if an applicable income tax treaty so requires) attributable to a permanent establishment that you maintain in the United States.~~

~~If distributions are effectively connected with~~custodial accounts maintained by a U.S. trade or business and (if applicable) attributable to a U.S. permanent establishment, you generally will be subject to tax on such distributions in the same manner as a U.S. Holder, as described in “Taxation offinancial institution). U.S. Holders ~~- Distributions~~are urged to consult their tax advisers regarding the effect, if any, of this legislation on Ordinary Shares or ADSs” above. In addition, any such distributions received by a corporate Non-U.S. Holder may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.

~~Dispositions of Ordinary Shares or ADSs~~

~~Subject to the discussion in “Information Reporting~~their ownership and ~~Backup Withholding” below, as a Non-U.S. Holder, you generally will not be subject to U.S. federal income tax, including withholding tax, on any gain recognized on a sale or other taxable~~ disposition of ordinary shares or ADSs, unless (i) the gain is effectively connected with your conduct of a trade or business in the United States and (if an applicable income tax treaty so requires) attributable to a permanent establishment that you maintain in the United States, or (ii) you are an individual and are present in the United States for at least 183 days in the taxable year of the disposition, and certain other conditions are met.

If you meet the test in clause (i) above, you generally will be subject to tax on any gain that is effectively connected with your conduct of a trade or business in the United States in the same manner as a U.S. Holder, as described in “Taxation of U.S. Holders — Dispositions of Ordinary Shares or ADSs” above. Effectively connected gain realized by a corporate Non-U.S. Holder may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.

~~If you meet the test in clause (ii) above, you generally will be subject to tax at a 30% rate on the amount by which your U.S. source capital gain exceeds your U.S. source capital loss.~~

~~Information Reporting and Backup Withholding~~

Payments to Non-U.S. Holders of distributions on, or proceeds from the disposition of, ordinary shares or ADSs are generally exempt from information reporting and backup withholding. However, a Non-U.S. Holder may be required to establish that exemption by providing certification of non-U.S. status on an appropriate IRS Form W-8.

Backup withholding is not an additional tax. Rather, amounts withheld under the backup withholding rules may be credited against your U.S. federal income tax liability. Furthermore, you may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS and furnishing any required information in a timely manner.

~~Enforcement of Civil Liabilities~~

~~We are incorporated in the Cayman Islands because of the following benefits found there:~~

	•		~~political and economic stability;~~

	•		~~an effective judicial system;~~

	•		~~a favorable tax system;~~

	•		~~the absence of exchange control or currency restrictions; and~~

	•		~~the availability of professional and support services.~~

~~However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include:~~

~~(1) The Cayman Islands has a less developed body of securities laws as compared to the United States and provides significantly less protection to investors; and~~

~~(2) Cayman Islands companies may not have standing to sue before the federal courts of the United States.~~

Our constituent documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders be arbitrated.

A substantial portion of our current operations is conducted in China through our wholly-owned subsidiaries which are incorporated in China. All or most of our assets are located in China. We have appointed CT Corporation System, 111 Eighth Avenue, New York, NY 10011, as our agent upon whom process may be served in any action brought against us under the securities laws of the United States. A majority of our directors and officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

Appleby, our counsel as to Cayman Islands law, has advised us and we are of the understanding as to Chinese law, that there is uncertainty as to whether the courts of the Cayman Islands or China would:

(1) recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or

(2) entertain original actions brought in the Cayman Islands or China against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

Appleby has further advised us that a final and conclusive judgment in the federal or state courts of the United States under which a sum of money is payable, other than a sum payable in respect of taxes, fines, penalties or similar charges, may be subject to enforcement proceedings as a debt in the courts of the Cayman Islands under the common law doctrine of obligation.

We are further of the understanding that the recognition and enforcement of foreign judgments are provided for under Chinese Civil Procedures Law. Chinese courts may recognize and enforce foreign judgments in accordance with the requirements of Chinese Civil Procedures Law based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions.ADSs.

F. Dividends and Paying Agents

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

We have ~~previously~~filed this annual report, including exhibits, with the SEC. As allowed by the SEC, in Item 19 of this annual report, we incorporate by reference certain information we filed with the ~~Commission a registration statement on Form F-1 and prospectus, and a registration statement on Form F-6, under~~SEC. This means that we can disclose important information to you by referring you to another document filed separately with the ~~Securities Act~~SEC. The information incorporated by reference is considered to be part of ~~1933, as amended, with respect to our ordinary shares represented by ADSs, as well as the ADSs.~~this annual report.

We are subject to ~~the~~ periodic reporting and other informational requirements of the ~~Securities~~ Exchange Act ~~of 1934,~~ as ~~amended, or the Exchange Act. Under the Exchange Act,~~applicable to foreign private issuers. Accordingly, we ~~are~~will be required to file reports, including annual reports on Form 20-F, and other information with the SEC. Specifically, we are required to file annually a Form 20-F no later than six months after the close of each fiscal year, which is December 31 of each year. Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can request copies of these documents upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. The SEC also maintains a website at~~www.sec.govthat contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system.~~ As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. Our annual reports and other information so filed can be inspected and copied at the public reference facility maintained by the SEC at 100 F. Street, N.E., Washington, D.C. 20549. You can request copies of these documents upon payment of a duplicating fee by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facility. Our SEC filings will also be available to the public on the SEC’s Internet Web site athttp://www.sec.gov.

Our financial statements have been prepared in accordance with US GAAP.

We will make available to our shareholders annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with US GAAP.

I. Subsidiary Information

Not applicable.

Item 11. Quantitative and Qualitative Disclosures About Market Risk

Please refer to Item 5. “Operating and Financial Review and Prospects—Quantitative and Qualitative Disclosures About Market Risk.”

Item 12. Description of Securities Other than Equity Securities

~~Not Applicable.~~D. American Depositary Shares

Citibank, N.A. is our Depositary. The depositary’s office is located at 111 Wall Street, New York, NY 10043, U.S.A. Each of our ADSs represents 100 shares of par value US$0.00005 per share.

ADR Fees Payable by Investors

The Depositary collects its fees for delivery and surrender of ADSs directly from investors depositing ordinary shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.


Persons depositing or withdrawing shares must pay:		For:
A fee not in excess of $5.00 per 100 ADSs		• Issuance of ADSs, including issuances resulting from a distribution of ordinary shares or rights or other property

		• Cancellation or withdrawals of ADSs

		• Distributions of securities other than ADSs or rights to purchase additional ADSs

A fee not in excess of $2.00 per 100 ADSs		• Distributions of cash dividends or other cash distributions to holders of ADRs

		• Annual depositary services, except to the extent of any cash dividend fee(s) charged

A fee not in excess of $1.50 per ADR		• Transfers of ADRs

Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or ordinary shares underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes		• As necessary

Any charges, fees or expenses incurred by the depositary or its agents for servicing the deposited securities		• As necessary

Payments Received

For the year ended December 31, 2010, the Depositary made payments on our behalf to third parties of $36,488.13, ($14,722.3 for legal expenses, $3,633.11 for account maintenance and $18,132.72 for proxy expenses) which is deducted from the amount of reimbursements made by the Depositary to us.

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

Not Applicable.

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

Use of Proceeds

The following “Use of Proceeds” information relates to the registration statement on Form F-1 (File No. 333-121987) (the “Registration Statement”) for our initial public offering of 6,880,000 American Depositary Shares, each representing 100 of our ordinary shares, which were sold by us and certain selling shareholders for an aggregate offering price of $70.5 million. Our Registration Statement was declared effective by the SEC on February 3, 2005.

We received net proceeds of approximately $59.4 million from our initial public offering (taking into account underwriting discounts of approximately $4.9 million, transaction expenses of approximately $3.8 million and payments to selling shareholders of approximately $2.4 million). None of the transaction expenses included payments to directors or officers of our company or their associates, persons owning 10% or more of our equity securities or our affiliates.

As of December 31, ~~2007,~~2010, we have used approximately ~~$11.8~~$47.4 million in net proceeds from our initial public offering to acquire certain businesses and fund expenses, primarily for general corporate purposes, product development, software and technology infrastructure products and other capital expenditures. None of the net proceeds from the initial public offering were paid, directly or indirectly, to any of our directors or officers of our company or their associates, persons owning 10% or more of our equity securities or our affiliates.

~~Citigroup Global Markets Inc., Piper Jaffray Co. and Think Equity Partners LLC were the underwriters for our initial public offering.~~

Item 15. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

~~Under~~As of the ~~supervision and with~~end of the ~~participation of management, including~~period covered by this report, our acting chief executive officer and ~~the~~ chief financial officer wehave conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as ~~of December 31, 2007.~~amended. Based on this evaluation, our acting chief executive officer and chief financial officer concluded ~~as of December 31, 2007 that our~~the Company’s disclosure controls and procedures were ~~effective.~~not effective because of the material weaknesses in our internal control over financial reporting described below under “Management’s Report on Internal Control over Financial Reporting.”

Management’s Report on Internal Control over Financial Reporting

Management of Ku6 Media Co., Ltd. (together with its consolidated subsidiaries and variable interest entities, the “Group”) is responsible for establishing and maintaining adequate internal control over financial ~~reporting. Internal~~reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Group’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted ~~accounting principles and~~in the United States of America. The Group’s internal control over financial reporting includes those policies and procedures that

~~(1)~~ (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of ~~a company’s~~the assets

~~(2)~~ of the Group; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of ~~consolidated~~ financial statements in accordance with generally accepted accounting principles, and that ~~a company’s~~ receipts and expenditures of the Group are being made only in accordance with authorizations of ~~a company’s management~~management; and ~~directors, and~~

~~(3)~~(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of ~~a company’s~~the Group’s assets that could have a material effect on the ~~consolidated~~ financial statements.

Changes in Internal Control ~~Over~~over Financial Reporting

Management’s Plan for Remediation of Material Weaknesses

Item 16. Reserved

Item 16A. Audit Committee Financial Expert

Our ~~board~~Board of ~~directors~~Directors has determined that Mr. ~~Alan Powrie~~Bruno Wu qualifies as an ~~Audit Committee Financial Expert as defined by~~audit committee financial expert in accordance with the ~~applicable rules~~terms of Item 16A of Form 20-F. Mr. Wu satisfies the “independence” requirements of the ~~SEC~~NASDAQ Stock Market Rules and ~~that Mr. Powrie is “independent” as defined~~meets the criteria for “independence” under ~~applicable Nasdaq rules.~~Rule 10A-3 under the Exchange Act.

Item 16B. Code of Ethics

We have adopted a Code of Business Conduct which applies to our employees, officers and non-employee directors, including our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. This code is intended to qualify as a “code of ethics” within the meaning of the applicable rules of the SEC.

The Code of Business Conduct is available on our investor relations website at~~www.hurray.com~~http://www.mzcan.com/us/KUTV/irwebsite. To the extent required by law, any amendments to, or waivers from, any provision of the Code of Business Conduct will be promptly disclosed to the public. Copies of the Code of Business Conduct will be provided to any shareholder upon written request ~~to the~~to: Legal Counsel, ~~15/F, Tower B, Gateway Plaza, No.18 Xia Guang Li, East Third Ring,~~Building 6, Zhengtongchuangyi Centre, No. 18, Xibahe Xili, Chaoyang District, Beijing ~~100027,~~100020, People’s Republic of China.

Item 16C. Principal Accountant Fees and Services

Disclosure of Fees Charged by Independent Accountants

The following table summarizes the fees charged by Deloitte Touche Tohmatsu CPA Ltd. (our independent accountants from 2001 to the second quarter of 2009) and PricewaterhouseCoopers Zhong Tian CPAs Limited Company (our independent accountants from the third quarter of 2009 until the present time) for certain services rendered to our company during ~~2007~~2010 and ~~2006.~~2009.

For the year ended
December 31,
2007 2006
Audit fees⁽¹⁾
$ 641,898 $ 315,375
Audit related fees⁽²⁾
$ 6,362 $ 4,696
Tax fees⁽³⁾
— —
All other fees⁽⁴⁾
— —


	For the year ended
	December 31,
	2010		2009
Audit fees (1)	$	1,026,652	$	1,247,687
Audit-related fees (2)		—		—
Tax fees (3)		29,544		—
All other fees (4)		—		41,233


(1)		“Audit fees” means the aggregate fees incurred in each of the fiscal years listed for our calendar year audits and reviews of financial statements.

(2)		“Audit-related fees” means the aggregate fees incurred in each of the fiscal years listed for professional services related to the audit of our financial statements that are not reported under “Audit fees” and consultation on accounting standards or transactions.


(3)		“Tax fees” means the aggregate fees incurred in each of the fiscal years listed for professional services rendered for tax compliance, tax advice and tax planning.

(4)		“All other fees” means the aggregate fees incurred in each of the fiscal years listed for professional services rendered other than those reported under “Audit fees,” “Audit-related fees,” and “Tax fees.”

101

Audit Committee Pre-approval Policies and Procedures

Our audit committee has adopted procedures which set forth the manner in which the committee will review and approve all audit and non-audit services to be provided by Deloitte Touche Tohmatsu CPA Ltd. and PricewaterhouseCoopers Zhong Tian CPAs Limited Company before ~~that firm is~~those firms are retained for such services. The pre-approval procedures are as follows:

	•		Any audit or non-audit service to be provided to us by the independent accountant must be submitted to the audit committee for review and approval, with a description of the services to be performed and the fees to be charged.

	•		The audit committee in its sole discretion then approves or disapproves the proposed services and documents such approval, if given, through written resolutions or in the minutes of meetings, as the case may be.

Any audit or non-audit service to be provided to us by the independent accountant must be submitted to the audit committee for review and approval, with a description of the services to be performed and the fees to be charged.

The audit committee in its sole discretion then approves or disapproves the proposed services and documents such approval, if given, through written resolutions or in the minutes of meetings, as the case may be.

Item 16D. Exemptions from the Listing Standards for Audit Committees

We have not been granted an exemption from the applicable listing standards for the audit committee of our board of directors.

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

Item 16F. Changes in Registrant’s Certifying Accountant

Not applicable

Item 16G. Corporate Governance

Pursuant to the NASDAQ Stock Market Rules, foreign private issuers such as our company may follow home-country practice in lieu of certain NASDAQ corporate governance requirements. We have notified NASDAQ that a majority of our directors do not qualify as independent directors, we do not have a nominations committee, nor is independent director involvement required in the selection of director nominees or in the determination of executive compensation. Issuances of securities in connection with equity-based compensation of officers, directors, employees or consultants will be permitted without obtaining prior shareholder approval and we will post our annual reports to shareholders in lieu of mailing physical copies to record holders and beneficial owners of our ADSs and ordinary shares. This home-country practice of ours differs from Rules 5605(b), (d) and (e), 5635(c) and 5615(a)(3) of the NASDAQ Stock Market Rules, because there are no specific requirements under Cayman Islands law on director independence or on the establishment of a nominations committee, and neither are there any requirements on independent directors’ involvement in the selection of director nominees nor in the determination of executive compensation.

PART III

Item 17. Financial Statements

~~The Company has~~We have elected to provide financial statements pursuant to Item 18.

Item 18. Financial Statements

The consolidated financial statements for ~~Hurray! Holding~~Ku6 Media Co., Ltd. and its subsidiaries are included at the end of this annual report on Form 20-F.

Pursuant to Rule 3-05 of SEC Regulation S-X, financial statements of Ku6 Holding Limited for the year ended December 31, 2008 and 2009, of which we acquired 100% stake in January 2010, are included at the end of this annual report on a voluntary basis, although it is not required for foreign private issuers to be included in Form 20-F.

102

Item 19. Exhibits


Exhibit
Number		Document

	1.1	Amended and Restated Memorandum and Articles of Association of the Company (incorporated herein by reference to Exhibit 3.1 to our registration statement on Form F-1 (Registration No. 333-121987) filed with the Commission on January 12, 2005).

	1.2	Amendment to the Amended and Restated Memorandum and Articles of Association of the Company as adopted on October 16, 2009 (incorporated herein by reference to Exhibit 1.2 to our Form 20-F (file No. 000-51116) filed with the Commission on April 30, 2010).

	1.3	Amendment to the Amended and Restated Memorandum and Articles of Association of the Company as adopted on June 24, 2011.

	2.1	Specimen American Depositary Receipt of ~~the Company (incorporated by reference to Exhibit 4.1 to our registration statement on Form F-6 (Registration No. 333-122004) filed with the Commission on January 13, 2005).~~Ku6 Media Co., Ltd.

	2.2	Specimen Share Certificate ~~of the Company~~ (incorporated herein by reference to Exhibit 4.2 to our registration statement on Form F-1 (Registration No. 333-121987) filed with the Commission on January 12, 2005).

	2.3	Form of Deposit Agreement ~~dated February 9, 2005~~ among ~~the Company,~~us, Citibank N.A. and holders of the American Depositary Receipts issued thereunder (incorporated by reference to Exhibit 3(a) to our registration statement on Form F-6 (Registration No. 333-122004) filed with the Commission on January 13, 2005).

	4.1	English translation of Equity Transfer Agreement dated May 17, 2010, between Hurray! Digital Media Technology Co., Ltd. and Huayi Brothers Media Corporation relating to the equity interest in Beijing Huayi Brothers Music Co., Ltd.

	4.2	Share Purchase Agreement dated November 26, 2009 among Hurray! Holding Co., Ltd., the selling shareholders of Ku6 Holding Limited and Ku6 Holding Limited.

	4.3	Master Transaction Agreement between Shanda Interactive Entertainment Limited and Hurray! Holding Co., Ltd., dated June 1, 2010 (incorporated by reference to Exhibit 99.2 to our press release on Form 6-K (file no. 000-51116) filed with the Commission on June 2, 2010).

	4.4	English Translation of Loan Agreement between Ku6 (Beijing) Information Technology Co., Ltd. and Shanghai Dongfang Branch of China Merchants Bank Stock Limited Company dated December 31, 2010.

	4.5	English Translation of Loan Agreement between Ku6 (Beijing) Information Technology Co., Ltd. and Shanghai Dongfang Branch of China Merchants Bank Stock Limited Company dated February 10, 2011.

	4.6	English Translation of Loan Agreement between Ku6 Media Co., Ltd. and Shanda Games Limited dated December 27, 2010.

	4.7	English Translation of Loan Agreement between Ku6 Media Co., Ltd. and Shanda Games Limited dated January 25, 2011.

	4.8	English translation of Loan Agreement between Ku6 (Beijing) Technology Co., Ltd. and Shanyou Li dated April 11, 2007.

74103


Exhibit
Number		Document
	~~4.1~~	~~Amended and Restated Registration Rights~~
	4.9	English translation of Loan Agreement ~~dated as of June 16, 2003 by and among Hurray! Holding~~between Ku6 (Beijing) Technology Co., Ltd.~~, Fidelity Greater China Ventures Fund L.P., Venture TDF Technology Fund III, L.P., Granite Global Ventures (Q.P.) L.P.~~ and ~~Granite Global Ventures L.P. (incorporated by reference to Exhibit 10.1 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).~~Shanyou Li dated June 23, 2008.

	~~4.2~~4.10	~~2002 Incentive Compensation Plan (incorporated by reference to Exhibit 10.2~~English translation of ~~our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).~~Loan Agreement between Ku6 (Beijing) Technology Co., Ltd. and Hailong Han dated April 11, 2007.

	~~4.3~~4.11	~~2003 Stock Option Plan (incorporated by reference to Exhibit 10.3~~English translation of ~~our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).~~Exclusive Business Cooperation Agreement between Ku6 (Beijing) Technology Co., Ltd. and Ku6 (Beijing) Information Technology Co., Ltd dated June 23, 2008.

	~~4.4~~4.12	English translation of Share Pledge Agreement among Ku6 (Beijing) Technology Co., Ltd., Shanyou Li and Ku6 (Beijing) Information Technology Co., Ltd dated July 8, 2009.

	4.13	English translation of Share Pledge Agreement among Ku6 (Beijing) Technology Co., Ltd., Hailong Han and Ku6 (Beijing) Information Technology Co., Ltd dated April 11, 2007.

	4.14	English translation of Supplementary Agreement to the Share Pledge Agreement among Ku6 (Beijing) Technology Co., Ltd., Hailong Han and Ku6 (Beijing) Information Technology Co., Ltd dated June 23, 2008.

	4.15	English translation of Power of Attorney by Shanyou Li dated July 8, 2009.

	4.16	English translation of Power of Attorney by Hailong Han dated June 23, 2008.

	4.17	English translation of Exclusive Option Agreement among Ku6 (Beijing) Technology Co., Ltd., Shanyou Li and Ku6 (Beijing) Information Technology Co., Ltd dated July 8, 2009.

	4.18	English translation of Exclusive Option Agreement among Ku6 (Beijing) Technology Co., Ltd., Hailong Han and Ku6 (Beijing) Information Technology Co., Ltd dated April 11, 2007.

	4.19	English translation of Exclusive Intellectual Property Option Agreement between Ku6 (Beijing) Technology Co., Ltd. and Ku6 (Beijing) Information Technology Co., Ltd dated June 23, 2008.

	4.20	English translation of Supplementary Agreement to the Exclusive Option Agreement among Ku6 (Beijing) Technology Co., Ltd., Hailong Han and Ku6 (Beijing) Information Technology Co., Ltd dated June 23, 2008.

	4.21	English translation of Loan Agreement between WeiMoSanYi (Tianjin) Technology Co., Ltd. and Shanyou Li dated May 27, 2010.

	4.22	English translation of Loan Agreement between WeiMoSanYi (Tianjin) Technology Co., Ltd. and Xingye Zeng dated May 27, 2010.

	4.23	English translation of Exclusive Consulting And Service Agreement between WeiMoSanYi (Tianjin) Technology Co., Ltd. and Ku6 (Beijing) Cultural Media Co., Ltd dated May 27, 2010.

	4.24	English translation of Business Operation Agreement among WeiMoSanYi (Tianjin) Technology Co., Ltd., Ku6 (Beijing) Cultural Media Co., Ltd., Shanyou Li and Xingye Zeng dated May 27, 2010.

	4.25	English translation of Power of Attorney by Shanyou Li dated May 27, 2010.

	4.26	English translation of Power of Attorney by Xingye Zeng dated May 27, 2010.

	4.27	English translation of Share Pledge Agreement between WeiMoSanYi (Tianjin) Technology Co., Ltd. and Shanyou Li dated May 27, 2010.

104


Exhibit
Number		Document

	4.28	English translation of Share Pledge Agreement between WeiMoSanYi (Tianjin) Technology Co., Ltd. and Xingye Zeng dated May 27, 2010.

	4.29	English translation of Equity Disposition Agreement among WeiMoSanYi (Tianjin) Technology Co., Ltd., Shanyou Li, Xingye Zeng and Ku6 (Beijing) Cultural Media Co., Ltd. dated May 27, 2010.

	4.30	English translation of Transfer Agreement among Shanda Computer (Shanghai) Co., Ltd., Ku6 (Beijing) Technology Co., Ltd. and Dongxu Wang dated August 5, 2010.

	4.31	English translation of Exclusive Consulting And Service Agreement between Ku6 (Beijing) Technology Co., Ltd. and Shanghai Yisheng Network Technology Co., Ltd. dated August 5, 2010.

	4.32	English translation of Business Operation Agreement among Ku6 (Beijing) Technology Co., Ltd., Dongxu Wang and Shanghai Yisheng Network Technology Co., Ltd. dated August 5, 2010.

	4.33	English translation of Power of Attorney by Dongxu Wang dated August 5, 2010.

	4.34	English translation of Share Pledge Agreement between Ku6 (Beijing) Technology Co., Ltd. and Dongxu Wang dated August 5, 2010.

	4.35	English translation of Equity Disposition Agreement among Ku6 (Beijing) Technology Co., Ltd., Dongxu Wang and Shanghai Yisheng Network Technology Co., Ltd. dated August 5, 2010.

	4.36	English translation of Share Proxy Agreement between Ku6 (Beijing) Technology Co., Ltd. and Dongxu Wang dated August 5, 2010.

	4.37	English translation of Exclusive Option Agreement among WeiMoSanYi (Tianjin) Technology Co., Ltd., Ku6 (Beijing) Information Technology Co., Ltd and Tianjin Ku6 Zheng Yuan Information Technology Co., Ltd. dated March 21, 2009.

	4.38	English translation of Exclusive Business Cooperation Agreement between WeiMoSanYi (Tianjin) Technology Co., Ltd., and Tianjin Ku6 Zheng Yuan Information Technology Co., Ltd. dated March 21, 2009.

	4.39	English translation of Equity Interest Pledge Agreement among WeiMoSanYi (Tianjin) Technology Co., Ltd., Ku6 (Beijing) Information Technology Co., Ltd and Tianjin Ku6 Zheng Yuan Information Technology Co., Ltd. dated March 21, 2009.

	4.40	English translation of Power of Attorney by Ku6 (Beijing) Information Technology Co., Ltd dated March 21, 2009.

	4.41	2010 Equity Compensation Plan.

	4.42	Form of Indemnification Agreement (incorporated by reference to Exhibit 10.4 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.5~~4.43	~~Employment~~Share Purchase Agreement ~~by and~~ between ~~Hurray! Holding~~Ku6 Media Co., Ltd. and ~~Qindai Wang~~Shanda Media Group Limited, dated ~~May 5, 2004 (incorporated by reference to Exhibit 10.5 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).~~April 1, 2011.

	~~4.6~~4.44	~~Employment~~Senior Convertible Bond Purchase Agreement ~~by and~~ between ~~Hurray! Holding~~Ku6 Media Co., Ltd. and ~~Shaojian (Sean) Wang on May 23, 2006 (incorporated by reference to Exhibit 4.7of our annual report on Form 20-F (File No. 000-51116) filed with the Commission on June 15, 2007).~~Shanda Media Group Limited, dated April 1, 2011.

	~~4.7~~4.45	~~Translation of~~ Equity ~~Transfer~~Purchase Agreement by and among Zhang Yi, Shang Aiqin, Wang Jiang, Xu Hongyan, Xie Peifu, He Ming and Chen Yixiao dated December 30, 2005 (incorporated by reference to Exhibit 4.13 of our annual report on Form 20-F filed with the Commission on June 15, 2006).

	~~4.8~~	~~Translation of Equity Transfer and Capital Increase Agreement by and among Beijing Huayi Brothers Advertising~~Ku6 Media Co., Ltd., ~~Beijing Qixin Weiye Culture Development~~the shareholders of Hangzhou Soushi Networking Co., Ltd. and ~~Hurray! Digital Music Technology~~Hangzhou Soushi Networking Co., Ltd. dated ~~December 12, 2005 (incorporated by reference to Exhibit 4.15~~as of ~~our annual report on Form 20-F filed with the Commission on June 15, 2006).~~

	~~4.9~~	Translation of Cooperation Agreement by and among Hurray! Solutions, Ltd., Beijing Enterprise Mobile Technology Co., Ltd., Beijing Hutong Wuxian Technology Co., Ltd., Zhong Xiongbing, Guangdong Freeland Movie and Television Production Co., Ltd., Beijing Shiji Freeland Movie and Television Distribution Co., Ltd., Shanghai Hai Le Audio & Video Distribution Co., Ltd. and Hong Kong Freeland Movie Industry Group Co., Ltd. dated November 14, 2005 (incorporated by reference to Exhibit 4.16 of our annual report on Form 20-F filed with the Commission on June 15, 2006).

	~~4.10~~	Translation of Data Service Cooperation Agreement between Beijing Enlight Times Info Co., Ltd and Hurray! Solutions Ltd. (incorporated by reference to Exhibit 10.21 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.11~~	Translation of Contracts in Relation to Maximum Amount of Guarantee between Hua Xia Bank as creditor and each of Hurray! Times Communications (Beijing) Ltd. and Beijing Enterprise Network Technology Co., Ltd. as guarantor dated December 31, 2004 (incorporated by reference to Exhibit 10.23 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.12~~	Translation of Agreement for Transfer of Entitlement to Dividends between Qindai Wang and Hurray! Holding Co., Ltd. dated August 15, 2003 (incorporated by reference to Exhibit 10.24 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.13~~	Translation of Software Assignment Agreement between Hurray! Solutions Ltd. and Hurray! Times Communications (Beijing) Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.27 of our registration statement on Form F-1 (File No. 333 121987) filed with the Commission on January 12, 2005).April 20, 2011.

75105


Exhibit
Number		Document
	~~4.14~~	Translation of Software License Agreement between Hurray! Times Communications (Beijing) Ltd. and Hurray! Solutions Ltd. dated May 5, 2004(incorporated by reference to Exhibit 10.28 of our registration statement on Form F-1 (File No. 333 121987) filed with the Commission on January 12, 2005).

	~~4.15~~	Translation of Letter of Undertaking by Qindai Wang dated May 5, 2004 (incorporated by reference to Exhibit 10.31 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.16~~	Translation of Authorization Agreement by Songzuo Xiang dated May 5, 2004 (incorporated by reference to Exhibit 10.32 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.17~~	Translation of Exclusive Technical Consulting and Services Agreement between Hurray! Times Communications (Beijing) Ltd. and Hurray! Solutions Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.33 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.18~~	Translation of Operating Agreement among Hurray! Times Communications (Beijing) Ltd., Hurray! Solutions Ltd., Qindai Wang and Songzuo Xiang dated May 5, 2004 (incorporated by reference to Exhibit 10.34 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.19~~	Translation of Contract Related to Exclusive Purchase Right of Equity Interest among Hurray! Holding Co., Ltd., Hurray! Solutions Ltd. and Qindai Wang dated May 5, 2004 (incorporated by reference to Exhibit 10.35 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.20~~	Translation of Contract Related to Exclusive Purchase Right of Equity Interest among Hurray! Holding Co., Ltd., Hurray! Solutions Ltd. and Songzuo Xiang dated May 5, 2004 (incorporated by reference to Exhibit 10.36 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.21~~	Translation of Equity Interests Pledge Agreement between Qindai Wang and Hurray! Times Communications (Beijing) Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.37 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.22~~	Translation of Equity Interests Pledge Agreement between Songzuo Xiang and Hurray! Times Communications (Beijing) Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.38 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.23~~	Translation of Letter of Undertaking by Qindai Wang dated May 5, 2004 (incorporated by reference to Exhibit 10.39 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.24~~	Translation of Authorization Agreement by Hurray! Solutions Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.40 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.25~~	Translation of Exclusive Technical Consulting and Services Agreement between Hurray! Times Communications (Beijing) Ltd. and Beijing Cool Young Information Technology Co., Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.41 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.26~~	Translation of Operating Agreement among Hurray! Times Communications (Beijing) Ltd., Beijing Cool Young Information Technology Co., Ltd., Qindai Wang and Hurray! Solutions Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.42 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).


~~Exhibit~~
~~Number~~		~~Document~~
	~~4.27~~	Translation of Contract Related to Exclusive Purchase Right of Equity Interest among Hurray! Holding Co., Ltd., Qindai Wang and Beijing Cool Young Information Technology Co., Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.43 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.28~~	Translation of Contract Related to Exclusive Purchase Right of Equity Interest among Hurray! Holding Co., Ltd., Hurray! Solutions Ltd. and Beijing Cool Young Information Technology Co., Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.44 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.29~~	Translation of Equity Interests Pledge Agreement between Hurray! Times Communications (Beijing) Ltd. and Qindai Wang dated May 5, 2004 (incorporated by reference to Exhibit 10.45 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.30~~	Translation of Equity Interests Pledge Agreement between Hurray! Times Communications (Beijing) Ltd. and Hurray! Solutions Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.46 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.31~~	Translation of Software License Agreement between Hurray! Times Communications (Beijing) Ltd. and Beijing Cool Young Information Technology Co., Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.49 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.32~~	Translation of Software License Agreement between Hurray! Times Communications (Beijing) Ltd. and Beijing WVAS Solutions Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.53 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.33~~	Translation of Authorization Agreements by each of Sun Hao and Wang Xiaoping dated October 1, 2004 and October 1, 2004, respectively (incorporated by reference to Exhibit 10.55 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.34~~	Translation of Authorization Agreement by Beijing Enterprise Network Technology Co., Ltd. dated October 1, 2004 (incorporated by reference to Exhibit 10.56 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.35~~	Translation of Exclusive Technical Consulting and Services Agreement between Hurray! Times Communications (Beijing) Ltd. and Beijing WVAS Solutions Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.57 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.36~~	Translation of Operating Agreement among Hurray! Times Communications (Beijing) Ltd., Beijing WVAS Solutions Ltd., Beijing Enterprise Network Technology Co., Ltd., Sun Hao and Wang Xiaoping dated October 1, 2004 (incorporated by reference to Exhibit 10.58 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.37~~	Translation of Contracts Relating to Exclusive Purchase Right of Equity Interest between Hurray! Holding Co., Ltd., Beijing WVAS Solutions Ltd. and each of Sun Hao and Wang Xiaoping dated October 1, 2004 and October 1, 2004, respectively (incorporated by reference to Exhibit 10.59 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.38~~	Translation of Contract Relating to Exclusive Purchase Right of Equity Interest between Hurray! Holding Co., Ltd., Beijing WVAS Solutions Ltd. and Beijing Enterprise Network Technology Co., Ltd. dated October 1, 2004 (incorporated by reference to Exhibit 10.60 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.39~~	Translation of Equity Interests Pledge Agreements between Hurray! Times Communications (Beijing) Ltd. and each of Sun Hao and Wang Xiaoping dated October 1, 2004 and October 1, 2004, respectively (incorporated by reference to Exhibit 10.61 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).


~~Exhibit~~
~~Number~~		~~Document~~
	~~4.40~~	Translation of Equity Interests Pledge Agreement between Hurray! Times Communications (Beijing) Ltd. and Beijing Enterprise Network Technology Co., Ltd. dated October 1, 2004 (incorporated by reference to Exhibit 10.62 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.41~~	Translation of Software Assignment Agreement between Hurray! Times Communications (Beijing) Ltd. and Beijing Palmsky Technology Co., Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.65 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.42~~	Translation of Software License Agreement between Hurray! times Communications (Beijing) Ltd. and Beijing Palmsky Technology Col, Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.66 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.43~~	Translation of Authorization Agreement by Yang Haoyu dated October 1, 2004 (incorporated by reference to Exhibit 10.69 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.44~~	Translation of Authorization Agreement by Wang Jianhua dated October 1, 2004 (incorporated by reference to Exhibit 10.70 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.45~~	Translation of Exclusive Technical Consulting and Services Agreement between Hurray! Times Communications (Beijing) Ltd. and Beijing Palmsky Technology Co., Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.71 of our registration statement on Form F-1 (File No. 333-121987) filed with the
		~~Commission on January 12, 2005).~~

	4.46	English Translation of ~~Operating~~Loan Agreement ~~among Hurray! Times Communications (Beijing) Ltd., Beijing Palmsky~~between Shanghai Yisheng Network Technology Co., Ltd.~~, Yang Haoyu~~ and ~~Wang Jianhua~~Shanghai Dongfang Branch of China Merchants Bank Stock Limited Company dated ~~October 1, 2004 (incorporated by reference to Exhibit 10.72 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).~~June 2009.

	4.47	English Translation of ~~Contract Relating to Exclusive Purchase Right of Equity Interest among Hurray! Holding Co., Ltd., Yang Haoyu and Beijing Palmsky~~Loan Agreement between Shanghai Yisheng Network Technology Co., Ltd. and Shanghai Dongfang Branch of China Merchants Bank Stock Limited Company dated ~~October 1, 2004 (incorporated by reference to Exhibit 10.73 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).~~2010.

	4.48	English Translation of ~~Contract Relating to Exclusive Purchase Right of Equity Interest among Hurray! Holding Co., Ltd., Wang Jianhua and Beijing Palmsky~~Loan Agreement between Ku6 (Beijing) Information Technology Co., Ltd. and Shanghai Dongfang Branch of China Merchants Bank Stock Limited Company dated ~~October 1, 2004 (incorporated by reference to Exhibit 10.74 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).~~June 2011.

	4.49	Translation of Equity Interests Pledge Agreement between Hurray! Times Communications (Beijing) Ltd. and Yang Haoyu dated October 1, 2004 (incorporated by reference to Exhibit 10.75 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.50~~	Translation of Equity Interests Pledge Agreement between Hurray! Times Communications (Beijing) Ltd. and Wang Jianhua dated October 1, 2004 (incorporated by reference to Exhibit 10.76 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.51~~	Translation of Software License Agreement between Hurray! Times Communications (Beijing) Ltd. and Beijing Enterprise Network Technology Co., Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.79 of our registration statement on Form F-1 (file No. 333-121987) filed with the Commission on January 12, 2005).


~~Exhibit~~
~~Number~~		~~Document~~
	~~4.52~~	Translation of Authorization Agreement by Sun Hao dated August 15, 2004 (incorporated by reference to Exhibit 10.81 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.53~~	Translation of Authorization Agreement by Wang Xiaoping dated August 15, 2004 (incorporated by reference to Exhibit 10.82 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.54~~	Translation of Exclusive Technical Consulting and Services Agreement between Hurray! Times Communications (Beijing) Ltd. and Beijing Enterprise Network Technology Co., Ltd. dated May 5, 2004 (incorporated by reference to Exhibit 10.83 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.55~~	Translation of Operating Agreement between Hurray! Times Communications (Beijing) Ltd., Beijing Enterprise Network Technology Co., Ltd., Sun Hao and Wang Xiaoping dated August 15, 2004 (incorporated by reference to Exhibit 10.84 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.56~~	Translation of Contract Relating to Exclusive Purchase Right of Equity Interest among Hurray! Holding Co., Ltd., Wang Xiaoping and Beijing Enterprise Network Technology Co., Ltd. dated August 15, 2004 (incorporated by reference to Exhibit 10.85 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.57~~	Translation of Contract Relating to Exclusive Purchase Right of Equity Interest among Hurray! Holding Co., Ltd., Sun Hao and Beijing Enterprise Network Technology Co., Ltd. dated August 15, 2004 (incorporated by reference to Exhibit 10.86 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.58~~	Translation of Equity Interests Pledge Agreement between Hurray! Times Communications (Beijing) Ltd. and Sun Hao dated October 1, 2004 (incorporated by reference to Exhibit 10.87 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.59~~	Translation of Equity Interests Pledge Agreement between Hurray! Times Communications (Beijing) Ltd. and Wang Xiaoping dated October 1, 2004 (incorporated by reference to Exhibit 10.88 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.60~~	Translation of Agreement on Transfer of Shares of Beijing Enterprise Network Technology Co., Ltd. between Sun Hao and Wang Xiaoping and Hurray! Solutions Ltd. and Wang Qindai dated July 19, 2004 (incorporated by reference to Exhibit 10.89 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.61~~	Translation of Software License Agreement by and between Hurray! Times Communications (Beijing) Ltd. and Shanghai Magma Digital Technology Co. Ltd. dated January 12, 2006 (incorporated by reference to Exhibit 4.97 of our annual report on Form 20-F (File No. 000-51116) filed with the
		~~Commission on June 15, 2006).~~

	~~4.62~~	Translation of Software Assignment Agreement by and between Shanghai Magma Digital Technology Co. Ltd. and Hurray! Times Communications (Beijing) Ltd. dated January 12, 2006 (incorporated by reference to Exhibit 4.98 of our annual report on Form 20-F (File No. 000-51116) filed with the Commission on June 15, 2006).

	~~4.63~~	Translation of Authorization Agreement by Shang Aiqin dated January 12, 2006 (incorporated by reference to Exhibit 4.101 of our annual report on Form 20-F (File No. 000 51116) filed with the Commission on June 15, 2006).

	~~4.64~~	Translation of Authorization Agreement by Zhang Yi dated January 12, 2006 (incorporated by reference to Exhibit 4.102 of our annual report on Form 20-F (File No. 000 51116) filed with the Commission on June 15, 2006).


~~Exhibit~~
~~Number~~		~~Document~~
	~~4.65~~	Translation of Exclusive Technical Consulting and Services Agreement by and between Hurray! Times Communications (Beijing) Ltd. and Shanghai Magma Digital Technology Co. Ltd. dated January 12, 2006 (incorporated by reference to Exhibit 4.103 of our annual report on Form 20-F (File No. 000 51116) filed with the Commission on June 15, 2006).

	~~4.66~~	Translation of Operating Agreement by and among Hurray! Times Communications (Beijing) Ltd., Shanghai Magma Digital Technology Co. Ltd., Zhang Yi and Shang Aiqin dated January 12, 2006 (incorporated by reference to Exhibit 4.104 of our annual report on Form 20-F (File No. 000 51116) filed with the Commission on June 15, 2006).

	~~4.67~~	Translation of Contract Relating to the Exclusive Purchase Right of an Equity Interest by and among Hurray! Holding Co., Ltd., Shang Aiqin and Shanghai Magma Digital Technology Co. Ltd. dated January 12, 2006 (incorporated by reference to Exhibit 4.105 of our annual report on Form 20-F (File No. 000 51116) filed with the Commission on June 15, 2006).

	~~4.68~~	Translation of Contract Relating to the Exclusive Purchase Right of an Equity Interest by and among Hurray! Holding Co., Ltd., Zhang Yi and Shanghai Magma Digital Technology Co. Ltd. dated January 12, 2006 (incorporated by reference to Exhibit 4.106 of our annual report on Form 20-F (File No. 000 51116) filed with the Commission on June 15, 2006).

	~~4.69~~	Translation of Equity Interests Pledge Agreement by and between Hurray! Times Communications (Beijing) Ltd. and Zhang Yi dated January 12, 2006 (incorporated by reference to Exhibit 4.107 of our annual report on Form 20-F (File No. 000 51116) filed with the Commission on June 15, 2006).

	~~4.70~~	Translation of Equity Interests Pledge Agreement by and between Hurray! Times Communications (Beijing) Ltd. and Shang Aiqin dated January 12, 2006 (incorporated by reference to Exhibit 4.108 of our annual report on Form 20-F (File No. 000 51116) filed with the Commission on June 15, 2006).

	~~4.71~~	~~2004 Share Incentive Plan (incorporated by reference to Exhibit 10.95 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).~~

	~~4.72~~	Translation of Supplemental Agreement to Agreement on Transfer of Shares of Beijing Enterprise Network Technology Co., Ltd. among Hurray! Holding Co., Ltd., Qindai Wang, Yu Qin and Zhang Chen dated November 4, 2004 (incorporated by reference to Exhibit 10.96 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.73~~	Translation of Supplemental Agreement to Agreement on Transfer of Shares of Beijing Enterprise Mobile Technology Co., Ltd. among Hurray! Holdings Co., Ltd., Funway Investment Holdings Ltd. and I-mode Technology Ltd. dated November 4, 2004 (incorporated by reference to Exhibit 10.97 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.74~~	English Translation of Loan Agreement between ~~Beijing Enterprise Network Technology~~Ku6 Media Co., Ltd. and ~~Yu Qin dated November 4, 2004 (incorporated by reference to Exhibit 10.98 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).~~

	~~4.75~~	Translation of Loan Agreement between WVAS Solutions Ltd. and Yu Qin dated November 4, 2004 (incorporated by reference to Exhibit 10.99 of our registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 12, 2005).

	~~4.76~~	Translation of Supplemental Agreement dated January 25, 2005 to certain Equity Interests Pledge Agreements (incorporated by reference to the registration statement on Form F-1 (File No. 333-121987) filed with the Commission on January 28, 2005).

	~~4.77~~	Translation of Cooperation Agreement between Hurray! Digital Media Technology Co., Ltd., Lan Gang, Chen Jianzhong, Hu Li, and Guangzhou Hurray! Secular Bird Culture Communication Co., Ltd, dated March 12, 2007 (incorporated by reference to Exhibit 4.120 of our annual report on Form 20-F (File No. 000-51116) filed with the Commission on June 15, 2007).


~~Exhibit~~
~~Number~~		~~Document~~
	~~4.78~~	~~Translation of Supplemental Agreement between Hurray Holdings Co., Ltd. and Magma Digital International~~Shanda Games Limited dated ~~September 1, 2006 (incorporated by reference to Exhibit 4.121 of our annual report on Form 20-F (File No. 000-51116) filed with the Commission on~~ June ~~15, 2007).~~

	~~4.79~~	Translation of Supplemental Agreement between Hurray Solutions, Ltd., Beijing Enterprise Mobile Technology Co., Ltd., Beijing Hutong Wuxian Technology Co., Ltd., Zhong Xiongbing, Guangdong Freeland Movie and Television Production Co., Ltd., Beijing Shiji Freeland Movie and Television Distribution Co., Ltd., Shanghai Hai Le Audio and Video Distribution Co., Ltd., Hong Kong Freeland Movie Industry Group Co., Ltd. and Beijing Freeland Wu Xian Digital Music Technology Co., Ltd., dated July 30, 2006 (incorporated by reference to Exhibit 4.122 of our annual report on Form 20-F (File No. 000-51116) filed with the Commission on June 15, 2007).

	~~4.80~~	Translation of Supplemental Agreement between Hurray Solutions, Ltd., Beijing Enterprise Mobile Technology Co., Ltd., Beijing Hutong Wuxian Technology Co., Ltd., Zhong Xiongbing, Guangdong Freeland Movie and Television Production Co., Ltd., Beijing Shiji Freeland Movie and Television Distribution Co., Ltd., Shanghai Hai Le Audio and Video Distribution Co., Ltd. and Hong Kong Freeland Movie Industry Group Co., Ltd, dated November 30, 2006 (incorporated by reference to Exhibit 4.123 of our annual report on Form 20-F (File No. 000-51116) filed with the Commission on June 15, 2007).

	~~4.81~~	Translation of Cooperation Agreement between China Mobile Communications Group Corporation and Monternet WAP Service Provider between China Mobile Communications Group Corporation and Beijing Hutong Wuxian Technology Co., Ltd, dated April 27, 2007.

	~~4.82~~	Translation of Mobile Value-added Service Cooperation Agreement with China United Telecommunications Corporation between China United Telecommunications Corporation and Beijing Hengjiweiye Electronic Commerce Co., Ltd., dated August 30, 2007.

	~~4.83~~	Share Purchase Agreement among Hurray! Holding Co., Ltd., Enlight Media Limited, Changtian Wang, Yinglian Du, Delai Li, Xiaoping Li and Hongtian Wang (incorporated by reference to Exhibit 99.3 of our report of foreign issuer on Form 6-K (File No. 000-51116) filed with the Commission on November 23, 2007).

	~~4.84~~	~~Translation of Equity Transfer Agreement between TWM Holding, Hurray! Holding Co., Ltd., and Hurray! Times Communications (Beijing) Ltd. dated October~~ 8, ~~2007.~~

	~~4.85~~	~~Translation of Equity Transfer Agreement of Shanghai Saiyu Information Technology Co., Ltd. among Liang Ruan, Yuqi Shi, Jie Li and Jianmei Wan, dated February 12, 2007.~~

	~~4.86~~	Translation of Transfer Agreement between Hurray! Times Communications (Beijing) Co., Ltd., Beijing WVAS Solutions Ltd., Beijing Enterprise Network Technology Co., Ltd., Xiaoping Wang, Hao Sun and Beijing Hurray! Times Technology Co., Ltd., dated May, 2007.2011.

	8.1	List of Significant Subsidiaries and Affiliates.


~~Exhibit~~
~~Number~~		~~Document~~

	11.1	Code of Business Conduct (incorporated by reference to Exhibit 11.1 of our annual report on Form 20-F filed with the Commission on June 15, 2006).

	12.1	Certification of Acting Chief Executive Officer Required by Rule 13a-14(a).

	12.2	Certification of Chief Financial Officer Required by Rule 13a-14(a).

	13.1	Certification of Acting Chief Executive Officer Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code.

	13.2	Certification of Chief Financial Officer Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code.

	15.1	Consent of PricewaterhouseCoopers Zhong Tian CPAs Limited Company.

	15.2	Consent of Deloitte Touche Tohmatsu CPA Ltd., Independent Registered Public Accounting Firm.

82106

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.


~~HURRAY! HOLDING~~	KU6 MEDIA CO., LTD.
~~By:~~	~~/s/ Shaojian (Sean) Wang~~
	~~Shaojian (Sean) Wang~~
	~~Acting Chief Financial Officer~~By:	/s/ Haifa Zhu

		Name:	Haifa Zhu
		Title:	Acting Chief Executive Officer

	Date:	June 28, 2011

~~Date: June 19, 2008~~

83107

KU6 MEDIA CO., LTD.
INDEX TO FINANCIAL STATEMENTS
~~HURRAY! HOLDING CO., LTD.~~


	Page
Report of Independent Registered Public Accounting Firm as of and for the years ended December 31, 2009 and 2010		~~F-1~~F-2

Report of Independent Registered Public Accounting Firm for the year ended December 31, 2008		F-3

Consolidated Balance Sheets as of December 31, ~~2007~~2009 and ~~2006~~2010		~~F-2~~F-4

Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, ~~2007, 2006~~2008, 2009 and ~~2005~~2010		~~F-3~~F-5

Consolidated Statements of ~~Shareholders’~~Changes in Equity ~~and Comprehensive Income~~ for the years ended December 31, ~~2007, 2006~~2008, 2009 and ~~2005~~2010		~~F-5~~F-7

Consolidated Statements of Cash Flows for the years ended December 31, ~~2007, 2006~~2008, 2009 and ~~2005~~2010		~~F-7~~F-8

Notes to the Consolidated Financial Statements		~~F-8~~F-10

Additional Information — Financial Statement Schedule 1		~~F-35~~F-58

KU6 HOLDING LIMITED
INDEX TO FINANCIAL STATEMENTS


	Page
Report of Independent Registered Public Accounting Firm as of and for the years ended December 31, 2008 and 2009		F-61

Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2008, and 2009		F-63

Consolidated Balance Sheets as of December 31, 2008 and 2009		F-62

Consolidated Statements of Changes in Equity for the years ended December 31, 2008 and 2009		F-64

Consolidated Statements of Cash Flows for the years ended December 31, 2008 and 2009		F-65

Notes to the Consolidated Financial Statements		F-66

84F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
KU6 MEDIA CO., LTD.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive loss, of changes in equity and of cash flows present fairly, in all material respects, the financial position of Ku6 Media Co., Ltd. (the “Company”) and its subsidiaries at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition in our opinion, the accompanying financial statement schedule as of and for the years ended December 31, 2010 and 2009 present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because of a material weakness in internal control over financial reporting related to the lack of sufficient competent accounting personnel with appropriate levels of accounting knowledge and experience to address complex accounting issues and prepare financial statements and related disclosures under accounting principles generally accepted in the United States of America existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in Management’s Report on Internal Control over Financial Reporting appearing under Item 15. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2010 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company’s management is responsible for these financial statements and the financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in management’s report referred to above. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 2(6) to the consolidated financial statements, in 2009 the Company changed the manner in which it accounts for business combinations.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers Zhong Tian CPAs Limited Company

PricewaterhouseCoopers Zhong Tian CPAs Limited Company
Shanghai, the People’s Republic of China
June 28, 2011

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Ku6 Media Co., Ltd. (formerly known as Hurray! Holding Co., Ltd.
)

Beijing, the ~~People’s~~People’s Republic of China

We have audited the accompanying consolidated balance ~~sheets~~sheet of Ku6 Media Co., Ltd. (formly known as Hurray! Holding Co., Ltd.) and its subsidiaries and variable interest entities (the ~~“Company”~~"Company") at December 31, ~~2007 and 2006, and~~2008, which is not included in the consolidated balance sheets), the related consolidated statements of operations ~~shareholders’ equity~~ and comprehensive ~~income,~~loss, change in equity, and cash flows for the ~~years~~year ended December 31, ~~2007, 2006~~2008, and ~~2005, and~~the related financial statement schedule for the year ended December 31, 2008 included in Schedule 1. These financial statements and related financial statement schedule are the responsibility of the ~~Company’s~~Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and related financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the ~~Company’s~~Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of ~~Hurray! Holding Co., Ltd. and its subsidiaries and variable interest entities~~the Company at December 31, ~~2007 and 2006~~2008 and the results of ~~their~~its operations and ~~their~~its cash flows for the ~~above stated periods~~year ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements as of and for the year ended December 31, 2008 taken as a whole, presents fairly, in all material respects, the information set forth therein.

As described in Note 2 (6) to the consolidated financial statements, ~~effective January 1, 2006,~~ the ~~Company adopted~~accompanying financial statements for the year ended December 31, 2008 have been adjusted for the retrospective application of Statement of Accounting Standard Codification (“ASC”) 810-10-65 Transition (formerly issued as Financial Accounting Standards ~~No. 123 (revised 2004) “Share-Based payment”. In addition, effective~~No.160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No.51”), which was adopted by the Company on January 1, ~~2007,~~2009.

As described in Note 2 (1)(b) to the ~~Company adopted~~consolidated financial statements, the ~~recognition and measurement methods under Financial Accounting Standards Board Interpretation No. 48, “Accounting~~accompanying financial statements for ~~Uncertainty in Income Taxes— An Interpretation of FASB Statement No.109”.~~the year ended December 31, 2008 have been retrospectively adjusted for discontinued operations.

Deloitte Touche Tohmatsu CPA Ltd.

Beijing, the ~~People’s~~People’s Republic of China

June ~~18, 2008~~

~~F-1~~

~~HURRAY! HOLDING CO.~~25, 2009 (April 29, 2010 as to the effects of the adoption of ASC 810-10-65 described in Note 2(6), ~~LTD.~~

~~CONSOLIDATED BALANCE SHEETS~~

December 31,
2007 2006
(in U.S. dollars, except share data)
Assets

Current assets:
Cash $ 65,978,884 $ 74,596,978
Accounts receivable, net of allowance of $699,525 and $284,402 as of December 31, 2007 and 2006, respectively 14,691,160 13,449,419
Prepaid expenses and other current assets 3,120,050 2,700,704
Amount due from related parties 464,410 167,464
Inventories 292,655 177,926
Current deferred tax assets 748,049 295,755
Receivable on disposal of subsidiary 4,151,400 —

Total current assets 89,446,608 91,388,246
Property and equipment, net 1,636,089 1,954,201
Acquired intangible assets, net 4,970,920 6,023,183
Investment in equity affiliate 2,420,522 —
Goodwill 5,620,906 39,621,494
Deposits and other long-term assets 848,588 632,494
Non-current deferred tax assets 650,091 370,781

Total assets
$ 105,593,724 $ 139,990,399

Liabilities and shareholders’ equity

Current liabilities:
Accounts payable $ 3,575,410 $ 3,680,913
Acquisitions payable 7,101,498 5,832,464
Accrued expenses and other current liabilities 2,906,400 2,613,313
Amount due to related parties 256,058 321
Income tax payable 210,548 488,639
Current deferred tax liabilities 416,835 344,802

Total current liabilities 14,466,749 12,960,452
Long-term payable 32,304 —
Non-current deferred tax liabilities 844,610 850,734

Total liabilities
15,343,663 13,811,186

Commitments and contingencies (Note 20)
Minority interests 4,667,402 3,359,193

Shareholders’ equity:
Ordinary shares ($0.00005 par value; 4,560,000,000 shares authorized; 2,173,784,440 and 2,162,031,740 shares issued and outstanding as of December 31, 2007 and 2006, respectively) 108,689 108,102
Additional paid-in capital 74,066,839 73,608,117
Statutory reserves 6,502,849 5,661,061
(Accumulated deficit) retained earnings (2,750,592 ) 40,041,391
Accumulated other comprehensive income 7,654,874 3,401,349

Total shareholders’ equity 85,582,659 122,820,020

Total liabilities, minority interests and shareholders’ equity
$ 105,593,724 $ 139,990,399

~~The accompanying notes are an integral part~~and June 28, 2011 as to the effects of ~~these consolidated financial statements.~~

~~F-2~~

~~HURRAY! HOLDING CO., LTD.~~

~~CONSOLIDATED STATEMENTS OF OPERATIONS~~

Year ended December 31,
2007 2006 2005
(in U.S. dollars, except share data)
Revenues:

Wireless value-added services $ 50,038,014 $ 62,512,483 $ 56,062,368
Recorded music 10,488,613 6,203,418 —

Total revenues 60,526,627 68,715,901 56,062,368

Cost of revenues:
Wireless value-added services 36,394,300 40,672,113 28,634,488
Recorded music 6,232,728 3,553,144 —

Total cost of revenues 42,627,028 44,225,257 28,634,488

Gross profit 17,899,599 24,490,644 27,427,880

Operating expenses:
Product development (including stock-based compensation expense of $921, $79,587 and $4,886 for the years ended December 31, 2007, 2006 and 2005, respectively) 2,028,265 2,169,124 1,852,421
Selling and marketing (including stock-based compensation expense of $286,885, $346,456 and $9,911 for the years ended December 31, 2007, 2006 and 2005, respectively) 11,513,850 11,014,215 8,981,998
General and administrative (including stock-based compensation expense of $155,169, $117,514 and $22,775 for the years ended December 31, 2007, 2006 and 2005, respectively) 9,141,381 6,699,607 3,442,916
Provision for goodwill impairment 38,778,584 — —

Total operating expenses 61,462,080 19,882,946 14,277,335

(Loss) income from continuing operations (43,562,481 ) 4,607,698 13,150,545
Interest income 2,313,576 2,529,419 1,390,392
Interest expense (179,062 ) (44,765 ) (27,312 )
Other income, net 465,825 315,210 330,299

(Loss) income before provision for income taxes, earnings in equity investments, gain from disposal of subsidiary, minority interest and discontinued operations (40,962,142 ) 7,407,562 14,843,924
Income taxes (credit) expense (182,370 ) 204,980 322,800

Net (loss) income from continuing operations after income taxes before minority interests (40,779,772 ) 7,202,582 14,521,124
Equity in losses of affiliate (62,756 ) — —
Minority interests 688,440 562,189 —

Net (loss) income from continuing operations (41,530,968 ) 6,640,393 14,521,124
Discontinued operations:
Net (loss) income from discontinued operations, net of tax (612,170 ) (836,448 ) 4,097,608
Gain from disposal of subsidiary 192,943 — —

Net (loss) income from discontinued operations, net of tax (419,227 ) (836,448 ) 4,097,608

Net (loss)income $ (41,950,195 ) $ 5,803,945 $ 18,618,732

the retrospective adjustment for the discontinued operations described in Note 2 (1)(b))

F-3

Year ended December 31,
2007 2006 2005
(in U.S. dollars, except share data)
Net (loss) income from continuing operations per share:
Basic $ (0.02 ) $ 0.00 $ 0.01

Diluted $ (0.02 ) $ 0.00 $ 0.01

Net (loss) income from discontinued operations per share:
Basic $ (0.00 ) $ (0.00 ) $ 0.00

Diluted $ (0.00 ) $ (0.00 ) $ 0.00

Net (loss) income per share
Basic $ (0.02 ) $ 0.00 $ 0.01

Diluted $ (0.02 ) $ 0.00 $ 0.01

Weighted average shares used in calculating basic (loss) income per share 2,172,208,190 2,189,748,563 2,092,089,848

Weighted average shares used in calculating diluted (loss) income per share 2,172,208,190 2,208,758,636 2,129,228,961

KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)

CONSOLIDATED BALANCE SHEETS


	Note		December 31, 2009			December 31, 2010
			(Adjusted)
			(Note 2(1))
			(in U.S. dollars, except number of shares)
Assets
Current assets:
Cash and cash equivalents				49,743,934			27,294,819
Short term investments				10,000,000			—
Accounts receivable, net of allowance for doubtful accounts		19		4,009,841			8,135,195
Accounts receivable due from related party		12		51,832			325,757
Prepaid expenses and other current assets		5		1,890,285			3,487,327
Other receivables due from related parties		12		63,312			5,532,248
Inventories				201,576			31,038

Total current assets				65,960,780			44,806,384

Property and equipment, net		6		1,471,732			8,003,474
Acquired intangible assets, net		7		1,644,531			27,264,283
Goodwill		9		2,099,290			6,896,340
Deposits and other non-current assets				331,958			—

Total assets				71,508,291			86,970,481


Liabilities and shareholders’ equity
Current liabilities:
Accounts payable				4,652,050			15,502,901
Accounts payable due to related party		12		—			1,664,570
Notes payable				227,720			—
Accrued expenses and other current liabilities		11		6,331,687			11,462,241
Other payables due to related parties		12		1,904,455			7,776,698
Income tax payable				654,835			—
Current deferred tax liabilities		15		12,316			—

Total current liabilities				13,783,063			36,406,410

Long-term payable				17,554			—
Non-current deferred tax liabilities		2(26),15		403,308			4,925,538

Total liabilities				14,203,925			41,331,948


Commitments and contingencies		21		—			—

Redeemable non-controlling interest		3		370,870			—

Equity:
Ordinary shares ($0.00005 par value; 4,560,000,000 shares authorized; 2,200,194,040 and 3,481,174,498 shares issued and outstanding as of December 31, 2009 and 2010, respectively)				109,959			174,008
Additional paid-in capital				76,605,958			130,100,153
Statutory reserves		20		1,791,324			—
Accumulated deficits				(33,386,524	)		(83,105,464	)
Accumulated other comprehensive income (loss)				9,955,687			(1,422,414	)

Total Ku6 Media Co., Ltd. shareholders’ equity				55,076,404			45,746,283
Non-controlling interests				1,857,092			(107,750	)

Total equity				56,933,496			45,638,533

Total liabilities and equity				71,508,291			86,970,481

The accompanying notes are an integral part of these consolidated financial statements.

F-4

KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)

CONSOLIDATED STATEMENTS OF ~~SHAREHOLDERS’ EQUITY~~
OPERATIONS AND COMPREHENSIVE ~~INCOME~~LOSS

(Accumulated Accumulated
Series A convertible Additional deficit) other Total
preference shares Ordinary shares Subscription paid-in Statutory retained comprehensive shareholders’ Comprehensive
Shares Amount Shares Amount receivable capital reserves earnings income (loss) equity income (loss)
(in U.S. dollars, except share data)
Balance as of January 1, 2005 16,924,497 $ 16,925 1,186,672,000 $ 59,334 $ (50,880 ) $ 16,416,197 $ 2,085,269 $ 19,194,506 $ (685 ) $ 37,720,666
Initial public offering of shares, net of offering costs of $8,655,528 — — 662,433,900 33,121 — 59,394,269 — — — 59,427,390
Conversion of Series A convertible preference shares (16,924,497 ) (16,925 ) 338,489,940 16,925 — — — — — —
Collection of subscription receivable — — — — 50,880 — — — — 50,880
Stock-based compensation from accelerated-vesting of stock options — — — — — 16,804 — — — 16,804
Stock options issued to non-employees — — — — — 20,768 — — — 20,768
Exercise of stock options — — 42,158,500 2,108 — 1,487,494 — — — 1,489,602
Statutory reserve — — — — — — 3,201,788 (3,201,788 ) — —
Foreign currency translation adjustment — — — — — — — — 1,274,189 1,274,189 $ 1,274,189
Net income — — — — — — — 18,618,732 — 18,618,732 18,618,732

Balance as of December 31, 2005 — — 2,229,754,340 111,488 — 77,335,532 5,287,057 34,611,450 1,273,504 118,619,031 $ 19,892,921

Issuance of ordinary shares related to acquisition of Shanghai Magma (see Note 3) — — 8,955,200 448 — 539,552 — — — 540,000
Repurchase and cancellation of ordinary shares — — (79,260,000 ) (3,963 ) — (5,030,785 ) — — — (5,034,748 )
Forward contract at fair value (See Note 3) — — — — — 124,918 — — — 124,918
Stock-based compensation expense — — — — — 543,557 — — — 543,557
Exercise of stock options — — 2,582,200 129 — 95,343 — — — 95,472
Statutory reserve — — — — — — 374,004 (374,004 ) — —

~~F-5~~


			Year ended			Year ended			Year ended
	Note		December 31, 2008			December 31, 2009			December 31, 2010
			(Adjusted)			(Adjusted)
			(Note 2(1))			(Note 2(1))
			(in U.S. dollars, except number of shares)
Net revenues:		2(19)
Advertising
Third parties				—			757,723			15,853,948
Related parties				—			279,341			701,732

Total net revenues				—			1,037,064			16,555,680

Cost of revenues:		2(19)
Advertising				—
Third parties				—			(556,639	)		(40,082,758	)
Related parties				—			—			(376,302	)

Total cost of revenues				—			(556,639	)		(40,459,060	)

Gross profit/(loss)				—			480,425			(23,903,380	)

Operating expenses:
Product development		2(20)		(105,283	)		—			—
Selling and marketing		2(22)		(622,846	)		(665,131	)		(16,195,539	)
General and administrative		2(21)		(1,672,608	)		(6,465,080	)		(13,507,701	)

Total operating expenses				(2,400,737	)		(7,130,211	)		(29,703,240	)

Operating loss from continuing operations				(2,400,737	)		(6,649,786	)		(53,606,620	)
Interest income				1,431,507			356,167			57,464
Interest expense				—			—			(31,134	)
Other income, net				—			1,783			3
Gain on reduction of acquisition payable		13		5,000,000			—			—
Foreign exchange loss		2(7),14		(8,990,067	)		—			—

Loss before income tax benefit from continuing operations				(4,959,297	)		(6,291,836	)		(53,580,287	)
Income tax benefit		2(26),15		—			13,721			41,172

Loss from continuing operations, net of tax				(4,959,297	)		(6,278,115	)		(53,539,115	)

Discontinued operations:
Loss from operations of discontinued operations, net of tax		4		(7,743,284	)		(21,778,174	)		(3,382,438	)
Gain from disposal of discontinued operations, net of tax				412,530			221,899			4,486,786

Loss (income) from discontinued operations, net of tax				(7,330,754	)		(21,556,275	)		1,104,348


Net loss				(12,290,051	)		(27,834,390	)		(52,434,767	)
Less: Net loss attributable to the non-controlling interests from continuing operations				—			256,654			680,837
Less: Net loss attributable to the non-controlling interests and redeemable non-controlling interests from discontinued operations				337,455			4,182,875			243,666


Net loss attributable to Ku6 Media Co., Ltd.				(11,952,596	)		(23,394,861	)		(51,510,264	)


Loss from continuing operations, net of tax, attributable to Ku6 Media Co., Ltd.				(4,959,297	)		(6,021,461	)		(52,858,278	)
Income (loss) from discontinued operations, net of tax, attributable to Ku6 Media Co., Ltd.				(6,993,299	)		(17,373,400	)		1,348,014

Net loss attributable to Ku6 Media Co., Ltd.				(11,952,596	)		(23,394,861	)		(51,510,264	)

The accompanying notes are an integral part of these ~~consolidated~~financial statements.

F-5

KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS


	Note		Year ended			Year ended			Year ended
	(cont’d)		December 31, 2008			December 31, 2009			December 31,2010
			(Adjusted)			(Adjusted)
			(Note 2(1))			(Note 2(1))
			(in U.S. dollars, except number of shares)

Net loss				(12,290,051	)		(27,834,390	)		(52,434,767	)
Other comprehensive income (loss):
Currency translation adjustments of subsidiaries				2,658,344			(36,057	)		(809,654	)

Comprehensive loss				(9,631,707	)		(27,870,447	)		(53,244,421	)
Comprehensive loss attributable to non-controlling interests and redeemable non-controlling interests				11,551			4,443,959			921,701

Comprehensive loss attributable to Ku6 Media Co., Ltd.				(9,620,156	)		(23,426,488	)		(52,322,720	)


Loss per share-basic and diluted		18
Loss from continuing operations attributable to Ku6 Media Co., Ltd. common shareholders				(0.00	)		(0.00	)		(0.02	)
Loss from discontinued operations attributable to Ku6 Media Co., Ltd. common shareholders				(0.01	)		(0.01	)		0.00

Net loss attributable to Ku6 Media Co., Ltd. common shareholders				(0.01	)		(0.01	)		(0.02	)


Weighted average share used in per share calculation-basic and diluted				2,185,615,129			2,196,291,947			3,096,421,097


Loss per ADS-basic and diluted (1ADS = 100 shares):		18
Loss from continuing operations attributable to Ku6 Media Co., Ltd. common shareholders				(0.23	)		(0.27	)		(1.71	)
Loss from discontinued operations attributable to Ku6 Media Co., Ltd. common shareholders				(0.32	)		(0.79	)		0.04

Net loss attributable to Ku6 Media Co., Ltd. common shareholders				(0.55	)		(1.06	)		(1.67	)


Weighted average ADS used in per ADS calculation-basic and diluted				21,856,151			21,962,919			30,964,211

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

F-6

KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)

CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~CHANGES IN EQUITY

Year ended December 31,
2007 2006 2005
(In U.S. dollars)
Operating activities:

Net (loss) income $ (41,950,195 ) $ 5,803,945 $ 18,618,732
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Impairment of goodwill 38,778,584 — —
Impairment of acquired intangible assets 2,480,253 — —
Stock-based compensation 442,975 543,557 37,572
Depreciation and amortization 3,644,095 3,481,415 1,939,130
Bad debt provision 453,674 269,235 2,783
Minority interests 688,440 562,189 —
Equity in losses of affiliate 62,756 — —
Gain from disposal of subsidiary (192,943 ) — —
Receivable from disposal of subsidiary (net of cash disposed of $771,570) (3,186,887 ) — —
Loss on disposal of property and equipment 74,300 1,155 16,920
Changes in assets and liabilities net of effect of businesses acquired and sold:
Accounts receivable and notes receivable (2,069,378 ) 5,518,845 (5,799,209 )
Prepaid expenses and other current assets (138,548 ) 3,113,531 (528,260 )
Amount due from related parties (273,618 ) (164,008 ) —
Deposits and other long-term assets (147,543 ) (258,610 ) (62,341 )
Inventories (81,422 ) 268,556 (363,511 )
Current deferred tax assets (414,011 ) (289,651 ) —
Non-current deferred tax assets (285,660 ) (221,599 ) (137,292 )
Accounts payable (140,809 ) (222,881 ) (282,045 )
Accrued expenses and other current liabilities 305,097 (899,530 ) 203,030
Amount due to related parties 245,379 (204,420 ) —
Income tax payable (299,897 ) 387,148 90,308
Current deferred tax liabilities 64,060 86,212 246,431
Non-current deferred tax liabilities (114,325 ) (139,229 ) (2,165 )

Net cash (used in) provided by operating activities
(2,055,623 ) 17,635,860 13,980,083

Investing activities:

Purchases of property and equipment (863,603 ) (956,972 ) (1,288,698 )
Proceeds from disposal of property and equipment — 30,229 4,955
Acquisitions of intangible assets (1,535,436 ) (1,714,198 ) (4,161,788 )
Payments related to acquisitions of new businesses (net of cash acquired of $1,398,709, $441,147, and $2,316,674 for the years ended December 31, 2007, 2006 and 2005, respectively) (3,237,834 ) (12,515,544 ) (1,145,472 )
Investment in equity affiliate (2,483,277 ) — —

Net cash used in investing activities
(8,120,150 ) (15,156,485 ) (6,591,003 )

Financing activities:

Proceeds from the issuance of ordinary shares — 540,000 —
Repurchase of ordinary shares — (5,034,748 ) —
Proceeds from issuance of ordinary shares upon initial public offering, net of offering costs of $7,660,172 paid in 2005 — — 60,422,746
Proceeds from exercise of options 16,334 95,472 1,489,602
Collection of subscription receivable — — 50,880
Repayments of short-term borrowings — — (2,658,128 )

Net cash provided by (used in) financing activities
16,334 (4,399,276 ) 59,305,100

Net (decrease) increase in cash
(10,159,439 ) (1,919,901 ) 66,694,180
Cash, beginning of year
74,596,978 75,958,964 8,713,697
Effect of exchange rate changes
1,541,345 557,915 551,087

Cash, end of year
$ 65,978,884 $ 74,596,978 $ 75,958,964

Supplemental disclosure of cash flow information:

Interest paid $ — $ — $ 92,539

Income taxes paid $ 854,864 $ 287,266 $ 390,062

Supplemental disclosure of non-cash financing activities:

Conversion of Series A convertible preference shares into ordinary shares $ — $ — $ 16,925


														Accumulated			Total Ku6 Media
	Ordinary shares				Additional									other			Co., Ltd.
	(US$0.00005 par value)				paid-in			Statutory			Accumulated			comprehensive			shareholders’			Non-controlling			Total
	Shares		Amount		capital			reserves			deficits			income			equity			interests			equity
	(in U.S. dollars, except shares data)
Balance as of January 1, 2008		2,174,784,440		108,689		74,066,839			6,502,849			(2,750,592	)		7,654,874			85,582,659			4,667,402			90,250,061
Stock-based compensation expense		18,499,300		925		944,357			—			—			—			945,282			—			945,282
Exercise of stock options		60,000		3		1,497			—			—			—			1,500			—			1,500
Transfer statutory reserve to retained earnings		—		—		—			(4,711,525	)		4,711,525			—			—			—			—
Capital contribution to a subsidiary by non-controlling shareholders		—		—		—			—			—			—			—			127,358			127,358
Cumulative currency translation adjustments of subsidiaries		—		—		—			—			—			2,332,440			2,332,440			325,904			2,658,344
Net loss		—		—		—			—			(11,952,596	)		—			(11,952,596	)		(337,455	)		(12,290,051	)

Balance as of December 31, 2008		2,193,343,740		109,617		75,012,693			1,791,324			(9,991,663	)		9,987,314			76,909,285			4,783,209			81,692,494

Stock-based compensation expense		6,500,300		324		168,986			—			—			—			169,310			—			169,310
Exercise of stock options		350,000		18		8,732			—			—			—			8,750			—			8,750
Online audio business (“Yisheng”) contributed by Shanda Interactive Entertainment Limited (“Shanda”)		—		—		1,415,547			—			—			—			1,415,547			(43,533	)		1,372,014
Capital contribution to Yisheng by non-controlling shareholders		—		—		—			—			—			—			—			362,773			362,773
Cumulative currency translation adjustments of subsidiaries		—		—		—			—			—			(31,627	)		(31,627	)		(4,430	)		(36,057	)
Net loss		—		—		—			—			(23,394,861	)		—			(23,394,861	)		(3,240,927	)		(26,635,788	)

Balance as of December 31, 2009 (Adjusted (Note 2(1)))		2,200,194,040	$	109,959		76,605,958			1,791,324			(33,386,524	)		9,955,687			55,076,404			1,857,092			56,933,496

Stock-based compensation expense		3,000,100		150		607,014			—			—			—			607,164			—			607,164
Exercise of stock options		450,000		22		20,328			—			—			—			20,350			—			20,350
Issuance of ordinary shares related to acquisitions of Ku6 Holding Limited		723,684,204		36,185		28,838,816			—			—			—			28,875,001			—			28,875,001
Disposal of Huayi Brothers Music Co., Ltd.		—		—		—			(74,246	)		74,246			(221,315	)		(221,315	)		(209,736	)		(431,051	)
Contribution by Shanda related to Yisheng		—		—		663,570			—			—			—			663,570			—			663,570
Issuance of ordinary shares for Yisheng to Shanda		415,384,615		20,769		12,440,769			—			—			—			12,461,538			—			12,461,538
Deemed distribution to Shanda related to Yisheng		—		—		(12,461,538	)		—			—			—			(12,461,538	)		—			(12,461,538	)
Purchase of additional equity interests of Yisheng from non-controlling shareholders		138,461,539		6,923		(520,181	)		—			—			—			(513,258	)		513,258			—
Disposal of WVAS and recorded music businesses to Shanda		—		—		23,905,417			(1,717,078	)		1,717,078			(10,344,330	)		13,561,087			(1,464,169	)		12,096,918
Cumulative currency translation adjustments of subsidiaries		—		—		—			—			—			(812,456	)		(812,456	)		2,802			(809,654	)
Net loss		—		—		—			—			(51,510,264	)		—			(51,510,264	)		(806,997	)		(52,317,261	)

Balance as of December 31, 2010		3,481,174,498		174,008		130,100,153			—			(83,105,464	)		(1,422,414	)		45,746,283			(107,750	)		45,638,533

The accompanying notes are an integral part of these consolidated financial statements.

F-7

KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Year ended			Year ended			Year ended
	December 31, 2008			December 31, 2009			December 31, 2010
				(Adjusted)
				(Note 2(1))
	(in U.S. dollars)

Net loss		(12,290,051	)		(27,834,390	)		(52,434,767	)

Adjustments to reconcile net loss to net cash used in operating activities:
Share-based compensation		945,282			169,310			607,164
Share based compensation cost in relation to acquisition of Ku6		—			—			1,284,766
Depreciation and amortization		3,327,798			1,798,396			5,266,212
Amortization and write-down of licensed video copyrights		—			—			15,751,814
Impairment of goodwill		2,675,211			3,592,933			—
Impairment for investment in affiliated company		1,870,897			209,848			—
Impairment of intangible assets		2,850,714			3,542,071			—
Bad debt provision		1,012,738			3,819,894			1,474,568
Inventory provision		—			238,370			84,481
Exchange loss		—			17,198			(898,682	)
Equity in (earning) loss of affiliated company		(64,293	)		704,224			—
Gain from disposal of subsidiary		(412,530	)		(221,899	)		(4,486,786	)
Loss (gain) on disposal of property and equipment		112,745			(5,843	)		196,969
Change in fair value of contingent consideration		—			(352,217	)		—
Gain on reduction of acquisition payable		(5,000,000	)		—			—
Gain on reduction of Unicom liability		(1,557,153	)		—			—
Gain from reversed litigation expenses		(557,167	)		—			—
Changes in assets and liabilities, net of acquisitions and dispositions:
Accounts receivable		3,492,068			5,883,070			(8,678,575	)
Prepaid expenses and other current assets		(1,142,954	)		2,737,066			(796,237	)
Amount due from related parties		(245,724	)		732,563			(2,836,461	)
Deposits and other non-current assets		183,003			439,859			(414	)
Inventories		56,833			(130,333	)		(94,101	)
Deferred taxes		187,671			(530,190	)		(72,985	)
Accounts payable		(761,068	)		579,864			8,753,566
Notes payable		—			22,901			(54,218	)
Accrued expenses and other current liabilities		(71,705	)		2,283,336			5,976,116
Amount due to related parties		(63,140	)		(78,307	)		1,408,305
Income tax payable		(102,057	)		290,670			(20,633	)

Net cash used in operating activities		(5,552,882	)		(2,091,606	)		(29,569,898	)

Investing activities:
(Increase)/decrease of short-term investments		—			(10,000,000	)		10,000,000
Purchases of property and equipment		(349,233	)		(867,061	)		(6,586,819	)
Proceeds from disposal of property and equipment		—			80,498			—
Purchase of intangible assets		(1,718,340	)		(66,258	)		—
Payment for licensed video copyright		—			—			(15,046,257	)
Proceeds from disposal of subsidiaries, net of cash disposed (nil, nil, and $669,705 for the years ended December 31, 2008, 2009 and 2010, respectively)		4,517,070			254,102			4,376,048
Acquisition of subsidiaries, net of cash acquired (nil, $1,034,308 and $329,743 for the years ended December 31, 2008, 2009 and 2010, respectively)		(2,207,132	)		1,034,308			329,743
Cash received upon consolidation of a subsidiary contributed by Shanda		—			633,424			—
Net cash received from disposal of wireless value-added service and recorded music businesses to Shanda, net of cash disposed $24,948,577 for the years ended December 31, 2010)		—			—			12,295,323
Loan to related parties under common control by Shanda		—			—			(3,200,000	)
Payments related to acquisition not yet consummated		(1,907,400	)		—			—
Investment at cost in Seed Music Group Limited		(600,038	)		—			—

Net cash provided by (used in) investing activities		(2,265,073	)		(8,930,987	)		2,168,038

F-8


	Year ended			Year ended			Year ended
	December 31, 2008			December 31, 2009			December 31, 2010
				(Adjusted)
	(Note 2(1))

Financing activities:
Proceeds from exercise of options		1,500			2,500			20,350
Cash injection into VIE subsidiary by Shanda		—			1,083,057			—
Borrowings from related parties under common control by Shanda		—			—			4,596,001
Cash injection in VIE subsidiary by non-controlling shareholders		—			362,773			—

Net cash provided by financing activities		1,500			1,448,330			4,616,351

Effect of exchange rate changes on cash and cash equivalents		1,310,274			(154,506	)		336,394

Net decrease in cash and cash equivalents		(6,506,181	)		(9,728,769	)		(22,449,115	)
Cash and cash equivalents, beginning of year		65,978,884			59,472,703			49,743,934

Cash and cash equivalents, end of the year		59,472,703			49,743,934			27,294,819

Supplemental disclosure of cash flow information:
Income taxes paid		385,501			465,696			23,047
			��

Supplemental disclosure of non-cash investing and financing activities:
Accounts payable related to purchase of property and equipment		—			—			2,045,032
Accounts payable related to licensed video copyright		—			—			2,946,304
Issuance of ordinary shares to Shanda for Yisheng		—			—			12,461,538
Purchase of additional equity interests of Yisheng from non-controlling shareholders		—			—			4,153,846
Issuance of ordinary shares related to acquisition of Ku6 Holding Limited		—			—			28,875,000

The accompanying notes are an integral part of these consolidated financial statements.

F-9

KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, ~~2007, 2006 and 2005~~2008, 2009 AND 2010

(Amounts expressed in U.S. dollars, unless otherwise stated)

1. ORGANIZATION AND PRINCIPAL ACTIVITIES

Ku6 Media Co., Ltd. (Fomerly known as Hurray! Holding Co., Ltd. ~~(“Hurray!~~, “Hurray!” or the “Company”), a Cayman Islands corporation, ~~and its consolidated subsidiaries, its variable interest entities and equity associate (collectively the “Company”) provide~~originally provided wireless value-added services to mobile phone users delivered over the wireless networks of the ~~two mobile operators and over the fixed wireless networks of the two major fixed-line~~three telecommunication operators in the People’s Republic of China (“PRC”) and also engaged in music production and distribution in the ~~PRC. The Company specializes in the development, marketing~~PRC and ~~distribution of music and entertainment oriented consumer wireless value-added services.~~

~~At December 31, 2007, Hurray!’s~~Taiwan through its consolidated subsidiaries, ~~and~~its variable interest entities (“VIEs”) ~~are~~and equity associate (collectively referred to as ~~follows (unless otherwise stated,~~the “Group”) before August, 2010.

In July, 2009, Shanda Interactive Entertainment Limited (“Shanda”) (Nasdaq: SNDA), a leading interactive entertainment media company in China, and Shanda Music Group Limited (“Shanda Music”), a wholly owned subsidiary of Shanda, announced its completion of the tender offer of total $46.2 million for 1,155,045,300 ordinary shares, par value $0.00005 per ordinary share (“Shares”), of the Company, including Shares represented by American Depositary Shares (“ADSs,” each representing 100 Shares) at a purchase price of $0.04 per Share (equivalent to $4.00 per ADS) in cash, without interest and subject to any applicable withholding taxes. Immediately after giving effect to the acquisition of Shares (including Shares represented by ADSs) in the tender offer, Shanda hold, through Shanda Music, approximately 51% of the Company’s total outstanding Shares calculated on a fully-diluted basis as of December 31, 2009.

In January, 2010, the Company completed the acquisition of 100% equity interests of Ku6 Holding Limited (“Ku6”), a leading online video portal in China, pursuant to the share purchase agreement entered into by and among Hurray!, Ku6 and the shareholders of Ku6 dated as of November 26, 2009 by issuing an aggregate of 723,684,204 ordinary shares. After the closing of the acquisition of Ku6, Shanda’s equity interest in the Company was diluted to 41.97%.

In May, 2010, the Company sold all of ~~these entities are incorporated~~its 51% equity interest in Beijing Huayi Brothers Music Co., Ltd. including its wholly owned subsidiary of Beijing Huayi Brothers Music Broker Co., Ltd. (collectively referred to as “Huayi Music”) to Huayi Brothers Media Corporation. (“Huayi Media”) for an aggregate consideration of RMB34,450,000 (equivalent to $5,045,754).

In August, 2010, the Company completed (1) the disposal of all of its remaining subsidiaries and VIEs of wireless value-added services (“WVAS”) and recorded music businesses as well as the equity investment in an affiliated company, except for Invest China Group Limited, Beijing Hand-in-Hand Media Technology Co., Ltd. and Shanghai Fuming Information Technology Co., Ltd., to Shanda for $37,243,904 in cash and (2) acquisition of 75% equity interests of Shanghai Yisheng Network Technology Co., Ltd. (“Yisheng”), an online audio business, from Shanda in exchange for 415,384,615 newly issued ordinary shares (collectively the “Reorganization”). The Reorganization was approved by a committee comprised of three independent directors after receiving a fairness opinion on the proposed transaction from its independent financial advisor and shareholders of the Company. Then the Company changed its name to Ku6 Media Co., Ltd., (“KUTV”) and has changed its trading symbol on the Nasdaq Global Market from HRAY to KUTV. After the closing of the Reorganization and as of December 31, 2010, Shanda’s equity interest in the ~~PRC and~~Company was 51.65%.

In connection with the acquisition of 75% equity interests of Yisheng from Shanda, the Company ~~is entitled~~issued 138,461,539 ordinary shares to acquire the ~~whole benefit~~remaining 25% of ~~these entities’ economic interest ):~~equity interests in Yisheng from the non-controlling shareholders in August 2010.

Following the above transactions in 2010, the Group primarily provides online advertising services on its online video sharing platform of www.ku6.com namely through Ku6’ subsidiaries and VIEs in China as set out below.

F-10

KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(Amounts expressed in U.S. dollars, unless otherwise stated)


		Date of		Percentage of
	~~Date of~~			~~effective~~
	~~incorporation or~~	~~Place of~~		~~ownership by~~
Name of Subsidiaries	~~acquisition~~	incorporation		~~Hurray!~~			~~Principal activities~~
~~Wireless value-added services (“WVAS”) business segment:~~							ownership

Subsidiaries
~~Beijing Hurray! Times~~Ku6 (Beijing) Technology Co., Ltd. (“Beijing ~~Hurray Times”~~WOFE”)	~~June 27, 2002~~	~~the PRC~~March 5, 2007			100	%		~~WVAS business~~
~~Hurray Technologies (Hong Kong)~~Wei Mo San Yi (Tianjin) Science and Technology Co., Ltd.(“Tianjin WOFE”)	~~July~~December 23, ~~2003~~	~~Hong Kong~~			99	%		~~WVAS business~~
~~Invest China Group Limited~~	~~April 1, 2007~~	~~British Virgin Islands~~2008			100	%		~~WVAS business~~
~~Beijing Hand in Hand Media Technology Co., Ltd.~~	~~April 1, 2007~~	~~the PRC~~			~~100~~	%		~~WVAS business~~

Variable Interest Entities
Ku6 (Beijing) Information Technology Co., Ltd. (“Beijing VIE”)
~~Hurray! Solutions Ltd.~~	~~September 21, 1999~~	~~the PRC~~April 20, 2006			100	%
Tianjin Ku6 Zheng Yuan Information Technology Co., Ltd. (“Tianjin VIE”)	~~WVAS business~~March 20, 2009		100	%
~~Beijing Enterprise~~Shanghai Yisheng Network Technology Co., Ltd.	~~March, 31, 2004~~	~~the PRC~~November 22, 2007			100	%		~~WVAS business~~
~~Beijing Hengji Weiye Electronic Commerce Co., Ltd. (“Hengji Weiye”)~~	~~October 1, 2005~~	~~the PRC~~			~~100~~	%		~~WVAS business~~
~~Beijing Hutong Wuxian Technology Co., Ltd. (“Beijing Hutong”)~~	~~April 1, 2005~~	~~the PRC~~			~~100~~	%		~~WVAS business~~
~~Beijing Palmsky Technology Co., Ltd.~~	~~March, 31, 2004~~	~~the PRC~~			~~100~~	%		~~WVAS business~~
~~Henan Yinshan Digital Network Technology Co., Ltd. (“Henan Yinshan”)~~	~~June 30, 2007~~	~~the PRC~~			~~100~~	%		~~WVAS business~~
~~Shanghai Magma Digital Technology Co., Ltd. (“Shanghai Magma”)~~	~~January 1, 2006~~	~~the PRC~~			~~100~~	%		~~WVAS business~~
~~Shanghai Saiyu Information Technology Co., Ltd. (“Saiyu”)~~	~~April 1, 2007~~	~~the PRC~~			~~100~~	%		~~WVAS business~~

~~F-8~~


			~~Percentage of~~
	~~Date of~~		~~effective~~
	~~incorporation or~~	~~Place of~~	~~ownership by~~
~~Name of Subsidiaries~~	~~acquisition~~	~~incorporation~~	~~Hurray!~~			~~Principal activities~~
~~Subsidiaries of Variable Interest Entities~~
~~Beijing Cool Young Information Technology Co., Ltd.~~	~~January 28, 2003~~	~~the PRC~~		~~100~~	%	~~WVAS business~~
~~Beijing WVAS Solutions Ltd.~~	~~October 10, 2001~~	~~the PRC~~		~~100~~	%	~~WVAS business~~

~~Recorded music business segment:~~

~~Subsidiaries~~
~~Hurray! Music Holding Co., Ltd.~~	~~August 19, 2005~~	~~Cayman Islands~~		~~100~~	%	~~Recorded music business~~

~~Subsidiaries of Variable Interest Entities~~
~~Hurray! Digital Media Technology Co., Ltd.~~	~~November 10, 2005~~	~~the PRC~~		~~100~~	%	~~Recorded music business~~
~~Beijing Huayi Brothers Music Co., Ltd. (“Huayi Brothers Music”)~~	~~December 31, 2005~~	~~the PRC~~		51	%	~~Recorded music business~~
~~Beijing Huayi Brothers Broker Co., Ltd.~~	~~April 17, 2007~~	~~the PRC~~		51	%	~~Recorded music business~~
~~Hurray! Freeland Digital Music Technology Co., Ltd. (“Freeland Music”)~~	~~January 1, 2006~~	~~the PRC~~		60	%	~~Recorded music business~~
~~Hurray! Freeland Cultural Media Co., Ltd.~~	~~January 8, 2007~~	~~the PRC~~		60	%	~~Recorded music business~~
~~Beijing Hurray! Fly Songs International Culture Co., Ltd. (“Fly Songs”)~~	~~August 21, 2007~~	~~the PRC~~		~~30.6~~	%	~~Recorded music business~~
~~Guangzhou Hurray! Secular Bird Culture Communication Co., Ltd. (“Secular Bird”)~~	~~May 30, 2007~~	~~the PRC~~		65	%	~~Recorded music business~~

To comply with PRC laws and regulations that restrict direct foreign ownership of telecommunication service businesses in the PRC, the Company conducts substantially all of its business through several VIEs. The VIEs have entered into various agreements with one of Hurray!’s subsidiaries, including exclusive cooperation agreements. Under these agreements, Hurray! through a wholly owned PRC subsidiary, Beijing Hurray! Times, is the exclusive provider of technical and consulting services to the VIEs. In return, the VIEs are required to pay Beijing Hurray! Times’ service fees for the technical and consulting services received. The technical and consulting service fees can be, and are, adjusted at Hurray!’s discretion depending on the level of service provided. Beijing Hurray! Times is entitled to receive service fees in an amount up to all of the net income of the VIEs In addition, Beijing Hurray! Times has been assigned all voting rights by the direct and indirect owners of the VIEs through agreements which are valid for ten years and cannot be amended or terminated except by written consent of all parties. Finally, Beijing Hurray! Times has the option to acquire the equity interest of the VIEs . The Company also has extended loans without interest to the registered shareholders to finance their investments in the VIEs. Each of the registered shareholders is a related party of the Company acting as de facto agent for the Company. The direct equity interest in these entities has been pledged as collateral for the loans and when permitted under Chinese laws, the loans are to be repaid by transferring the direct equity interest in these entities to the Company. Therefore, no minority interest was recorded for the registered capital from the registered shareholders.

Hurray! is the sole beneficiary of the VIEs because all the variable interests are held by Hurray!. Accordingly, the Company consolidates the VIEs under Financial Accounting Standard Board (“FASB”) Interpretation (“FIN”) No. 46 (revised), “Consolidation of Variable Interest Entities,” which requires certain VIEs to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.

~~F-9~~

~~In February 2005, Hurray! completed an initial public offering of 6,880,000 American Depositary Shares on the NASDAQ Global Market in the United States of America.~~

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

~~(a)~~(1) Basis of presentation

The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

As a result of the disposal of Huayi Music in May 2010 and Reorganization in August 2010, the Company adjusted its consolidated financial statements as of December 31, 2009 and for the years ended December 31, 2008 and 2009 for the above mentioned transactions to present the WVAS and recorded music businesses as discontinued operations and to reflect the Yisheng merger as a common control transaction

(a) Acquisition under common control

The acquisition of Yisheng’s online audio business from Shanda is accounted for as a common control transaction as Hurray! is considered to be under the control of Shanda since the Company was acquired by Shanda in July 2009. Accordingly, the accompanying consolidated financial statements have been prepared as if the acquisition of Yisheng had been in effect since the inception of common control, which is the date that Hurray! was consolidated into Shanda’s consolidated financial statement on August 31, 2009. Therefore total assets and liabilities as well as the non-controlling interests of Yisheng were recorded at the carrying amount as capital contribution from Shanda in the consolidated statements of changes in equity at the inception of common control. The effect of accounting for the acquisition under common control has increased the net loss for the year ended December 31, 2009 by $736,969, which represents the net loss of this business from August 31, 2009 through December 31, 2009. The fair value of the 415,384,615 ordinary shares issued by the Company amounting to $12,461,538 was recorded through equity as a deemed distribution to Shanda in 2010.

In connection with the acquisition of 75% equity interests of Yisheng from Shanda, the Company issued 138,461,539 ordinary shares to acquire 25% of equity interests in Yisheng from non-controlling shareholders in August 2010. This transaction was accounted for as an equity transaction in 2010 and the difference between fair value of the ordinary shares issued amounting to $4,153,846 and carrying amount of the non-controlling interest is recognized as a decrease in additional paid-in capital attributable to the Company in accordance ASC 810.

The following consolidated balance sheet as of December 31, 2009 and for the year then ended reflects the effects of the acquisition of the online audio business under common control:

F-11


Consolidated Balance Sheet as of December	As originally			Effect of acquisition of
31, 2009	reported			online audio business			As adjusted*

Assets
Cash and cash equivalents		48,489,095			1,254,839			49,743,934
Short term investments		10,000,000			—			10,000,000
Accounts receivable, net of allowance		3,192,366			817,475			4,009,841
Accounts receivable due from related party		—			51,832			51,832
Prepaid expenses and other current assets		1,834,361			55,924			1,890,285
Amount due from related parties		62,725			587			63,312
Inventories		196,745			4,831			201,576

Total current assets		63,775,292			2,185,488			65,960,780

Property and equipment, net		879,775			591,957			1,471,732
Acquired intangible assets, net		1,081,962			562,569			1,644,531
Goodwill		2,099,290			—			2,099,290
Deposits and other non-current assets		331,958			—			331,958

Total assets		68,168,277			3,340,014			71,508,291


Liabilities
Accounts payable		3,731,562			920,488			4,652,050
Notes payable		227,720			—			227,720
Accrued expenses and other current liabilities		6,260,849			70,838			6,331,687
Amount due to related parties		439,445			1,465,010			1,904,455
Income tax payable		654,835			—			654,835
Current deferred tax liabilities		12,316			—			12,316

Total current liabilities		11,326,727			2,456,336			13,783,063

Long-term payable		17,554			—			17,554
Non-current deferred tax liabilities		262,665			140,643			403,308

Total liabilities		11,606,946			2,596,979			14,203,925


Redeemable non-controlling interests		370,870			—			370,870

Equity
Ordinary shares		109,959			—			109,959
Additional paid-in capital		75,190,411			1,415,547			76,605,958
Statutory reserves		1,791,324			—			1,791,324
Accumulated deficits		(32,649,555	)		(736,969	)		(33,386,524	)
Accumulated other comprehensive income		9,953,826			1,861			9,955,687

Total Ku6 Media Co., Ltd. shareholders’ equity		54,395,965			680,439			55,076,404
Non-controlling interests		1,794,496			62,596			1,857,092

Total equity		56,190,461			743,035			56,933,496

Total liabilities and equity		68,168,277			3,340,014			71,508,291

F-12


Consolidated Statement of Operations and
Comprehensive Loss for the year ended	As originally			Effect of acquisition of
December 31, 2009	reported			online audio business			As adjusted*

Net revenues:
Wireless value-added services		20,169,110			—			20,169,110
Recorded music		14,473,185			—			14,473,185
Advertising-third party		—			757,723			757,723
Advertising-related party		—			279,341			279,341

Total net revenues:		34,642,295			1,037,064			35,679,359

Cost of revenues:
Wireless value-added services		(15,331,675	)		—			(15,331,675	)
Recorded music		(12,625,139	)		—			(12,625,139	)
Advertising		—			(556,639	)		(556,639	)

Total cost of revenues:		(27,956,814	)		(556,639	)		(28,513,453	)

Gross profit		6,685,481			480,425			7,165,906

Operating expenses:
Product development		(466,543	)		—			(466,543	)
Selling and marketing		(6,329,856	)		(546,609	)		(6,876,465	)
General and administrative		(22,992,865	)		(941,660	)		(23,934,525	)
Goodwill impairment		(3,592,933	)		—			(3,592,933	)

Total operating expenses		(33,382,197	)		(1,488,269	)		(34,870,466	)

Operating loss from continuing operations		(26,696,716	)		(1,007,844	)		(27,704,560	)
Interest income		454,438			499			454,937
Interest expenses		(13,681	)		—			(13,681	)
Other income, net		341,651			1			341,652

Loss before income tax expenses from continuing operations		(25,914,308	)		(1,007,344	)		(26,921,652	)
Income tax benefit (expense)		(234,286	)		13,721			(220,565	)
Equity in loss of affiliated company		(914,072	)		—			(914,072	)

Loss from continuing operations, net of tax		(27,062,666	)		(993,623	)		(28,056,289	)


Discontinued operations:
Loss from operations of discontinued operations		—			—			—
Gain from disposal of discontinued operations		221,899			—			221,899

Gain from discontinued operations, net of tax		221,899			—			221,899

Loss from continuing and discontinued operations		(26,840,767	)		(993,623	)		(27,834,390	)
Less: Net loss attributable to the non-controlling interests and redeemable non-controlling interest from coninuting operations		4,182,875			256,654			4,439,529

Net loss attributable to Ku6 Media Co., Ltd.		(22,657,892	)		(736,969	)		(23,394,861	)


Loss from continuing operations, net of tax, attributable to Ku6 Media Co., Ltd.		(22,879,791	)		(736,969	)		(23,616,760	)
Loss from discontinued operations, net of tax, attributable to Ku6 Media Co., Ltd.		221,899			—			221,899

Net loss attributable to Ku6 Media Co., Ltd.		(22,657,892	)		(736,969	)		(23,394,861	)

F-13


Consolidated Statement of Operations and
Comprehensive Loss for the year ended	As originally			Effect of acquisition of
December 31, 2009	reported			online audio business			As adjusted*

Net loss		(26,840,767	)		(993,623	)		(27,834,390	)
Other comprehensive loss:
Currency translation adjustments of subsidiaries		(37,917	)		1,861			(36,056	)

Comprehensive loss		(26,878,684	)		(991,763	)		(27,870,446	)
Comprehensive loss attributable to non-controlling interests and redeemable non-controlling interests		4,187,304			256,654			4,443,958

Comprehensive loss attributable to Ku6 Media Co., Ltd.		(22,691,380	)		(735,108	)		(23,426,488	)


Loss per share-basic and diluted:
Loss from continuing operations attributable to Ku6 Media Co., Ltd. common shareholders		(0.01	)		(0.00	)		(0.01	)
Loss from discontinued operations attributable to Ku6 Media Co., Ltd. common shareholders		0.00			—			0.00

Net loss attributable to Ku6 Media Co., Ltd. common shareholders		(0.01	)		(0.03	)		(0.01	)


Weighted average share used in per share calculation-basic and diluted		2,196,291,947			2,196,291,947			2,196,291,947


Loss per ADS-basic and diluted (1ADS = 100 shares):
Loss from continuing operations attributable to Ku6 Media Co., Ltd. common shareholders		(1.04	)		(0.03	)		(1.07	)
Loss from discontinued operations attributable to Ku6 Media Co., Ltd. common shareholders		0.01			—			0.01

Net loss attributable to Ku6 Media Co., Ltd. common shareholders		(1.03	)		(0.03	)		(1.06	)


Weighted average ADS used in per ADS calculation-basic and diluted		21,96,2,919			21,96,2,919			21,96,2,919


*		As adjusted reflects the acquisition of Yisheng only and does not include the effects of the disposal of wireless value-added services and recorded music business as discussed in note (b) below.

(b) ~~Basis~~Disposal of ~~consolidation~~wireless value-added services and recorded music businesses

As mentioned above, the Company completed the disposal of Huayi Music to Huayi Media for RMB34,450,000 (equivalent to $5,045,754) in cash in May, 2010 and the corresponding disposal gain of Huayi Music recognized in 2010 was $4,486,786. The disposal of wireless value-added services and remaining recorded music businesses under common control was consummated in August, 2010. The difference of $13,561,087 between the cash consideration received from Shanda of $37,243,904 and the carrying amount of the assets, liabilities and non-controlling interests and redeemable non-controlling interest of WVAS and recorded music business of $23,682,817 and the corresponding cumulative translation difference of $10,344,330 are accounted for as contribution by Shanda in additional paid in capital in 2010. No gain or loss was recognized in 2010.

F-14

KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010

(Amounts expressed in U.S. dollars, unless otherwise stated)

A summary of the major financial information for the discontinued operations of WVAS and recorded music businesses for the years ended December 31, 2008, 2009 and eight months period ended August 31, 2010 is set out below:


	Year ended			Year ended			Eight months
	December 31,			December 31,			ended August 31,
	2008			2009			2010

Net revenues:
Wireless value added services Revenue		42,671,588			20,169,110			5,385,985
Recorded music Revenue		11,286,812			14,473,185			9,458,423

Total net revenues		53,958,400			34,642,295			14,844,408

Wireless value added services Cost		(32,839,642	)		(15,331,675	)		(3,799,581	)
Recorded music Cost		(6,729,725	)		(12,625,139	)		(6,118,305	)

Total cost of revenues		(39,569,367	)		(27,956,814	)		(9,917,886	)

Gross profit		14,389,033			6,685,481			4,926,522
Product development		(886,406	)		(466,543	)		(444,581	)
Selling and marketing		(8,509,528	)		(6,211,334	)		(3,397,797	)
General and administrative		(10,311,365	)		(17,469,445	)		(4,544,460	)
Goodwill impairment		(2,675,211	)		(3,592,933	)		—
Gain on reduction of Unicom liability		1,557,153			—			—
Gain from reversed litigation expenses		557,167			—			—

Total operating expenses		(20,268,190	)		(27,740,255	)		(8,386,838	)

Loss from operations		(5,879,157	)		(21,054,774	)		(3,460,316	)
Interest income		181,571			98,770			42,627
Interest expense		—			(13,681	)		—
Other income		247,156			339,869			9,667

Loss before income tax benefit (expense), equity in (loss) earnings of affiliated company, impairment for investment in affiliated company		(5,450,430	)		(20,629,816	)		(3,408,022	)
Income tax benefit (expense)		(486,250	)		(234,286	)		25,584
Equity in (loss) earnings of affiliated company		64,293			(914,072	)		—
Impairment for investment in affiliated company		(1,870,897	)		—			—

Net loss		(7,743,284	)		(21,778,174	)		(3,382,438	)
Less: Net loss attributable to the non-controlling interests and redeemable non-controlling interest		337,455			4,182,875			243,666

Net loss from discontinued operations, net of tax		(7,405,829	)		(17,595,299	)		(3,138,772	)
Gain from disposal of Huayi Music		—			—			4,486,786

Total net (loss) income from discontinued operations		(7,405,829	)		(17,595,299	)		1,348,014

According to ASC 205, the effect of discontinued operations has been accounted for retroactively in the consolidated statement of operations for all the periods presented herein.

F-15

(c) Liquidity

The Group operates with significant losses and negative cash flows from operations in recent years. As of December 31, 2010, the accumulated deficits of the Group were $83,105,464 and the working capital was $8,399,974. The Company intends to raise additional funds through additional issuance of shares or loans to finance future capital commitments and for working capital purposes. As further discussed in Note 22, on April 1, 2011, the Company entered into agreements with Shanda Media Group Ltd. (“Shanda Media”), a wholly owned subsidiary of Shanda, pursuant to which the Company agreed to issue to Shanda Media 1,538,461,538 ordinary shares at a per share price of $0.0325 for $50,000,000 in cash, and $50,000,000 aggregate principal amount of 3% senior convertible notes at face value. The convertible notes will mature in three years after issuance and will bear an interest of 3% per annum, payable semi-annually. The transaction was committed to by Shanda and has been approved by the board in April 2011 and special shareholders’ meeting of the Company in June 2011 and expected to be closed in the second quarter of 2011 or not later than early of the third quarter of 2011. The management believes that the proceeds from the committed issuance of ordinary shares and convertible notes to Shanda will provide sufficient capital during the next twelve months to fund operations and other necessary capital expenditures, and as such, these financial statements are prepared under the going concern assumption which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business.

(2) Use of estimates

The preparation of consolidated financial statements in conformity with GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities at the dates of the financial statements. Significant accounting estimates reflected in the Company’s financial statements include accruals for revenue and cost of revenue adjustments, sales rebate, allowance for doubtful accounts, assessment of impairment for long-lived assets and goodwill, assessment of the net realizable value of licensed video copyright, the useful lives for intangible assets and property and equipment, share-based compensation expense, the recognition and measurement of deferred taxes and loss contingecies. Actual amounts may differ from these estimates under different assumptions or conditions.

(3) Consolidation

The consolidated financial statements include the financial statements of ~~Hurray!,~~the Company, its subsidiaries and VIEs. All inter-company transactions and balances have been eliminated upon consolidation. The affiliated company in which the Company controls more than 20% but less than 50% of the investment is accounted for using the equity method of accounting. The Company’s share of earnings (losses) of the equity investment is included in the accompanying consolidated statements of operations.

~~(c) Use~~The Group follows the guidance relating to the consolidation of ~~estimates~~Variable Interest Entities in Accounting Standard Codification (“ASC”) 810-10 (formerly referred to FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”), which requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.

F-16

Prior to the Reorganization in August 2010, to comply with PRC laws and regulations that restrict direct foreign ownership of telecommunication service businesses in the PRC, the Company conducted substantially all of its WVAS and recorded music businesses through several VIEs. The VIEs had entered into various agreements with one of Hurray!’s subsidiaries, including exclusive cooperation agreements. Under these agreements, Hurray! through a wholly owned PRC subsidiary, Beijing Hurray! Times Technology Co., Ltd. (“Beijing Hurray! Times”), was the exclusive provider of technical and consulting services to the VIEs. In return, the VIEs were required to pay Beijing Hurray! Times’ service fees for the technical and consulting services received. The technical and consulting service fees could be, and were, adjusted at Hurray!’s discretion depending on the level of service provided. Beijing Hurray! Times is entitled to receive service fees in an amount up to all of the net income of the VIEs. In addition, Beijing Hurray! Times had been assigned all voting rights by the direct and indirect owners of the VIEs through agreements which were valid for ten years and were renewable indefinitely and couldnot be amended or terminated except by written consent of all parties. Finally, Beijing Hurray! Times had the option to acquire the equity interest of the VIEs if and when it is legal to do so under PRC laws and regulations. The Company also had extended loans without interest to the registered shareholders to finance their investments in the VIEs. Each of the registered shareholders was a related party of the Company acting as de facto agent for the Company. The direct equity interest in these entities had been pledged as collateral for the loans and when permitted under Chinese laws, the loans were to be repaid by transferring the direct equity interest in these entities to the Company. Therefore, no minority interest was recorded for the registered capital from the registered shareholders.

Hurray! was the considered the primary beneficiary of the VIEs of WVAS and recorded music businesses because of all the variable interests held by Hurray! and the Company had the power to direct the activities of the VIEs. Therefore the Company consolidated the results of operations of the VIEs of WVAS and recorded music businesses before they were disposed in 2010.

After the acquisition of Ku6 in January 2010, to comply with PRC laws and regulations that prohibit or restrict foreign ownership of companies that provide advertising services and hold Internet Content Provider (“ICP”) license and the License for Transmission of Audio-Visual Programs through the Internet (“the License”), the Company conducts substantially all of its advertising business through Beijing VIE and Tianjin VIE. The paid-in capital of Beijing VIE was funded by the Company through loans extended to the authorized individuals (“nominee shareholders”) and Tianjin VIE was incorporated by Beijing VIE.

The ~~preparation~~Company has various agreements with its VIEs, through which, the Company holds all the variable interests of the VIEs and has the power to direct the activities of the VIEs. Consequently the Company is the primary beneficiary of these VIEs. Details of certain key agreements with the VIEs are as follows:

• Loan Agreements: Beijing WOFE has granted interest-free loans to the nominee shareholders with the sole purpose of providing funds necessary for the capital injection of Beijing VIE. The portion of the loans for subsequent capital injection is eliminated with the capital of the VIE during consolidation. The interest-free loans to the nominee shareholders of VIE as of December 31, 2010 were RMB9 million. Beijing WOFE is able to require the nominee shareholders to settle the loan amount through the entire equity interest of the VIE and nominate someone else to hold the shares on Beijing WOFE’s behalf.

• Proxy Agreement: The nominee shareholders of Beijing VIE and the shareholder of Tianjin VIE irrevocably appointed Beijing WOFE and Tianjin WOFE’s officers to vote on their behalf on all matters they are entitled to vote on, including matters relating to the transfer of any or all of their respective equity interests in VIEs, making all the operational, financial ~~statements~~decisions and the appointment of the directors, general managers and other senior management of the VIEs.

F-17

• Equity Interest Pledge Agreements: The nominee shareholders of Beijing VIE and the shareholder of Tianjin VIE have pledged their respective equity interests in the VIEs as collateral to ~~make estimates~~secure the nominee shareholders’ obligation under other agreements and ~~assumptions that affect~~for the ~~reported amounts~~payment by the VIEs under the exclusive technical consulting and services agreements and the loan agreement. The nominee shareholders of ~~assets~~Beijing VIE and ~~liabilities~~the shareholder of Tianjin VIE cannot sell or pledge their equity interests to others without the approval from Beijing WOFE and Tianjin WOFE, and the nominee shareholders of Beijing VIE and the shareholder of Tianjin VIE cannot receive any dividends without the approval of Beijing WOFE and Tianjin WOFE.

• Exclusive Call Option Agreements: The nominee shareholders of the VIEs grant Beijing WOFE and Tianjin WOFE the exclusive and irrevocable right to purchase from the nominee shareholders, to the extent permitted under PRC laws and regulations or at the ~~dates~~request of the ~~financial statements~~Company, all of the equity interest in these entities for a purchase price equal to the amount of the registered capital or at the lowest price permitted by PRC laws and regulations. Beijing WOFE and Tianjin WOFE may exercise such option at any time. In addition, VIEs and its nominee shareholders agree that without Beijing WOFE and Tianjin WOFE’s prior written consent, they will not transfer or otherwise dispose the reported amounts of revenues and expenses in the reporting periods. Significant accounting estimates reflected in the Company’s financial statements include accruals for revenue and cost of revenue adjustments, valuations of acquired intangible assets and goodwill, stock based compensation, and deferred income tax assets valuation allowances.equity interest or declare any dividend.

~~(d)~~• Exclusive Business Cooperation Agreements: Beijing WOFE and Tianjin WOFE are the exclusive provider of the technical, consulting and related services and information of Beijing VIE and Tianjin VIE.

As a result of the above contractual agreements, the Company consolidates the VIEs as required by Accounting Standards Codification (“ASC”) 810-10,Consolidation(formerly referred to as Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46R, Consolidationof Variable Interest Entities, an Interpretation of ARB No. 51).

(4) Significant risks and uncertainties

The ~~Company~~Group participates in ~~industries with rapid changes in regulations,~~a dynamic high technology ~~trends, customer demand and competition~~industry and believes that changes in any of the following areas could have a material adverse effect on the ~~Company’s~~Group’s future financial position, results of operations or cash flows: i) changes in the overall demand for ~~entertainment-oriented wireless value-added services;~~services and products; ii) changes in business offerings; iii) competitive pressures due to new entrants; iv) advances and new trends in new technologies and industry standards; v) changes in ~~key~~bandwidth suppliers; vi) changes in certain strategic relationships or customer relationships; vii) regulatory ~~or other factors;~~considerations; viii) copyright regulations; and ix) risks associated with the ability to maintain strategic relationships with the mobile and fixed-line telecommunication operators; risks associated with attracting and retaining music artists, accessing songs and songwriters, and managing the Company’s new music businesses; and risks associated with the Company’sGroup’s ability to attract and retain ~~other~~employees necessary ~~employees~~ to support its growth.

~~(e)~~(5) Fair value

The Company adopted Accounting Standard Codification (“ASC”) 820 “Fair value measurements and disclosures” (formerly referred to as the Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”)) on January 1, 2008. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The guidance outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under US GAAP, certain assets and liabilities must be measured at fair value, and the guidance details the disclosures that are required for items measured at fair value.

The Company measures the financial assets and liabilities using inputs from the following three levels of the fair value hierarchy. The three levels are as follows:

Level 1 inputs are unadjusted quoted prices in active markets for identical assets that the management has the ability to access at the measurement date.

F-18

Level 2 inputs include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable for the asset (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 includes unobservable inputs that reflect the management’s judgments about the assumptions that market participants would use in pricing the asset. The management develops these inputs based on the best information available, including their own data.

(6) Business combinations and non-controlling interests

The Company accounts for its business combinations using the purchase method of accounting. This method requires that the acquisition cost to be allocated to the assets, including separately identifiable intangible assets, and liabilities the Company acquired based on their estimated fair values.

From January 1, 2009, the Company adopted ASC 805 (formerly referred to as SFAS No. 141 (revised 2007), “Business combinations”). Following this adoption, the cost of an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations (For periods prior to January 1, 2009, contingent consideration was not recorded until the contingency was resolved) and all contractual contingencies as of the acquisition date. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total of cost of acquisition, fair value of the non-controlling interests (Prior to January 1, 2009, any non-controlling interest was reflected at historical cost) and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement.

The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable management judgment. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. The Company determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of assets and forecasted life cycle and forecasted cash flows over that period. Although the Company believes that the assumptions applied in the determination are reasonable based on information available at the date of acquisition, actual results may differ from the forecasted amounts and the difference could be material.

From January 1, 2009, following the adoption of the authoritative guidance on non-controlling interests, previously issued as SFAS No.160, “Non-controlling Interests in Consolidated Financial Statements-an amendment of ARB No.51.”), now codified as ASC 810, Consolidation, the Company also renamed minority interests to non-controlling interests and reclassified it on the consolidated balance sheet from the mezzanine section between liabilities and equity to a separate line item in equity except for the redeemable securities that are subject to the guidance in ASC 268 (formerly referred to as EITF Topic D-98, “Classification and Measurement of Redeemable Securities”). The Company also expanded disclosures in the consolidated financial statements to clearly identify and distinguish the interests of the Company from the interests of the non-controlling owners of its subsidiaries. Consolidated net income is adjusted to include net income attributed to the non-controlling interest and consolidated comprehensive income is adjusted to include comprehensive income attributed to the non-controlling interest. The Company has applied the presentation and disclosure requirements retrospectively for all periods presented.

F-19

(7) Foreign currency translation

The functional currency and reporting currency of the Company is the United States dollar (“U.S. dollar”). The Company’s subsidiaries and VIEs, with the exception of its subsidiaries of Seed Music Co., Ltd and Profita Publishing Limited, use Renminbi (“RMB”) as their functional currency. From January 1, 2009, the Company consolidated Seed Music into its consolidated financial statements upon consummation of the acquisition. Seed Music Co., Ltd and Profita Publishing Limited, the subsidiaries of Seed Music Co., Ltd., which was disposed in August 2010 (Note 2(1)), mainly operate in Taiwan and use Taiwan dollar (“TWD”) as their functional currency.

Assets and liabilities of the Company’s subsidiaries and VIEs are translated at the current exchange rates quoted by the Federal Reserve Bank of New York in effect at the balance sheet dates, equity accounts are translated at historical exchange rates and revenues and expenses are translated at the average exchange rates in effect during the reporting period to USD. Translation adjustments resulting from foreign currency translation to reporting currency are reported as cumulative translation adjustments and recorded in accumulated other comprehensive income (loss) in the consolidated statements of changes in equity for the years presented.

Transactions denominated in currencies other than RMB or TWD functional currencies are translated into the functional currencies at the exchange rates quoted by the People’s Bank of China or the Central Bank of the Republic of China (Taiwan) prevailing at the dates of the transactions. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations and comprehensive income. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currencies using the applicable exchange rates quoted by the People’s Bank of China or the Central Bank of the Republic of China (Taiwan) at the balance sheet dates. All such exchange gains and losses are included in the statements of operations and comprehensive loss.

In 2008 the Company incurred losses of $8,990,067 following the conversion into Euros and subsequent conversion back into U.S. dollars of a significant portion of the Company’s U.S. dollar deposits arising from the high volatility in the currency markets.

RMB is not fully convertible into U.S. dollars. The rate of exchange for the U.S. dollar quoted by the Federal Reserve Bank of New York was RMB 6.8259 on December 31, 2009 and 6.6000 on December 31, 2010, respectively.

(8) Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, demand deposits and highly liquid investments ~~which are unrestricted as~~placed with bank or other financial institutions with no restriction to withdrawal or use, ~~and~~ which have original maturities of three months or less.

~~(f)~~(9) Short-term investments

Short-term investments represent time deposits with bank with original maturities longer than three months and less than one year.

(10) Allowances for doubtful accounts

The Company determines the allowance for doubtful accounts when facts and circumstances indicate that the receivable is unlikely to be collected by taking into account of an aging analysis of the accounts receivable balances, historical bad debt records, repayment patterns in the prior year and other factors such as the policies of operators and financial condition of the customer.

F-20

(11) Inventories

Inventories represent music compact discs (“CDs”)and related music products and are stated at the lower of cost, determined using the first-in, first-out method, or ~~market.~~market price. The Group provides estimated inventory allowance for excessive, slow moving and obsolete inventories as well as inventory whose carrying value is in excess of net realizable value.

~~(g)~~(12) Investment in affiliated company

Affiliated companies are entities over which the Company has significant influence, but which it does not control. Investments in affiliated companies are accounted for by the equity method of accounting. Under this method, the Company’s share of the post-acquisition profits or losses of affiliated companies is recognized in the consolidated statements of operations. Unrealized gains on transactions between the Company and its affiliated companies are eliminated to the extent of the Company’s interest in the affiliated companies; unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. When the Company’s share of losses in an affiliated company equals or exceeds its interest in the affiliated company, the Company does not recognize further losses, unless the Company has incurred obligations or made payments on behalf of the affiliated company.

The Company continually reviews its investments in affiliated companies to determine whether a decline in fair value below the carrying value is other than temporary. The primary factors the Company considers in its determination are the length of time that the fair value of the investment is below the Company’s carrying value and the financial condition, operating performance and near term prospects of the investee. In addition, the Company considers the reason for the decline in fair value, including general market conditions, industry specific or investee specific reasons, changes in valuation subsequent to the balance sheet date and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for a recovery in fair value. If the decline in fair value is deemed to be other than temporary, the carrying value of the investment is written down to fair value. Impairment loss amounting to $1.9 million was recorded in the year ended December 31, 2008 (Note 8). No impairment was provided during the years ended December 31, 2009 and 2010.

(13) Property and equipment, net

Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over the following estimated useful lives:


Furniture and office equipment		33~5 years
Motor vehicles		5 years
Telecommunications equipment		33~5 years
Leasehold improvements		Lesser of original lease term or estimated useful life

Expenditures for maintenance and repairs are expensed as incurred. Gain or loss on the disposal of property and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets and is recognized in the consolidated statements of operations.

~~F-10~~F-21

~~(h)~~KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(Amounts expressed in U.S. dollars, unless otherwise stated)

(14) Acquired intangible assets, net

An intangible asset is required to be recognized separately from goodwill based on its estimated fair value if such asset arises from contractual or legal right or if it is separable as defined by ASC 805 (formerly referred to as SFAS No. 141 (revised 2007), “Business combinations”, (“SFAS No. 141(R)”)). Acquired intangible assets consists of intangible assets, as detailed in Note 8,7, acquired through direct purchases and various business acquisitions and are amortized on a straight-line basis over their ~~expected~~estimated useful economic ~~life.~~lives.

~~(i)~~(15) Video production and acquisition costs and licensed video copyrights

The Company contracts for the production, self produces and acquisition of videos and owned the video copyright to exhibit on its websites since the acquisition of Ku6. The Company also licensed videos to exhibit on its websites since the acquisition of Ku6.

Video production and acquisition costs

Following the guidance under ASC 926-20-25, video production (which mainly include direct production costs and production overhead) and acquisition costs are capitalized, if the capitalization criteria was met, and stated at the lower of unamortized cost or estimated fair value.

With respect to production and acquisition costs, until the Company can establish estimates of secondary market revenues, capitalized costs for each video produced are limited to the amount of revenues contracted for that video. The costs in excess of revenues contracted for that video are expensed as incurred on an actual basis, and are not restored as assets in subsequent periods. Once the Company can establish estimates of secondary market revenues in accordance with ASC 926-20-35-5(b), it capitalizes subsequent film costs.

Capitalized video production costs are amortized in accordance with the guidance in ASC 926-20-35-1 using the individual-film-forecast-computation method, based on the proportion of the revenues earned in a period to the estimated remaining unrecognized ultimate revenues as of the beginning of that period. The Company estimates total revenues to be earned (“ultimate revenues”) throughout the life of a video. Ultimate revenue estimates for the produced or acquired videos are periodically reviewed and adjustments, if any, will result in changes to amortization rates. Estimates used in calculating the fair value of the self produced content are based upon assumptions about future demand and market conditions. The capitalized costs are subject to assessment for impairment in accordance with ASC 926-20-35-12 to 35-18, if an event or change in circumstances indicates that the fair value is less than its unamortized costs.

During the year ended December 31, 2010, video production and acquisition costs did not meet the criteria for capitalization and as a result all the video production costs have been expensed as incurred.

Licensed video copyrights

The licensed video copyrights are amortized over their respective licensing periods.

The licensed video copyrights are carried at the lower of amortized cost or net realizable value. Under the net realizable value approach, the Company determines the expected cash inflows that are directly attributed to the contents s which comprise of the expected revenues directly attributable to the content less the direct costs to deliver the content to derive the net realizable value of the asset. The Company writes down the carrying value of the licensed content if the estimated net future direct cash inflows from the licensed video copyrights over the licensing period are lower than the carrying amount.

F-22

The amortization period of the licensed video copyrights mainly range from 1 to 3 years during the year ended December 31, 2010. Amortization and write-down expense for the year ended December 31, 2010 was $8,012,252 and $7,739,562, respectively.

(16) Goodwill

Goodwill represents the excess of the purchase price over the fair value of the identifiable assets acquired and liabilities assumed as a result of the Company’s acquisitions.

The Company tests goodwill for impairment by reporting unit on an annual basis or more frequently if an event occurs or circumstances change that could more likely than not reduce the fair value of the goodwill below its carrying amount. The Company performs a two-step goodwill impairment test. The first step compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of the affected reporting unit’s goodwill to the carrying value of that goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. ~~The~~As discussed in Note 9, impairment ofprovisions relating to goodwill ~~is determined by~~amounting to approximately $2.7 million and $3.6 million were recognized in the ~~Company estimating~~discontinued operations (Note 2(1)) in the fair value based upon the present value of future cash flows. In estimating the future cash flows of each reporting unit, the Company has taken into consideration the overall and industry economic conditions and trends, market risk of the Company and historical information.

~~The Company changed the impairment test date from January 31 to~~year ended December 31, 2008 and 2009, respectively. No goodwill impairment was recognized in ~~2006 to better utilize~~ the ~~existing budget information for the future cash flow projection for each fiscal~~ year ~~ending~~ended December ~~31. Such change has no material effect on the Company’s financial statements.~~31, 2010.

~~(j)~~(17) Impairment of long-lived assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the Company measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Company would recognize an impairment loss based on the fair value of the assets. The Company uses estimates and judgments in its impairment tests and if different estimates or judgments are utilized, the timing or the amount of the impairment charges could be different. As discussed in Note 7, impairment provisions relating to intangible assets amounting to approximately $2.9 million and $3.5 million were recognized in the year ended December 31, 2008 and 2009, respectively, included in discontinued operations. No impairment incurred during the year ended December 31, 2010.

~~(k)~~(18) Financial instruments

Financial instruments include cash and cash equivalents, short term investments, accounts receivable, prepayments and other current assets, amount due from/to related parties, accounts payable and accrued expenses and other current liabilities. As of December 31, 2009 and 2010, their carrying values approximated their fair values because of their generally short maturities. There are no other financial assets or liabilities that are being measured at fair value at December 31, 2009 and 2010 except for the contingent consideration in relation to the acquisition of Seed Music (Note 3) in January 2009 and disposed in August 2010 (Note 2(1)), which is recorded at fair value and classified within Level 3 of the fair value hierarchy.

F-23

(19) Revenue recognition and cost of revenues

In accordance with ASC 605, Revenue Recognition, the Group recognizes revenues when the following criteria are met: persuasive evidence of an arrangement exists, the sales price is fixed or determinable, delivery has occurred and collectability is reasonably assured. Revenues are recorded net of sales taxes.

Wireless value-added services (discontinued operations (Note 2(1))

Wireless value-added service revenues ~~are~~were derived from providing personalized media, games, entertainment and communication services to mobile phone and personal handy phone (collectively “mobile phones”) customers of the various subsidiaries of ~~four~~the three major Chinese operators of ~~mobile and fixed-line~~ telecommunication networks, China United Telecommunications Corporation (“China Unicom”), China Mobile Communications Corporation (“China Mobile”), and China Telecommunications ~~Corporation and China Netcom Communications Group~~ Corporation (collectively, the “Telecom Operators”). Fees for these services, negotiated by a network service agreement with the Telecom Operators and indicated in the message received on the mobile phone, ~~are~~were charged on a per-use basis or on a monthly subscription basis, and vary according to the type of services delivered.

The Company ~~contracts~~contracted with the Telecom Operators ~~(defined above)~~ for the transmission of wireless services as well as for billing and collection services. The Telecom Operators ~~provide~~provided the Company with a monthly statement that represents the principal evidence that service ~~has~~had been delivered and ~~triggers~~triggered revenue recognition for a substantial portion of the Company’s revenue. In certain instances, when a statement iswas not received within a reasonable period of time, the Company ~~makes~~made an estimate of the revenues and cost of services earned during the period covered by the statement based on its internally generated information, historical experience and/or other assumptions that ~~are~~were believed to be reasonable under the circumstances. ~~The Company recognizes WVAS revenues in the period in which the services are performed net of business taxes of $1,506,002, $1,664,706 and $1,397,538 for 2007, 2006 and 2005, respectively.~~

~~F-11~~

The Company ~~measures~~measured its revenues based on the total amount paid by mobile phone customers, for which the Telecom Operators bill and collect on the Company’s behalf. Accordingly, the service fee paid to the Telecom Operators iswas included in the cost of revenues. In addition, in respect of 2G services, the Telecom Operators ~~charge~~charged the Company a network fee based on a per message fee, which varies depending on the volume of messages sent in the relevant month, multiplied by the excess of messages sent over messages received. These network fees ~~are~~were likewise retained by the Telecom Operators and ~~are~~were reflected as cost of revenues. The cost of revenues also ~~includes~~included fees paid to ~~our~~ content providers and marketing partners, maintenance costs related to equipment used to provide the services, bandwidth leasing charges and data center services, alternative channels, media and related Internet costs, operator imposed penalty charges, and certain distribution costs.

The Company ~~evaluates~~evaluated its cooperation arrangements with the ~~criteria outlined in Emerging Issues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as Principal Versus Net as~~Telecom Operators to determine whether to recognize the Company’s revenues on a gross basis or net of the service fees and net transmission charges paid to the Telecom Operators. The Company’s determination is based upon an ~~Agent,” in determining~~assessment of whether it ~~is appropriate~~acted as a principal or agent when providing its services. The Company had concluded that it acts as principal in the arrangement. Factors that support the Company’s conclusion mainly included:

the Company was the primary obligor in the arrangement;

the Company was able to ~~record~~establish prices within price caps prescribed by the telecommunications operators to reflect or react to changes in the market;

the Company determined the service specifications of the services it will be rendering;

the Company was able to control the selection of its content suppliers; and

the Telecom Operators usually would not pay the Company if users couldnot be billed or if users did not pay the Telecom Operators for services delivered and, as a result, the Company bears the delivery and billing risks for the revenues generated with respect to its services.

F-24

Based on these factors, the Company believed that recognizing revenues on a gross ~~amount~~basis was appropriate. However, as noted above, the Company’s reported revenues were net of ~~revenues and related costs or the net amount earned after deducting the fees charged~~bad debt charges that had been deducted by the Telecom Operators. The Company records the gross amounts billed to its customers based on the following facts: (i) it is the primary obligor in these transactions, (ii) it has latitude in establishing prices and selecting suppliers and (iii) it is involved in the determination of the service specifications.

Recorded Music (discontinued operations (Note 2(1))

~~Through the acquisition of Huayi Brothers Music and Freeland Music at the end of 2005 and the beginning of 2006, respectively, the~~The Company ~~entered~~was in the business of artist development music production, offline music distribution and online distribution through wireless ~~value added~~value-added services and the Internet. Recorded music revenues ~~are~~were derived from live performances, corporate sponsorship and advertising, online and wireless sales, and offline CD ~~sales.~~sales

The Company ~~generates~~generated revenues from the sale of CDs either by providing the CD master to a distributor or by directly arranging for the volume production and subsequent wholesale of the CDs. In the former case, the Company ~~receives~~received a fixed fee, ~~has~~had no further obligations and ~~recognizes~~recognized the fee as revenue when the master CD iswas provided. In the latter case, the Company ~~ships~~shipped the produced CDs to retail distributors and ~~recognizes~~recognized wholesale revenues at the time of shipment less a provision for future estimated returns. ~~In 2007, the estimated sales returns rate is approximately 18% based on past experience.~~

The Company ~~recognizes~~recognized artist performance fees and corporate sponsorship or marketing event fees once the performance or the service ~~has~~had been completed. In accordance with the relevant accounting standards for revenue recognition, corporate sponsorship arrangements involving multiple deliverables are broken into single-element arrangements using residual method for revenue recognition purpose. The Company recognized revenue on the service elements delivered and deferred the recognition of revenue for larger of the contractual cash holdback or the fair value of the undelivered service elements until the remaining obligations had been satisfied. The Company determined the fair value of undelivered service elements based on the price charged for the similar performance or marketing events on a standalone basis. Where the Company ~~acts~~acted as the primary obligor in the transaction, revenues ~~are~~were recorded on a gross basis. Where the Company iswas considered an agent or where the artists separately contract with the event organizer, revenues ~~are~~were recorded on a net basis.

The Company ~~licenses~~licensed its music to third parties for guaranteed minimum royalty payments and normally received non-refundable upfront ~~and typically non-refundable.~~licensing fees. In such cases the Company ~~recognizes~~recognized revenue on a straight-line basis over the ~~life of the~~ license period and unrecognized revenues ~~are~~were included in liabilities. When the contract provides for additional payments if revenues exceed the minimum amount guaranteed, such amounts ~~are~~were included in revenues when the Company iswas notified of its entitlement to additional payments.

The Company ~~incurs~~incurred costs in producing CD masters, volume CD production, artist and songwriter royalties based on certain percentage of the revenue, and royalties payable to other parties for the use of their work. The cost of record masters and volume CD productions, and royalties paid in advance ~~are~~were recorded in prepaid expenses and other current assets when the sales of the recording ~~are~~were expected to recover the cost and amortized as ~~costs of revenues~~expenses over the revenue generating period, typically within one year. The decision to capitalize an advance to an artist, songwriter or other party requires significant judgment as to the recoverability of these advances. Advances for royalties and other capitalized costs ~~are~~were regularly assessed for ~~recoverability continuously.~~

~~(l) Foreign currency translation~~

~~Hurray! uses~~recoverability. The costs of ongoing royalties relating to the ~~United States dollar (“U.S. dollar”)~~live performance, corporate sponsorship and advertising, online and wireless sales and offline CD sales to retail distributors were recognized as its functional and reporting currency. Monetary assets and liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates of exchange prevailing at the balance sheet date. Transactions in currencies other than U.S. dollars during the year are converted into U.S. dollars at the applicable rates of exchange prevailing at the last day of the month transactions occurred. Transaction gains and losses are recognized in the statements of operations.

The financial records of certain of Hurray!’s subsidiaries and VIEs are maintained in Renminbi (“RMB”), which is their functional currency. Assets and liabilities are translated at the exchange rates at the balance sheet date, equity accounts are translated at historical exchange rates and revenues, expenses, gains and losses are translated using the average rate for the period. Translation adjustments are reported as cumulative translation adjustments and are reflected as a separate component of comprehensive income in the statements of shareholders’ equity.

RMB is not fully convertible into U.S. dollars. The rate of exchange for the U.S. dollar quoted by the Bank of China was RMB 7.2946, RMB 7.8087 and RMB 8.0702 on December 31, 2007, 2006 and 2005, respectively.incurred.

~~F-12~~F-25

~~(m)~~KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(Amounts expressed in U.S. dollars, unless otherwise stated)

Online advertising services

The Group’s revenues are derived principally from online brand advertising arrangements, where the advertisers pay to place their advertisements on the Company’s online video platform in different formats. Such formats generally include banners, buttons, links, pre-roll or post-roll video advertisements.

Advertisements on the Company’s online video platform are charged either based on the agreed number of clicks per day over the agreed period or on per day basis. In the first case, the delivery of service occurs when users click on the videos clips. In the latter case, the delivery is not linked to displays, but occurs as the advertisement is hosted each day.

All the Company’s revenue arrangements involve multiple element deliverables that may include placements of different types of advertisements, which are accounted for using the guidance under ASC 605-25 “Multiple Element Arrangements”.

The Group sells the advertising services over a broad price range and there is a lack of objective and reliable evidence of fair value for each deliverable included in the arrangement. Therefore for the arrangements that all the elements are not delivered in a uniform pattern over the agreement period, the Group treats all elements of advertising contracts as a single unit of accounting for revenue recognition purposes and recognizes the revenues on the completion of delivery of all the elements involved in the arrangements. When all of the elements within an arrangement are delivered uniformly over the agreement period, the revenues are recognized ratably over the contract period.

The Group makes a credit assessment of the customer to assess the collectability of the contract amounts prior to entering into contracts. For those contracts for which the collectability was assessed as not reasonably assured, the Group recognizes revenue only when the cash was received and all revenue recognition criteria were met.

The majority of the revenue arrangements are contracted with advertising agencies and the Group provides cash incentives in the form of rebate to these advertising agencies based on volume and performance, and accounts for such incentives as a reduction of revenue in accordance with ASC 605-50-25 (Formerly referred to as EITF 01-9,Accounting for Consideration Given by a Vendor to a Customer). The cash incentives to third-party advertising agencies in the year ended December 31, 2010 was $5,440,054.

Cost of advertising revenues consist primarily of employee costs associated with the platform operation and share based compensation, depreciation expenses, internet bandwidth leasing costs, video production cost, amortization and write-down of licensed video copyright.

Business tax and related surcharges

The Group’s subsidiaries and VIE subsidiaries are subject to business tax and related surcharges and value-added tax on the revenues earned for services provided in the PRC. The applicable business tax rate varies from 3% to 5% for the WVAS and recorded music services except for the offline CD distribution and the rate of value added tax is 13% on revenues from offline CD distribution. The applicable business tax rate for advertising business is 5% based on the gross advertising revenue before deducting the advertising agencies rebate. In the accompanying consolidated statements of operations, business tax and related surcharges for revenues derived from wireless value-added services and recorded music revenues and advertising revenues are deducted from gross revenues to arrive at net revenues when incurred.

F-26

(20) Product development expenses

Product development expenses consist of content development expenses including compensation and related costs for employees associated with the development and programming of mobile data ~~content.~~content related to WVAS business. These costs are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized. To date, the Company has essentially completed its development concurrently with the establishment of technological feasibility, and, accordingly, no costs have been capitalized.

~~(n)~~(21) General and administrative expenses

General and administrative expenses consist primarily of salary and benefits for general management, finance and administrative personnel, bad debt provision, depreciation, amortization and impairment of intangible assets, professional service fees, share-based compensation, and other expenses.

(22) Sales and marketing

Sales and marketing expenses consist primarily of the sales and marketing personnel payroll compensation and related employee costs, sales commission paid to the sales team and the third parties, advertising and market promotion expenses, office rental and other overhead expenses incurred by the Group’s sales and marketing personnel.

(23) Advertising costs

The Company expenses advertising costs as incurred. Total advertising expenses were $5,895,995, $4,191,045 and $210,987 for the years ended December 31, 2008, 2009 and 2010, respectively, and have been included in selling and marketing expenses and cost of revenues in discontinued operations. Total advertising expenses were nil, $153,633 $6,086,030 for the year ended December 31, 2008, 2009 and 2010, respectively, and have been included in selling and marketing expenses of continuing operations.

(24) Stock-based compensation

~~Effective January 1, 2006, the~~The Company adopted ~~the fair value recognition provisions of~~ASC 718 “Stock Compensation” (formerly referred to as Statement of Financial Accounting ~~Standards~~Standard 123(R) (“~~SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)~~SFAS123(R)”), ~~using the modified prospective transition method~~which requires all share-based payments to employees and ~~therefore has not restated results for prior periods. Under this transition method, stock-based~~directors, including grants of employee stock options and restricted shares, to be recognized as 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~~in the financial statements over the vesting period of ~~January 1, 2006~~the award based on the fair ~~market~~ value as of the award determined at the grant ~~date, measured~~date. The valuation provisions of ASC 718 apply to awards granted after the adoption of ASC 718, to awards granted to employees and directors before the adoption of ASC 718 whose related requisite services had not been provided, and to awards which were subsequently modified or cancelled. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent period if actual forfeitures differ from initial estimates.

In accordance with ~~SFAS 123,~~ASC 718, the Company has recognized share-based compensation expenses, net of a forfeiture rate, using the straight-line method for awards with graded vesting features and ~~(b) compensation expense~~service conditions only and using the graded-vesting attribution method for awards with graded vesting features and performance conditions. See Note 16 for further information on stock-based compensation.

F-27

(25) Leases

Leases where substantially all ~~stock-based compensation awards granted on or subsequent to January 1, 2006, based on grant-date fair vale estimated in accordance~~the rewards and risks of ownership of assets remain with the ~~provisions~~leasing company are accounted for as operating leases. Other leases are accounted for as capital leases. Payments made under operating leases, net of ~~SFAS 123(R). In March 2005,~~any incentives received by the ~~SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding~~Company from the ~~SEC’s interpretation~~leasing company, are charged to the consolidated statements of ~~SFAS 123(R)~~operations and ~~the valuation of stock-based payments for public companies. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). The Company recognizes stock-based compensation costs~~comprehensive income on a straight-line basis over the ~~requisite service period~~lease periods, as specified in the lease agreements, with reference to the actual number of users of the ~~award, which is generally~~leased assets, as appropriate.

(26) Taxation

Current income taxes are provided for on the ~~vesting period~~taxable income of each subsidiary on the ~~award.~~

~~Prior to the adoption of SFAS 123(R), the Company recognized stock-based compensation expense~~separate tax return basis in accordance with ~~Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and had adopted~~ the disclosure-only alternative of SFAS 123 and SFAS No. 148, “Accounting for Stock-based Compensation — Transition and Disclosure”. In accordance with APB 25 and related interpretations, stock-based compensation expense was not recorded in connection with share-based payment awards granted with exercise prices equal to or greater thanrelevant tax laws.

Deferred income taxes are provided using the ~~fair market value of the underlying shares on the date of grant.~~

~~Share-based payment transactions with non-employees are accounted for as share based compensation expenses~~liability method in accordance with ~~EITF 96-18 “Accounting for Equity Instruments that Are Issued~~ASC 740 (formerly referred to ~~Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services”.~~

~~See Note 15 to the Consolidated Financial Statements for further discussion on stock-based compensation.~~

~~(o) Taxation~~

as SFAS No. 109, “Income ~~taxes — Deferred~~Taxes”). Under this method, deferred income taxes are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, net operating loss carry forwards and credits by applying enacted statutory tax rates applicable to future years. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. The effect on deferred taxes of a change in tax rates is recognized in income in the period of change. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. ~~Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.~~

~~Value added taxes — The Company’s PRC subsidiaries and VIEs are subject~~ASC 740-10-25 (formerly referred to ~~value-added tax at a rate of 17% on revenues from sales of hardware and software~~ as well as the installation and system integration services which are deemed as mixed-sale of goods and thus subject to VAT. Value-added tax payable on revenues is computed net of value-added tax paid on purchases. If the net amount of value added tax payable exceeds 3% of the sales, the excess portion of value added tax can be refunded immediately. The Company therefore is subject to an effective net value added tax burden of 3% from the sales. This government policy is effective until 2010. The net amount of value added tax is recorded either in the line item of other tax payable or prepaid expenses and other current assets on the face of consolidated balance sheet. In 2007, 2006 and 2005, the Company received rebates of $7,001, $229,824 and $649,204, respectively, which are included in income from discontinued operations as the Company sold its software and system integration services in 2007.

Business taxes — The Company’s PRC subsidiaries and VIEs are also subject to business tax at a rate of 3-5% on wireless value-added services revenues. Business taxes are recorded as a deduction of revenue when incurred.

~~In June 2006, the Financial Accounting Standards Board (“FASB”) issued~~ Interpretation No. 48 (“FIN 48”), “Accountingfor Uncertainty in Income Taxes — an interpretation of FASB Statement No. ~~109”. FIN 48~~109”) prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006, with early adoption permitted. The Company adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not result in a cumulative adjustment on January 1, 2007 and had no significant impact on the Company’s accounting for income taxes for the year ended December 31, 2007. The Company did not incur any interest or penalties related to potential underpaid income tax expenses, and also does not expect to have a significant ~~increase or decrease on the~~ unrecognized tax benefits within 12 months from December 31, ~~2007.~~2009 and 2010.

(27) Statutory reserves

The Company’s subsidiaries incorporated in the PRC and the VIEs are required on an annual basis to make appropriations of retained earnings set at certain percentage of after-tax profit determined in accordance with PRC accounting standards and regulations (“PRC GAAP”).

The Company’s subsidiaries must make appropriations to (i) general reserve and (ii) enterprise expansion fund in accordance with the Law of the PRC on Enterprises Operated Exclusively with Foreign Capital. The general reserve fund requires annual appropriations of 10% of after-tax profit (as determined under PRC GAAP at each year-end) until such fund has reached 50% of the company’s registered capital; enterprise expansion fund appropriation is at the PRC subsidiaries’ directors’ discretion. The Company’s VIEs, in accordance with the China Company Laws, must make appropriations to a (i) statutory reserve fund and (ii) discretionary surplus fund. The statutory reserve fund requires annual appropriations of 10% of after-tax profit (as determined under PRC GAAP at each year-end) until such fund has reached 50% of the company’s registered capital; other fund appropriation is at the VIEs’ directors’ discretion.

The general reserve fund and statutory reserve fund can only be used for specific purposes, such as setting off the accumulated losses, enterprise expansion or increasing the registered capital. The enterprise expansion fund was mainly used to expand the production and operation; it also may be used for increasing the registered capital.

~~F-13~~F-28

~~The~~KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(Amounts expressed in U.S. dollars, unless otherwise stated)

Appropriations to these funds are classified in the consolidated balance sheets as statutory reserves. No appropriations were made during the year ended December 31, 2008, 2009 and 2010. There are no legal requirements in the PRC to fund these reserves by transfer of cash to restricted accounts, and the Company does not do so.

(28) Contingency

In the normal course of business, the Group is subject to ~~taxation in PRC~~contingencies, such as legal proceedings and ~~other tax jurisdictions. There~~claims arising out of its business, that cover a wide range of matters. Liabilities for such contingencies are recorded when it is ~~no ongoing examination by taxing authorities at this time. The Company’s various tax years from 2002 to 2007 are remaining open in various taxing jurisdictions.~~

~~(p) Comprehensive income (loss)~~

~~Comprehensive income (loss) includes foreign currency translation adjustments. Comprehensive income (loss) is reported in~~probable that a liability has been incurred and the ~~statements of shareholders’ equity.~~

~~(q) Fair value of financial instruments~~

Financial instruments include cash and cash equivalents, accounts receivable, short-term borrowings, accounts payable, and accrued expenses and other current liabilities. The carrying values of cash and cash equivalents, accounts receivable, short-term borrowings, accounts payable and accrued liabilities and other current liabilities approximate their fair values due to their short-term maturities. The amount ~~payable in December 2007 in respect~~ of the ~~acquisition of Shanghai Magma has been calculated after applying a discount of 3.875% to reflect approximate market rates for such liabilities.~~assessment can be reasonably estimated. See Note 21.

~~(r) Advertising costs~~

The Company expenses advertising costs as incurred. Total advertising expenses were $5,269,550, $5,404,935 and $969,122 an in 2007, 2006 and 2005, respectively, and have been included in selling and marketing expenses and cost of revenues.

~~(s) Net (Loss) income~~(29) Loss per share

Basic ~~(loss) income~~net loss attributable to the Company’s ordinary shareholders’ per share is computed by dividing ~~income~~net loss attributable to the Company’s ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. Diluted ~~(loss) income~~net loss attributable to the Company’s ordinary shareholders’ per ~~ordinary~~ share reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares were exercised or converted into ordinary shares. The dilutive effect of the stock options and nonvested shares is computed using the weighted average number of ordinary shares and, if dilutive, potential ordinary shares outstanding during the year. Potential ordinary shares consist of shares issuable upon the exercise of stock options for the purchase of ordinary shares and the settlement of restricted share units and are accounted for using the treasury stock method. Potential ordinary shares are not included in the denominator of the diluted loss per share calculation when inclusion of such shares would be anti-dilutive.

~~(t) Recently issued~~(30) Comprehensive loss

Comprehensive loss is defined as the change in equity of a company during the period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. Accumulated other comprehensive loss, as presented on the accompanying consolidated balance sheets, consists of cumulative foreign currency translation adjustment.

(31) Recent accounting ~~standards~~pronouncements

In ~~March 2008,~~October 2009, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued ~~SFAS No. 161, “Disclosures about Derivative Instruments~~new guidance on “revenue recognition for arrangements with multiple deliverables and ~~Hedging Activities,~~certain revenue arrangements that include software elements.” By providing another alternative for determining the selling price of deliverables, the guidance for arrangements with multiple deliverables will allow companies to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. The standard requires disclosure of fair values of derivative instruments and their gains and lossesallocate consideration in multiple deliverable arrangements in a ~~tabular format~~manner that better reflects the transaction’s economics and will often result in earlier revenue recognition. The new guidance modifies the fair value requirements of previous guidance by allowing “best estimate of selling price” in addition to vendor-specific objective evidence (“VSOE”) and other vendor objective evidence (“VOE,” now referred to as ~~well as cross-referencing within footnotes~~“TPE,” standing for third-party evidence) for determining the selling price of a deliverable. A vendor is now required to ~~enable financial statement users~~use its best estimate of the selling price when VSOE or TPE of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted under the new guidance. The new guidance for certain revenue arrangements that include software elements removes non-software components of tangible products and certain software components of tangible products from the scope of existing software revenue guidance, resulting in the recognition of revenue similar to ~~locate important information about derivative instruments. It also requires~~ that ~~more information be provided about an entity’s liquidity by requiring disclosure of derivative features that are credit risk-related. SFAS No.161~~for other tangible products. The new guidance is effective for fiscal years beginning on or after June 15, 2010. However, companies may adopt the guidance as early as interim periods ended September 30, 2009. The guidance may be applied either prospectively from the beginning of the fiscal year for new or materially modified arrangements or retrospectively. The Company has not early adopted the new guidance and does not expect the adoption of the new guidance will have a significant effect on its consolidated financial ~~statements~~statements.

F-29

In December 2010, FASB issued revised guidance on “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The revised guidance specifies that an entity with reporting units that have carrying amounts that are zero or negative is required to assess whether it is more likely than not that the reporting units’ goodwill is impaired. If the entity determines that it is more likely than not that the goodwill of one or more of its reporting units is impaired, the entity should perform Step 2 of the goodwill impairment test for those reporting unit(s). Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any goodwill impairments occurring after the initial adoption of the revised guidance should be included in earnings as required by Section 350-20-35. The revised guidance is effective for fiscal years, and interim periods within those years, beginning after ~~November~~December 15, ~~2008, with early application encouraged.~~2010. Early adoption is not permitted. The Company ~~does not expect~~is currently evaluating the ~~adoption of SFAS No. 161 to have a material~~ impact on its consolidated financial ~~statements.~~statements of adopting this guidance.

In December ~~2007, the~~2010, FASB issued ~~SFAS No.141(R), “Business Combinations,~~revised guidance on the “Disclosure of Supplementary Pro Forma Information for Business Combinations.” ~~to improve reporting by creating greater consistency in~~The revised guidance specifies that if a public entity presents comparative financial statements, the ~~accounting~~entity should disclose revenue and financial reporting of business combinations. The standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users allearnings of the ~~information they need~~combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The revised guidance also expands the supplemental pro forma disclosures to ~~evaluate and understand~~include a description of the nature and ~~financial effect~~amount of material, nonrecurring pro forma adjustments directly attributable to the business ~~combination. SFAS No. 141(R) applies~~combination included in the reported pro forma revenue and earnings. The revised guidance is effective prospectively tofor business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, ~~2008. Early adoption is prohibited.~~2010. The Company has not ~~yet begun~~early adopted the ~~process of assessing~~new guidance and is currently evaluating the ~~potential~~ impact ~~that the adoption of SFAS No. 141R may have~~ on its consolidated financial ~~position or results~~statements of ~~operations.~~adopting this guidance.

~~In December 2007,~~3. BUSINESS COMBINATIONS

(a) 2010 acquisition

On January 18, 2010, the ~~FASB~~Company completed the acquisition of Ku6 and its subsidiaries and VIEs, a leading online video portal in China, pursuant to the share purchase agreement entered into by and among Hurray!, Ku6 and the shareholders of Ku6 dated as of November 26, 2009 by issuing an aggregate of 723,684,204 ordinary shares, of which 44,438,100 will replace the options issued ~~SFAS No.160, “Noncontrolling Interests in Consolidated Financial Statements”~~by Ku6 and immediately vest without substantive future service requirement. After the completion of this acquisition, the Company owned 100% of equity interests of Ku6 and its subsidiaries and VIEs. The total fair value of the shares issued approximates $28.9 million based on the share price on the closing date and the difference amounting to ~~improve~~$1,284,766 between the ~~relevance, comparability,~~fair value of the 44,438,100 shares issued and ~~transparency~~the fair value of ~~financial information provided~~options issued by Ku6 at acquisition date attributable to ~~investors by requiring all entities to report noncontrolling (minority) interests in subsidiaries in~~ the ~~same way~~pre-combination portion was recorded as ~~required~~share based compensation expense in the consolidated ~~financial statements. Moreover, SFAS No. 160 eliminates~~statement of operations and other comprehensive loss. Since the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. SFAS No. 160 is effective for fiscal year, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company has ~~not yet begun~~unilateral control of Ku6, the ~~process~~Company started to consolidate the financial statements of ~~assessing the potential impact that the adoption of SFAS No. 160 may have on its consolidated financial position or results of operations.~~Ku6 from February 1, 2010.

~~F-14~~F-30

~~In February 2007,~~KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(Amounts expressed in U.S. dollars, unless otherwise stated)

The following table summarizes the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. The standard requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS 157. The Company is currently evaluating whether the adoption of SFAS 159 will have a significant effect on its consolidated results of operations and financial position.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which provides enhanced guidance for using fair value to measure assets and liabilities. This standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted. FASB Staff Position No. FAS 157-2, “ Effective Date of FASB Statement No. 157” delays the effective date of SFAS 157 for all nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. The Company is currently evaluating whether the adoption of SFAS 157 will have a significant effect on its consolidated financial position, results of operations or cash flows.

~~(u) Reclassifications~~

~~Certain prior year amounts have been reclassified to conform to the 2007 financial statement presentation.~~

~~3. ACQUISITIONS~~

During the three-year period ended December 31, 2007, the Company made a number of acquisitions of businesses directly or through its VIE companies. Each acquisition has been recorded using the purchase method of accounting, and accordingly the acquired assets and liabilities were recorded at their fair values on the dates of acquisitions and the results of their operations have been included in our operations since their respective acquisitions dates. Theestimated fair values of the assets acquired and liabilities assumed at the date of acquisition and the purchase price allocation.


Total purchase price:
Ordinary shares issued to acquired all of the outstanding shares of Ku6	27,101,920
Ordinary shares issued to replace the options issued by Ku6	1,773,080
Share based compensation related to post combination portion	(1,284,766	)

	27,590,234


			Amortization period
Aggregate purchase price allocation —Ku6:
Cash and cash equivalents	329,743
Account receivables	3,264,513
Other current assets	811,845
Acquired intangible assets:
Trademark	24,901,940		20 years
Software technology	2,197,230		7 years
Customer base	1,464,820		5 years
Non-current deferred tax liability	(4,826,059	)
Goodwill	6,232,770
Property and equipment, net	3,652,599
Other non-current assets	937,485
Current liabilities	(11,376,652	)

Total	27,590,234

Total identifiable intangible assets acquired ~~were estimated using~~upon consolidation, mainly including trademark, software technology and customer base, which have the weighted average amortization period of 18.2 years.

Goodwill primarily represents the expected synergies from combining operations of the Company and Ku6, which are complementary in a ~~combination~~way to each other, and any other intangible benefits that would accrue to the Company that do not qualify for separate recognition. Such goodwill is not deductible for tax purposes. The fair value of ~~valuation methods, such as “income~~intangible assets was measured primarily by income approach~~” “market approach,” and “cost approach” methods, considering, among other factors, forecasted~~ taking into consideration of the historical financial performance and estimates of future performance of Ku6’s business.

Ku6 is subject to claims and litigations, which may arise in the normal course of business. As of and subsequent to the acquisition date on January 18, 2010, Ku6 was involved in a number of cases in various courts and arbitrations. These cases are substantially related to alleged copyright infringement arising before the acquisition. Accordingly liabilities from contingencies assumed of $1,631,359 in relation to those cases have been recognized in the current liabilities upon acquisition. The compensation amount was based on judgments handed down by the court and out-of-court settlements or management’s best estimation based on the historical actual compensation amount in recent years and the advice from PRC counsel. There are no accruals for any additional losses related to unasserted claims as there was no manifestation of claims and the amount cannot be reasonably estimated.

The Company completed its acquisition of Ku6 on January 18, 2010 and began to consolidate the financial statements of Ku6 upon unilateral control from February 1, 2010. The amount of Ku6’s consolidated revenue and net loss for the eleven months ended December 31, 2010 included in the statements of operations and comprehensive loss was $14,101,171 and $45,165,985.

F-31

The following unaudited pro forma consolidated financial information reflects the results of operations for the year ended December 31, 2009 and 2010, as if the acquisitions of Ku6 had occurred as of January 1, 2009 and 2010, and after giving effect to purchase accounting adjustments primarily relating to the amortization of intangibles. The following pro forma financial information has been prepared for comparative purpose only and is not necessarily indicative of the ~~acquired business, market performance, and market potential~~results that would have been had the acquisitions been completed at the beginning of the ~~acquired business in China.~~period presented, nor is it indicative of future operating results:

Year Ended Year Ended
December 31, 2009 December 31, 2010
(unaudited) (unaudited)
Net revenues 7,261,708 16,787,493
Net loss attributable to Ku6 Media Co., Ltd. (35,258,520 ) (56,033,640 )
Loss per ADS- Basic and Diluted: (1.61 ) (1.81 )

The pro forma net loss for the year ended December 31, 2009 and 2010 includes $1,851,951 and $1,851,951 for the amortization of identifiable intangible assets arising from acquisition of Ku6.

~~(a) 2007 acquisitions~~(b) 2009 acquisition

Acquisition of ~~Henan Yinshan~~Seed Music Group Limited (disposed in August 2010 and ~~Saiyu~~presented in discontinued operation (Note 2(1))

In ~~April and June of 2007,~~September 2008, the Company ~~acquired 100% of the equity of Saiyu~~entered into a definitive agreement to acquire, through Hurray! Media Co., Ltd, a controlling stake in Seed Music Group Limited (“Seed Music”) and ~~Henan Yinshan, for~~its subsidiaries including Seed Music Co., Ltd., Profita Publishing Limited and Leguan Seed (Beijing) Culture Consulting Co., Ltd. (collectively referred to as “Seed Music Group”), a ~~total cash consideration of $5,328,699, including transaction costs of $1,292,960, to further expand the Company’s portfolio of wireless value-added services~~Taiwan based company that focuses on artist development, music production and offline music distribution in Asia Pacific, especially in China. OfThe Company paid an advance of $1,907,400 to the ~~total consideration, an amount~~selling shareholders to acquire approximately 47.58% equity interest of ~~$1,089,160~~Seed Music in 2008 and such payment was ~~unpaid~~recorded as prepaid acquisition cost as of December 31, ~~2007.~~ 2008 as this transaction had not closed as of that date. Concurrent with this transaction, the Company subscribed for an additional 7,813 shares, representing a 13.5% ownership interest, from Seed Music for $600,038 in 2008, which was recorded as an investment at cost at December 31, 2008, as that portion of the transaction had been consummated by that date. The acquisition of the 47.58% equity interest was completed and the Company began to consolidate Seed Music on January 1, 2009. The Company’s total ownership in Seed Music is 61.08% after the closing of the acquisition and subscription of Seed Music shares.

According to the agreements, there are further contingent payments based on Seed Music’s operating performance. The contingent payments will be paid in cash if Seed Music exceeds the performance target. If not, the selling holders are obligated to transfer certain Seed Music’s shares or make cash payments to the Company. Such contingent payments are recorded as contingent consideration based on the fair value of $352,217, which is classified within Level 3 of fair value hierarchy and measured on a recurring basis (Note 10). The contingent consideration was settled by June 30, 2010. As the actual performance of Seed Music has not met the specified earnings objectives, the Company was not required to make any further payment.

F-32

The non-controlling shareholders have options to sell their shares to the Company at a price based on a formula which includes Seed Music’s operating performance. Therefore from the date of consolidation the non-controlling interests are presented as redeemable non-controlling interests on the balance sheet and such amount will be accreted to the redemption value if the redemption is probable. Since the operating performance of Seed Music did not meet the specified target, the Company considered the redemption is not probable. In addition the non-controlling shareholders have granted call options to the Company to subscribe for all or part of their remaining shares in Seed Music. The embedded put and call options are not derivatives that require bifurcation as separate financial instruments and are accounted for together with the non-controlling interest.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The purchase price allocation has been finalized.

Total purchase price:
Cash consideration $ 4,035,739
Transaction costs 1,292,960

$ 5,328,699

Total purchase price:
Cash consideration 2,507,438
Contingent consideration (Note 10) 352,217
Fair value of redeemable non-controlling interests 1,569,808
4,429,463

Amortization
period
Aggregate purchase price allocation — Saiyu and Henan Yinshan:
Cash and cash equivalents $ 1,311,572
Accounts receivable 45,451
Other current assets 1,226
Acquired intangible assets:
Agreements with China Mobile 1,946,402 5 years
WVAS license 24,763 3 years
Goodwill (allocated to WVAS segment) 2,134,375 N/A
Property and equipment, net 9,496 3 – 5 years
Other assets 17,751
Current liabilities (71,652 )
Non-current deferred tax liabilities (90,685 )

Total $ 5,328,699

Amortization period
Aggregate purchase price allocation —Seed Music:
Cash and cash equivalents 1,034,308
Inventory 53,504
Other current assets 891,723
Acquired intangible assets:
Artist contracts 1,717,846 7.1~9.0 years
Trademarks 1,569,808 20 years
Non-compete agreement 183,218 4.5 years
Copyrights 5,863 0.4 years
Non-current deferred tax liability (869,184 )
Goodwill (allocated to music segment) 2,535,523
Property and equipment, net 50,084
Other non-current assets 51,526
Current liabilities (2,216,292 )
Other non-current liabilities (578,464 )
Total 4,429,463

Goodwill primarily represents the expected synergies from combining operations of the Company and Seed Music, which are complementary in a way to each other, and any other intangible benefits that would accrue to the Company that do not qualify for separate recognition. Such goodwill is not deductible for tax purposes. The fair value of intangible assets was measured primarily by income approach taking into consideration of the historical financial performance and estimates of future performance of Seed Music’s business.

The fair value of redeemable non-controlling interests has been determined using income approach including discounted cash flow model and unobservable inputs including assumptions of projected revenue, expenses, capital spending, other costs and a discount rate with regards to the non-controlling discount in recent share transactions made at arms length close to the acquisition date, taking into consideration other factors, as appropriate. The net fair value of the embedded call and put options was not material.

~~F-15~~F-33

~~Acquisition~~KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(Amounts expressed in U.S. dollars, unless otherwise stated)

The Company completed its acquisition of ~~Secular Bird~~Seed Music on January 1, 2009 and ~~Fly Songs~~began to consolidate Seed Music Group’s consolidated financial statements from then on. The amount of Seed Music Group’s revenue and net loss for the year ended December 31, 2009 included in the statements of operations and comprehensive loss was approximately $6.7 million and $1.0 million. Total net loss attributable to redeemable non-controlling interest was $1,198,591. As of December 31, 2009, the balance of redeemable of non-controlling interest was reduced to $370,870 as a result of share of loss and after giving effect to impact of foreign currency translation.

No acquisition was made by the Company ~~expanded its~~in 2008.

4. DISCONTINUED OPERATIONS

Disposal of WVAS and recorded music ~~segment by acquiring 65%~~businesses

In May 2010, the Company disposed Huayi Music to Huayi Media for RMB34,450,000 (equivalent to $5,045,754) in cash and in August 2010, the Company disposed all of ~~Secular Bird, an independent record label~~its WVAS and remaining recorded music businesses to Shanda for $37,243,904 in ~~China,~~cash. See Note 2(1).

A summary of the major financial information for the discontinued operations of WVAS and ~~through its Freeland Music joint venture, a 51% interest in Fly Songs, a concert~~recorded music businesses as of August 31, 2010 and performance organizer in China for a total consideration of $576,066, all paid in 2007. The following table summarizes the estimated fair values acquired and liabilities assumed at the dates of acquisition:

Amortization
period
Aggregate purchase price allocation — Secular Bird and Fly Songs:
Cash and cash equivalents $ 87,138
Inventory 10,747
Other current assets 116,559
Acquired intangible assets:
Artist management contract 32,293 4.6 years
Trademarks 24,644 20 years
Copyright for songs 17,846 1.9 years
Non-complete contract 4,249 3.8 years
Goodwill (allocated to recorded music segment) 253,705 N/A
Property and equipment, net 53,375 3 – 5 years
Other assets 1,402
Current liabilities (11,108 )
Non-current deferred tax liabilities (14,784 )

Total $ 576,066

~~The following unaudited pro forma information summarizes the results of operations~~ for the years ended December 31, ~~2007~~2008, 2009 and ~~2006 assuming the acquisitions during the years of 2006 and 2007 had occurred as of January 1, 2006. The following pro forma financial information~~eight months ended August 31, 2010 is ~~not necessarily indicative of the results that would have occurred had the acquisitions been completed at the beginning of that period, nor is it indicative of future operating results:~~set out below:

Year ended December 31,
2007 2006
(unaudited) (unaudited)
Pro forma total revenue $ 60,897,824 $ 69,617,966
Pro forma net (loss) income attributable to holders of ordinary shares (42,565,473 ) 5,783,149
Pro forma net (loss) income per share:
- basic $ (0.02 ) $ 0.00
- diluted $ (0.02 ) $ 0.00
Weighted average shares used in calculation of pro forma net (loss) income per share:
- basic 2,172,208,190 2,189,748,563
- diluted 2,172,208,190 2,208,758,636

~~The pro forma results of operations give effect to certain adjustments, including amortization of acquired intangible assets with definite lives, associated with the acquisitions.~~
August 31, 2010
Current assets:
Cash 24,948,577
Accounts receivable, net of allowance 5,402,738
Prepaid expenses and other current assets 2,610,863
32,962,178
Non-current assets:
Property and equipment, net 943,258
Intangible assets 766,847
Goodwill 1,998,821
Other non-current assets 300,532
4,009,458
Current liabilities:
Accounts payable 4,337,542
Accrued expenses and other current liabilities 7,034,894
11,372,436
Non-current liabilities:
Non-current deferred tax liabilities 186,528
Other non-current liabilities 12,322
198,850
Non-controlling interests and redeemable non-controlling interest:
1,717,533

~~F-16~~F-34

Year ended Year ended Eight months ended
December 31, 2008 December 31, 2009 August 31, 2010

Total net revenues 53,958,400 34,642,295 14,844,408
Loss from operations (5,879,157 ) (21,054,774 ) (3,460,316 )
Income tax benefit (expense) (486,250 ) (234,286 ) 25,584
Net loss (7,743,284 ) (21,778,174 ) (3,382,438 )
Less: Net loss attributable to the non-controlling interests and redeemable non-controlling interest 337,455 4,182,875 243,666

Net loss from discontinued operations, net of tax (7,405,829 ) (17,595,299 ) (3,138,772 )
Gain from disposal of Huayi Music — — 4,486,786

Total net (loss) income from discontinued operations (7,405,829 ) (17,595,299 ) 1,348,014

~~Acquisition~~Disposal of ~~Beijing New Run Entertainment Development Co.~~software and systems integration business

In 2007, the Company signed an agreement to sell its software and systems integration (“SSI”) business unit, Hurray! Times, to a subsidiary of Taiwan Mobile, a former shareholder of Hurray!. With this sale the Company was able to focus on its music and other entertainment services. The business was disposed on August 1, 2007, when the acquiring company took over the management and risks of this business. The consideration of the sale is approximately $4,816,837. Of the total consideration, $1,425,645 is contingent upon the receipt of the accounts receivable of the SSI business as of August 1, 2007. As of the date of the disposal, there were significant uncertainties with regards to the collectability of the outstanding accounts receivable balance. In addition, the Company is entitled to further payments if the performance of the business sold exceeds specified profit targets in 2007, 2008 and 2009. As the SSI business did not achieve the specified profit target for 2007, 2008 and 2009, no additional consideration was received in respect of these years.

Gains from disposal of the SSI are recognized based on payment to the Company by the purchaser of their collection of the accounts receivable. In 2008, the Company received $412,530 in respect of the accounts receivable and recorded as a gain in 2008. At December 31, 2008, approximately 79% of trade receivables for SSI business had been collected. Under the terms of the sale after December 31, 2008 any collections of the remaining balance of the trade receivables will not be refunded to the Company. In the first quarter of 2009, the Company received a further $221,899 in respect of amounts collected by the purchaser before December 31, 2008 and this has been recorded as a gain in 2009. By the end of April 2009, all of the consideration and trade receivables the Company is entitled from Taiwan Mobile had been collected.

F-35

KU6 MEDIA CO., ~~Ltd. (New Run)~~LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(Amounts expressed in U.S. dollars, unless otherwise stated)

5. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of:

December 31, 2009 December 31, 2010

Staff advances and other receivables 387,710 1,028,156
Advances to suppliers 700,569 454,273
Prepaid licensing fee of video copyright — 1,722,608
Prepaid expenses 396,436 282,290
Prepaid artist costs 405,570 —

1,890,285 3,487,327

6. PROPERTY AND EQUIPMENT, NET

Property and equipment, net, consist of:

December 31, 2009 December 31, 2010

Furniture and office equipment 3,303,822 1,208,434
Motor vehicles 336,778 —
Telecommunications equipment 3,630,903 10,627,167
Leasehold improvements 776,639 1,368,677

8,048,162 13,204,278
Less: accumulated depreciation and amortization (6,576,430 ) (5,200,804 )

1,471,732 8,003,474

Depreciation expense for the years ended December 31, 2008, 2009 and 2010 was $990,072, $881,633 and $3,265,975, respectively.

F-36

7. ACQUIRED INTANGIBLE ASSETS, NET

December 31, 2010
Gross carrying Accumulated Intangible assets Net carrying
amount amortization impairment amount
Online advertising segment:

Amortizable intangible assets

Software technology 823,273 425,358 — 397,915
Trademark 24,901,940 1,141,339 — 23,760,601
Technology 2,197,230 287,733 — 1,909,497
Customer list 1,464,820 268,550 — 1,196,270

29,387,263 2,122,980 — 27,264,283

December 31, 2009 (Adjusted) (Note 2(1))
Gross carrying Accumulated Intangible assets Net carrying
amount amortization impairment amount
WVAS segment:

Amortizable intangible assets

WVAS licenses 518,114 400,847 117,267 —
Customer agreements with Telecom Operators 2,849,884 780,129 2,069,755 —
Non-compete agreements 988,882 355,413 633,469 —
Business transaction codes 196,897 164,081 32,816 —
Platform 473,784 434,427 39,357 —
Software 95,226 95,226 — —
Trademarks 174,336 9,685 164,651 —

5,297,123 2,239,808 3,057,315 —

Recorded music segment:

Amortizable intangible assets

Artist contracts 6,700,617 2,653,318 3,840,082 207,217
Copyrights 698,055 552,944 145,111 —
Exclusive WVAS agreements 584,873 66,925 478,590 39,358
Exclusive copyright agreements 12,543 11,498 1,045 —
WVAS contracts 249,845 249,845 — —
Non-compete agreements 318,724 38,102 211,135 69,487
Software 6,431 4,431 — 2,000
Trademarks 2,264,634 176,610 1,324,124 763,900

10,835,722 3,753,673 6,000,087 1,081,962

Online advertising segment:

Amortizable intangible assets

Software technology 823,273 260,704 — 562,569

16,956,117 6,254,185 9,057,401 1,644,531

Amortization expense for the years ended December 31, 2008, 2009 and 2010 was $2,337,726, $916,763 and $2,000,237, respectively.

F-37

KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010

(Amounts expressed in U.S. dollars, unless otherwise stated)

During the third quarter of 2008, the Company performed impairment testing for the music business, which was subsequently disposed in 2010, due to the continued challenging business conditions and reduction in number of concerts and other music events because of the focus on the Olympic Games in Beijing. This resulted in a $2,460,467 write-down of the intangible assets mainly related to artist contracts, which was included in the discontinued operations. The Company again performed impairment testing at December 31, 2008 and recorded a write-down of $390,247 for the intangible assets mainly related to the trademark and customer agreements with Telecom Operators of WVAS segment for the year ended December 31, 2008 which was included in the discontinued operations.

During the second quarter of 2009, the Company performed impairment testing for the music business due to significantly lower than expected performance as a result of the continued challenging business conditions, reduction in number of concerts and other music events. This resulted in a $3,542,071 write-down of the intangible assets mainly related to the artist contracts and trademarks, which was included in the discontinued operations.

No impairment was provided for the acquired intangible assets in 2010.

Assuming no subsequent impairment of the identified intangible assets recorded as of December 31, 2010, amortization expenses for the net carrying amount of intangible assets is expected to be as follows in future years. If the Company acquires additional intangible assets in the future, the operating expenses or cost of revenue will be increased by the amortization of those assets.

2011 2,016,612
2012 2,016,612
2013 1,920,571
2014 1,851,960
2015 and later 19,458,528

27,264,283

8. INVESTMENT IN EQUITY AFFILIATE

In April 2007, the Company acquired a 30% equity interest in Beijing New Run Entertainment Development Co., Ltd. (“New Run”), an independent record label in China, and it has been accounted for onusing the equity basis from April 1, 2007. The ~~cash~~total acquisition cost ofis $2,483,277 in cash, including transaction ~~costs, has been paid during 2007. Additional consideration may be required upon the attainment of certain performance targets for the twelve-month period subsequent to the acquisition.~~costs. At December 31, ~~2007,~~2009, the Company’s share of New Run’s loss since acquisition was ~~$62,756.~~$912,535.

~~Acquisitions payable~~The Company regularly evaluates the impairment of the equity method investment based on performance and the financial position of the investee as well as other evidence of market value. Such evaluation includes, but is not limited to, reviewing the investee’s cash position, recent financings, projected and historical financial performance, cash flow forecasts and financing needs. An impairment loss is recognized in the statement of operations equal to the difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made. The fair value of the investment would then become the new cost basis of the investment. The Company recorded an other-than-temporary impairment charge totaling $1,870,897 for the year ended December 31, 2008. No impairment charges were recorded during the year ended December 31, 2009. As of December 31, 2009, the investment in New Run has reduced to nil as a result of share of loss and impairment charges and after giving effect to impact of foreign currency translation. The investment in New Run was also disposed in August 2010 (Note 2(1)).

F-38

9. GOODWILL

Recorded Online
Gross amount of goodwill WVAS Music Advertising Total
Balance as of January 1, 2009 41,910,021 5,313,132 — 47,223,153

Goodwill arising from acquisitions during the year — 2,535,523 — 2,535,523
Effect of exchange rate changes (19,630 ) — — (19,630 )

Balance as of December 31, 2009 41,890,391 7,848,655 — 49,739,046
Goodwill arising from acquisitions during the year — — 6,232,770 6,232,770
Goodwill contributed by Shanda — — 663,570 663,570
Goodwill transferred out due to disposal (42,148,288 ) (7,848,655 ) — (49,996,943 )
Effect of exchange rate changes 257,897 — — 257,897

Balance as of December 31, 2010 — — 6,896,340 6,896,340

Recorded Online
Accumulated goodwill impairment WVAS Music Advertising Total
Balance as of January 1, 2009 (41,910,021 ) (2,156,497 ) — (44,066,518 )

Goodwill impairment — (3,592,933 ) — (3,592,933 )
Effect of exchange rate changes 19,630 65 — 19,695

Balance as of December 31, 2009 (41,890,391 ) (5,749,365 ) — (47,639,756 )

Goodwill impairment — — — —
Impairment transferred out due to disposal 42,148,288 5,749,365 — 47,897,653
Effect of exchange rate changes (257,897 ) — — (257,897 )

Balance as of December 31, 2010 — — — —

Net carrying amount as of December 31, 2009 — 2,099,290 — 2,099,290

Net carrying amount as of December 31, 2010 — — 6,896,340 6,896,340

Goodwill arose from the business combination completed in year 2010 has been allocated to the respective reporting unit of the Group. ASC 350 requires that the goodwill impairment assessment be performed at the reporting unit level.

In 2008 the Company performed a goodwill impairment test in the third quarter and determined that the goodwill allocated to recorded music segment was impaired, thus necessitating a charge of $1,710,000, which was included in the discontinued operations, due to the continued challenging business conditions and reduction in number of concerts and other music events because of the focus on the Olympic Games in Beijing, coupled with the decline in the market price of the Company’s common stock. The Company re-evaluated the goodwill impairment at its annual goodwill impairment test at December 31, 2008 and recorded a further impairment charge of $446,497 related to goodwill allocated to recorded music segment. During the annual goodwill impairment test at December 31, 2008, the Company also determined that its WVAS segment was impaired due to the continued operation losses, thus necessitating a charge of $518,714, which was included in the discontinued operations.

F-39

Due to the significantly lower than expected performance as a result of the continued challenging business conditions, reduction in number of concerts and other music events, the Company performed a goodwill impairment test in 2009 and determined that the goodwill allocated to recorded music segment was impaired, thus necessitating a charge of $3,592,933, which was included in the discontinued operations.

In December 2010, the Company performed an impairment test at reporting unit level relating to goodwill from acquisitions and concluded that there was no impairment as to the carrying value of goodwill as of December 31, ~~2007 represents~~2010 given the market capitalization of the Company was much higher than the Company’s net book value. The Company tests goodwill annually for impairment or more frequently whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable.

In January 2009, the Company implemented the accounting and disclosure requirements of ASC 820 related to non-financial assets and liabilities that are re-measured at fair value on a non-recurring basis. When available, the Company uses observable market data, including pricing on recent closed market transactions, to determine the fair value of the reporting units and compare with carrying amount of the reporting units to assess any goodwill impairment. The fair value of reporting units was determined based on the market capitalization of the respective entities as of the valuation date. When there is little or no observable market data, the Company measures the fair value of each reporting unit primarily using the income approach and using the market approach as a validation of the value derived from income approach. The market approach included using financial metrics and ratios of comparable public companies. When the goodwill was determined to be impaired, the Company uses income approach including discounted cash flow model for each reporting unit and unobservable inputs including assumptions of projected revenue, expenses, capital spending, and other costs, as well as a discount rate calculated based on the risk profile of the related industry to determine the amount of any impairment.

10. FAIR VALUE MEASUREMENTS

As of December 31, 2009 and December 31, 2010, the carrying amount of the Company’s cash and short term investments approximates their fair value due to the short maturity of those instruments. The carrying value of receivables and payables approximates their market value based on their short-term maturities. There are no other financial assets or liabilities that are being measured at fair value on a recurring basis except for the contingent consideration in relation to the acquisition of Seed Music Group Limited (“Seed Music”) (Disposed in August 2010 (Note 2(1) and Note 4), which is classified within level 3. As of December 31, 2009, the fair value of the contingent receivable in relation to the acquisition of Seed Music was zero.

F-40

KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010

(Amounts expressed in U.S. dollars, unless otherwise stated)

The Company measures the fair value of contingent consideration using the probability-weighted discounted cash flow model and unobservable inputs mainly including assumptions about expected future cash flows of Seed Music and discounted rate calculated based on the risk profile of the music industry. The following table presents the changes in the contingent consideration that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3):


	Fair Value Measurements
	Using Significant
	Unobservable Inputs
	(Level 3)
	Contingent consideration
Balance as of January 1, 2009		—
Contingent consideration recognized as of acquisition date		(352,217	)
Change in fair value of contingent consideration		550,092
Impairment provision		(197,875	)

Balance as of December 31, 2009		—
Change in fair value of contingent consideration		—
Transferred out due to disposal		—
Balance as of December 31, 2010		—

In January 2009, the Company implemented ASC 820 for nonfinancial assets and liabilities that are re-measured at fair value on a non-recurring basis. Nonfinancial assets such as goodwill and intangible assets are measured at fair value when there is an indicator of impairment and recorded at fair value only when impairment is recognized. In the second quarter of 2009, the Company provided impairment loss of $3.5 million for the acquired intangible assets and $3.6 million for the goodwill allocated to recorded music segment, which was disposed in 2010 and were measured at fair value on a non-recurring basis using significant unobservable inputs (Level 3).

The Company tests its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of a long-lived asset may not be recoverable. The Company measures the fair value of long-lived assets based on an in-use premise using the discounted cash flow model and unobservable inputs including assumptions of projected revenue, expenses, capital spending, and other costs, as well as a discount rate calculated based on the risk profile of the music industry. See Note 7 to the Consolidated Financial Statements for additional information of the impairment provision relating to the acquired intangible assets.

The Company tests goodwill annually for impairment or more frequently whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. When available, the Company uses observable market data, including pricing on recent closed market transactions, to determine the fair value of the reporting units and compare with carrying amount of the reporting units to assess any goodwill impairment. The fair value of reporting units was determined based on the market capitalization of the respective entities as of the valuation date. When there is little or no observable market data, the Company measures the fair value of each reporting unit primarily using the income approach and using the market approach as a validation of the value derived from income approach. The market approach included using financial metrics and ratios of comparable public companies. When the goodwill was determined to be impaired, the Company uses income approach including discounted cash flow model for each reporting unit and unobservable inputs including assumptions of projected revenue, expenses, capital spending, and other costs, as well as a discount rate calculated based on the risk profile of the music industry to determine the amount of any impairment. See Note 9 to the Consolidated Financial Statements for additional information of the impairment provision relating to goodwill.

F-41

11. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of:

December 31, 2009 December 31, 2010

Accrued payroll 572,489 2,127,951
Accrued welfare benefits 667,756 1,731,403
Accrued professional service fee 1,214,404 1,524,890
Advance from customers 964,262 609,442
Business tax payable 441,235 1,722,830
Value-added tax payable 121,982 532
Other taxes payable 1,207,932 718,668
Accrued litigation provision — 748,299
Other accrued expenses 1,141,627 2,278,226

6,331,687 11,462,241

12. RELATED PARTY TRANSACTIONS AND BALANCES

As a result of the acquisition of Huayi Music, Hurray! Freeland Digital Music Technology Co., Ltd. (“Freeland Music”) and New Run, which were disposed in August 2010 and presented in discontinued operation (Note 2(1)), the Company agreed to use the existing distribution and CD manufacturing operations, where appropriate, owned by the other shareholders, or their related parties, of these music companies. In addition these parties may use the music or artists of these companies and make royalty and other payments to Huayi Music, Freeland Music or New Run. These agreements are for duration of one year but may be extended by the mutual agreement of both parties.

As a result of the Reorganization in August 2010, the Group provided advertising business to and received promotion services from companies under common control by Shanda.

During the years ended December 31, 2008, 2009 and 2010 significant related party transactions were as follows

Year Ended Year Ended Year Ended
December 31, 2008 December 31, 2009 December 31, 2010
Related party transactions in discontinued operations:

Consulting, royalty and artist performance fee from Huayi Brothers Media Corporation 281,795 — —
Consulting, production and marketing service fee from Huayi Brothers Times Culture Broker Co., Ltd. — 281,580 —
Royalty revenue from Shanghai Haiyue Music Distribution Co., Ltd. 120,129 — —
Royalty revenue from Beijing Oriental Freeland Film Media Co., Ltd. 128,995 — —
CD distribution revenue from Beijing Century Freeland Film Media Co., Ltd. 35,625 52,248 —

F-42

Year Ended Year Ended Year Ended
December 31, 2008 December 31, 2009 December 31, 2010
Related party transactions in continuing operations:

Advertising revenue received from companies under common control by Shanda — 279,341 701,732
Promotion service fee paid to companies under common control by Shanda — — 376,302
Loan from Shanghai Computer (Shanghai) Co., Ltd. — — 1,565,290
Loan from Shanghai Shulong Technology Co., Ltd. — — 3,030,711
Loan to Shanda Games Limited — — 3,200,000

At December 31, 2009 and December 31, 2010, the amounts receivable from and payable to related parties mainly represent the outstanding amounts arising from such transactions, except for the payables for licensed video copyrights amounting to $1,664,570 due to a related party under common control by Shanda since December 31, 2010.

Other balances with related parties are mainly as follows:

December 31, 2009 December 31, 2010
Other receivables due from related parties

Seed Music Group Limited — 980,000
Shanda Games Limited — 3,200,000
Hurray! Media Co., Ltd. — 1,246,641
Other companies under common control by Shanda 63,312 105,607

63,312 5,532,248

All amounts due from related parties are non-interest bearing, unsecured and receivable on demand except for the ~~acquisition~~receivables due from Seed Music Group Limited with an annual interest rate of 0.6% and the receivables from Shanda Games Limited with an annual interest rate of 0.6%.

December 31, 2009 December 31, 2010
Other payables due to related parties

Shanda Computer (Shanghai) Co., Ltd. 1,465,010 3,030,300
Shanghai Shulong Technology Co. Ltd — 3,030,711
Hurray! Solutions Ltd. — 1,586,899
Other related party 439,445 128,788

1,904,455 7,776,698

All amounts due to related parties are non-interest bearing, unsecured and payable on demand except for the payables due to Shanda Computer (Shanghai) Co., Ltd. guaranteed by 25% equity interest in Yisheng with an annual interest rate of 5.31% and the payables due to Shanghai ~~Magma, Henan Yinshan and Saiyu, and Beijing Hutong~~Shulong Technology Co. Ltd with an annual interest rate of ~~$6,000,000, $1,089,160 and $12,338 respectively.~~5.05%.

F-43

~~(b) 2006 acquisitions~~13. GAIN ON REDUCTION OF ACQUISITION PAYABLE

~~Acquisition of Shanghai Magma~~

Effective January 1, 2006, the Company acquired 100% of the outstanding equity of Shanghai Magma, a leading developer and publisher of wireless Java™ Games in China and Shanghai Magma has been consolidated since that date. Under the acquisition agreements, the Company made an initial cash payment of ~~$4.1 million~~$4,185,009 and agreed to pay additional amounts based on Shanghai Magma’s financial performance in 2006 and 2007 with a maximum total consideration, including the initial payment, of ~~$22 million.~~$22,000,000. In September 2006, the Company agreed with the selling shareholders to fix the additional amounts at a total of ~~$10.5 million~~$10,500,000 payable in two installments of ~~$4.5 million~~$4,500,000 in October 2006 and ~~$6.0 million~~$6,000,000 in December 2007. As part of the amended agreements certain selling shareholders agreed to subscribe ~~$1.25 million~~$1,250,000 of the payments received in the issue of ~~Hurray’s~~Hurray!’s ordinary shares of all the additional amount of $10,500,000 at a price based on the 5 ~~–day~~-day average price of ~~Hurray’s~~Hurray!’s shares prior to signing the revised agreements. ~~Such right~~As of ~~subscription was fair valued at $124,918 using~~December 31, 2006, the ~~respective valuation model.~~Company had made the payment of $4,500,000 and selling shareholders subscribed $540,000 of the payments received in the issue of Hurray!’s ordinary shares. On December 31, 2007, the amount payable under these agreements was ~~$6.0 million,~~$6,000,000, out of which ~~$0.71 million will~~$710,000 was to be used by the selling shareholders for subscription of ~~the Company’s~~Hurray!’s shares at a price of $6.03 per share. ~~Subsequently, in~~In February 2008, the Company and the selling shareholders agreed to further amend the agreements to reduce the consideration payable to ~~$1 million~~$1,000,000 and ~~eliminate~~cancelled the ~~need for~~option granted to the selling ~~shareholders to subscribe for the Company’s shares. This~~shareholders. The amount of $1,000,000 was paid in March 2008. The gain on reduction of ~~$5 million~~$5,000,000 in the purchase liability was recognized as other operating income in the first quarter of 2008.

Total purchase price:
Cash consideration $ 14,246,746
Fair value of share purchase right 124,918
Transaction costs 438,263

$ 14,809,927

14. FOREIGN EXCHANGE LOSS

Amortization
period
Purchase price allocation:
Cash and cash equivalents $ 393,425
Accounts receivable 564,291
Other current assets 1,156,492
Acquired intangible assets:
Partnership agreement with China Mobile 418,826 4 years
Trademarks 147,456 20 years
Software 59,478 5 years
Website 21,065 4.5 years
WVAS license 9,913 4.5 years
Non-compete agreement 63,196 4 years
Game content 76,826 0.17 years
Goodwill (allocated to WVAS segment) 12,168,190 N/A
Property and equipment, net 25,289 3 – 5 years
Current liabilities (191,214 )
Non-current deferred tax liabilities (103,306 )

Total $ 14,809,927

~~Acquisition~~Earlier in the year of ~~Freeland Music~~

~~Effective January 1, 2006,~~2008, the Company ~~acquired 60% of Freeland Music from the Freeland group, which is~~converted a group of affiliated companies in China engaged in the production and distribution of audio and video music products and Freeland Music has been consolidated from that date. In this acquisition the Freeland group injected its music business in a newly formed company, Freeland Music, owned 60% by the Company and 40% by the Freeland group. The initial consideration was $7,560,000 in cash, of which $2,160,000 was payable to the existing shareholders of the business and $5,400,000 was payable into Freeland Music as a capital injection to fund its operation. At December 31, 2007, all purchase consideration has been paid.

~~F-17~~

The final consideration payable by the Company and the respective ownership interests of the shareholders of Freeland Music were subject to adjustment based on the financial performance of Freeland Music in 2006. Subsequent to the acquisition, the Company and the Freeland group agreed to amend the terms of the agreements to extend the performance period to the 2007 financial year. If the actual net income of Freeland Music in that year exceeds $1.53 million (RMB 12 million), the Company will contribute the full amount of the remaining purchase consideration as a capital injection into Freeland Music. If the actual net income is between $1.28 million (RMB10 million) and $1.53 million, inclusive, the Company will contribute 50% of the remaining purchase consideration, equal to $1.35 million, as a capital injection. As the actual net income of Freeland Music for 2007 was less than $1.28 million, the Company was not required to make any further capital injection.

Total purchase price:
Cash consideration $ 4,320,000
Transaction costs 265,113

$ 4,585,113

Amortization
period
Purchase price allocation:
Cash and cash equivalents $ 47,722
Accounts receivable 43,568
Acquired intangible assets:
Artist contracts 1,406,890 5 years
Trademarks 215,932 8 years
Exclusive WVAS agreement 42,464 5 years
Exclusive copyright agreement 12,543 3 years
WVAS contracts 249,845 5 years
Copyright contracts 99,954 4 years
Goodwill (allocated to recorded music segment) 2,538,962 N/A
Property and equipment, net 14,540 3 – 5 years
Current liabilities (57,469 )
Non-current deferred tax liabilities (29,838 )

Total $ 4,585,113

The interests in Shanghai Magma and Freeland Music have been consolidated from January 1, 2006 and their results for the year ended December 31, 2006 are included in the Company’s 2006 financial statements. The following unaudited pro forma information summarizes the results of operations for the year ended December 31, 2005 assuming the acquisitions of Shanghai Magma and Freeland Music had occurred as of January 1, 2005. The following pro forma financial information is not necessarily indicative of the results that would have occurred had the acquisitions been completed at the beginning of that period, nor is it indicative of future operating results:

Year ended
December 31, 2005
(unaudited)
Pro forma total revenue $ 63,612,451
Pro forma net income attributable to holders of ordinary shares 18,756,840
Pro forma net income per share:
- basic $ 0.01
- diluted $ 0.01
Weighted average shares used in calculation of pro forma net income per share:
- basic 2,092,089,848
- diluted 2,129,228,961

~~The pro forma results of operations give effect to certain adjustments, including amortization of acquired intangible assets with definite lives, associated with the acquisition.~~

~~F-18~~

~~Acquisitions payable as of December 31, 2006 represents the payables for the acquisition of Shanghai Magma and Beijing Hutong of $5,820,938 and $11,526 respectively.~~

~~Acquisition of Huayi Brothers Music~~

On December 31, 2005, the Company acquired 51% of the outstanding equity of Huayi Brothers Music, which focuses on artist development, music production and off-line distribution of music in China, for a total cash consideration of $4,458,206, of which $196,206 was transaction costs. Assubstantial part of the ~~agreement,~~U.S. dollars cash balances into Euro term deposits to improve yield as well as to protect against further dollar weakening. The highly volatile markets in 2008 had seen the ~~Company will invest $4,262,000 in cash for 51% of Huayi Brothers Music, of which $2,905,000 was payable to the existing shareholders~~dollar strengthen as investors and ~~$1,357,000 was payable into Huayi Brothers Music~~financial institutions de-leveraged as a ~~capital injection. As of December 31, 2006, all the cash consideration and transaction costs had been paid.~~

The final consideration payable by the Company and the respective ownership interests of the shareholders of Huayi Brothers Music were subject to adjustment based on the financial performance in 2006 and 2007 of Huayi Brothers Music following the closing of the transaction. As the benchmark profit was not achieved for 2006 and 2007, therefore no additional consideration was required.

Total purchase price:
Cash consideration $ 4,262,000
Transaction costs 196,206

$ 4,458,206

Amortization
period
Purchase price allocation at 51% of Huayi Brothers Music:
Cash and cash equivalents $ 143,366
Capital contribution receivable 628,443
Accounts receivable 141,710
Other current assets 146,258
Acquired intangible assets:
Artist contracts 1,020,420 6.52 years
Trademarks 454,250 20 years
Copyright surrogate contract 69,578 5.67 years
Existing record copyright 17,189 3 years
Exclusive WVAS agreement 542,408 20 years
Non-compete agreement 131,257 20 years
Goodwill (allocated to recorded music segment) 2,331,239 N/A
Property and equipment, net 43,567 3 – 5 years
Current liabilities (473,895 )
Non-current deferred tax liabilities (737,584 )

Total $ 4,458,206

At the date of acquisition, Huayi Brothers Music had a payable of $202,276 due to its minority shareholders, which represents an advance for operational purposes and included in current liability above.

~~F-19~~

The following unaudited pro forma information summarizes the results of operations for the year ended December 31, 2005 assuming the acquisition of Huayi Music had occurred as of January 1, 2005. The following pro forma financial information is not necessarily indicative of the results that would have occurred had the acquisition been completed at the beginning of the period indicated, nor is it indicative of future operating results:

Year ended
December 31, 2005
(unaudited)
Pro forma total revenue $ 62,944,870
Pro forma net income attributable to holders of ordinary shares 17,822,639
Pro forma net income per share:
- basic $ 0.01
- diluted $ 0.01
Weighted average shares used in calculation of pro forma net income per share:
- basic 2,092,089,848
- diluted 2,129,228,961

~~The pro forma results of operations give effect to certain adjustments, including amortization of acquired intangible assets with definite lives, associated with the acquisition.~~

~~Acquisition of Beijing Hutong, Guangzhou Piosan and Hengji Weiye~~

During 2005, the Company made three other acquisitions of companies in China to expand the Company’s portfolio of wireless value-added services in China. The Company acquired the entire equity interests of Beijing Hutong, Guangzhou Piosan and Hengji Weiye for a total cash consideration of $3,406,693, including transaction costs of $135,488. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

Amortization
period
Aggregate purchase price allocation –Beijing Hutong, Guangzhou Piosan and Hengji Weiye:
Cash and cash equivalents $ 2,035,565
Prepaid expenses and other receivables 12,451
Acquired intangible assets:
Telecommunication wireless value-added licenses 113,062 4 – 4.25 years
Agreements with Telecom Operators 348,150 1.25 – 3 years
Business transaction codes 166,090 3 years
SMS platform 156,822 7 years
Goodwill (allocated to WVAS segment) 654,744 N/A
Property and equipment, net 105,424 3 – 5 years
Current liabilities (80,375 )
Non-current deferred tax liabilities (105,240 )

Total $ 3,406,693

~~F-20~~

The following unaudited pro forma information summarizes the results of operations for the year ended December 31, 2005 assuming the acquisitions of Beijing Hutong, Guangzhou Piosan and Hengji Weiye had occurred as of January 1, 2005. The following pro forma financial information is not necessarily indicative of the results that would have occurred had the acquisitions been completed at the beginning of the period, nor is it indicative of future operating results:

Year ended
December 31, 2005
(unaudited)
Pro forma revenue $ 63,051,933
Pro forma net income attributable to holders of ordinary shares 18,269,399
Pro forma net income per share:
- basic $ 0.01
- diluted $ 0.01
Weighted average shares used in calculation of pro forma net income per share:
- basic 2,092,089,848
- diluted 2,129,228,961

~~The pro forma results of operations give effect to certain adjustments, including amortization of acquired intangible assets with definite lives, associated with the acquisition.~~

~~4. DISCONTINUED OPERATIONS~~

In 2007, the Company signed an agreement to sell its software and systems integration (“SSI”) business unit, Hurray! Times, to a subsidiary of Taiwan Mobile, a shareholder of Hurray!. With this sale the Company was able to focus on its music and other entertainment services. The business was disposed on August 1, 2007, when the acquiring company took over the management and risks of this business. The consideration of the sale is approximately $4.8 million. Of the total consideration, $1.4 million is contingent upon the receipt of accounts receivable of SSI business as of August 1, 2008. By the end of April 2008, the Company received a total of $4,283,338. In addition, the Company is entitled to further payments if the performance of the business sold exceeds specified profit targets in 2007, 2008 and 2009. As the SSI business did not achieve the specified profit target for 2007, no additional consideration was receivable in respect of that year.

Gains from disposal of the SSI segment are adjusted based on the payment contingent upon the collections of trade receivables and future performance. At December 31, 2007, approximately 53% of trade receivables for SSI business as of August 1, 2007 had been collected.

~~A summary~~result of the financial ~~information for the discontinued operations as of August 1, 2007 is set out below:~~

August 1,
2007
Unaudited
(in U.S. dollars)

Current assets of discontinued operations

Cash $ 771,746
Accounts receivable, net of allowance 1,868,593
Prepaid expenses and other current assets 18,942
Amount due from related parties 4,918,631
Inventories 1,397

$ 7,579,309

Non-current assets of discontinued operations:

Property and equipment, net 49,842
Rental deposits 462

$ 50,304

Current liabilities of discontinued operations

Accounts payable 270,843
Accrued expenses and other current liabilities 605,739
Dividend payable 3,002,588

$ 3,879,170

~~F-21~~

Year ended December 31,
As at August 1, 2007 2006 2005
(in U.S. dollars)
Revenues $ 227,391 $ 1,177,053 $ 6,312,363
Operating (loss) income (643,151 ) (1,173,424 ) 3,470,108
Income taxes 178 (83,650 ) 70,546

Net (loss) income from discontinued operations, net of tax (612,170 ) (836,448 ) 4,097,608
Gain from disposal of SSI segment 192,943 — —

Total net (loss) income from discontinued operations $ (419,227 ) $ (836,448 ) $ 4,097,608

~~5. IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS~~

Incrisis in the second ~~quarter~~half year of ~~2007, the mobile operators introduced various new policies that adversely impacted the Company’s wireless value-added business~~2008 and introduced further uncertainties in the Company’s operating environment. By September 30, 2007, the market capitalization of Hurray! was lower than the Company’s net book value, which was an indicator of impairment. At that date the Company tested the carrying value of goodwill and acquired intangible assets and recorded a goodwill impairment charge of $9.6 million and an impairment of acquired intangible assets of $575,205. In view of the further decline of Hurray’s market capitalization at December 31, 2007 and continued difficult operating conditions, the Company recorded an ~~additional goodwill impairment charge~~exchange loss in 2008 of ~~$29.2 million and~~$9.0 million. Currently the Company holds substantial all non-Renminbi cash in U.S. dollars.

15. INCOME TAXES

The Company is a further impairment of acquired intangible assets of $1,905,048. The impairment charges of acquired intangibles are included in product development, selling and marketing and general and administrative of $88,838, $1,791,833 and $599,582, respectively. The valuation of goodwill and other intangible assets was performed using a combination of a market value approach (with comparisons to selected publicly traded companies operatingtax exempted company incorporated in the ~~same industry) and an income approach (discounted cash flows). Any continued adverse changes~~Cayman Islands.

The subsidiaries incorporated in the ~~mobile operators’ policies~~PRC are generally subject to a corporate income tax rate of 33% prior to January 1, 2008 or in25% post that date except for those subsidiaries that enjoy tax holidays or preferential tax treatment.

Basic and diluted earnings from continuing operations per share effects of the ~~competitive environment could lead to additional impairment charges.~~

~~6. PREPAID EXPENSES AND OTHER CURRENT ASSETS~~

~~Prepaid expenses~~tax holiday and ~~other current assets consist of:~~

December 31,
2007 2006
Staff advances and other receivables $ 690,005 $ 793,660
Advances to suppliers 1,042,427 1,231,258
Prepaid expenses 632,893 426,352
Prepaid artist costs 754,725 249,434

$ 3,120,050 $ 2,700,704

~~7. PROPERTY AND EQUIPMENT, NET~~

~~Property and equipment, net, consist of:~~

December 31,
2007 2006
Furniture and office equipment $ 2,924,803 $ 2,755,139
Motor vehicles 244,813 217,839
Telecommunications equipment 4,500,285 3,965,885
Leasehold improvements 1,132,946 1,048,292

8,802,847 7,987,155

Less: accumulated depreciation and amortization (7,166,758 ) (6,032,954 )

$ 1,636,089 $ 1,954,201

~~Depreciation expense~~preferential tax rates for the years ended ~~December~~March 31, ~~2007~~2008, 2009 and ~~2006 was $1,269,203~~2010 are nil, nil and ~~$1,580,005,~~nil, respectively.

Provision (credit) for income taxes consists of:

Year ended Year ended Year ended
December 31, 2008 December 31, 2009 December 31,2010

Current income taxes from discontinued operations 298,579 750,705 6,229
Deferred income taxes from discontinued operations 187,671 (516,419 ) (31,813 )
Deferred income taxes from continuing operations — (13,721 ) (41,172 )

486,250 220,565 (66,756 )

~~F-22~~F-44

~~8. ACQUIRED INTANGIBLE ASSETS, NET~~

December 31, 2007
Gross carrying Accumulated Intangible assets Net carrying
amount amortization impairment amount
WVAS Segment:

Amortizable intangible assets

WVAS licenses $ 482,551 $ 332,564 $ 52,010 $ 97,977
Customer agreements with Telecom Operators 2,666,773 705,785 1,840,399 120,589
Non-compete agreement 925,344 323,870 566,648 34,826
Business transaction codes 184,246 138,185 — 46,061
Platform 443,343 280,399 36,828 126,116
Software 89,107 36,678 — 52,429
Trademarks 163,135 — — 163,135

4,954,499 1,817,481 2,495,885 641,133

Recorded Music Segment:

Amortizable intangible assets

Artist contracts 3,172,460 1,027,576 — 2,144,884
Producing cost 1,418,847 853,993 — 564,854
Copyrights 616,744 348,738 — 268,006
Exclusive WVAS agreements 584,872 16,986 — 567,886
Exclusive copyright agreements 12,543 8,362 — 4,181
Non-compete agreement 135,506 652 — 134,854
Software 6,018 1,739 — 4,279
Trademarks 694,826 53,983 — 640,843

6,641,816 2,312,029 — 4,329,787

$ 11,596,315 $ 4,129,510 $ 2,495,885 $ 4,970,920

December 31, 2006
Gross carrying Accumulated Net carrying
amount amortization amount
WVAS Segment:

Amortizable intangible assets

WVAS licenses $ 427,567 $ 216,716 $ 210,851
Customer agreements with Telecom Operators 918,473 508,042 410,431
Non-compete agreement 864,419 129,663 734,756
Business transaction codes 172,115 71,715 100,400
Platform 414,153 154,841 259,312
Software 84,003 17,894 66,109
Trademarks 152,394 7,620 144,774
Game content 79,398 79,398 —

3,112,522 1,185,889 1,926,633

~~F-23~~

December 31, 2006
Gross carrying Accumulated Net carrying
amount amortization amount

Recorded Music Segment:

Amortizable intangible assets

Artist contracts 2,427,310 431,321 1,995,989
Copyrights 1,071,861 323,924 747,937
Exclusive WVAS agreements 584,872 8,493 576,379
Exclusive copyright agreements 12,543 4,181 8,362
WVAS contracts 249,845 249,845 —
Non-compete agreement 131,257 6,563 124,694
Trademarks 670,182 26,993 643,189

5,147,870 1,051,320 4,096,550

$ 8,260,392 $ 2,237,209 $ 6,023,183

~~Assuming no subsequent impairment of the identified intangible assets recorded as of December~~KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, ~~2007, amortization expenses for the net carrying amount of intangible assets is expected to be as follows~~2008, 2009 AND 2010
(Amounts expressed in ~~future years. If the Company acquires additional intangible assets in the future, the operating expenses or cost of revenue will be increased by the amortization of those assets.~~

2008 $ 1,771,947
2009 818,092
2010 621,864
2011 257,898
2012 and later 1,501,119

$ 4,970,920

~~9. GOODWILL~~U.S. dollars, unless otherwise stated)

Year ended December 31,
WVAS Recorded Music Total
Balance as of January 1,2006 $ 21,537,504 $ 2,331,239 $ 23,868,743

Effect of exchange rate changes 1,045,599 — 1,045,599
Goodwill arising from acquisitions during the year 12,168,190 2,538,962 14,707,152

Balance as of December 31, 2006 34,751,293 4,870,201 39,621,494

Effect of exchange rate changes 2,389,916 — 2,389,916
Goodwill arising from acquisitions during the year 2,134,375 253,705 2,388,080
Goodwill impairment (38,778,584 ) — (38,778,584 )

Balance as of December 31, 2007 $ 497,000 $ 5,123,906 $ 5,620,906

~~In 2007, the Company recorded $38.8 million of goodwill impairment due to the further decline of Hurray’s market capitalization and difficult operating conditions (see footnote 5).~~

~~10. SHORT-TERM BORROWINGS~~

Interest expense and the average interest rate for 2007, 2006 and 2005 were $179,062, and 3.875%, $44,765 and 3.875%, and $27,312 and 4.87%, respectively. Interest expense in 2007 and 2006 represents the imputed interest on the amount payable on the balance owed for the acquisition of Shanghai Magma.

~~F-24~~

~~11. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES~~

~~Accrued expenses and other current liabilities consist of:~~

December 31,
2007 2006
Accrued payroll $ 406,608 $ 528,843
Value-added tax payable 177,556 376,115
Other accrued expenses 1,231,384 1,108,437
Accrued welfare benefits 119,957 97,720
Business tax payable 857,062 411,660
Other taxes payable 113,833 90,538

$ 2,906,400 $ 2,613,313

~~12. RELATED PARTY TRANSACTIONS AND BALANCES~~

As part of the acquisition agreements for the purchase of the equity interests in Huayi Brothers Music and Freeland Music and New Run, the Company agreed to use the existing distribution and CD manufacturing operations, where appropriate, owned by the other shareholders, or their related parties, of these companies. In addition these parties may use the music or artists of these companies and make royalty and other payments to Huayi Brothers Music, Freeland Music or New Run. These agreements are for duration of one year but may be extended by the mutual agreement of both parties. During 2007 and 2006 the Company recognized revenues of $645,134 and $449,638, respectively, and had expenses of $96,725 and $28,256, respectively, under these agreements. In 2006 prior to the acquisition of the interest in New Run, Huayi Brothers Music acquired copyrights from that company amounting to $175,783. At December 31, 2007 and 2006, the amounts payable to and receivable from related parties represent the outstanding amounts arising from such transactions.

In addition to the above transactions, during 2006 Huayi Brothers Music made short-term loans totaling $2,288,592 to its minority shareholders and their related parties generating interest income of $17,355. All loans were repaid in 2006.

~~13. INCOME TAXES~~

Hurray! is a tax-exempted company incorporated in the Cayman Islands. Up until December 31, 2007, pursuant to the Income Tax Law of the PRC Concerning Foreign Investment and Foreign Enterprises and Tentative Regulations of the PRC on Enterprise Income Tax (the “Income Tax Laws”), Hurray’s PRC subsidiaries and VIEs were generally subject to Enterprise Income Tax at a statutory rate of 33%. Some of these subsidiaries and VIEs are qualified as high technology enterprises and under Income Tax Laws, they are subject to a preferential tax rate of 15%. In addition, some of Hurray’s subsidiaries are new-technology enterprises located in Beijing new-technology development zone 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. During 2007, the newly acquired companies, Saiyu and Henan Yinshan enjoyed reduced taxable income which is calculated based on 10% of the revenue and subject to an income tax rate of 33%.

These preferential tax arrangements will expire at various dates between 2006 and 2010. In 2005 and 2006 a number of VIEs became subject to a higher tax rate as tax exemptions expired or were reduced. The aggregate dollar and per share effect of the tax holidays in 2007, 2006 and 2005 were $1,904,064, $2,218,713 and $5,627,575 and $0.0009, $0.0010 and $0.0027 per share, respectively.

In March 2007, the National People’s Congress of China enacted a new Enterprise Income Tax Law, or the New EIT Law, which became effective on January 1, 2008. In addition, the Implementation Rules of the New Enterprise Income Tax Law, or the Implementation Rules were promulgated by the PRC State Council on December 6, 2007 and the Notice on Implementation of Transitional Arrangements for Preferential Policies of Enterprise Income Tax, or the Transitional Arrangements Notice, was promulgated by the PRC State Council on December 26, 2007. Under the New EIT system, a unified enterprise income tax rate of 25% and unified tax deduction standards will be applied equally to both domestic-invested enterprises and foreign-invested enterprises. Enterprises established prior to March 16, 2007 eligible for a preferential tax rate of 15% according to the effective PRC Enterprise Income tax law for Foreign-Invested Enterprise and Foreign Enterprise tax laws and administrative regulations shall be subject to transitional rules as stipulated in the Transitional Arrangements Notice. In addition, certain qualified high and new technology enterprises strongly supported by the state may still benefit from a preferential tax rate of 15% under the New EIT Law if they meet the definition of “qualified high and new technology enterprise” strongly supported by the state set out in the Implementation Rules which refers to companies hold independent ownership of core intellectual properties and simultaneously meet a list of other criteria as stipulated. As a result, if our PRC subsidiaries and VIEs qualify as qualified high and new technology enterprises strongly supported by the state under the new EIT Law, they will continue to benefit from a preferential tax rate of 15%. Otherwise, the applicable tax rate of our PRC subsidiaries may be subject to PRC income tax at a rate of 25% starting from 2008 under the New EIT system. Hurray! has used the new standard rates for calculation of deferred taxes until the necessary approvals are obtained.

~~F-25~~

~~Provision for income taxes consists of:~~

Year ended December 31,
2007 2006 2005
Current $ 576,774 $ 685,597 $ 286,372
Deferred (759,144 ) (480,617 ) 36,428

$ (182,370 ) $ 204,980 $ 322,800

The principal components of the deferred tax assets are as follows:


	December 31,
	2007			2006			December 31, 2009			December 31, 2010
Deferred tax assets:
Cost and expenses accruals	$	748,049		$	295,755			3,038,521			4,714,262
Revenue recognition								—			851,657
Less: valuation allowance								(3,038,521	)		(4,985,157	)

Current deferred tax assets	$	748,049		$	295,755			—			580,762


Depreciation and amortization	$	347,877		$	203,149			170,828			1,899,375
Net operating loss carry forwards		1,051,308			614,919			5,710,412			13,727,221
Less: valuation allowance		(749,094	)		(447,287	)		(5,271,100	)		(14,137,744	)

Non-current deferred tax assets	$	650,091		$	370,781			610,140			1,488,852


Deferred tax liabilities:
Revenue recognition	$	(416,835	)	$	(344,802	)		(622,456	)		(2,069,614	)

Current deferred tax liabilities	$	(416,835	)	$	(344,802	)		(622,456	)		(2,069,614	)


Intangible assets	$	(844,610	)	$	(850,734	)		(403,308	)		(4,925,538	)

Non-current deferred tax liabilities	$	(844,610	)	$	(850,734	)		(403,308	)		(4,925,538	)

A reconciliation between statutory income tax rate and the Company’s effective tax rate is as follows:


										Year ended			Year ended			Year ended
	Year Ended December 31,									December 31, 2008			December 31, 2009			December 31, 2010
	2007			2006			2005
Statutory tax rate		33.0	%		33.0	%		33.0	%		25.0	%		25.0	%		25.0	%
Effect of tax holidays		0.3	%		(34.2	)%		(29.6	)%
Differential statutory tax rates											10.1	%		0.2	%		(3.3	%)
Non-deductible expenses		(38.3	%)		11.9	%		9.0	%		(26.7	%)		(6.2	%)		0.4	%
Non-taxable income		45.0	%		(9.0	)%		(9.0	)%		15.9	%		—			—
Change in enterprise income tax rate		(8.6	%)		—			—			—			—			—
Change in valuation allowance		(13.8	%)		0.2	%		(1.3	)%		(37.3	%)		(19.8	%)		(22.0	%)
Impairment loss on intangibles		(9.2	%)		—			—

Effective tax rate		8.4	%		1.9	%		2.1	%		(13.0	%)		(0.8	%)		0.1	%

The movement of valuation allowances were as follows:

December 31, 2009 December 31, 2010

At beginning of year (7,772,515 ) (8,309,621 )
Consolidation of Ku6 — (6,123,900 )
Consolidation of Yisheng (167,418 ) —
Current year additions (1,029,311 ) (14,292,925 )
Current year reversals 655,761 1,404,205
Transferred out due to disposal of WVAS and recorded music businesses — 8,433,935
Effect of exchange rate changes 3,862 (234,595 )

(8,309,621 ) (19,122,901 )

At December 31, ~~2007,~~2009 and 2010, tax loss carry forwards amounted to approximately ~~$4.2~~$22.8 million and $54.9 million, respectively, which will expire by ~~2012.~~various years through 2015. The Company determines whether or not a valuation allowance is required at the level of each taxable entity. A valuation allowance of ~~$749,094~~$8,309,621 and ~~$447,287~~$19,122,901 and has been established as of December 31, ~~2007~~2009 and ~~2006,~~2010, respectively, in respect of certain deferred tax assets as it is considered more likely than not that the relevant deferred tax ~~asset~~assets will not be realized in the foreseeable future.

In ~~June 2006,~~accordance with the ~~Financial Accounting Standards Board~~EIT Law, dividends, which arise from profits of foreign invested enterprises (“~~FASB”~~FIEs”) issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006, with early adoption permitted. The Company adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not result in a cumulative adjustment on January 1, 2007 and had no significant impact on the Company’s accounting for income taxes for the year ended December 31, 2007. The Company did not incur any interest or penalties related to potential underpaid income tax expenses, and also does not expect to have a significant increase or decrease on the unrecognized tax benefits within 12 months from December 31, 2007.

~~F-26~~

The Company is subject to taxation in PRC and other tax jurisdictions. There is no ongoing examination by taxing authorities at this time. The Company’s various tax years from 2002 to 2007 are remaining open in various taxing jurisdictions.

Under the new Enterprise Income Tax law effective on January 1, 2008, the rules for determining whether an entity is resident in the PRC for tax purposes have changed and the determination of residence depends amongst other things on the “place of actual management”. If the Company, or its non-PRC subsidiaries, were to be determined to be a PRC resident for tax purposes, it or they, would be subject to tax in the PRC on its worldwide income including the income arising in jurisdictions outside the PRC. The Company has evaluated its resident status under the new law and related guidance and believes it would not be an income tax resident of PRC.

~~As the Company would be non-resident for PRC tax purposes, dividends paid to it out of profits~~ earned after January 1, 2008, ~~from its PRC subsidiaries would be~~are subject to a 10% withholding income tax. In addition, under tax treaties between the ~~case of dividends paid by~~ PRC ~~subsidiaries~~and Hong Kong, if the foreign investor is incorporated in Hong Kong and qualifies as a Hong Kong tax resident, the applicable withholding tax ~~would be~~rate is reduced to 5%, if the investor holds at least 25% in the FIE, or 10%., if the investor holds less than 25% in the FIE.

~~Aggregate~~Since there is no undistributed earnings of the Company’s ~~subsidiaries, VIE’s and its VIEs’~~ subsidiaries, located in the PRC, that are available for distribution to the Company at December 31, ~~2007 are considered~~2009 and 2010 and the Company does not have any present plan to ~~be indefinitely reinvested under APB opinion No. 23, “Accounting~~pay any cash dividends on its ordinary shares in the foreseeable future and intends to retain most of its available funds and any future earnings for ~~Income Taxes – Special Areas,”~~use in the operation and ~~accordingly,~~expansion of its business in the PRC. Accordingly, no provision has been made for ~~the Chinese dividend~~ withholding taxes that would be payable upon the distribution of ~~those amounts~~undistributed earnings of the Company’s PRC subsidiaries to the Company. ~~The Chinese tax authorities have also clarified that distributions made out of retained earnings accumulated prior to January 1, 2008 are not subject to the withholding tax.~~

~~14. SHAREHOLDERS’~~16. EQUITY COMPENSATION PLANS

On February 8, 2005, Hurray! completed an initial public offering of 6,880,000 ADSs, with each ADS representing 100 ordinary shares, at $10.25 per ADS to the public, of which 6,624,339 ADSs were issued by Hurray! and 255,661 ADSs were offered by existing shareholders. Total proceeds, net of direct offering expenses, of approximately $59.4 million were received by Hurray! as a result of the initial public offering.

On October 1, 2006, Hurray! issued 89,552 ADSs, represented by 8,955,200 ordinary shares, at a price of $6.03 per ADS, to former shareholders of Shanghai Magma pursuant to the amended purchase agreements.

~~In 2003, Hurray! issued 12,347,966 Series A convertible preference shares and warrants to purchase 8,786,077 Series A convertible preference shares for cash proceeds of $8,000,000.On April 30,~~ 2004 pursuant to the Series A convertible preference share agreement, Hurray! exercised its clawback rights to repurchase and retire 1,122,546 shares of Series A convertible preference shares at $0.001 per share. The remaining 16,924,497 shares of Series A convertible preference shares were automatically converted into ordinary shares upon Hurray!’s initial public offering on February 8, 2005 on a one-to-one basis.

In February 2006, the Board of Directors (“Board”) of Hurray! approved a stock repurchase program whereby Hurray! may repurchase up to $15.0 million of its issued and outstanding ADSs in open-market transactions. Under this program, in 2006, Hurray! purchased and cancelled 792,600 ADSs, equivalent to 79,260,000 ordinary shares, at an average cost of $6.35 per ADS for a total consideration of $5,034,748.

~~15. STOCK PLANS~~Share Incentive Plan

Stock option

~~Hurray!’s 2002, 2003 and~~Ku6 Meidas 2004 ~~stock option plans (the “Plans”~~Share Incentive Plan (“2004 Plan”) allow the Company to offer incentive awards to employees, directors, consultants or external service advisors of the Company. Under the terms of the Plans, options are generally granted at prices equal to or greater than the fair market value on the grant date, expire 10 years from the date of grant, and generally vest over 3-4 years.

Stock options under these plans were all granted prior to ~~2006. On December 20, 2005, Hurray!’s Board approved a plan to accelerate vesting~~2006 and as of January 1, 2006 all ~~outstanding~~granted stock options awarded under Hurray!’s stock option plans that would otherwise be unvested on December 31, 2005. As a result, the Company recorded compensation expense of $16,804 in 2005, which includes the intrinsic value measured at the acceleration date in excess of the original intrinsic value, which is zero, on date of grant for the estimated number of options that, absent the modification, would be unvested on December 31, 2005. As a result of the Board’s action, unvested stock options for approximately 40,021,000 ordinary shares became exercisable effective on January 1, 2006. The exercise prices of the affected stock options range from $0.0705 to $0.1405 per share. The acceleration of vesting did not change the exercise prices or other terms of the options.

~~F-27~~

vested. There were ~~75,266,200~~45,582,700 and ~~81,506,600~~44,584,700 and options outstanding as of December 31, ~~2007~~2009 and ~~2006,~~2010, respectively. ~~No stock options have been granted since January 1, 2006.~~ As of December 31, ~~2007, 63,712,340~~2009, 185,550,800 ordinary shares were available for future grants.

~~Prior to Hurray!’s initial public offering, the Company obtained, subsequent~~ Pursuant to the ~~dates of grant, a valuation analysis performed by an independent appraiser to determine the fair market value~~resolution of the ~~Hurray!’s ordinary shares. The valuation analysis utilizes generally accepted valuation methodologies such as the income and market approach and discounted cash flow approach to value the~~ Company’s business. For grants subsequent to the initial public offering, the Company uses NASDAQ market values to determine fair market value. Other than the stock-based compensation expenses recognized for the vesting accelerationboard on December ~~31, 2005,~~3, 2010, the ~~Company did not recognize any compensation expenses~~185,550,800 ordinary shares available for ~~employee options~~future grants under ~~APB 25 since~~ the exercise prices were equal to or greater than the fair market values at the date of grant..” Under SFAS 123(R), no expenses has incurred since all the options were fully vested as of January 1, 2006.

~~A summary of the stock option activity is as follows:~~

Ordinary shares
Weighted
Number of average
options exercise price
Options outstanding at January 1, 2005 151,374,220 $ 0.075
Granted 16,228,000 $ 0.102
Exercised (42,158,500 ) $ 0.035
Cancelled (25,870,020 ) $ 0.110

Options outstanding at December 31, 2005 99,573,700 $ 0.088
Exercised (2,582,200 ) $ 0.037
Cancelled (15,484,900 ) $ 0.109

Options outstanding at December 31, 2006 81,506,600 $ 0.085

Exercised (653,400 ) $ 0.027
Cancelled (5,587,000 ) $ 0.106

Options outstanding at December 31, 2007 75,266,200 $ 0.084

~~The following table summarizes information with respect to stock options outstanding at December 31, 2007:~~

Options outstanding Options exercisable
Weighted average Weighted Aggregated Weighted Aggregated
Number remaining average Intrinsic Number average intrinsic
Exercise Prices outstanding contractual life exercise price value exercisable exercise price value

Ordinary shares:
$0.0250 11,872,100 4.75 $ 0.03 $ 296,803 11,872,100 $ 0.03 $ 296,803
$0.0705 27,626,100 5.5 $ 0.07 $ 1,947,640 27,626,100 $ 0.07 $ 1,947,640
$0.1170 28,182,000 6 $ 0.12 $ 3,297,294 28,182,000 $ 0.12 $ 3,297,294
$0.1405 700,000 6.25 $ 0.14 $ 98,350 700,000 $ 0.14 $ 98,350
$0.1025 6,886,000 7 $ 0.10 $ 705,815 6,886,000 $ 0.10 $ 705,815

Total 75,266,200 $ 6,345,902 75,266,200 $ 6,345,902

2004 Plan was terminated effective from then.

~~F-28~~F-46

~~In January 2005, Hurray! granted 1,000,000 options to purchase ordinary shares to its external consultants~~KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(Amounts expressed in exchange for past services, which vested immediately. The Company recorded compensation expense of $20,768 in 2005, based on the fair value of each stock option estimated using the Black-Scholes Option Pricing model with the following assumptions on the date of grant:


~~Average risk free rate of return~~		~~2.77~~	%
~~Weighted average expected option life~~	~~7 months~~
~~Volatility rate~~		65	%
~~Dividend yield~~		0	%

~~Stock-based compensation~~U.S. dollars, unless otherwise stated)

The Company grants stock options to its employees and certain non-employees. For stock options vested prior to January 1, 2006 which represent all the options that have been granted by the Company under APB 25, the Company records compensation expense for employees for the excess of the fair valuemovement of the stock atoptions under the grant date or any other measurement date over the amount an employee must pay to acquire the stock. The compensation expense is recognized over the applicable service period, which is usually the vesting period. The Company accounts for stock-based awards to non-employees by recording compensation expense2004 Share Incentive Plan as of and for the ~~services rendered by the non-employees using their estimated fair values.~~

Had compensation cost for options granted to employees under Hurray!’s stock option plans been determined based on the fair values at the grant dates in accordance with SFAS123, the Company’s pro forma income for the yearyears ended December 31, ~~2005 would have been~~2009 and 2010 is set out below:

Weighted
Weighted Average
Options Average Remaining Aggregate
Outstanding Exercise Price Contractual Life Intrinsic Value
US$ US$
Outstanding at January 1, 2008 74,266,200 0.084 — —
Granted — — — —
Exercised (60,000 ) 0.025 — —
Cancelled or Expired (26,838,500 ) 0.094 — —

Outstanding at December 31, 2008 47,367,700 0.080 — —
Granted — — — —
Exercised (350,000 ) 0.025 — —
Cancelled or Expired (1,435,000 ) 0.115 — —

Outstanding at December 31, 2009 45,582,70 0.080 3.63 147,478
Granted — — — —
Exercised (450,000 ) 0.045 — —
Cancelled or Expired (548,000 ) 0.113 — —

Outstanding at December 31, 2010 44,584,700 0.080 2.63 226,985

Vested and expected to vest at December 31, 2010 44,584,700 0.080 2.63 226,985

Vested and exercisable at December 31, 2010 44,584,700 0.080 2.63 226,985

The aggregate intrinsic value as ~~follows:~~of December 31, 2009 and 2010 is calculated as the difference between the market value of $0.0405 and $0.0495 of ordinary shares as of December 31, 2009 and 2010, respectively, and the exercise price of the shares. The total intrinsic value of options exercised during the years ended December 31, 2008, 2009 and 2010 was approximately nil, $0.5 million and nil, respectively.

Net income, as reported $ 18,618,732
Add: Employee stock-based compensation as reported 16,804
Less: Employee stock-based compensation determined using the fair value method (1,628,723 )

Pro forma income attributable to ordinary shareholders $ 17,006,813

Basic income per share:
As reported $ 0.01
Pro forma $ 0.01

Diluted income per share:
As reported $ 0.01
Pro forma $ 0.01
Non-vested shares

~~There was no pro-forma information for~~Since 2006, ~~since~~ the Company ~~adopted SFAS 123(R). The fair value of each option granted is estimated on the date of grant using the Black-Scholes Option Pricing model with the following assumptions for grants during 2005.~~


~~Option Grants~~	~~2005~~
~~Average risk-free rate of return~~		~~3.27% – 3.75~~	%
~~Weighted average expected option life~~		~~3.25 years~~
~~Volatility rate~~		65	%
~~Dividend yield~~		0	%

~~Nonvested shares~~

~~In 2006, the Company~~has granted restricted purchase share awards, in lieu of stock options, under ~~Hurray!’s~~the 2004 Share Incentive Plan ~~(the “2004 Plan”)~~ to certain officers and senior management.

On February 7, 2006, ~~Hurray!~~the Company granted 33,000,000 ~~nonvested shares~~non-vested stock units to its employees pursuant to the 2004 Plan at offering price of par value which resulted in stock-based compensation expense of $1.6 million to be recognized over the applicable vesting period. The ~~nonvested shares~~non-vested stock units vest on an annual basis equally over three years.

On June 20, 2006, ~~Hurray!~~the Company granted 7,500,000 ~~nonvested shares~~non-vested stock units to its employees at offering price of par value which resulted in stock-based compensation expense of $0.3 million to be recognized over the applicable vesting period. The ~~nonvested shares~~non-vested stock units vest on an annual basis equally over 34 months.

~~F-29~~

On March 14, 2007, ~~Hurray!~~the Company granted 20,000,000 ~~nonvested shares~~non-vested stock units to its employees at offering price of par value which resulted in stock-based compensation expense of $0.61 million to be recognized over the applicable vesting period. The ~~nonvested shares~~non-vested stock units vest on an annual basis equally over three years.

On November 23, 2007, ~~Hurray!~~the Company granted 19,500,000 ~~nonvested shares~~non-vested stock units to its employees at offering price of par value which resulted in stock-based compensation expense of $0.36 million to be recognized over the applicable vesting period. The ~~nonvested shares~~non-vested stock units vest on an annual basis equally over three years.

F-47

Share-based compensation expense related to non-vested stock units granted by the Company under the 2004 Plan amounted to $945,282, $169,310 and $84,233 for the years ended December 31, 2008, 2009 and 2010.

A summary of ~~nonvested shares’~~non-vested stock units activity as of December 31, 2009 and 2010 is presented below:

Weighted
Number average grant
Non-vested stock units outstanding date fair value
US$
Outstanding at January 1, 2008 49,833,800 0.0488
Granted — —
Vested (18,499,300 ) 0.0523
Forfeited (17,834,200 ) 0.0513

Outstanding at December 31, 2008 13,500,300 0.0406
Granted — —
Vested (6,500,300 ) 0.0313
Forfeited (3,999,900 ) 0.0507

Outstanding at December 31, 2009 3,000,100 0.0313
Granted — —
Vested (3,000,100 ) 0.0313
Forfeited — —

Outstanding at December 31, 2010 — —

2010 Equity Compensation Plan

In December 2010, the Company authorized an equity compensation plan (“2010 Equity Compensation Plan”) that provides for issuance of options to purchase up to 698,381,300 ordinary shares of the Company. Under the 2010 Equity Compensation Plan, the directors may, at their discretion, grant any officers (including directors) and employees of the Company and/or its subsidiaries, and individual consultant or advisor (i) options to subscribe for ordinary shares, (ii) share appreciation rights to receive payment, in cash and/or the Company’ ordinary shares, equals to the excess of the fair market value of the Company’ ordinary shares, or (iii) other types of compensation based on the performance of the Company’ ordinary shares.

On December 4, 2010, the Company granted stock options to purchase up to 516,750,000 ordinary shares under the 2010 Equity Compensation Plan at an exercise price of $0.0568 per share equivalent to the average market value in the previous fifteen trading days of the grant dates to its employees, senior management and directors. Of all the stock options granted, 272,850,000 were granted to senior management and 243,900,000 were granted to directors and employees. The contractual term of the options granted to the directors and employees is six years and the contract term of the options granted to senior management is seven years. As of December 31, 2010, 181,631,300 ordinary shares were available for future grants for 2010 Equity Compensation Plan.

The options granted to the directors and employees vest over a four year period, with 25% of the options to vest on each of the first, second, third and fourth anniversaries of the grant date as ~~follows:~~stipulated in the stock option agreement.

F-48

KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010

(Amounts expressed in U.S. dollars, unless otherwise stated)

For the options granted to senior management, 2/16 options earned in the first two quarters of 2011 shall vest and become exercisable on December 31, 2011. For each quarter during the four years beginning on July 1, 2011 (“Performance Period Start Date”) through the four-year Performance Period till June 30, 2015, 1/16th of the options have the opportunity to be earned for each quarter contingent on the achievement of positive quarterly operating income provided the aggregate number of options earned in the Performance Period shall not exceed 14/16 options granted. Then on each of the first, fourth, eighth and twelfth quarter earnings release date from the first quarter of the Performance Period, all of the earned options during the four quarters preceding such earnings release date shall vest and become exercisable, in each case, that the employees remain employed by the Company on such vesting date.

In accordance with ASC 718, the Company recognized share-based compensation expenses for the options granted to directors and employees as well as the options to senior management vested only based on passage of time and continued employment with the Company, net of a forfeiture rate, using the straight-line method. For the options granted to senior management earned contingent on the achievement of quarterly performance target, the Company recognized share-based compensation expenses for the options earned in each quarter during the Performance Period using graded-vesting method when the Company concluded that it is probably that the performance targets will be achieved, net of a forfeiture rate.

Share-based compensation expense related to the option award granted by the Company under the 2010 Equity Compensation Plan amounted to $522,931 for the year ended December 31, 2010.

The movement of the stock options under the 2010 Equity Compensation Plan as of and for the years ended December 31, 2010 is set out below:

Weighted
Weighted Average
Options Average Remaining Aggregate
Outstanding Exercise Price Contractual Life Intrinsic Value
US$ US$
Outstanding at January 1, 2010 — — — —
Granted 516,750,000 0.0568 — —
Exercised — — — —
Cancelled or Expired — — — —

Outstanding at December 31, 2010 516,750,000 0.0568 6.46 —

Vested and expected to vest at December 31, 2010 355,129,632 0.0568 6.65 —

Vested and exercisable at December 31, 2010 — — — —

The intrinsic value as of December 31, 2010 is calculated as the difference between the fair value of $0.0495 of ordinary shares as of December 31, 2010 and the exercise price of the shares.

The weighted average grant-date fair value of options granted during the year ended December 31, 2010 was $0.0483. No option was vested during the year ended December 31, 2010.

F-49

As of December 31, 2010, there was $15.4 million of unrecognized compensation cost, adjusted for the estimated forfeitures, related to stock options under 2010 Equity Compensation Plan. This cost is expected to be recognized over a weighted averaged period of 4.2 years. Total compensation cost may be adjusted for future changes in estimated forfeitures and the probability of the achievement of performance conditions.

The fair value of each option granted under the Company’s 2010 Equity Compensation Plan is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions noted in the following table:

The Black-Scholes option pricing model is used to determine the fair value of the stock options granted in December 2010. The Black-Scholes model requires the input of highly subjective assumptions, including the expected stock price volatility and the sub-optimal early exercise factor. For expected volatilities, the Company has made reference to historical volatilities of several comparable companies. The sub-optimal early exercise factor was estimated based on the vesting and contractual terms of the awards and management’s expectation of exercise behavior of the grantees. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The fair values of stock options granted in December 2010 were estimated using the following weighted-average assumptions:


	~~Nonvested shares~~	2010
Fair value of ordinary shares (US$)	~~Outstanding~~	0.0800
~~Nonvested shares outstanding at January 1, 2006~~Exercise price (US$)		—	0.0568
~~Granted~~Expected volatility (%)		~~40,500,000~~	60%~65%
~~Forfeited~~Expected dividend yield (%)		~~(8,666,700~~	)0%
~~Vested~~Expected term (years)	4~5
—Risk-free interest rate (per annum) (%)	1.9407%~2.6565%


~~Nonvested shares outstanding at December 31, 2006~~(1)	The risk-free interest rate for periods within the contractual life of the share option is based on the U.S. Treasury yield curve in effect at the time of grant for a term consistent with the expected term of the awards.	~~31,833,300~~

~~Granted~~(2)	The expected term of stock options granted is developed giving consideration to vesting period, contractual term and historical exercise pattern of options granted by the Company.	~~39,500,000~~

~~Forfeited~~(3)		~~(10,400,200~~	)
~~Vested~~		~~(11,099,300~~	)The Company has no history or expectation of paying dividends on its common stock.

(4)
~~Nonvested shares outstanding at December 31, 2007~~		~~49,833,800~~
			Expected volatility is estimated based on the historical volatility of comparable companies’ stocks and of the Company’s common stock for a period equal to the expected term preceding the grant date.

~~The following table summarizes information with respect to nonvested shares outstanding at December 31, 2007:~~

Nonvested shares outstanding
Number Aggregate intrinsic
outstanding value
Grant date
February 7, 2006 11,333,800 $ 859,102
June 20, 2006 4,000,000 $ 211,200
March 14, 2007 15,000,000 $ 750,000
November 23, 2007 19,500,000 $ 610,350

Total 49,833,800 $ 2,430,652

The Company ~~recorded share-based compensation expenses~~follows the provisions of ~~$442,975 and $543,557 for the years ended December 31, 2007 and 2006, respectively. The amount of unvested stock-based compensation currently estimated~~ASC 280,Segment Reporting(formerly referred to ~~be expensed from 2008 through 2010 related to unvested share-based payment awards at December 31, 2007 is $1,289,931. This amount will be recognized~~ as ~~presented by the following table.~~

2008 $ 762,981
2009 378,780
2010 148,170

$ 1,289,931

~~16. SEGMENT INFORMATION~~

~~Based on the criteria established by Statement of Financial Accounting Standards~~SFAS No. 131, ~~“Disclosure~~“Disclosures about Segments of an Enterprise and Related ~~Information”~~Information”), which establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.

F-50

The Company’s chief operating decision maker has been identified as the Chief Executive Officer, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Company. Prior to the disposal of wireless value-added services (“WVAS”) and recorded music businesses in August 2010 (Note 2(1)), which have been presented as discontinued operations for all the periods presented herein, the Company ~~currently operates in~~operated and managed two principal ~~business segments:~~operating segments, wireless value-added services (“WVAS”) and recorded music. The wireless value-added services are delivered through the 2.5G mobile networks, which comprise of Wireless Application Protocol (“WAP”) services, Multimedia Messaging Services (“MMS”), ~~and~~ Java™ services, and WEB, and through 2G technology platforms, which comprise of Short Messaging Services (“SMS”), Interactive Voice Response services (“IVR”), and Color Ring Back Tones (“CRBT”). Recorded music services are delivered through the Company’s majority-controlled music companies ~~the Company acquired at the end of 2005~~ and ~~beginning of 2006~~their parent company, Hurray Digital Media Technology Co., Ltd., which ~~contract~~contracts with music artists and composers to perform and produce music. ~~Business segments~~Corporate assets are ~~defined~~related to the bank balance of overseas companies that are not directly attributable to the other reportable segments. The Company uses gross profit as ~~components~~the measure of ~~an enterprise about which separate~~each reportable segment. Expenses are not allocated to each segment.

Pursuant to the disposal of the WVAS and recorded music businesses (Note 2(1)) in August 2010 presented in discontinued operations for all the periods presented herein, the Group has only one operating segment of Ku6’s online advertising business.

The financial information for the business segment, which was disposed in 2010 (Note 2(1)), reflects that information which is ~~available that~~specifically identifiable or which is ~~evaluated regularly~~allocated based on an internal allocation method. Selected financial information by operating segments disposed in 2010 is as follow:

December 31, 2008 December 31, 2009 December 31, 2010

WVAS 28,952,925 24,400,482 —
Recorded music 16,977,258 9,863,363 —
Corporate assets 42,394,219 33,904,432 —

Total assets 88,324,402 68,168,277 —

Year ended Year ended Eight months ended
December 31, 2008 December 31, 2009 August 31, 2010

Total expenditures for additions to long-lived assets

WVAS 228,431 599,254 402,710
Recorded music 120,802 79,028 84,613

Total capital expenditure 349,233 678,282 487,323

F-51

Year ended Year ended Eight months ended
December 31, 2008 December 31, 2009 August 31, 2010

Revenues

WVAS 42,671,588 20,169,110 5,385,985
Recorded music 11,286,812 14,473,185 9,458,423

Total revenues 53,958,400 34,642,295 14,844,408

Cost of revenues

WVAS 32,839,642 15,331,675 3,799,581
Recorded music 6,729,725 12,625,139 6,118,305

Total cost of revenues 39,569,367 27,956,814 9,917,886

Gross profit

WVAS 9,831,946 4,837,435 1,586,404
Recorded music 4,557,087 1,848,046 3,340,118

Total gross profit 14,389,033 6,685,481 4,926,522

Revenues from WVAS segment by product and service are shown in the Company’s chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company does not allocate any operating expenses or any assets, with the exception of newly acquired intangible assets and goodwill, to its business segments as management does not believe that allocating these expenses is useful in evaluating these segments’ performance. Also, no measures of assets by segment are reported and used by the chief operating decision maker. Hence,table below:

Year ended Year ended Eight months ended
December 31, 2008 December 31, 2009 August 31, 2010

Revenues

SMS 13,319,011 5,307,435 456,968
IVR 12,207,136 3,943,733 545,890
RBT 4,960,624 4,447,918 2,493,929

2G revenues 30,486,771 13,699,086 3,496,787

WAP 7,434,197 3,145,885 565,205
MMS 1,355,441 1,692,585 170,281
JAVA 2,244,010 1,541,618 902,194
WEB 218,810 11,794 —

2.5G revenues 11,252,458 6,391,882 1,637,680

Other revenues 932,359 78,142 251,518

Total WVAS revenue 42,671,588 20,169,110 5,385,985

Recorded music revenue 11,286,812 14,473,185 9,458,423

Total revenues 53,958,400 34,642,295 14,844,408

For recorded music revenue, the Company ~~has not made disclosure of total assets~~cannot break down the revenue by ~~reportable segment.~~

~~Summarized information by business segment for the years ended December 31 2007, 2006 and 2005 is as follows:~~

Year ended December 31,
2007 2006 2005
Revenues

WVAS $ 50,038,014 $ 62,512,483 $ 56,062,368
Recorded Music 10,488,613 6,203,418 —

Total revenue $ 60,526,627 $ 68,715,901 $ 56,062,368

Cost of revenues

WVAS $ 36,394,300 $ 40,672,113 $ 28,634,488
Recorded Music 6,232,728 3,553,144 —

Total cost of revenues $ 42,627,028 $ 44,225,257 $ 28,634,488

Gross profit

WVAS $ 13,643,714 $ 21,840,370 $ 27,427,880
Recorded Music 4,255,885 2,650,274 —

Total gross profit $ 17,899,599 $ 24,490,644 $ 27,427,880

service or product line without undue costs.

Geographic Information

The Company primarily operates in the PRC and all of the Company’s long-lived assets are located in the PRC.

F-52

~~17. NET (LOSS) INCOME~~KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(Amounts expressed in U.S. dollars, unless otherwise stated)

18. LOSS PER SHARE

The following table sets forth the computation of basic and diluted net ~~(loss) income~~loss per ~~share:~~share (1 ADS = 100 Shares):

Year ended December 31,
2007 2006 2005
Net (loss) income from continuing operations (numerator), basic and diluted $ (41,530,968 ) $ 6,640,393 $ 14,521,124
Net (loss) income from discontinued operations, net of tax (numerator), basic and diluted (419,227 ) (836,448 ) 4,097,608
Net (loss) income (numerator), basic and diluted $ (41,950,195 ) $ 5,803,945 $ 18,618,732

Weighted average shares (denominator):
Weighted average ordinary shares outstanding used in computing basic income per share 2,172,208,190 2,189,748,563 2,092,089,848
Dilutive effect of nonvested shares, stock options and warrants — 19,010,073 37,139,113

Weighted average ordinary shares outstanding used in computing diluted income per share 2,172,208,190 2,208,758,636 2,129,228,961

Net (loss) income from continuing operations per share, basic and diluted $ (0.02 ) $ 0.00 $ 0.01
Net (loss) income from discontinued operations per share, basic and diluted (0.00 ) (0.00 ) 0.00

Net (loss) income per share, basic and diluted $ (0.02 ) $ 0.00 $ 0.01

Year ended Year ended Year ended
December 31, 2008 December 31, 2009 December 31, 2010

Numerator:

Net loss attributable to Ku6 Media Co., Ltd. from continuing operations for basic and diluted earnings per ADS (4,959,297 ) (6,021,461 ) (52,858,278 )
Net loss (income) attributable to Ku6 Media Co., Ltd. from discontinued operations for basic and diluted earnings per ADSs (6,993,299 ) (17,373,400 ) 1,348,014

Net loss attributable to Ku6 Media Co., Ltd. (11,952,596 ) (23,394,861 ) (51,510,264 )

Denominator:

Weighted-average ordinary shares outstanding for basic calculation 2,185,615,129 2,196,291,947 3,096,421,097
Dilutive effect of restricted shares and stock options — — —

Weighted average ordinary shares outstanding for diluted calculation 2,185,615,129 2,196,291,947 3,096,421,097

Weighted-average ADS used in per basic ADS calculations 21,856,151 21,962,919 30,964,211
Dilutive effect of restricted shares and stock options — — —

Weighted-average ADS used in per diluted ADS calculations 21,856,151 21,962,919 30,964,211

Loss per share — basic and diluted

Loss from continuing operations attributable to Ku6 Media Co., Ltd. ordinary shareholders per share — basic and diluted (0.00 ) (0.00 ) (0.02 )
Loss (income) from discontinued operations attributable to Ku6 Media Co., Ltd. ordinary shareholders per share — basic and diluted (0.01 ) (0.01 ) 0.00

Loss attributable to Ku6 Media Co., Ltd. ordinary shareholders per share — basic and diluted (0.01 ) (0.01 ) (0.02 )

Loss per ADS — basic and diluted

Loss from continuing operations attributable to Ku6 Media Co., Ltd. ordinary shareholders per ADS — basic and diluted (0.23 ) (0.27 ) (1.71 )
Loss (income) from discontinued operations attributable to Ku6 Media Co., Ltd. ordinary shareholders per ADS— basic and diluted (0.32 ) (0.79 ) 0.04

Loss attributable to Ku6 Media Co., Ltd. ordinary shareholders per ADS — basic and diluted (0.55 ) (1.06 ) (1.67 )

~~F-31~~F-53

~~Ordinary~~KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(Amounts expressed in U.S. dollars, unless otherwise stated)

Incremental ordinary share ~~equivalents~~ are calculated using the treasury stock method. Under the treasury stock method, the proceeds from the assumed conversion of options ~~warrants~~ and ~~nonvested~~non-vested shares are used to repurchase outstanding ordinary shares using the average fair value for the period.

~~The Company had a weighted-average of 63,931,948, 71,626,000 and 66,481,587 ordinary share options outstanding during~~For the years ended December 31, ~~2007, 2006~~2008, 2009 and ~~2005,~~2010, potentially dilutive shares of approximately 1 million, 3 million and 4.8 million, respectively, ~~which~~ were excluded in the computation of diluted ~~income~~loss per share for these periods as their effect would have been ~~antidilutive, as their exercise prices were above the average market values in such periods.~~anti-dilutive.

~~18.~~19. CONCENTRATIONS

(a) Dependence on Telecom Operators

The revenues of the Company are substantially derived from network service agreements with ~~China Mobile and China Unicom.~~the Telecom Operators before the disposal of WVAS business to Shanda in August 17, 2010 (Note 2(1)). These companies are entitled to a service and network fee for the transmission of wireless value-added services as well as for the billing and collection of services. If the contractual relationships with ~~either company~~one or more of the Telecom Operators in the PRC are terminated or scaled-back, or if these companies alter the network service agreements in a way that is adverse to the Company, the Company’s wireless value-added service business would be adversely affected.

Revenues generated from the mobile phone customers through China Mobile, ~~and~~ China Unicom and ~~as a percentage of total revenues~~China Telecom, the principal operators that the Company dealt with for the years ended December 31, 2008 and 2009 and eight months ended August 31, 2010 presented in the discontinued operations were as follows:


	Year ended December 31,															Year ended December 31, 2008					Year ended December 31, 2009					Eight months ended August 31, 2010
	2007					2006					2005					Revenues		%			Revenues		%			Revenues		%
	Revenues		%			Revenues		%			Revenues		%
China Mobile																	24,352,344		45	%		10,074,902		28	%		2,455,914		46	%
China Unicom	$	12,789,026		21	%	$	21,144,096		31	%	$	36,267,213		65	%		10,775,358		20	%		5,068,739		14	%		1,711,726		32	%
China Mobile		29,921,502		49	%		36,756,895		53	%		18,946,035		34	%
China Telecom																	5,070,996		9	%		4,405,260		12	%		1,059,075		20	%

Accounts receivable due from the mobile phone customers through China Mobile, ~~and~~ China Unicom and ~~as a percentage of total accounts receivables~~China Telecom were as follows:

(b) Credit risk

~~The~~Before the disposal of WVAS and recorded music business in 2010 (Note 2(1)), the Company depends on the billing systems of the Telecom Operators to charge the mobile phone customers through mobile phone bills and to collect payments from customers for WVAS business. Recorded music services are delivered through the Company’s majority-controlled music companies, which contracts with music artists and composers to perform and produce music and collects receivables from music customers.

As of December 31, 2010, accounts receivable of the advertising business are typically unsecured and are derived from revenue earned from customers in China. The risk with respect to accounts receivables is mitigated by credit evaluations the Company performs on its customers and its ongoing monitoring process of outstanding balances. No individual customer accounted for more than 10% of net advertising revenues during the year ended December 31, 2010.

The Company generally does not require collateral for its accounts receivable. The movements of the allowance for doubtful accounts were as follows:

Movement of allowance for doubtful accounts


						Year ended			Year ended
	Year ended December 31,					December 31, 2009			December 31, 2010
	2007			2006
Balance at beginning of the period	$	284,402		$	15,167		826,026			4,015,145
Consolidation of Seed Music							425,065			—
Consolidation of Ku6							—			101,484
Provisions		661,504			269,235		4,107,915			1,976,053
Reversed		(233,057	)		—		(373,943	)		(501,485	)
Written off		(13,324	)		—		(969,918	)		(53,563	)
Transferred out due to disposal of WVAS and recorded music businesses							—			(3,100,455	)

Balance at the end of the period	$	699,525		$	284,402		4,015,145			2,437,179

~~19.~~20. MAINLAND CHINA CONTRIBUTION PLAN AND ~~PROFIT APPROPRIATION~~STATUTORY RESERVES

Full time employees of the Company in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require the Company to accrue for these benefits based on certain percentages of the employees’ salaries. The total ~~provisions~~amounts charged to the statements of operations and comprehensive loss for such employee benefits were ~~$2,434,409, $2,396,079~~$2,157,825, $2,692,679 and ~~$1,647,503~~$3,660,438 for the years ended December 31, ~~2007, 2006~~2008, 2009 and ~~2005,~~2010, respectively.

F-55

21. COMMITMENTS AND CONTINGENCIES

Operating leases commitments

The Company entered into leasing arrangements relating to office area and servers equipment in 2008, 2009 and 2010. Rental expense under operating leases for the year ended December 31, 2008, 2009 and 2010 were $1,931,102, $2,768,340 and $11,785,743, respectively.

Future minimum lease payments under non-cancelable operating lease agreements are as follows:


Within 1 year			7,529,765
Between 1 and 2 years			1,657,259
Between 2 and 3 years			543,843
Between 3 and 4 years			43,653

Total			9,774,520

Capital commitments

As of December 31, 2010, the Group has commitments in respect of purchased video copyrights amounting to $3,217,670.

Litigation

The Group is subject to claims and litigations, which may arise in the normal course of business. Beijing VIE is involved in a number of cases pending in various courts and arbitration as of December 31, 2010. These cases are substantially related to alleged copyright infringement. Adverse results in these lawsuits may include awards of damages and may also result in, or even compel, a change in the Group’s business practices, which could impact the Group’s future financial results.

The Group has accrued $748,299 in “Accrued expenses and other liabilities” in the consolidated balance sheets as of December 31, 2010 (Note 11). The compensation was based on judgments handed down by the court and out-of-court settlements as of or after December 31, 2010 but related to alleged copyright infringement arising on or before the acquisition of Ku6 or management’s best estimation according to the historical actual compensation amount per video of Ku6 in prior years and the advice from PRC ~~legal restrictions~~counsel. Beijing VIE is in the process of appealing certain judgments for which the loss has been accrued.

There are no accruals for any additional losses related to unasserted claims as the amount cannot be reasonably estimated.

Contingent considerations for business acquisitions

In connection with the acquisition of Seed Music, other than the initial consideration of $2,507,438 in cash, there are further contingent payments according to the agreements based on Seed Music’s operating performance. The contingent payments will be paid in cash if Seed Music exceeds the performance target. If not, the selling holders are obligated to transfer certain shares or make cash payments to the Company. Although the maximum contingent consideration is material to the Company, payment of such amount is considered remote. As Seed Music did not achieve the specified earnings target, the Company was not required need to make additional payment.

F-56

22. SUBSEQUENT EVENT

On March 13, 2011, the Company announced the resignation of CEO Mr. Li Shanyou effective on March 14, 2011. He will remain a Board member of the Company. The options granted to him in 2010 to purchase 140,370,000 ordinary shares with an exercise price of US$0.0568 per share were forfeited.

On April 1, 2011, the Company entered into agreements with Shanda Media Group Ltd. (“Shanda Media”), a wholly owned subsidiary of Shanda Interactive, pursusnt to which the Company agreed to issue to Shanda Media 1,538,461,538 ordinary shares at a per share price of $0.0325 for $50,000,000 in cash, and $50,000,000 aggregate principal amount of 3% senior convertible notes at face value. The notes will mature in three years after issuance and will bear an interest of 3% per annum. The notes will be convertible into ordinary shares at a price of $0.03925 per ordinary share. The conversion rights will start after six months following the issuance of the notes. The transaction was committed to by Shanda and has been approved by the board in April 2011 and special shareholders’ meeting of the Company in June 2011. The transaction was expected to be closed in the second quarter of 2011. The Company intends to use the net proceeds from the sale of the convertible bonds and ordinary shares for business expansion, working capital and other general corporate purposes.

On April 20, 2011 the Company and the shareholders of Hangzhou Soushi Networking Co., Ltd. (“Pipi”), a P2P based internet video platform in China, including Shanghai Shanda Networking Co., Ltd. (“Shanda Networking”), a wholly-owned subsidiary of Shanda, have agreed to the sale of all of the equity interests in Pipi to the Company in exchange for an aggregate of 2,212,114,257 ordinary shares. However, during the adjourned extraordinary general meeting of shareholders held on June 24, 2011, the shareholders did not approve this transaction. As provided in the Equity Purchase Agreement, either Pipi or the Company may terminate the Equity Purchase Agreement if the closing of the acquisition is not consummated on or before June 30, 2011.

On May 18, 2011, the Company announced a plan to restructure its sales department by reducing total workforce by approximately 20% and all employees affected by this plan will be from the sales force. The Company expects that a non-recurring restructuring charge will be recorded in the second quarter of 2011, and that its revenues in short term would be negatively affected by the restructuring.

In June 2011, the Company entered into two loan agreements to borrow RMB 43.0 million (equivalent to $6.6 million) from Shanghai Shulong Technology Co., Ltd. and lend $7.3 million to Shanda Games Limited, two companies controlled by Shanda Interactive, which carries an interest rate of 0.6% and 5.05% per year, respectively, and are due in June 2012.

On June 24, 2011, the Company announced that its shareholders, during its adjourned extraordinary general meeting of shareholders held on June 24, 2011, approved the change of the authorized share capital of Ku6 to US$600,000 divided into 12,000,000,000 ordinary shares of par value US$0.00005 each.

23. RESTRICTED NET ASSETS

Relevant PRC laws and regulations permit ~~payments of dividends by~~ PRC companies to pay dividends only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. ~~Prior to payment of dividends, pursuant to the laws applicable to the PRC’s Foreign Investment Enterprises,~~Additionally, the Company’s VIE subsidiaries ~~and VIEs in~~can only distribute dividends upon approval of the shareholders after they have met the PRC ~~must make appropriations from after-tax profit~~requirements for appropriation to non-distributable reserve funds as determined by the Board of Directors of each company. These reserve funds include (i) a general reserve, (ii) an enterprise expansion fund and (iii) a staff bonus and welfare fund. Subject to certain cumulative limits, thestatutory reserve. The statutory general reserve fund requires annual appropriations of 10% of net after-tax ~~profit (as determined under generally accepted accounting principles in the PRC at each year-end); the other fund appropriations are at the Company’s discretion. These reserve funds can only~~income should be ~~used for specific purposes~~set aside prior to payment of ~~enterprise expansion and staff bonus and welfare and are not distributable as cash~~any dividends. For the years ended December 31, 2007, 2006 and 2005, the Company’s PRC subsidiaries and VIEs made appropriations to the general reserve fund of $841,788, $374,004 and $3,201,788, respectively. The PRC subsidiaries and VIEs elected not to make any appropriations to the enterprise expansion fund and staff bonus and welfare fund in any of the periods presented. As a result of these and other restrictions under PRC laws and regulations, the PRC subsidiaries and ~~VIEs~~affiliates are restricted ~~from transferring~~in their ability to transfer a portion of their net assets to the ~~Company. Restricted~~Company either in the form of dividends, loans or advances, which restricted portion amounted to approximately $41.7 million, or 91.2% of the Company’s total consolidated net assets ~~were approximately $75.6 million and $69.1 million,~~ as of December 31, ~~2007~~2010. Even though the Company currently does not require any such dividends, loans or advances from the PRC subsidiaries and ~~2006, respectively.~~affiliates for working capital and other funding purposes, the Company may in the future require additional cash resources from our PRC subsidiaries and affiliates due to changes in business conditions, to fund future acquisitions and developments, or merely declare and pay dividends to or distributions to the Company shareholder. Accordingly, the Company has included Schedule 1I in accordance with Regulation S-X promulgated by the United States Securities and Exchange Commission.

~~20. COMMITMENTS AND CONTINGENCIES~~

~~Operating leases as lessee~~

The Company leases certain office premises under non-cancelable leases, of which the principal one expires in 2009. Rent expense under operating leases for 2007, 2006 and 2005 was $1,862,610, $1,455,640 and $1,051,276, respectively.

~~Future minimum lease payments under non-cancelable operating lease agreements were as follows:~~

December 31,
2008 $ 1,725,147
2009 1,378,993
2010 21,443

Total $ 3,125,583

~~Artist contracts~~

~~Huayi Brothers Music and Freeland Music have non-cancelable agency agreements with certain artists that provide for minimum payments. Future minimum payments were as follows:~~

December 31,
2008 $ 1,974,067
2009 1,974,067
2010 1,137,830

Total $ 5,085,964

~~F-33~~F-57

~~21. SUBSEQUENT EVENTS~~

~~Amendment to Shanghai Magma purchase agreement~~

In February 2008, the Company and the former shareholders of Shanghai Magma agreed to amend the purchase agreements, whereby, among other things, the Company’s remaining purchase liability to these shareholders was reduced from $6 million to $1 million. This amount was paid in March 2008. The gain on reduction of $5 million in the purchase liability was recognized as other income in the first quarter of 2008. The parties have also agreed to waive the requirement that the selling shareholders subscribe for shares in Hurray!.

~~Termination of agreement with Enlight~~

~~On November 19, 2007, the Company agreed to acquire 100% of Enlight Media, Ltd (“Enlight”)~~KU6 MEDIA CO., a leading private entertainment content and distribution company in China in an all stock transaction. Upon completion of the transaction, Hurray! would be required to issue ordinary shares equivalent to 15.74 million American Depository Shares (“ADSs”), representing a 42% interest in Hurray! on a pro-forma basis and additional shares, up to a maximum of the equivalent of 23.3 millions ADSs, would to be issued to the original shareholders of Enlight if, during the sixth and twenty-fourth months after completion of the transaction, the three-month average share price of Hurray! exceeded certain targets ranging from $5.00 per ADS to $8.50 per ADS. If all price targets were met the original Enlight shareholders could own up to 65% of Hurray!.

On March 6, 2008, the Company and the Enlight agreed to terminate the agreement due to a divergence in business strategies and a mutual determination that a combination would not be in our mutual interests. Each party will bear their own costs relating to the proposed transaction.

~~F-34~~

LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.)

ADDITIONAL INFORMATION — FINANCIAL STATEMENT SCHEDULE I
~~FINANCIAL INFORMATION OF PARENT COMPANY~~

BALANCE SHEETS

(In U.S. dollars)


	December 31,				December 31, 2009			December 31, 2010
	2007		2006		(Adjusted)
	(in U.S. dollars, except share data)				(Note 2(1))
					(in U.S. dollars, except number of shares)
Assets
Current assets:
Cash	$	49,061,529	$	48,496,751		23,760,844			11,048,500
Short term investments						10,000,000			—
Prepaid expenses and other current assets		224,297		450,298		134,436			241,017
Amounts due from subsidiaries and variable interest entities		—		12,404,359
Amount due from subsidiaries and variable interest entities						—			31,959,213
Amount due from related parties						—			3,841,766

Total current assets		49,285,826		61,351,408		33,895,280			47,090,496
Receivable on disposal of subsidiary		4,151,400		—
Investments in subsidiaries and variable interest entities		39,681,837		67,481,687		22,838,722			—
Investment in equity affiliate		150,000		—

Total assets	$	93,269,063	$	128,833,095		56,734,002			47,090,496


Liabilities and shareholders’ equity
Current liabilities:
Accrued expenses and other current liabilities	$	595,648	$	192,137		1,280,993			1,266,380
Amounts due to subsidiaries and variable interest entities		530,756		—		376,605			77,833
Acquisitions payable		6,560,000		5,820,938

Total current liabilities		7,686,404		6,013,075		1,657,598			1,344,213


Shareholders’ equity:
Ordinary shares ($0.00005 par value; 4,560,000,000 shares authorized; 2,173,784,440 and 2,162,031,740 a shares issued and outstanding as of December 31, 2007, and 2006, respectively)		108,689		108,102
Ordinary shares ($0.00005 par value; 4,560,000,000 shares authorized; 2,200,194,040 and 3,481,174,498 shares issued and outstanding as of December 31, 2009 and 2010, respectively)						109,959			174,008
Additional paid-in capital		74,066,839		73,608,117		76,605,958			130,100,153
Retained earnings		3,752,257		45,702,452
Accumulated other comprehensive income		7,654,874		3,401,349
Accumulated deficit						(31,595,200	)		(83,105,464	)
Accumulated other comprehensive income (loss)						9,955,687			(1,422,414	)

Total shareholders’ equity		85,582,659		122,820,020		55,076,404			45,746,283

Total liabilities and shareholders’ equity	$	93,269,063	$	128,833,095		56,734,002			47,090,496

KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.

)
ADDITIONAL INFORMATION — FINANCIAL STATEMENT SCHEDULE I
~~FINANCIAL INFORMATION OF PARENT COMPANY~~
STATEMENT OF OPERATIONS
(In U.S. dollars)

Year ended December 31,
2007 2006 2005
(in U.S. dollars, except share data)

Operating expenses
Product development (represents stock-based compensation expense of $921, $79,587 and $4,886 for the years ended December 31, 2007, 2006 and 2003, respectively) $ 9,385 $ 79,587 $ 4,886
Selling and marketing (including stock-based compensation expense of $286,885, $346,456 and $9,911 for the years ended December 31, 2007, 2006 and 2005, respectively) 286,885 346,211 187,111
General and administrative (including stock-based compensation expense of $155,169, $117,514 and $22,775 for the years ended December 31, 2007, 2006 and 2005, respectively) 2,440,417 1,757,720 1,411,309

Total operating expenses 2,736,687 2,183,518 1,603,306

Loss from operations (2,736,687 ) (2,183,518 ) (1,603,306 )
Interest income 2,082,629 2,372,585 1,291,258
Interest expense (179,062 ) (44,765 ) —
Other income, net 105,485 — —
Gain from disposal of subsidiary 192,943 — —
Equity in earnings (loss) of subsidiaries, variable interest entities and affiliate (41,415,503 ) 5,659,643 18,930,780

Net (loss) income $ (41,950,195 ) $ 5,803,945 $ 18,618,732

Year ended Year ended Year ended
December 31, 2008 December 31, 2009 December 31, 2010
(Adjusted)
(Note (2(1))
(in U.S. dollars, except number of shares)
Operating expenses:

Product development 105,283 — 150,584
Selling and marketing 622,846 118,521 160,231
General and administrative 1,666,532 5,520,453 4,072,134

Total operating expenses 2,394,661 5,638,974 4,382,949

Loss from operations
(2,394,661 ) (5,638,974 ) (4,382,949 )
Interest income 1,429,837 355,616 9,404
Interest expense — — —
Other income 5,000,000 — 205,043
Foreign exchange loss (gain) (8,990,067 ) 1,085 (38,767 )
Gain from disposal of subsidiary 412,530 221,899 —
Equity in loss of subsidiaries, VIEs and affiliate (7,410,235 ) (18,334,487 ) (47,302,995 )

Net loss
(11,952,596 ) (23,394,861 ) (51,510,264 )

~~F-36~~F-59

KU6 MEDIA CO., LTD. (FOMERLY KNOWN AS HURRAY! HOLDING CO., LTD.

)
ADDITIONAL INFORMATION — FINANCIAL STATEMENT SCHEDULE I
~~FINANCIAL INFORMATION OF PARENT COMPANY~~
STATEMENTS OF CASH FLOWS
(In U.S. dollars)

Year ended December 31,
2007 2006 2005
(in U.S. dollars)
Cash flows from operating activities:

Net (loss) income $ (41,950,195 ) $ 5,803,945 $ 18,618,732
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Stock-based compensation expense 442,975 543,557 37,572
Equity in (losses) earnings of subsidiaries, variable interest entities and affiliate 41,415,503 (5,659,643 ) (18,930,780 )
Gain from disposal of subsidiary (192,943 ) — —
Receivable from disposal of subsidiary (net of cash disposed of $771,570) (3,186,887 ) — —
Changes in assets and liabilities:
Prepaid expenses and other current assets 226,001 (19,649 ) (807,662 )
Amounts due from subsidiaries and variable interest entities 5,843,380 792,290 —
Accrued expenses and other current liabilities 403,512 (243,793 ) 224,768
Amounts due to subsidiaries and variable interest entities 530,756 (1,243,090 ) (1,063,505 )
Payroll withholding taxes payable — (504,945 ) 504,945

Net cash provided by (used in) operating activities
3,532,102 (531,328 ) (1,415,930 )

Investing activities:

Investment in subsidiaries and variable interest entities (2,833,658 ) (7,475,860 ) (62,350 )
Purchase of equity affiliate (150,000 ) — —

Net cash (used in) provided by investing activities
(2,983,658 ) (7,475,860 ) (62,350 )

Financing activities:

Proceeds from the issuance of ordinary shares upon initial public offering, net of offering costs of $7,578,637 (offering costs of $7,399,844 and $178,793 were paid for the years ended December 31, 2006 and 2005, respectively) — 540,000 60,422,746
Payment to repurchase ordinary shares — (5,034,748 ) —
Collection of subscription receivable — — 50,880
Proceeds from exercise of stock options 16,334 95,472 1,489,602

Net cash provided by (used in) financing activities
16,334 (4,399,276 ) 61,963,228

Net increase (decrease) in cash and cash equivalents
564,778 (12,406,464 ) 60,484,948
Cash and cash equivalents, beginning of year
48,496,751 60,903,215 418,267

Cash and cash equivalents, end of year
$ 49,061,529 $ 48,496,751 $ 60,903,215

Year ended Year ended Year ended
December 31, 2008 December 31, 2009 December 31, 2010
Adjusted
(Note 2(1))
(In U.S. dollars)
Net loss

Operating activities:

Net loss (11,952,596 ) (23,394,861 ) (51,510,264 )
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation 945,282 169,310 1,891,931
Equity in profit of subsidiary companies 7,410,235 18,334,487 47,302,995
Gain from disposal of subsidiary (412,530 ) (221,899 ) —
Receivable from disposal of subsidiary — — —
Gain on reduction of acquisition payable (5,000,000 ) — —
Prepaid expenses and other current assets 56,064 40,047 (106,581 )
Amount due from related parties — — (942,919 )
Other payables and accruals (322,804 ) 1,008,149 4,738
Amounts due to subsidiaries and variable interest entities (189,080 ) 34,929 2,381

Net cash provided by (used in) operating activities
(9,465,429 ) (4,029,838 ) (3,357,719 )

Investing activities:

Decrease/(Increase) of short-term investments — (10,000,000 ) 10,000,000
Proceeds from disposal of subsidiary 4,517,070 268,759 37,243,901
Loan to subsidiaries — — (53,418,876 )
Loan to related parties — — (3,200,000 )
Payments related to acquisitions consummated (1,987,930 ) — —
Payments related to acquisition not yet consummated (1,907,400 ) — —
Investment in cost affiliate (600,038 ) — —
Investment in subsidiary (2,000,000 ) —
Purchase of equity affiliate — — —

Net cash used in (provided by) investing activities
21,702 (11,731,241 ) (9,374,975 )

Financing activities:

Proceeds from exercise of options 1,500 2,500 20,350

Net cash provided by financing activities
1,500 2,500 20,350

Effect of exchange rate changes on cash and cash equivalents
(99,879 ) — —
Net increase (decrease) in cash and cash equivalents
(9,442,227 ) (15,758,579 ) (12,712,344 )
Cash and cash equivalents, beginning of year
49,061,529 39,519,423 23,760,844

Cash and cash equivalents, end of the year
39,519,423 23,760,844 11,048,500

Note

Basis for Preparation

The Financial Information of the Parent Company has been prepared using the same accounting policies as set out in the Company’s consolidated financial statements except that the Company has used the equity method to account for its investment in its subsidiaries and its variable interest entities.

~~F-37~~F-60

~~EXHIBIT INDEX~~REPORT OF INDEPENDENT AUDITORS

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
KU6 HOLDING LIMITED:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive loss, changes in shareholders’ deficit and cash flows present fairly, in all material respects, the financial position of Ku6 Holding Limited (the “Company”) and its subsidiaries (collectively the “ Group”) as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers Zhong Tian CPAs Limited Company

PricewaterhouseCoopers Zhong Tian CPAs Limited Company
Shanghai, the People’s Republic of China
June 28, 2011

F-61

KU6 HOLDING LIMITED

CONSOLIDATED BALANCE SHEETS

December 31, December 31,
Note 2008 2009
US$ US$

ASSETS

Current assets:
Cash and cash equivalents 2(5), 3 11,401,733 4,035,454
Accounts receivable, net of allowance �� 2(6), 4 2,516,845 3,160,757
Prepayments and other current assets 119,587 273,259

Total current assets 14,038,165 7,469,470

Property and equipment, net 2(7), 5 3,154,020 2,197,165

Total assets
17,192,185 9,666,635

LIABILITIES

Current liabilities:
Accounts payable 1,052,439 2,415,507
Taxes payable 6 233,357 304,898
Other payables and accruals 7 3,930,770 4,957,976

Total current liabilities 5,216,566 7,678,381

Warrant liability 8, 10 228,886 42,481

Total liabilities
5,445,452 7,720,862

Commitments and contingencies 15 — —

MEZZANINE EQUITY

Series A Convertible Preferred Shares, US$0.0001 par value; 55,555,555 shares authorized; issued and outstanding as of December 31, 2008 and 2009 (Liquidation value: US$4,736,842 as of December 31, 2008 and 2009) 8 4,736,842 4,736,842
Series A-1 Convertible Preferred Shares, US$0.0001 par value; 10,198,604 shares authorized; issued and outstanding as of December 31, 2008 and 2009 (Liquidation value: US$1,000,000 as of December 31, 2008 and 2009) 8 1,000,000 1,000,000
Series B Convertible Preferred Shares,US$0.0001 par value; 80,000,000 shares authorized; 74,880,455 issued and outstanding as of December 31, 2008 and 2009(Liquidation value: US$20,890,631 as of December 31, 2008 and 2009) 8 14,150,634 15,810,338
Series B-1 Convertible Preferred Shares,US$0.0001 par value; 32,967,402 shares authorized; 22,967,402 issued and outstanding as of December 31, 2008 and 2009(Liquidation value: US$7,500,005 as of December 31, 2008 and 2009) 8 5,281,372 5,846,367

SHAREHOLDERS’ DEFICIT

Ordinary shares (US$0.0001 par value; 321,278,439 shares authorized, 100,701,104 shares issued and outstanding as of December 31, 2008 and 2009) 10,070 10,070
Additional paid-in capital 774,423 978,759
Subscription receivable (10,070 ) (10,070 )
Accumulated loss (14,010,821 ) (26,247,228 )
Accumulated comprehensive loss (185,717 ) (179,305 )

Total shareholders’ deficit (13,422,115 ) (25,447,774 )

Total liabilities and shareholders’ deficit
17,192,185 9,666,635

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

F-62

KU6 HOLDING LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

Note For the years ended December 31
2008 2009
US$ US$

Total net revenues 2(11) 4,296,358 6,224,644

Cost of revenue 2(12), 11 (7,662,012 ) (10,018,489 )

Gross loss (3,365,654 ) (3,793,845 )

Operating expenses:
Sales and marketing 2(13) (2,708,703 ) (3,790,651 )
General and administrative 2(14) (2,748,404 ) (2,582,885 )

Total operating expenses (5,457,107 ) (6,373,536 )

Loss from operations (8,822,761 ) (10,167,381 )

Interest income 2(16) 13,628 7,619
Interest expense (221,263 ) (40,206 )
Other income, net — 1,727
Beneficial conversion charge on convertible note 8 (508,352 ) —
Fair value changes in warrant liabilities 8 (46,328 ) 186,533

Loss before income tax expenses (9,585,076 ) (10,011,708 )

Income tax expenses 2(18), 12 — —

Net loss attributable to the Company (9,585,076 ) (10,011,708 )

Accretion on Convertible Redeemable Series B Preferred Shares to redemption value (822,315 ) (1,659,705 )
Accretion on Convertible Redeemable Series B-1 Preferred Shares to redemption value (281,369 ) (564,994 )

Net loss attributable to the Company’s ordinary shareholders (10,688,760 ) (12,236,407 )

Net loss (9,585,076 ) (10,011,708 )
Other comprehensive loss:
Currency translation adjustments of the Company and subsidiaries (83,471 ) 6,412

Comprehensive loss attributable to the Company (9,668,547 ) (10,005,296 )

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

F-63

KU6 HOLDING LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

Accumulated Total
Ordinary shares Subscription Additional Accumulated comprehensive shareholders’
Shares Amount receivable paid-in capital loss loss deficit
US$ US$ US$ US$ US$ US$

Balance as of January 1, 2008 100,701,104 10,070 (10,070 ) 133,145 (3,322,061 ) (102,246 ) (3,291,162 )

Accretion on Convertible Redeemable Series BPreferred Shares to redemption value
— — — — (822,315 ) — (822,315 )
Accretion on Convertible Redeemable Series B-1Preferred Shares to redemption value
— — — — (281,369 ) — (281,369 )
Beneficial conversion feature on convertible note — — — 508,352 — — 508,352
Stock-based compensation expense — — — 132,926 — — 132,926
Cumulative currency translation adjustments of subsidiaries — — — — — (83,471 ) (83,471 )
Net loss — — — — (9,585,076 ) — (9,585,076 )

Balance as of December 31, 2008 100,701,104 10,070 (10,070 ) 774,423 (14,010,821 ) (185,717 ) (13,422,115 )

Accretion on Convertible Redeemable Series BPreferred Shares to redemption value
— — — — (1,659,705 ) — (1,659,705 )
Accretion on Convertible Redeemable Series B-1Preferred Shares to redemption value
— — — — (564,994 ) — (564,994 )
Stock-based compensation expense — — — 204,336 — — 204,336
Cumulative currency translation adjustments of subsidiaries — — — — — 6,412 6,412
Net loss — — — — (10,011,708 ) — (10,011,708 )

Balance as of December 31, 2009 100,701,104 10,070 (10,070 ) 978,759 (26,247,228 ) (179,305 ) (25,447,774 )

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

F-64

KU6 HOLDING LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31,
2008 2009
US$ US$

Cash flows from operating activities:

Net loss (9,585,076 ) (10,011,708 )
Adjustments for:
Share-based compensation 132,926 204,336
Depreciation of property and equipment 921,408 1,413,150
Amortization and write-down of video copyrights 1,533,326 1,747,350
Interest expense 221,263 40,206
Bad debt provision for receivables and other assets 73,554 101,415
Loss from disposal of property and equipment — 53,106
Foreign exchange loss 40,249 18,177
Beneficial conversion charge on convertible loan 508,352
Fair value changes in warrant liabilities 46,328 (186,533 )
Changes in assets and liabilities:
Accounts receivable (2,063,507 ) (742,668 )
Prepayments and other current assets 45,894 (153,488 )
Accounts payable 402,356 928,002
Taxes payable 137,708 71,289
Other payables and accruals 3,329,990 982,836

Net cash used in operating activities (4,255,229 ) (5,534,530 )

Cash flows from investing activities:

Purchase of property and equipment (1,823,016 ) (905,528 )
Purchase of video copyrights (1,514,305 ) (915,275 )

Net cash used in investing activities (3,337,321 ) (1,820,803 )

Cash flows from financing activities:

Cash received from issuance of convertible note 3,000,001 —
Proceeds from issuance of convertible redeemable preferred shares 15,873,282 —
Issuance cost paid in connection with the issuance of the redeemable convertible preferred shares (598,769 ) —

Net cash provided by financing activities 18,274,514 —

Effect of exchange rate changes on cash (179,109 ) (10,946 )

Net increase/(decrease) in cash and cash equivalents 10,502,855 (7,366,279 )
Cash, beginning of year 898,878 11,401,733

Cash, end of year 11,401,733 4,035,454

Supplemental disclosure of cash flow information:

Cash (received) paid during the year for income tax — —

Supplemental disclosure of non-cash investing and financing activities:

Accounts payable related to purchase of property and equipment and video copyrights 464,855 898,297
Conversion of the convertible notes to redeemable convertible preferred shares 3,053,809 —

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

F-65

KU6 HOLDING LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in U.S. dollars, unless otherwise stated)

1. ORGANIZATION AND NATURE OF OPERATIONS

Ku6 Holding Limited (the “Company” or “Ku6”) was incorporated under the law of Cayman Islands (“Cayman”) as a limited liability company on January 24, 2007. The Company was incorporated as an investment holding company and currently has no significant assets or operations of its own, other than its investments in the entities discussed below.

The accompanying consolidated financial statements include the financial statements of the Company, its subsidiaries and variable interest entities (“VIEs” or “VIE subsidiaries”) as follows:


~~Exhibit~~
~~Number~~				~~Document~~
	~~4.81~~			Translation of Cooperation Agreement between China Mobile Communications Group Corporation and Monternet WAP Service Provider between China Mobile Communications Group Corporation and Beijing Hutong Wuxian Technology Co., Ltd, dated April 27, 2007.

	~~4.82~~	Date of		Percentage		~~Translation~~
Name of Mobile Value-added Service Cooperation Agreement with China United Telecommunications Corporation between China United Telecommunications Corporation and Beijing Hengjiweiye Electronic Commerce Co., Ltd., dated August 30, 2007.Subsidiaries		incorporation		of ownership

	~~4.84~~
Subsidiaries			~~Translation of Equity Transfer Agreement between TWM Holding, Hurray! Holding~~
Ku6 (Beijing) Technology Co., Ltd. (“Beijing WOFE”)		March 5, 2007			100	%
Wei Mo San Yi (Tianjin) Science and Technology Co., ~~and Hurray! Times Communications (Beijing)~~ Ltd. ~~dated October 8, 2007.~~(“Tianjin WOFE”)		December 23, 2008			100	%

	~~4.85~~			~~Translation of Equity Transfer Agreement of Shanghai Saiyu Information Technology Co., Ltd. among Liang Ruan, Yuqi Shi, Jie Li and Jianmei Wan, dated February 12, 2007.~~
Variable Interest Entities
Ku6 (Beijing) Information Technology Co., Ltd. (“Beijing VIE”)	~~4.86~~	April 20, 2006			~~Translation of Transfer Agreement between Hurray! Times Communications (Beijing) Co., Ltd., Beijing WVAS Solutions Ltd., Beijing Enterprise Network~~100	%
Tianjin Ku6 Zheng Yuan Information Technology Co., Ltd.~~, Xiaoping Wang, Hao Sun and Beijing Hurray! Times Technology Co., Ltd., dated May, 2007.~~ (“Tianjin VIE”)
	March 20, 2009			100	%

The Company, its subsidiaries and the consolidated VIEs are collectively referred to as the “Group”.

The Group engages primarily in provision of online advertising services by posting online advertisements on its online video sharing platform (www.ku6.com), where users can upload, view and share video clips, through its operating subsidiaries. The Group’s principal geographic market is in the People’s Republic of China (“PRC”).

Beijing VIE was the predecessor of the Group and operated substantially all of the businesses of the Group prior to March 20, 2009. It is wholly owned by Shanyou Li, the Company’s Chief Executive Officer, who was subsequently resigned in March 2011, and Hailong Han. The paid-in capital of Beijing VIE was funded by the Group through loans extended to the authorized individuals (“nominee shareholders”) and Tianjin VIE was incorporated by Beijing VIE on March 20, 2009.

On April 11, 2007, the Group undertook a restructuring and reorganization (the “Reorganization”) immediately prior to the issuance of Series A Convertible Redeemable Preferred Shares to several foreign investors. The Reorganization was necessary to comply with PRC laws and regulations that prohibit or restrict foreign ownership of companies that provide advertising services and hold Internet Content Provider (“ICP”) license and the license for Transmission of Audio-Visual Programs through the Internet (“the License”).

As part of the Reorganization, the Company established Beijing WOFE, a wholly foreign owned enterprise, and Beijing WOFE entered into a series of agreements with Beijing VIE. Details of certain key agreements with the VIEs are as follows:

• Loan Agreements: Beijing WOFE has granted interest-free loans to the nominee shareholders with the sole purpose of providing funds necessary for the capital injection of Beijing VIE. The portion of the loans for subsequent capital injection is eliminated with the capital of the VIE during consolidation. The interest-free loans to the nominee shareholders of VIE as of December 31, 2008 and 2009 were RMB9 million. Beijing WOFE is able to require the nominee shareholders to settle the loan amount through the entire equity interest of the VIE and nominate someone else to hold the shares on Beijing WOFE’s behalf.

F-66

KU6 HOLDING LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars, unless otherwise stated)

1. ORGANIZATION AND NATURE OF OPERATIONS (CONTINUED)

• Proxy Agreement: The nominee shareholders of Beijing VIE irrevocably appointed Beijing WOFE’s officers to vote on their behalf on all matters they are entitled to vote on, including matters relating to the transfer of any or all of their respective equity interests in Beijing VIE, making all the operational, financial decisions and the appointment of the directors, general managers and other senior management of the Beijing VIE.

• Equity Interest Pledge Agreements: The nominee shareholders of Beijing VIE have pledged their respective equity interests in Beijing VIE as collateral to secure the nominee shareholders’ obligation under other agreements and for the payment by Beijing VIE under the exclusive technical consulting and services agreements and the loan agreement. The nominee shareholders of Beijing VIE cannot sell or pledge their equity interests to others without the approval from Beijing WOFE, and the nominee shareholders of Beijing VIE cannot receive any dividends without the approval of Beijing WOFE.

• Exclusive Call Option Agreements: The nominee shareholders of Beijing VIE grant Beijing WOFE the exclusive and irrevocable right to purchase from the nominee shareholders, to the extent permitted under PRC laws and regulations or at the request of the Company, all of the equity interest in these entities for a purchase price equal to the amount of the registered capital or at the lowest price permitted by PRC laws and regulations. Beijing WOFE may exercise such option at any time. In addition, Beijing VIE and its nominee shareholders agree that without Beijing WOFE’s prior written consent, they will not transfer or otherwise dispose the equity interest or declare any dividend.

• Exclusive Technical Consulting and Services Agreements: Beijing WOFE is the exclusive provider of the technical consulting and related services and information of Beijing.

As a result of the above contractual agreements, the Company have the substantial ability to direct the activities of Beijing VIE that most significant impact its economic performance and consequently is the primary beneficiary of Beijing VIE and accordingly Beijing VIE’s results are consolidated in the financial statements of the Company in accordance with Accounting Standards Codification (“ASC”) 810-10,Consolidation(formerly referred to as Financial Accounting Standards Board (“FASB��) Interpretation (“FIN”) No. 46R, Consolidationof Variable Interest Entities, an Interpretation of ARB No. 51).

2. PRINCIPAL ACCOUNTING POLICIES

(1) Basis of presentation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”).

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

Significant accounting estimates reflected in the Group’s financial statements mainly include share-based compensation, allowance for doubtful accounts, valuation of deferred tax assets, useful lives of equipment recoverability of licensed video copyrights and long-lived assets and litigation provisions.

F-67

KU6 HOLDING LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars, unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

The Group operates with significant losses of $9.6 million and $10.0 million during the years ended December 31, 2008 and 2009, respectively, which principally resulted from depreciation of property and equipment, payroll cost, licensed video copyright cost and the lease of internet bandwidth. As of December 31, 2009, the accumulated deficits of the Group were $25.4 million and the working capital was deficit of $208,911. The Company incurred net cash outflows from operations of $4.3 million and $5.5 million in 2008 and 2009, respectively. The Company intends to raise additional funds through additional issuance of shares or loans to finance future capital commitments and for working capital purposes. In January 2010, the Company was acquired by Hurray! Holding Co., Ltd. (“Hurray!”), a Nasdaq listed company which was renamed to Ku6 Media Co., Ltd. (“Ku6 Media”) in August 2010, and the balance of Hurray!’s cash and short term investment as of December 31, 2009 is $49.7 million. Therefore management believes that cash and short term investment of Hurray! will provide sufficient capital for the Company during the next twelve months from Decmeber 31, 2009 to fund operations and other necessary capital expenditures, and as such, these financial statements are prepared under the going concern assumption which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business.

On April 1, 2011, Ku6 Media Co., Ltd., the parent company, entered into agreements with Shanda Media Group Ltd. (“Shanda Media”), a wholly owned subsidiary of Shanda Interactive Entertainment Limited (“Shanda”), pursuant to which Ku6 Media agreed to issue to Shanda Media $50,000,000 of ordinary shares at a per share price of $0.0325 and $50,000,000 aggregate principal amount of 3% senior convertible notes at face value. The convertible notes will mature in three years after issuance and will bear an interest of 3% per annum, payable semi-annually. The transaction was committed to by Shanda and has been approved by the board in April 2011 and special shareholers of Ku6 Media in June 2011.

(2) Consolidation

The consolidated financial statements include the financial statements of the Company, its subsidiaries and VIEs for which the Company is the primary beneficiary. All transactions and balances among the Company, its subsidiaries and VIEs have been eliminated upon consolidation.

The Group follows ASC 810, which requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.

(3) Fair value measurements

On January 1, 2008, the Company adopted ASC 820 (formerly referred to as the Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (or SFAS 157)) for financial assets and liabilities. On January 1, 2009, the Company also adopted ASC 820-10-55 (formerly referred to as FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No 157”) for all nonfinancial assets and nonfinancial liabilities. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. As such, fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. The hierarchy is broken down into three levels based on the reliability of inputs as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted price in active markets that are observable either directly or indirectly, or quoted prices in less active markets; and (Level 3) unobservable inputs with respect to which there is little or no market data, which require the Company to develop its own assumptions.

F-68

KU6 HOLDING LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars, unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

When available, the Company measures the fair value of financial instruments based on quoted market prices in active markets, valuation techniques that use observable market-based inputs or unobservable inputs that are corroborated by market data. Pricing information the Company obtains from third parties is internally validated for reasonableness prior to use in the consolidated financial statements. When observable market prices are not readily available, the Company generally estimates the fair value using valuation techniques that rely on alternate market data or inputs that are generally less readily observable from objective sources and are estimated based on pertinent information available at the time of the applicable reporting periods. In certain cases, fair values are not subject to precise quantification or verification and may fluctuate as economic and market factors vary and the Company’s evaluation of those factors changes. Although the Company uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique. In these cases, a minor change in an assumption could result in a significant change in its estimate of fair value, thereby increasing or decreasing the amounts of the Company’s consolidated assets, liabilities, equity and net income.

(4) Foreign currency translation

The Group’s functional currency is the Renminbi (“RMB”). Transactions denominated in currencies other than functional currencies are translated into functional currencies at the exchange rates quoted by the People’s Bank of China (the “PBOC”) prevailing at the dates of the transactions. Gains and losses resulting from foreign currency transactions are included in the consolidated statement of operations and comprehensive income. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currencies using the applicable exchange rates quoted by the PBOC at the balance sheet dates. All such exchange gains and losses are included in the statement of operations.

The reporting currency of the Group is the United States dollar (“US dollar” or “US$”). Assets and liabilities are translated at the exchange rates at the balance sheet date, equity accounts are translated at historical exchange rates and revenues, expenses, gains and losses are translated using the average rate for the year. Translation adjustments are reported as accumulated comprehensive loss and are shown as a separate component in the consolidated statements of equity.

(5) Cash and cash equivalents

Cash and cash equivalents represent cash on hand and demand deposits placed with banks or other financial institutions, which have original maturities less than three months.

(6) Allowances for doubtful accounts

The Group makes specific provisions for bad debts when facts and circumstances indicate that the receivable is unlikely to be collected. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances as required are made.

F-69

KU6 HOLDING LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars, unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(7) Property and equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the following estimated useful lives.


	~~8.1~~Computer equipment		~~List of Significant Subsidiaries and Affiliates.~~3 years
Leasehold improvements		Lesser of the term of the lease or the estimated useful lives of the assets
Furniture and fixtures
	~~12.1~~		~~Certification of Chief Executive Officer Required by Rule 13a-14(a).~~

	~~12.2~~		~~Certification of Chief Financial Officer Required by Rule 13a-14(a).~~

	~~13.1~~		~~Certification of Chief Executive Officer Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code.~~

	~~13.2~~		~~Certification of Chief Financial Officer Required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code.~~

	~~15.1~~		~~Consent of Deloitte Touche Tohmatsu CPA Ltd., Independent Registered Public Accounting Firm.~~3 years

(8) Video production and acquisition costs and licensed video copyrights

The Company contracts for the production and acquisition of, self produces, and licenses videos to exhibit on its websites.

Video production and acquisition costs

Following the guidance under ASC 926-20-25, video production (which mainly include direct production costs and production overhead) and acquisition costs are capitalized, if the capitalization criteria are met, and stated at the lower of unamortized cost or estimated fair value.

Capitalized video production and acquisition costs are amortized in accordance with the guidance in ASC 926-20-35-1 using the individual-film-forecast-computation method, based on the proportion of the revenues earned in a period to the estimated remaining unrecognized ultimate revenues as of the beginning of that period. The Company estimates total revenues to be earned (“ultimate revenues”) throughout the life of a video. Ultimate revenue estimates for the produced videos are periodically reviewed and adjustments, if any, will result in changes to amortization rates. Estimates used in calculating the fair value of the self produced content are based upon assumptions about future demand and market conditions. The capitalized costs are subject to assessment for impairment in accordance with ASC 926-20-35-12 to 35-18, if an event or change in circumstances indicates that the fair value is less than its unamortized costs.

Since the inception of the Group, video production and acquisition costs did not meet the criteria for capitalization and as a result all the video production and acquisition costs have been expensed as incurred.

F-70

KU6 HOLDING LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars, unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

Licensed video copyrights

The licensed video copyrights are amortized over their respective licensing periods.

The licensed video copyrights are carried at the lower of amortized cost or net realizable value. Under the net realizable value approach, the Company determines the expected cash inflows that are directly attributed to the premium content licensed which comprise of the expected revenues directly attributable to the content less the direct costs to deliver the content to derive the net realizable value of the asset. The Company writes down the carrying value of the licensed content if the estimated net future direct cash inflows from the licensed video copyrights over the licensing period are lower than the carrying amount.

The amortization period of the licensed video copyrights mainly range from 1 to 3 years during the years ended December 31, 2008 and 2009. Amortization expense for the years ended December 31, 2008 and 2009 was US$1,450,813and US$144,806, respectively. Write-down of US$82,513 and US$1,602,544 related to the licensed video copyrights was recognized during the years ended December 31, 2008 and 2009, respectively.

(9) Impairment of long-lived assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of any impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use is based on the amount the carrying value exceeds the fair value of the asset.

(10) Financial instruments

Financial instruments of the Group primarily comprise of cash and cash equivalents, accounts receivable, other current assets, accounts payable, other payables, warrant liability and convertible redeemable preferred shares. As of December 31, 2008 and 2009, their carrying values approximated their fair values because of their generally short maturities, except for the warrant liability (Note 10) and convertible redeemable preferred shares (Note 8).

(11) Revenue recognition

Online advertising services

Advertisements on the Company’s online video platform are charged either based on the agreed number of clicks per day over the agreed period or on per day basis. In the first case, the delivery of service occurs when users click on the designated videos clips. In the latter case, the delivery is not linked to displays, but occurs as the advertisement is hosted each day.

F-71

KU6 HOLDING LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars, unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

Software service revenue

The Group also provides software services primarily involving development and customization of video related software, either or not based on the core software the Group has, and assistance in implementing the software on fixed-price basis. Revenues are recognized when the software is delivered. Post-contract customer service support, which includes general maintenance, are recognized with the total fees as the post-contract customer support is usually one year, the cost of such support is insignificant and there are no upgrades or enhancement during the post-contract customer support period. Revenues recognized for software services totaled US$75,007 and US$461,382 for the years ended December 31, 2008 and 2009, respectively.

Business tax and related surcharges

The Group’s subsidiaries and its VIE subsidiaries are subject to business tax and related surcharges on the revenues earned for services provided in the PRC. The applicable business tax rate is 5% based on the gross advertising revenue before deducting the advertising agencies rebate. In the accompanying consolidated statements of operations, business tax and related surcharges for revenues derived from online advertising and software services are deducted from gross revenues to arrive at net revenues when incurred.

(12) Cost of revenue

Cost of revenues consist primarily of employee costs associated with the platform operation and share based compensation, depreciation expenses, internet bandwidth leasing costs, amortization and write-down of licensed video copyright.

F-72

KU6 HOLDING LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars, unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(13) Sales and marketing

Advertising and market promotion expenses, primarily advertisements through media publications, are expensed when incurred. Advertising and market promotion expenses amounted to US$1,613,982 and US$1,247,877 during the years ended December 31, 2008 and 2009, respectively.

(14) General and administrative

General and administrative expenses consist primarily of salary and benefits, litigation cost and provision related to copyright infringement claims, share based compensation, bad debt provision, office rental, depreciation and amortization and other overhead expenses incurred by the Group’s management and administrative departments.

(15) Share-based compensation

The Group follows ASC 718 (formerly referred to as Statement of Financial Accounting Standard 123(R) “Accounting for stock-based compensation”) to determine whether a share option should be classified and accounted for as a liability award or equity award. All grants of share-based awards to employees classified as equity awards are recognized in the financial statements based on their grant date fair values which are calculated using an option pricing model. All grants of share-based awards to employees and directors classified as liability are re-measured at the end of each reporting period with an adjustment for fair value recorded to the current period expense in order to properly reflect the cumulative expense based on the current fair value of the vested rewards over the vesting periods. The Company has elected to recognize compensation expense on share-based awards with service condition on a straight-line basis over the requisite service period, which is generally the vesting period.

Under ASC 718, the Company applied the Black-Scholes option pricing model in determining the fair value of options granted.

ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Share-based compensation expense was recorded net of estimated forfeitures such that expense was recorded only for those share-based awards that are expected to vest.

(16) Interest income

Interest income is recognized on a time proportion basis taking into account deposit balances and the effective interest rate.

(17) Leases

Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Other leases are accounted for as capital leases. Payments made under operating leases, net of any incentives received by the Group from the lessor, are charged to the statements of operations on a straight-line basis over the lease periods or based on certain formulas, as specified in the lease agreements, with reference to the actual number of users of the leased assets, as appropriate.

F-73

KU6 HOLDING LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars, unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

(18) Taxation

Deferred income taxes are provided using the liability method. Under this method, deferred income taxes are recognized for the future tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statements carrying amounts and the tax bases of existing assets and liabilities. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. The effect on deferred taxes of a change in tax rates is recognized in income in the period of change. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that amount of the deferred tax assets will not be realized.

ASC 740-10-25 (formerly referred to as Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”) prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company’s adoption of ASC 740-10-25 did not result in a cumulative adjustment to the opening balance of retained earnings as of January 1, 2007. The Company did not have any interest and penalties associated with uncertain tax positions and did not have unrecognized uncertain tax positions as of December 31, 2008 and 2009.

(19) Profit appropriation and statutory reserves

The Company’s PRC subsidiaries and VIEs are required to allocate at least 10% of their after-tax profit under PRC accounting regulations to the general reserve in accordance with the relevant PRC regulations until the general reserve has reached 50% of the registered capital of each company. Appropriations to the enterprise expansion fund, staff welfare and bonus fund are at the discretion of the board of directors of the subsidiaries. These reserves can only be used for specific purposes and are not transferable to the Company in the form of loans, advances, or cash dividends. As of December 31, 2008 and 2009, the Company’s PRC subsidiaries and VIEs have not appropriated any statutory reserves because there were accumulated deficits.

(20) Contingency

In the normal course of business, the Group is subject to contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters. Liabilities for such contingencies are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. See Note 15.

(21) Recent accounting pronouncements

In May 2009, the FASB issued ASC 855 (formerly referred to as SFAS No. 165 “Subsequent Events”), which sets forth general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 is effective after June 15, 2009. In February 2010, the FASB issued ASU No. 2010-09 (“ASU 2010-09”),Subsequent Events(ASC topic 855:Amendments to Certain Recognition and Disclosure Requirements), which updates ASC 855 and removes the requirement for public companies to disclose the date through which an entity has evaluated subsequent events. ASU 2010-09 became effective immediately. The adoption of ASC 855 and ASU 2010-09 did not have a material impact on the Company’s financial statements.

F-74

KU6 HOLDING LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars, unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

In June 2009, FASB issued ASC 105 (formerly referred to as SFAS No. 168,The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No.162). ASC 105 establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This Statement is effective for the reporting period ending on September 30, 2009. Beginning with the third fiscal quarter of 2009, the references made to U.S. GAAP use the new Codification numbering system prescribed by the FASB. The adoption of ASC 105 does not have any impact to the Company’s consolidated results of operations and financial condition.

In June 2009, the FASB issued amendments to various sections of ASC 810 (formerly referred to as SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)”, which amends FASB Interpretation No. 46 (revised December 2003)) to address the elimination of the concept of a qualifying special purpose entity. Such amendments to ASC 810 also replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity. Additionally, such amendments to ASC 810 provide more timely and useful information about an enterprise’s involvement with a variable interest entity. These amendments to ASC 810 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company does not expect the adoption of ASC 810 to have a significant impact to the Company’s consolidated financial statements.

In October 2009, the FASB issued ASU No. 2009-13 (“ASU 2009-13”),Multiple-Deliverable Revenue Arrangements. ASU 2009-13 amends ASC 605-25 regarding revenue arrangements with multiple deliverables. This update addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting, and how the arrangement consideration should be allocated among the separate units of accounting. These updates are effective for fiscal years beginning after June 15, 2010 and to be applied retrospectively or prospectively for new or materially modified arrangements. In addition, early adoption is permitted. The Group is currently assessing the impact, if any, of the adoption of ASU 2009-13 on its consolidated financial statements.

In January 2010, the FASB issued ASU No. 2010-06 (“ASU 2010-06”),Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends ASC topic 820 (“ASC 820”), Fair Value Measurements and Disclosures (formerly referred to as SFAS No. 157 Fair Value Measurements) to require a number of additional disclosures regarding (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements and (4) the transfers between Level 1, 2 and 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Group does not expect the adoption of ASU 2010-06 to have a material impact on its consolidated financial statements.

F-75

KU6 HOLDING LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars, unless otherwise stated)

2. PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

In February 2010, the FASB issued ASU No. 2010-08 (“ASU 2010-08”),Technical Corrections to Various Topics. This amendment eliminated inconsistencies and outdated provisions and provided the needed clarifications to various topics within ASC topic 815(“ASC 815”). The amendments are effective for the first reporting period (including interim periods) beginning after issuance (February 2, 2010), except for certain amendments. The amendments to the guidance on accounting for income taxes in reorganizations (ASC subtopic 852-740) should be applied to reorganizations for which the date of the reorganization is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. For those reorganizations reflected in interim financial statements issued before the amendments in this ASU are effective, retrospective application is required. The clarifications of the guidance on the embedded derivates and hedging (ASC subtopic 815-15) are effective for fiscal years beginning after December 15, 2009, and should be applied to existing contracts (hybrid instruments) containing embedded derivative features at the date of adoption. The Group does not expect the adoption of ASU 2010-08 to have a material impact on its consolidated financial statements.

In April 2010, the FASB issued ASU No. 2010-13 (“ASU 2010-13”),Compensation- Stock Compensation(ASC topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades—a consensus of the FASB Emerging Issues Task Force. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Earlier application is permitted. The Group does not expect the adoption of ASU 2010-13 to have a material impact on its consolidated financial statements.

3. CASH AND CASH EQUIVALENTS

Cash and cash equivalents as of December 31, 2008 and 2009 included cash balances denominated in U.S. dollars of approximately US$11,096,136 and US$2,840,947 (equivalent to RMB75,837,652 and RMB19,397,828) as of December 31, 2008 and 2009, respectively.

4. ACCOUNTS RECEIVABLE

December 31, December 31,
2008 2009
US$ US$

Accounts receivable 2,516,845 3,262,220
Less: Allowance for doubtful accounts — (101,463 )

2,516,845 3,160,757

The movement of the allowance for doubtful accounts during the years is as follow:

2008 2009
US$ US$

Balance at beginning of year — —
Add: Current year additions — (101,463 )
Less: Current year reversal — —

Balance at end of year — (101,463 )

F-76

KU6 HOLDING LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars, unless otherwise stated)

5. PROPERTY AND EQUIPMENT

Property and equipment and its related accumulated depreciation as of December 31, 2008 and 2009 are as follows:

December 31, December 31,
2008 2009
US$ US$

Computer equipment (including servers) 4,022,606 3,923,815
Leasehold improvements 72,837 72,905
Furniture and fixtures 278,882 311,922

Total 4,374,325 4,308,642
Less: Accumulated depreciation (1,220,305 ) (2,111,477 )

Net book value 3,154,020 2,197,165

Depreciation expense for the years ended December 31, 2008 and 2009 was US$921,408 and US$1,413,150, respectively.

6. TAX PAYABLES

December 31, December 31,
2008 2009
US$ US$

Business tax payable 192,138 249,924
Others 41,219 54,974

Total 233,357 304,898

7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

December 31, December 31,
2008 2009
US$ US$

Accrued payroll and welfare 709,112 1,410,013
Accrued litigation provision (Note 15) 1,593,199 1,644,200
Accrued advertising and promotion expenses 860,816 1,437,372
Accrued professional consulting fee — 325,446
Payable to a third party company 585,257 —
Others 182,386 140,945

Total 3,930,770 4,957,976

Payable to a third party company was non-interest bearing, unsecured and payable on demand, which was subsequently repaid in 2009.

F-77

KU6 HOLDING LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars, unless otherwise stated)

8. REDEEMABLE CONVERTIBLE PREFERRED SHARES AND CONVERTIBLE NOTES

In April 2007, the Company issued 55,555,555 Series A Redeemable Convertible Preferred Shares (“Series A Preferred Shares”) at the purchase price of US$$0.08526 per Series A Preferred Share for an aggregate purchase price of US$4,736,842 in cash, except US$736,842 settled a liability for advertising services provided by one then shareholder in 2007. The issuance cost relates to Series A Preferred Shares is US$140,954

In June 2007, the Company also issued 10,198,604 Series A-1 Redeemable Convertible Preferred Shares (“Series A-1 Preferred Shares”) at the purchase price of US$$0.0981 per Series A-1 Preferred Share for an aggregate purchase price of US$1,000,000 in cash.

In January 2008, the Company entered into an agreement with several institutional investors and issued convertible notes (the “Convertible Notes I”) for an aggregated amount of US$1,000,000. The Convertible Notes I expire in 6 months from the issuance date and carries an interest of 8% per annum starting from January 16, 2008. According to the agreement, if the Company can complete an issuance of Series B Redeemable Convertible Preferred Shares (“Series B Preferred Shares”) in 6 months from the issuance date, the Convertible Notes I shall be automatically converted into the Series B Preferred Shares with the conversion price equal to the purchase price of Series B Preferred Shares, otherwise the Convertible Notes I shall be converted into Series A Preferred Shares at the original purchase price of Series A Preferred Shares.

In connection with the issuance of the Convertible Notes I, the Company also issued warrants to the respective holders of the Convertible Notes I, for no additional cash consideration, to purchase up to US$200,000 Series B Preferred Shares, with an initial exercise price at the purchase price of the Series B Preferred Shares (“Note I Warrants”). The Note I Warrants have an exercise period of 3 years starting from the issuance date of Series B Preferred Shares.

In April 2008, the Company entered into an agreement with one of the institutional investors of the Convertible Notes I and issued convertible note (the “Convertible Note II”) for an amount of US$1,000,000. The Convertible Note II expires on the earlier of the issuance date of Series B Preferred shares or November 16, 2008 and carries an interest of 8% per annum starting from May 9, 2008. According to the agreement, if the Company completes an issuance of Series B Preferred Shares before August 31, 2008, the Convertible Note II can be converted into the Series B Preferred Shares with the conversion price equal to 75% of the purchase price of Series B Preferred Shares at the holder’s option. If the Company completes an issuance of Series B Preferred Shares between September 1, 2008 and November 15, 2008, the Convertible Note II can be converted into the Series B Preferred Shares with the conversion price equal to 60% of the purchase price of Series B Preferred Shares at the holder’s option, otherwise the Convertible Note II can be convertible into Series A Preferred Shares at the original purchase price of Series A Preferred Shares within 3 months after November 16, 2008.

In April 2008, the Company also entered into an agreement with another institutional investor and issued convertible note (the “Convertible Note III”) for an amount of US$1,000,001. The Convertible Note III expires in 6 or 12 months from the issuance date and carries an interest of 8% per annum starting from May 9, 2008. According to the agreement, if the Company completes an issuance of Series B Preferred Shares in 6 or 12 months from the issuance date, the Convertible Note III can be converted into the Series B Preferred Shares at purchase price of Series B Preferred Shares at the holder’s option. The investor can require the Company to repay the Convertible Notes III upon the completion of issuance of Series B Preferred Shares or in the event of an Acceleration Event as specified in the notes purchase agreement. If there is an IPO as defined in the notes purchase agreement before the issuance of Series B Preferred Shares, the Convertible Note III shall be converted into the ordinary shares at the original purchase price Series A Preferred Shares.

F-78

KU6 HOLDING LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars, unless otherwise stated)

8. REDEEMABLE CONVERTIBLE PREFERRED SHARES AND CONVERTIBLE NOTES (CONTINUED)

In connection with the issuance of the Convertible Notes III, the Company also issued a warrant to the holder of the Convertible Notes III, for no additional cash consideration, to purchase up to US$200,000 Series B Preferred Shares, with an initial exercise price at the purchase price of the Series B Preferred Shares (“Note III Warrant”). However, if there is an IPO before the issuance of Series B Preferred Shares, the Note III Warrant shall be exercisable into the ordinary shares at the original purchase price Series A Preferred Shares. The Note III Warrant has an exercise period of 3 years starting from the issuance date of Series B Preferred Shares.

In June 2008, the Company issued 57,081,354 Series B Preferred Shares at the purchase price of US$0.19049 per Series B Preferred Share, for an aggregate purchase price of US$10,873,278 in cash. In addition the Company issued 17,799,101 Series B Preferred Shares upon conversion of the Convertible Notes I, II and III afore-mentioned at the purchase price of US$0.19049 per Series B Preferred Share, except for 7,070,160 shares at US$0.14287 per Series B Preferred Shares converted from Convertible Note II. The issuance cost relates to Series B Preferred Shares is US$598,769.

In July 2008, the Company issued 22,967,402 Series B-1 Convertible Redeemable Preferred Shares (“Series B-1 Preferred Shares”) at the purchase price of US$0.21770 per Series B-1 Preferred Share for an aggregate purchase price of US$5,000,003 in cash.

Redeemable convertible preferred shares

As of December 31, 2008 and 2009, the Series A, A-1, B and B-1 Preferred Shares (collectively the “Preferred Shares”) are comprised of the following:

Proceeds
Issuance Outstanding net of issuance Carrying amount Carrying amount
Series date Shares Issue Price costs December 31, 2008 December 31, 2009
US$ US$ US$ US$
A April 2007 55,555,555 0.08526 4,595,888 4,736,842 4,736,842
A-1 June 2007 10,198,604 0.0981 1,000,000 1,000,000 1,000,000
B June 2008 67,810,295 0.19049 12,318,204 12,814,541 14,317,537
B June 2008 7,070,160 0.14287 1,010,114 1,336,093 1,492,801
B-1 July 2008 22,967,402 0.21770 5,000,003 5,281,372 15,810,338

163,602,016 25,168,848 27,393,547

The significant terms of Preferred Shares are summarized below:

a. Dividends:

The holders of the Preferred Shares are entitled to receive dividends at the rate of 8% of the original Preferred Share issue price per annum, when and if declared by the Board of Directors of the Company, prior and in preference to the ordinary shareholders or any other class of shareholders on an as-converted basis. The dividend of the Preferred Shares shall be non-cumulative. The holders of the Preferred Shares are also entitled to receive any other dividend, when and if declared by the Board on an as-converted basis. For the years ended December 31, 2008 and 2009, the Board of the Company had not declared the dividend.

F-79

KU6 HOLDING LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars, unless otherwise stated)

8. REDEEMABLE CONVERTIBLE PREFERRED SHARES AND CONVERTIBLE NOTES (CONTINUED)

b. Liquidation preference

Upon the occurrence of any liquidation, the holders of the Preferred Shares shall be entitled to receive, before any distribution or payment to the holders of the ordinary shares of the Company, an amount equal to 100% of their original issue price for Series A and A-1 Preferred Shares and 150% of their original issue price for Series B and B-1 Preferred Shares, as adjusted for any share splits, share dividends, combinations, recapitalizations and similar transactions, plus all declared and unpaid dividends.

c. Voting rights

Each Preferred Share has voting rights equivalent to the number of ordinary shares into which such Preferred Shares could be then convertible. The holders of the Preferred Shares also would have certain veto rights including, but not limited to, any increase or decrease in the total number of directors and change of board composition, dividend declaration, any merger, split, reorganization or consolidation.

d. Conversion

The Preferred Shares are convertible, at the option of the Investors, into the Company’s ordinary shares at an initial conversion ratio of 1:1 at any time after the original issuance date. However, the conversion price of Series B and B-1 Preferred Shares is subject to adjustment according to certain specified financial and non-financial measures such as net revenue and traffic volume, etc. No adjustment was made subsequently pursuant to the board resolution in November 2009.

In addition, each Preferred Share is automatically convertible into such number of ordinary shares of the Company as shall be determined by reference to the then effective and applicable conversion ratio upon the earlier of (i) immediately prior to the closing of a Qualified IPO as defined in the Preferred Shares agreement or (ii) the vote or written consent of the holders of two-thirds (2/3) of the Preferred Shares, each voting as a separate class.

In the event that the Company issues additional ordinary shares at a price lower than the then-applicable conversion price for the Preferred Shares, the conversion price of the Preferred Shares shall be reduced to a price equal to the issue price per share of the additional ordinary shares are issued, except for issuances under certain circumstances.

e. Redemption

The holders of a majority of the outstanding Series A or A-1 Preferred Shares may, on or after July 31, 2010, would have options at any time to redeem all of the Series A and A-1 Preferred Shares at a redemption price equal to the original issue price plus any declared and unpaid dividends and interest with respect to such Preferred Shares thereon.

The holders of two thirds of the outstanding Series B or B-1 Preferred Shares may, on or after July 31, 2010, would have options at any time to redeem all of the Series B and B-1 Preferred Shares at a redemption price equal to 150% of the original issue price plus any declared and unpaid dividends and interest with respect to such Preferred Shares thereon.

F-80

KU6 HOLDING LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars, unless otherwise stated)

8. REDEEMABLE CONVERTIBLE PREFERRED SHARES AND CONVERTIBLE NOTES (CONTINUED)

No beneficial conversion feature charge was recognized for the issuance of Preferred Shares as the estimated fair value of the ordinary shares does not exceed the effective conversion price on the date of issuance. The Preferred Shares are redeemable at the option of the Investors and as such are presented as mezzanine equity on the balance sheet and such amount is accreted to the redemption value from the issuance date to the earliest redemption date in accordance with ASC 480-10-S99. The carrying value of the Preferred Shares is adjusted for accretion with a corresponding adjustment to accumulated deficits in the statement of changes in shareholders’ equity.

Warrants

Following the application of ASC 480 and ASC 815-40-25, the Note I Warrants and Note III Warrant (collectively the “Warrants”) issued in connection with the Convertible Notes I and III are classified as liability due to the Warrants convertible into the Series B Preferred Shares, which are classified as mezzanine equity. The proceeds from the issuance of the Convertible Notes I and III and Warrants are first allocated to the Warrants based upon the fair value of the Warrants, amounting to US$173,765 and the residual amount of proceeds of US$1,826,236 are allocated to the Convertible Notes I and III. Effectively recording the Convertible Notes I and III a discount, the carrying amount of the Convertible Notes I, II and III of US$2,826,236 is accreted to US$3,053,808 its face value over the period and the accretion of US$227,573 from the issuance date to the conversion date in 2008 is recorded as interest expenses.

The Warrants are carried subsequently at fair value and the changes in the fair value on each balance sheet dates are recognized separately in the consolidated statements of operations. No Warrants were forfeited, cancelled or exercised for the years ended December 31, 2008 and 2009. The revaluation arising from changes in the fair values of the Warrants was loss of US$46,328 and gain of US$186,533 during the years ended December 31, 2008 and 2009, respectively.

Warrants (continued)

In determining the initial fair value of the Warrants, the Company applied the Black-Scholes option pricing model with the following assumptions used:

Note I Warrant Note III Warrant
Fair value of Series B Preferred Shares (US$) 0.1905 0.1905
Exercise price 0.1905 0.1905
Expected volatility (%) 49%~82 % 57 %
Expected dividend yield (%) 0 % 0 %
Expected term(years) 3 3
Risk-free interest rate (per annum) (%) 4.419%~4.283 % 2.746 %

Expected volatility was estimated based on average annualized standard deviation of the share price of comparable listed companies and applied certain discount for a period equal to the expected term preceding the valuation date.

Expected dividends are considered as zero because the Company has no history or expectation of paying dividends on its ordinary shares.

The expected term was considered as equal to the term of the warrants pursuant to the agreement.

Risk-free interest rates are based on the derived market yield of the US$ denominated Chinese government bonds for the term approximating the expected life of the warrants at the time of valuation.

F-81

KU6 HOLDING LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars, unless otherwise stated)

8. REDEEMABLE CONVERTIBLE PREFERRED SHARES AND CONVERTIBLE NOTES (CONTINUED)

Convertible Notes

The Company assessed the beneficial conversion feature attributable to the Convertible Notes I, II and III in accordance with ASC 470-20 and determined that at the commitment date, there was a contingent beneficial conversion feature with amount of US$510,457 as a result of the recording the Convertible Notes I and III a discount and 25% discount of the conversion price of Convertible Note II to purchase Series B Preferred Shares, which was recognized as beneficial conversion charge expense in the consolidated statements of operations upon the automatic conversion of Convertible Notes I, II and III upon issuance of Series B Preferred Shares in 2008.

9. SHARE-BASED COMPENSATION

In April 2007, the Company adopted the 2007 Stock Incentive Plan (the “Plan”). The Plan provides for the granting of share options to employees, officers, directors or consultants of the Company. These options were granted with exercise prices denominated in U.S. dollars. The Company has reserved 17,283,951 ordinary shares for issuance under the Plan. The maximum term of any issued stock option is ten years from the grant date. These awards vest over a four-year schedule for employees and officers with 25% of the options to vest on each of the first, second, third and fourth anniversaries of the award date as stipulated in the share option agreement.

In accordance with ASC 718-10, all share-based payments to employees are measured in the consolidated financial statements based on their grant-date fair values. Compensation expense is recognized on a straight-line basis, net of estimated forfeiture over the requisite service period with a graded vesting schedule.

A summary of the option activity, relating to the options held by the Company’s employees and directors under the Plan as of and for the year ended December 31, 2008 and 2009 are set out below:

Weighted
Weighted average
Options Average remaining Aggregate
Outstanding Exercise Price contractual life Intrinsicvalue
US$ US$
Outstanding at January 1, 2008 922,000 0.00853
Granted 8,611,000 0.09166
Forfeited — —

Outstanding at January 1, 2009 9,533,000 0.08362
Granted — —
Forfeited — —

Outstanding at December 31,2009 9,533,000 0.08362 8.3 175,230

Vested and expected to vest at December 31, 2009 9,306,500 0.08399 8.3 167,629

Vested and exercisable at December 31, 2009 2,613,750 0.07700 8.2 65,352

F-82

KU6 HOLDING LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars, unless otherwise stated)

9. SHARE-BASED COMPENSATION (CONTINUED)

The aggregate intrinsic value in the table above represents the difference between the fair value of the Company’s ordinary shares of $0.102 per share as of December 31, 2009 and the exercise price.

The weighted average grant-date fair value of options granted during fiscal years 2008 and 2009 was US$0.5977 and Nil, respectively. Total fair value of options vested as of December 31, 2008 and 2009 was US$109,271 and US$1,395,898, respectively.

As of December 31, 2009, there was US$466,437 (equivalent to RMB3,184,927) of unrecognized share-based compensation cost related to stock options, which is expected to be recognized over a weighted-average vesting period of 2.3 years. To the extent the actual forfeiture rate is different from the Company’s estimate, actual share-based compensation related to these awards may be different from the expectation.

The fair value of each option granted under the Plan is estimated on the date of grant using the Black-Scholes option pricing model that uses assumptions noted in the following table:

2007 2008
Fair value of ordinary shares (US$) 0.067~0.077 0.123~0.128
Exercise price (US$) 0.00853 0.042632~0.0981
Expected volatility (%) 40%~45 % 55%~65 %
Expected dividend yield (%) 0 % 0 %
Expected term(years) 5.5~7 5.5~7
Risk-free interest rate (per annum) (%) 5.16%~5.38 % 4.52%~5.05 %

Expected dividends are considered as zero because the Company has no history or expectation of paying dividends on its ordinary shares.

The expected term was considered as equal to the term of the options pursuant to the agreement.

F-83

KU6 HOLDING LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars, unless otherwise stated)

10. FAIR VALUE MEASUREMENTS

As of December 31, 2008 and 2009, the carrying amount of the Company’s cash and cash equivalents approximates their fair value due to the short maturity of the instruments. The carrying value of receivables and payables approximates their market value based on their short-term maturities. There are no other financial assets or liabilities that are being measured at fair value on a recurring basis except for the warrant liability (Note 8), which is classified within level 3. As of December 31, 2008 and 2009, the fair value of the warrant liabilities was US$228,886 and US$42,481, respectively.

The Company measures the fair value of warrant liability using the Black-Scholes option pricing model and unobservable inputs mainly including assumptions about expected future cash flows of the Company and discounted rate calculated based on the risk profile of the online video industry as well as expected volatility, expected term, etc. The following table presents the changes in the warrant liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

2008 2009
US$ US$

Balance at beginning of year — 228,886
Issuance of warrants 173,765 —
Change in fair value of warrant liability 46,328 (186,533 )
Effect of exchange rate changes 8,793 128

Balance at end of year 228,886 42,481

In January 2009, the Company implemented ASC 820 for nonfinancial assets and liabilities that are re-measured at fair value on a non-recurring basis. Nonfinancial assets such as property and equipment are measured at fair value when there is an indicator of impairment and recorded at fair value only when impairment is recognized. The Company tests its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of a long-lived asset may not be recoverable. The Company measures the fair value of long-lived assets based on an in-use premise using the discounted cash flow model and unobservable inputs including assumptions of projected revenue, expenses, capital spending, and other costs, as well as a discount rate calculated based on the risk profile of the online video industry.

11. COST OF REVENUES

2008 2009
US$ US$

Payroll 1,703,558 2,505,645
Internet bandwidth cost 2,790,243 3,709,045
Depreciation of servers and other equipments 835,661 1,277,816
Amortization and write-down of licensed video copyright cost 1,533,326 1,747,350
Share based compensation 33,184 43,799
Others 766,040 734,834

Total 7,662,012 10,018,489

F-84

KU6 HOLDING LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars, unless otherwise stated)

12. TAXATION

Cayman Islands

Under the current laws of Cayman Islands, the Group is not subject to tax on its income or capital gains. In addition, upon payments of dividends by the Group to its shareholders, no Cayman Islands withholding tax will be imposed.

China

Prior to January 1, 2008, the Company’s subsidiaries and VIEs that were incorporated in the PRC are subject to Enterprise Income Tax (“EIT”) on the taxable income as reported in their respective statutory financial statements adjusted in accordance with the Enterprise Income Tax Law and the Income Tax Law of the People’s Republic of China concerning Foreign Investment Enterprise and Foreign Enterprises (collectively the “previous PRC Income Tax Laws”), respectively. Pursuant to the previous PRC Income Tax Laws, companies are generally subject to EIT at a statutory rate of 33%. Beijing VIE and Beijing WOFE are entitled to a preferential EIT rate of 15% before January 1, 2008 due to qualified new and high technology enterprises.

On March 16, 2007, the National People’s Congress approved and promulgated a new PRC EIT Law, as supplemented by various detailed implementation guidance, which will take effect beginning January 1, 2008. The new tax laws apply a general enterprise income tax rate of 25% to both foreign-invested enterprises and domestic enterprises. The new EIT Law provides a five-year transitional period for those entities established before March 16, 2007, which enjoyed a favorable income tax rate of less than 25% under the previous income tax laws and rules, to gradually change their rates to 25%.

Composition of income tax expense

The current and deferred portion of income tax expense included in the consolidated statements of operations for the years ended December 31, 2008 and 2009 are as follows:

2008 2009
US$ US$

Current income tax expenses — —
Deferred income tax expense — —

Income tax expenses — —

Reconciliation of the differences between statutory tax rate and the effective tax rate

The reconciliation between the statutory EIT rate and the Group’s effective tax rate for the years ended December 31, 2008 and 2009 is as follows:

2008 2009

Statutory income tax rate 25 % 25 %
Differential statutory tax rate (3 %) (2 %)
Change in valuation allowance (22 %) (23 %)
Effect of non-deductible expenses 0 % 0 %

Effective EIT rate 0 % 0 %

F-85

KU6 HOLDING LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars, unless otherwise stated)

12. TAXATION (CONTINUED)

Significant components of deferred tax assets

December 31, December 31,
2008 2009
US$ US$

Deferred tax assets:
Temporary differences in relation to accruals 853,654 1,237,682
Less: Valuation allowance (700,676 ) (1,094,781 )

Current deferred tax assets 152,978 142,901

Depreciation and amortization 152,570 433,761
Tax loss carry-forwards 1,901,479 3,611,293
Less: Valuation allowance (2,054,049 ) (3,919,418 )

Non-current deferred tax assets — 125,636

Deferred tax liabilities:
Revenue recognition (152,978 ) (268,537 )

Current deferred tax liabilities (152,978 ) (268,537 )

Net deferred tax assets — —

Movement of valuation allowance

2008 2009
US$ US$

Balance at the beginning of year (536,252 ) (2,754,725 )
Current year additions (2,109,077 ) (2,255,835 )
Effect of exchange rate changes (109,396 ) (3,639 )

Balance at the end of year (2,754,725 ) (5,014,199 )

Valuation allowances have been provided on the net deferred tax assets due to the uncertainty surrounding their realization. As of December 31, 2008 and 2009, valuation allowances of US$2,754,725 and US$5,014,199 were provided because it was more likely than not that the Group will not be able to utilize certain tax losses carry forwards and other deferred tax assets generated by its subsidiaries and VIEs. If events occur in the future that allow the Group to realize more of its deferred tax assets than the presently recorded amount, an adjustment to the valuation allowances will increase income when those events occur. Tax losses incurred in 2008 and 2009 approximated US$5.4 million and US$6.8 million, respectively. The tax losses carry forward as at December 31, 2008 and 2009 approximated US$7.6 million and US$14.4 million, respectively, which will expire during the period from 2012 to 2014.

F-86

KU6 HOLDING LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars, unless otherwise stated)

13. EMPLOYEE BENEFITS

The full-time employees of the Company’s subsidiaries and VIE subsidiaries that are incorporated in the PRC are entitled to staff welfare benefits, including medical care, welfare subsidies, unemployment insurance and pension benefits. These companies are required to accrue for these benefits based on certain percentages of the employees’ salaries in accordance with the relevant regulations, and to make contributions to the state-sponsored pension and medical plans out of the amounts accrued for medical and pension benefits. The total amounts charged to the statements of operations and comprehensive income for such employee benefits amounted to approximately US$298,024 and US$747,609 for the years ended December 31, 2008 and 2009, respectively. The PRC government is responsible for the medical benefits and ultimate pension liability to these employees

14. CERTAIN RISKS AND CONCENTRATIONS

Concentration of credit risks

Financial instruments that potentially subject the Group to significant concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable and prepayments and other current assets. As of December 31, 2008 and 2009 substantially all of the Group’s cash and cash equivalents and short-term investments were held by major financial institutions located in the PRC and in Hong Kong, which management believes are of high credit quality.

Accounts receivable are typically unsecured and are derived from revenue earned from customers in China. The risk with respect to accounts receivables is mitigated by credit evaluations the Company performs on its customers and its ongoing monitoring process of outstanding balances.

Business and economic risks

The Group participates in a dynamic high technology industry and believes that changes in any of the following areas could have a material adverse effect on the Group’s future financial position, results of operations or cash flows: i) changes in the overall demand for services and products; ii) changes in business offerings; iii) competitive pressures due to new entrants; iv) advances and new trends in new technologies and industry standards; v) changes in bandwidth suppliers; vi) changes in certain strategic relationships or customer relationships; vii) regulatory considerations; viii) copyright regulations; and ix) risks associated with the Group’s ability to attract and retain employees necessary to support its growth.

There were two customers who individually accounted for greater than 10% of total revenues for the years ended December 31, 2008. The percentage of total revenues from the two customers was 13% and 12%, respectively, and the amount was US$543,082 and US$589,805, respectively, for the year ended December 31, 2008. No individual customer accounted for more than 10% of net revenues during the year ended December 31, 2009.

The Group’s operations could be adversely affected by significant political, economic and social uncertainties in the PRC.

F-87

KU6 HOLDING LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars, unless otherwise stated)

14. CERTAIN RISKS AND CONCENTRATIONS (CONTINUED)

Foreign currency exchange rate risk

The Company’s exposure to foreign currency exchange rate risk primarily relates to cash and cash equivalents denominated in the U.S. dollar. On July 21, 2005, the People’s Bank of China, or PBOC, announced an adjustment of the exchange rate of the US dollar to RMB from 1:8.27 to 1:8.11 and modified the system by which the exchange rates are determined. This adjustment has resulted in an appreciation of the RMB against the US dollar. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further revaluation and a significant fluctuation of the exchange rate of RMB against the US dollar.

For the years ended December 31, 2008 and 2009, the net foreign exchange loss resulting from cash dominated in US$ is not material.

15. COMMITMENTS AND CONTINGENCIES

Operating lease agreements

The Group has entered into leasing arrangements relating to office area and computer equipment in 2009 that are classified as operating leases. Future minimum lease payments for non-cancellable operating leases as of December, 31, 2009 are as follows:

Total
operating
lease
commitments
US$

2010 2,573,602
2011 13,421

2,587,023

Litigation

The Group is subject to claims and litigations, which may arise in the normal course of business. Beijing VIE is involved in a number of cases pending in various courts and arbitration as of December 31, 2008 and 2009. These cases are substantially related to alleged copyright infringement arising on or before December 31, 2008 and 2009, respectively. Adverse results in these lawsuits may include awards of damages and may also result in, or even compel, a change in the Group’s business practices, which could impact the Group’s future financial results.

The Group has accrued US$1,593,199 and US$1,644,200 in “Accrued expenses and other liabilities” in the consolidated balance sheets as of December 31, 2008 and 2009, respectively (Note 7). The compensation was based on judgments handed down by the court and out-of-court settlements after December 31, 2008 and 2009 or management’s best estimation according to the historical actual compensation amount per video of Ku6 in prior years and the advice from PRC counsel. Beijing VIE is in the process of appealing certain judgments for which the loss has been accrued.

There are no accruals for any additional losses related to unasserted claims as the amount cannot be reasonably estimated.

F-88

KU6 HOLDING LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in U.S. dollars, unless otherwise stated)

16. SUBSEQUENT EVENT

On January 18, 2010, the Company was acquired by Hurray! Holding Co., Ltd. (“Hurray!”) in exchange for 723,684,204 ordinary shares, of which 44,438,100 will be represented by American Depositary Shares of Hurray!, each representing 100 ordinary shares of the Company. Following the transaction, the Company became the wholly owned subsidiary of Hurray!.

In June 2011, the Company entered into a loan agreement to borrow RMB 43.0 million (equivalent to $6.6 million) on an unsecured basis from Shanghai Shulong Technology Co., Ltd., a company controlled by Shanda Interactive, through an entrusted loan agreement, which carries an interest rate of 5.05% per year and is due in June 2012.

F-89


~~INTRODUCTION~~		Page

~~PART I~~INTRODUCTION	1

PART I	2

Item 1. Identity of Directors, Senior Management and ~~Advisers~~Advisors	12

Item 2. Offer Statistics and Expected Timetable	12

Item 3. Key Information	12

Item 4. Information Onon the Company	2133

Item 4A. Unresolved Staff Comments	3754

Item 5. Operating and Financial Review and Prospects	3754

Item 6. Directors, Senior Management and Employees	5375

Item 7. Major Shareholders and Related Party Transactions	6181

Item 8. Financial Information	6385

Item 9. The Offer and Listing	6385

Item 10. Additional Information	6486

Item 11. Quantitative and Qualitative Disclosures About Market Risk	7198

Item 12. Description of Securities Other than Equity Securities	7298

PART II	99

Item 13. Defaults, Dividend Arrearages and Delinquencies	7299

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds	7299

Item 15. Controls and Procedures	7299

Item 16. Reserved	73101

Item 16A. Audit Committee Financial Expert	73101

Item 16B. Code of Ethics	73101

Item 16C. Principal Accountant Fees and Services	73101

Item 16D. Exemptions from the Listing Standards for Audit Committees	74102

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers	74102

~~PART III~~Item 16F. Changes in Registrant’s Certifying Accountant	102

Item 16G. Corporate Governance	102

PART III	102

Item 17. Financial Statements	74102

Item 18. Financial Statements	74102

Item 19. Exhibits	74103

Exhibit ~~4.81~~1.3
Exhibit ~~4.82~~2.1
Exhibit ~~4.84~~4.1
Exhibit ~~4.85~~4.2
Exhibit ~~4.86~~4.4
Exhibit 4.5
Exhibit 4.6
Exhibit 4.7
Exhibit 4.8
Exhibit 4.9
Exhibit 4.10
Exhibit 4.11
Exhibit 4.12
Exhibit 4.13
Exhibit 4.14
Exhibit 4.15
Exhibit 4.16
Exhibit 4.17
Exhibit 4.18
Exhibit 4.19
Exhibit 4.20
Exhibit 4.21
Exhibit 4.22
Exhibit 4.23
Exhibit 4.24
Exhibit 4.25
Exhibit 4.26
Exhibit 4.27
Exhibit 4.28
Exhibit 4.29
Exhibit 4.30
Exhibit 4.31
Exhibit 4.32
Exhibit 4.33
Exhibit 4.34
Exhibit 4.35
Exhibit 4.36
Exhibit 4.37
Exhibit 4.38
Exhibit 4.39
Exhibit 4.40
Exhibit 4.41
Exhibit 4.43
Exhibit 4.44
Exhibit 4.45
Exhibit 4.46
Exhibit 4.47
Exhibit 4.48
Exhibit 4.49
Exhibit 8.1
Exhibit 12.1
Exhibit 12.2
Exhibit 13.1
Exhibit 13.2
Exhibit 15.1
Exhibit 15.2


	Noon Buying Rate
	RMB per US$1.00
	High		Low
December 2007		7.4120		7.2946
January 2008		7.2946		7.1818
February 2008		7.1973		7.1100
March 2008		7.1110		7.0105
April 2008		7.0185		6.9840
May 2008		7.0000		6.9377


	Average Noon Buying Rate
	RMB per US$1.00
2003		8.2771
2004		8.2768
2005		8.1826
2006		7.9579
2007		7.5806
2008 (through May 30)		7.0464


	For the Year Ended December 31, 2007
	China		China		China		China
	Mobile		Unicom		Telecom		Netcom		Others		Total
	(in millions of U.S. dollars)
SMS	$	7.0	$	2.5	$	0.2	$	0.3	$	1.0	$	11.0
IVR		13.3		1.2		2.4		0.3		—		17.2
RBT		1.6		1.7		2.4		—		—		5.7

2G Revenues		21.9		5.4		5.0		0.6		1.0		33.9

WAP		5.9		6.7		—		—		—		12.6
MMS		0.7		0.7		—		—		—		1.4
Java		1.4		—		—		—		—		1.4

2.5G revenues		8.0		7.4		—		—		—		15.4

Other revenues		0.1		—		—		—		0.6		0.7

Total	$	30.0	$	12.8	$	5.0	$	0.6	$	1.6	$	50.0


	For the Year Ended December 31, 2006
	China		China		China		China
	Mobile		Unicom		Telecom		Netcom		Total
	(in millions of U.S. dollars)

SMS	$	11.3	$	5.7	$	—	$	0.1	$	17.1
IVR		5.2		2.5		2.5		0.6		10.8
RBT		2.0		1.3		1.4		—		4.7

2G Revenues		18.5		9.5		3.9		0.7		32.6

WAP		10.4		11.1		—		—		21.5
MMS		3.5		0.5		—		—		4.0
Java™		4.4		—		—		—		4.4

2.5G revenues		18.3		11.6		—		—		29.9

Total	$	36.8	$	21.1	$	3.9	$	0.7	$	62.5


	For the Year Ended December 31, 2005
	China		China		China		China
	Mobile		Unicom		Telecom		Netcom		Total
	(in millions of U.S. dollars)

SMS	$	2.0	$	8.6	$	—	$	—	$	10.6
IVR		4.8		2.9		0.7		0.2		8.6
RBT		0.5		0.4		—		—		0.9

2G Revenues		7.3		11.9		0.7		0.2		20.1

WAP		10.2		24.1		—		—		34.3
MMS		1.5		0.2		—		—		1.7
Java™		—		—		—		—		—

2.5G revenues		11.7		24.3		—		—		36.0

Total	$	19.0	$	36.2	$	0.7	$	0.2	$	56.1


*⁽¹⁾		Represents ~~non-cancelable agency agreements with certain artists that provide for minimum payments.~~commitments in respect of purchased video copyrights.


(1)		Member of the compensation and leadership development committee

(2)		Member of the corporate development and finance committee

(3)		Member of the audit committee ~~compensation committee and nominating committee.~~


	Sales Price
	High		Low
First Quarter 2008	$	4.21	$	2.36
Second Quarter 2008 (April 1, 2008 through May 30, 2008)	$	3.10	$	2.61

Monthly highs and lows
December 2007	$	4.53	$	3.46
January 2008	$	4.21	$	3.11
February 2008	$	3.52	$	3.05
March 2008	$	3.38	$	2.36
April 2008	$	3.00	$	2.61
May 2008	$	3.10	$	2.66

	•		~~the amount allocated to each of the other years will be treated as ordinary income and taxed at the highest applicable tax rate in effect for that year; and~~

	•		~~the resulting tax liability from any such prior years will be subject to the interest charge applicable to underpayments of tax.~~


																					(Accumulated			Accumulated
	Series A convertible															Additional					deficit)			other			Total
	preference shares						Ordinary shares						Subscription			paid-in			Statutory		retained			comprehensive			shareholders’			Comprehensive
	Shares			Amount			Shares			Amount			receivable			capital			reserves		earnings			income (loss)			equity			income (loss)
	(in U.S. dollars, except share data)
Balance as of January 1, 2005		16,924,497		$	16,925			1,186,672,000		$	59,334		$	(50,880	)	$	16,416,197		$	2,085,269	$	19,194,506		$	(685	)	$	37,720,666
Initial public offering of shares, net of offering costs of $8,655,528		—			—			662,433,900			33,121			—			59,394,269			—		—			—			59,427,390
Conversion of Series A convertible preference shares		(16,924,497	)		(16,925	)		338,489,940			16,925			—			—			—		—			—			—
Collection of subscription receivable		—			—			—			—			50,880			—			—		—			—			50,880
Stock-based compensation from accelerated-vesting of stock options		—			—			—			—			—			16,804			—		—			—			16,804
Stock options issued to non-employees		—			—			—			—			—			20,768			—		—			—			20,768
Exercise of stock options		—			—			42,158,500			2,108			—			1,487,494			—		—			—			1,489,602
Statutory reserve		—			—			—			—			—			—			3,201,788		(3,201,788	)		—			—
Foreign currency translation adjustment		—			—			—			—			—			—			—		—			1,274,189			1,274,189		$	1,274,189
Net income		—			—			—			—			—			—			—		18,618,732			—			18,618,732			18,618,732

Balance as of December 31, 2005		—			—			2,229,754,340			111,488			—			77,335,532			5,287,057		34,611,450			1,273,504			118,619,031		$	19,892,921

Issuance of ordinary shares related to acquisition of Shanghai Magma (see Note 3)		—			—			8,955,200			448			—			539,552			—		—			—			540,000
Repurchase and cancellation of ordinary shares		—			—			(79,260,000	)		(3,963	)		—			(5,030,785	)		—		—			—			(5,034,748	)
Forward contract at fair value (See Note 3)		—			—			—			—			—			124,918			—		—			—			124,918
Stock-based compensation expense		—			—			—			—			—			543,557			—		—			—			543,557
Exercise of stock options		—			—			2,582,200			129			—			95,343			—		—			—			95,472
Statutory reserve		—			—			—			—			—			—			374,004		(374,004	)		—			—


Total purchase price:
Cash consideration	$	4,035,739
Transaction costs		1,292,960

	$	5,328,699


Total purchase price:
Cash consideration			2,507,438
Contingent consideration (Note 10)			352,217
Fair value of redeemable non-controlling interests			1,569,808

			4,429,463


				Amortization
				period
Aggregate purchase price allocation — Saiyu and Henan Yinshan:
Cash and cash equivalents	$	1,311,572
Accounts receivable		45,451
Other current assets		1,226
Acquired intangible assets:
Agreements with China Mobile		1,946,402			5 years
WVAS license		24,763			3 years
Goodwill (allocated to WVAS segment)		2,134,375			N/A
Property and equipment, net		9,496			3 – 5 years
Other assets		17,751
Current liabilities		(71,652	)
Non-current deferred tax liabilities		(90,685	)

Total	$	5,328,699


			Amortization period
Aggregate purchase price allocation —Seed Music:
Cash and cash equivalents	1,034,308
Inventory	53,504
Other current assets	891,723
Acquired intangible assets:
Artist contracts	1,717,846		7.1~9.0 years
Trademarks	1,569,808		20 years
Non-compete agreement	183,218		4.5 years
Copyrights	5,863		0.4 years
Non-current deferred tax liability	(869,184	)
Goodwill (allocated to music segment)	2,535,523
Property and equipment, net	50,084
Other non-current assets	51,526
Current liabilities	(2,216,292	)
Other non-current liabilities	(578,464	)

Total	4,429,463


				Amortization
				period
Aggregate purchase price allocation — Secular Bird and Fly Songs:
Cash and cash equivalents	$	87,138
Inventory		10,747
Other current assets		116,559
Acquired intangible assets:
Artist management contract		32,293			4.6 years
Trademarks		24,644			20 years
Copyright for songs		17,846			1.9 years
Non-complete contract		4,249			3.8 years
Goodwill (allocated to recorded music segment)		253,705			N/A
Property and equipment, net		53,375			3 – 5 years
Other assets		1,402
Current liabilities		(11,108	)
Non-current deferred tax liabilities		(14,784	)

Total	$	576,066


	August 31, 2010

Current assets:
Cash		24,948,577
Accounts receivable, net of allowance		5,402,738
Prepaid expenses and other current assets		2,610,863

		32,962,178

Non-current assets:
Property and equipment, net		943,258
Intangible assets		766,847
Goodwill		1,998,821
Other non-current assets		300,532

		4,009,458

Current liabilities:
Accounts payable		4,337,542
Accrued expenses and other current liabilities		7,034,894

		11,372,436

Non-current liabilities:
Non-current deferred tax liabilities		186,528
Other non-current liabilities		12,322

		198,850


Non-controlling interests and redeemable non-controlling interest:		1,717,533


	Year ended			Year ended			Eight months ended
	December 31, 2008			December 31, 2009			August 31, 2010

Total net revenues		53,958,400			34,642,295			14,844,408
Loss from operations		(5,879,157	)		(21,054,774	)		(3,460,316	)
Income tax benefit (expense)		(486,250	)		(234,286	)		25,584
Net loss		(7,743,284	)		(21,778,174	)		(3,382,438	)
Less: Net loss attributable to the non-controlling interests and redeemable non-controlling interest		337,455			4,182,875			243,666

Net loss from discontinued operations, net of tax		(7,405,829	)		(17,595,299	)		(3,138,772	)
Gain from disposal of Huayi Music		—			—			4,486,786

Total net (loss) income from discontinued operations		(7,405,829	)		(17,595,299	)		1,348,014


	December 31, 2009		December 31, 2010

Staff advances and other receivables		387,710		1,028,156
Advances to suppliers		700,569		454,273
Prepaid licensing fee of video copyright		—		1,722,608
Prepaid expenses		396,436		282,290
Prepaid artist costs		405,570		—

		1,890,285		3,487,327


	December 31, 2010
	Gross carrying		Accumulated		Intangible assets		Net carrying
	amount		amortization		impairment		amount
Online advertising segment:
Amortizable intangible assets
Software technology		823,273		425,358		—		397,915
Trademark		24,901,940		1,141,339		—		23,760,601
Technology		2,197,230		287,733		—		1,909,497
Customer list		1,464,820		268,550		—		1,196,270

		29,387,263		2,122,980		—		27,264,283


2011			2,016,612
2012			2,016,612
2013			1,920,571
2014			1,851,960
2015 and later			19,458,528

			27,264,283


				Recorded			Online
Gross amount of goodwill	WVAS			Music			Advertising		Total
Balance as of January 1, 2009		41,910,021			5,313,132			—		47,223,153

Goodwill arising from acquisitions during the year		—			2,535,523			—		2,535,523
Effect of exchange rate changes		(19,630	)		—			—		(19,630	)

Balance as of December 31, 2009		41,890,391			7,848,655			—		49,739,046
Goodwill arising from acquisitions during the year		—			—			6,232,770		6,232,770
Goodwill contributed by Shanda		—			—			663,570		663,570
Goodwill transferred out due to disposal		(42,148,288	)		(7,848,655	)		—		(49,996,943	)
Effect of exchange rate changes		257,897			—			—		257,897

Balance as of December 31, 2010		—			—			6,896,340		6,896,340


				Recorded			Online
Accumulated goodwill impairment	WVAS			Music			Advertising		Total
Balance as of January 1, 2009		(41,910,021	)		(2,156,497	)		—		(44,066,518	)

Goodwill impairment		—			(3,592,933	)		—		(3,592,933	)
Effect of exchange rate changes		19,630			65			—		19,695

Balance as of December 31, 2009		(41,890,391	)		(5,749,365	)		—		(47,639,756	)

Goodwill impairment		—			—			—		—
Impairment transferred out due to disposal		42,148,288			5,749,365			—		47,897,653
Effect of exchange rate changes		(257,897	)		—			—		(257,897	)

Balance as of December 31, 2010		—			—			—		—


Net carrying amount as of December 31, 2009		—			2,099,290			—		2,099,290

Net carrying amount as of December 31, 2010		—			—			6,896,340		6,896,340


	December 31, 2009		December 31, 2010

Accrued payroll		572,489		2,127,951
Accrued welfare benefits		667,756		1,731,403
Accrued professional service fee		1,214,404		1,524,890
Advance from customers		964,262		609,442
Business tax payable		441,235		1,722,830
Value-added tax payable		121,982		532
Other taxes payable		1,207,932		718,668
Accrued litigation provision		—		748,299
Other accrued expenses		1,141,627		2,278,226

		6,331,687		11,462,241


	December 31, 2009		December 31, 2010
Other receivables due from related parties
Seed Music Group Limited		—		980,000
Shanda Games Limited		—		3,200,000
Hurray! Media Co., Ltd.		—		1,246,641
Other companies under common control by Shanda		63,312		105,607

		63,312		5,532,248


	December 31, 2009		December 31, 2010
Other payables due to related parties
Shanda Computer (Shanghai) Co., Ltd.		1,465,010		3,030,300
Shanghai Shulong Technology Co. Ltd		—		3,030,711
Hurray! Solutions Ltd.		—		1,586,899
Other related party		439,445		128,788

		1,904,455		7,776,698


Total purchase price:
Cash consideration	$	14,246,746
Fair value of share purchase right		124,918
Transaction costs		438,263

	$	14,809,927


				Amortization
				period
Purchase price allocation:
Cash and cash equivalents	$	393,425
Accounts receivable		564,291
Other current assets		1,156,492
Acquired intangible assets:
Partnership agreement with China Mobile		418,826			4 years
Trademarks		147,456			20 years
Software		59,478			5 years
Website		21,065			4.5 years
WVAS license		9,913			4.5 years
Non-compete agreement		63,196			4 years
Game content		76,826			0.17 years
Goodwill (allocated to WVAS segment)		12,168,190			N/A
Property and equipment, net		25,289			3 – 5 years
Current liabilities		(191,214	)
Non-current deferred tax liabilities		(103,306	)

Total	$	14,809,927


Total purchase price:
Cash consideration	$	4,320,000
Transaction costs		265,113

	$	4,585,113


	Year ended
	December 31, 2005
	(unaudited)
Pro forma total revenue	$	63,612,451
Pro forma net income attributable to holders of ordinary shares		18,756,840
Pro forma net income per share:
- basic	$	0.01
- diluted	$	0.01
Weighted average shares used in calculation of pro forma net income per share:
- basic		2,092,089,848
- diluted		2,129,228,961


Total purchase price:
Cash consideration	$	4,262,000
Transaction costs		196,206

	$	4,458,206