CDC 20F/A 2004 Annual report (foreign) (amended)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F/A

Amendment No. 1


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, 2004.

Commission file number: 000-30134


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

CDC Corporation

(Exact name of Registrant as specified in its charter)

Cayman Islands
(Jurisdiction of incorporation or organization)

34/F Citicorp Centre
18 Whitfield Road
Causeway Bay
Hong Kong
telephone: (852) 2893-8200
facsimile: (852) 2893-5245
e-mail: investor_relations@cdccorporation.net
(Address of principal executive offices)

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

Class A common shares

Indicate the number of outstanding shares of each of the Issuer’s class of capital or common stock as of the close of the period covered by this Annual Report:


Class of shares		Number outstanding as of March 31, 2005

Class A common shares		110,965,246
Preferred Shares		Nil

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 which financial statement item the registrant has elected to follow.

Item 17o Item 18þ

TABLE OF CONTENTS

Page


Explanatory Note			2
Item 3. Key Information			4
Item 5. Operating And Financial Review And Prospects			45
Item 15. Controls and Procedures			76
Item 18. Financial Statements			76
Item 19. Exhibits			77
EX-12.1 CERTIFICATION OF CEO REQUIRED BY RULE 13a-14(a)
EX-12.2 CERTIFICATION OF CFO REQUIRED BY RULE 13a-14(a)
EX-13.(A).1 CERTIFICATION OF CEO PURSUANT TO SECTION 906
EX-13.(A).2 CERTIFICATION OF CFO PURSUANT TO SECTION 906
EX-15.(A).1 CONSENT OF ERNST & YOUNG
EX-15.(A).2 CONSENT OF PRICEWATERHOUSECOOPERS LLP

EXPLANATORY NOTE

Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, CDC Corporation (the “Company”, “CDC”, “we”, “us” or “our”) hereby amends its Annual Report on Form 20-F for the fiscal year ended December 31, 2004 as filed with the U.S. Securities and Exchange Commission on June 30, 2005 (the “Original Filing”) by setting forth the following amendments to Item 18 of the Original Filing:

•

A restatement of the following line items in our Consolidated Balance Sheet as at December 31, 2004 and our Consolidated Statement of Operations, Consolidated Statement of Cash Flows and Consolidated Statement of Shareholders’ Equity for the year ended December 31, 2004 to correct a minority interest calculation error which resulted in an overstatement of our minority interests in income of consolidated subsidiaries by US$1.2 million:

	•		minority interests;

	•		accumulated deficit;

	•		total shareholders’ equity;

	•		minority interests in losses/(income) of consolidated subsidiaries;

	•		income/(loss) from continuing operations;

	•		net income/(loss);

	•		basic and diluted earnings/(loss) per share from continuing operations;

	•		basic and diluted earnings/(loss) per share; and

	•		comprehensive income/(loss).

	•		The restatement of notes 2(o), 4(g), 20 and 30(ii) and the addition of note 2(y) to the Consolidated Financial Statements to reflect the impact of the restatement.

	•		The inclusion of an updated audit report from Ernst & Young, our independent registered public accounting firm, that contains an explanatory paragraph describing the correction of an accounting error for the year ended December 31, 2004 and refers to the amendments to the Consolidated Financial Statements for the year ended December 31, 2004.

To reflect the foregoing restatement of certain line items, this Form 20-F/A also amends the Selected Financial Data in Item 3. “Key Information”, certain tabular and quantitative disclosures under Item 5. “Operating and Financial Review and Prospects”, and certain disclosures under Item 15. “Controls and Procedures”. In addition, this Form 20-F/A amends the exhibit list under Item 19. “Exhibits” to reflect the filing of new certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, and furnishing of new certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

The minority interest calculation error which resulted in an overstatement of our minority interests in income of consolidated subsidiaries by US$1.2 million related to the consolidation of Cayman First Tier. We hold a 51% interest in Cayman First Tier, the holding company of IMI and one of our enterprise software subsidiaries. A minority shareholder holds the remaining 49% in Cayman First Tier. In preparing the 2004 consolidated financial statements, certain post-closing adjustments relating to charges that should have been booked at the Cayman First Tier level were inadvertently booked at the CDC level instead. As a result, the minority interest offset attributable to the minority shareholder of Cayman First Tier was not properly recorded. As a result of the restatement, our net loss for 2004 decreased to US$9.3 million from US$10.6 million. On the balance sheet, minority interests decreased from US$47.1 million to US$45.9 million, and accumulated deficit decreased from US$229.5 million to US$228.2 million.

Other than as expressly set forth above, this Form 20-F/A does not, and does not purport to, amend, update or restate the information in any other item of the Original Filing or reflect any events that have occurred after the date on which the Original Filing was made.

In reporting and discussing our financial results, we have generally rounded the results to one decimal point. We note that the figures in certain tables presented in this Form 20-F/A may not sum to the indicated totals due to rounding.

ITEM 3. KEY INFORMATION

A. Selected Financial Data

The following selected consolidated financial data of CDC and our subsidiaries should be read in conjunction with the consolidated balance sheets as of December 31, 2003 and 2004 and the related consolidated statements of operations, cash flows and shareholders’ equity for the years ended December 31, 2002, 2003 and 2004 and the notes thereto, together referred to as the Consolidated Financial Statements, included as Item 18 — “Financial Statements”, and the information included in Item 5 — “Operating and Financial Review and Prospects”. The Consolidated Financial Statements have been prepared and presented in accordance with US GAAP. The following selected consolidated financial data of CDC and our subsidiaries for the years ended December 31, 2000 and 2001, and the consolidated balance sheets as of December 31, 2000, 2001 and 2002 are derived from our audited financial data, after adjustment for the restatement of discontinued operations and segment reporting, which are not included in this Annual Report.


	Year ended December 31,
	2000			2001			2002			2003			2004
	(in thousands of U.S. dollars except share and per share data)
Income Statement Data: (1)													[Restated(8)]
Revenues:
Software	$	—		$	—		$	3,526		$	12,891		$	107,879
Business services		45,791			16,643			10,148			37,242			39,391
Mobile services and applications		—			—			—			16,876			23,694
Advertising/marketing		21,051			9,337			7,527			8,841			11,709
Others		953			3,730			1,599			2,001			10

		67,795			29,710			22,800			77,851			182,683

Cost of revenues:
Software		—			—			(1,328	)		(9,357	)		(43,240	)
Business services		(28,972	)		(11,923	)		(4,544	)		(22,072	)		(26,750	)
Mobile services and applications		—			—			—			(2,247	)		(4,597	)
Advertising/marketing		(10,432	)		(4,400	)		(4,477	)		(4,312	)		(4,645	)
Others		(1,081	)		(1,390	)		(676	)		(889	)		—

		(40,485	)		(17,713	)		(11,025	)		(38,877	)		(79,232	)


Gross profit		27,310			11,997			11,775			38,974			103,451
Selling, general and administrative expenses		(89,524	)		(69,949	)		(22,476	)		(31,785	)		(80,419	)
Research and development expenses		—			—			—			—			(13,825	)
Depreciation and amortization expenses		(29,807	)		(19,007	)		(9,515	)		(6,954	)		(12,276	)
Impairment of goodwill and intangible assets		(31,712	)		(21,908	)		—			—			—
Restructuring expenses		—			—			—			—			(3,387	)

Total operating expenses		(151,043	)		(110,864	)		(31,991	)		(38,739	)		(109,907	)


Operating income/(loss)		(123,733	)		(98,867	)		(20,216	)		235			(6,456	)
Interest income		29,717			26,501			23,631			13,412			9,653
Interest expense		(851	)		(1,266	)		(2,461	)		(1,070	)		(1,895	)
Gain/(loss) arising from share issuance of a subsidiary		140,031			(55	)		—			—			—


	Year ended December 31,
	2000			2001			2002			2003			2004
	(in thousands of U.S. dollars except share and per share data)
Gain/(loss) on disposal of available-for-sale securities		1,685			4,411			(163	)		4,599			167
Gain/(loss) on disposal of subsidiaries and cost investments		13,981			(1,915	)		(66	)		(1,263	)		549
Other non-operating gains		—			—			508			934			—
Other non-operating losses		(2,226	)		(927	)		(288	)		(148	)		—
Impairment of cost investments and available-for-sale securities		(84,696	)		(12,260	)		(5,351	)		—			(1,362	)
Share of income/(losses) in equity investees(2)		(9,423	)		(2,592	)		682			(124	)		(308	)

Total other income		88,218			11,897			16,492			16,340			6,804

Income/(loss) before income taxes		(35,515	)		(86,970	)		(3,724	)		16,575			348
Income tax benefits/(income taxes)		(327	)		(65	)		162			598			(7,541	)

Income/(loss) before minority interests		(35,842	)		(87,035	)		(3,562	)		17,173			(7,193	)
Minority interests in losses/(income) of consolidated subsidiaries		546			3,162			248			(2,257	)		(1,000	)

Income/(loss) from continuing operations		(35,296	)		(83,873	)		(3,314	)		14,916			(8,193	)
Discontinued operations:
Loss from operations of discontinued subsidiaries, net of tax		(24,506	)		(40,512	)		(15,462	)		(1,519	)		(190	)
Gain/(loss) on disposal/dissolution of discontinued subsidiaries, net		—			—			545			2,127			(950	)

Net income/(loss)	$	(59,802	)	$	(124,385	)	$	(18,231	)	$	15,524		$	(9,333	)


Basic and diluted earnings/(loss) per share(3)		(0.61	)		(1.21	)		(0.18	)		0.15			(0.09	)
Basic and diluted earnings/(loss) per share from continuing operations(3)		(0.36	)		(0.82	)		(0.03	)		0.14			(0.08	)
Weighted average number of shares:
Basic		98,091,541			102,589,760			102,269,735			100,532,594			105,898,392
Diluted		98,091,541			102,589,760			102,269,735			103,199,421			105,898,392


	As of December 31,
	2000		2001		2002		2003		2004
	(in thousands of U.S. dollars except share and per share data)
Balance Sheet Data:									[Restated(8)]
Cash and cash equivalents	$	47,483	$	20,820	$	33,153	$	55,508	$	110,206
Restricted cash		4,134		1,274		109		238		3,886
Available for sale debt securities(4)		242,324		346,980		320,056		282,145		104,159
Restricted available for sale debt securities(5)		148,622		134,960		151,123		31,109		75,780
Available for sale equity securities		10,368		2,064		2,050		590		527
Bank loans(6)		3,934		118,455		127,384		26,826		63,781
Working capital(7)		450,391		359,412		340,476		270,451		170,682
Total assets		622,920		596,494		580,957		546,054		664,331
Common stock		25		26		25		25		28
Total shareholders’ equity	$	512,024	$	389,861	$	377,700	$	390,446	$	440,950


(1)		In 2004, CDC adopted new reporting segmentation, changing from the previous segmentation of software and consulting services, mobile services and applications and advertising and marketing activities to the current segmentation of software, business services, mobile services and applications, advertising/marketing and others. In addition, CDC discontinued the operations of certain subsidiaries in the software,


		business services, advertising/marketing and others segments. In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the operating results of the discontinued operating units were retroactively reclassified as a loss from operations of discontinued subsidiaries, net of tax, in the consolidated statements of operations. The results of the continuing operations of 2000, 2001, 2002 and 2003 were reclassified to conform to the 2004 presentation. Prior to January 1, 2002, goodwill was amortized to expense on a straight-line basis over a period of two to five years. From January 1, 2002, CDC ceased amortizing goodwill and instead performs annual impairment tests on goodwill.

(2)		The term “equity investees” refers to CDC’s investments in which it has the ability to exercise significant influence (generally 20% to 50% owned investments).

(3)		The computation of diluted earnings/(loss) per share did not assume the conversion of the Company’s warrants for 2002 and 2003 and its stock options for 2002 and 2004 because their inclusion would have been antidilutive.

(4)		Available-for-sale debt securities includes short-term and long-term debt securities available-for-sale.

(5)		Restricted available-for-sale debt securities include short-term and long-term restricted debt securities.

(6)		Bank loans include short-term and long-term bank loans.

(7)		Working capital represents current assets less current liabilities.

(8)		Refer to Note 2(y) to the Consolidated Financial Statements.

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

Risks Relating to CDC Corporation

Risks relating to our overall business

Because our business model and strategy have evolved, we lack experience and have a limited operating history in our new markets and cannot assure you that we will be successful in meeting the needs of customers in these markets. Our operating results could fall below expectations, resulting in a decrease in our stock price.

We began in June 1997 as a pan-Asian integrated Internet company. Our business model and strategy has evolved with a new focus and goal to be a global company focused on enterprise software and mobile services and applications with additional operations in advertising/marketing activities and business services. You will not be able to evaluate our prospects solely by reviewing our past businesses and results, but should consider our prospects in light of the changes in our business focus. Each of our targeted markets is rapidly changing, and we cannot assure you that we can successfully address the challenges in our new lines of business or adapt our business model and strategy to meet the needs of customers in these markets. If we fail to modify our business model or strategy to adapt to these markets, our business could suffer.

We have incurred losses in prior periods, may incur losses in the future and cannot provide any assurance that we can achieve or sustain profitability.

We have incurred operating losses and net losses in each of our last 5 fiscal years (except for fiscal year 2003) as follows:


	2000			2001			2002			2003		2004
	(in thousands of U.S. dollars)											[Restated(1)]
Operating income/(loss)		(123,733	)		(98,867	)		(20,216	)		235		(6,456	)
Net income/(loss)		(59,802	)		(124,385	)		(18,231	)		15,524		(9,333	)


(1)		Refer to Note 2(y) to the Consolidated Financial Statements.

Our operating losses and net losses may increase in the future, and we may never regain or sustain operating profitability or net profitability. We may continue to incur operating losses and post net losses in the future due to several factors, including:

•

increased investment activities related to our new businesses as we seek to achieve organic growth, which may include;

	•		increased sales and marketing costs;

	•		greater levels of product development expenses;

	•		a high level of planned operating expenditures, including costs we expect to incur as a result of our ongoing efforts to comply with the regulations promulgated under the Sarbanes-Oxley Act of 2002;

	•		continuing effects of acquisition-related adjustments including intangible asset amortization, stock compensation and deferred tax expense; and

	•		any additional acquisition activities related to the growth and development of our enterprise software, mobile services and applications, advertising/marketing and business services businesses.

In addition, while we experienced sequential quarterly increases in revenues in 2004, we cannot be certain that revenue growth will continue in the future. We may see a reversal of the recent sequential growth in quarterly revenues due to several factors, including:

	•		increases in revenues in 2004 have been due in significant part to our acquisition related activity which increased our revenue base substantially in 2004. As we expect to significantly decrease our acquisition related activity in 2005, growth of our revenue base through acquisition will no longer drive our revenue increases;

	•		any decisions to dispose of business units or subsidiaries which we no longer believe to be central to our new business model and strategy, which would shrink our revenue base;

	•		a substantial portion of our software license revenue is recognized in the last month of a quarter, and often in the last weeks or days of a quarter, which may result in increased volatility in quarterly revenues if customers decide to defer or cancel orders or implementations, particularly large orders or implementations, from one quarter to the next;

	•		delay of new software product releases which can result in a customer’s decision to delay execution of a contract or, for contracts that include the new software release as an element of the contract, will result in deferral of revenue recognition until such release;

	•		the imposition of penalties, such as a temporary suspension of service, for violation of current or future Chinese laws, rules or regulations regarding Internet related services and telecom related activities, such as that experienced by our Go2joy subsidiary during 2004;

	•		the potential or actual loss of key clients and key personnel, including those from our enterprise software, mobile services and applications, advertising/marketing and business services businesses;

	•		decisions to discontinue products and services which would shrink our revenue base;

	•		our failure to increase market awareness of our company, our brands and our products and services; and

	•		a slowdown in the U.S., European, Asian and other economic markets.

These factors could also adversely affect our ability to regain or sustain profitability. We cannot assure you that we will generate sufficient revenue to regain or sustain profitability, or that we can regain, sustain or increase profitability on a quarterly or annual basis in the future. Even though our revenue is difficult to predict, we base our decisions regarding our operating expenses on anticipated revenue trends. Many of our expenses are relatively fixed, and we cannot quickly reduce spending if our revenue is lower than expected. As a result, revenue shortfalls could result in significantly lower income or result in a greater loss than anticipated for any given period, which could result in a decrease in our stock price. If revenue does not meet our expectations, or if operating expenses exceed what we anticipate or cannot be reduced accordingly, our business, results of operations and financial condition will be materially and adversely affected.

During each of 2003 and 2004, we were dependent upon acquisitions for our increase in revenues rather than organic growth of our businesses.

During each of 2003 and 2004, we acquired several businesses material to our results for those years.

	•		During 2003, our material acquisitions included the acquisition in February 2003 of Praxa, an Australian information technology outsourcing and professional services organization; the acquisition in April 2003 of Palmweb Inc. which operates Newpalm, a provider of mobile services and applications in China; and the acquisition in September 2003 of IMI, an international provider of software to the supply chain management sector principally in Europe and the United States.

	•		During 2004, our material acquisitions included the acquisition in February 2004 of Pivotal Corporation, or Pivotal, a customer relationship management (CRM) company focused on mid-sized enterprises; the acquisition in May 2004 of Group Team Investments Limited, which holds Beijing He He Technology Co. Ltd. which operates Go2joy, a mobile services and applications provider based in Beijing, China; and the acquisition in August 2004 of Ross Systems, Inc., or Ross, an ERP company focused on the food and beverage, life sciences, chemicals, metals and natural products industries.

Between 2002 and 2003, our revenues increased by US$55.1 million, or approximately 242%, from US$22.8 million in 2002 to US$77.9 million in 2003 principally due to the acquisitions of IMI, Newpalm and Praxa. Between 2003 and 2004, our revenues increased by US$104.8 million, or approximately 135%, from US$77.9 million in 2003 to US$182.7 million in 2004 principally due to the acquisitions of Ross, Pivotal, and Go2joy, as well as a full year of results from acquisitions made in 2003.

While we will seek to grow our businesses, including the businesses we have acquired, organically in the future, we cannot assure you that we will be successful in increasing revenues through organic growth.

Our ability to achieve organic growth in our businesses is subject to numerous risks and uncertainties, including the following:

•

We may face difficulties in integrating, assimilating and managing the operations, technologies, intellectual property, products and personnel of our acquired businesses individually and cumulatively;

	•		We will be making additional new investments, including increasing sales and marketing efforts, developing new products and providing additional training in order to generate organic growth, none of which may ultimately prove successful in generating such growth;

	•		We may not be successful in introducing products and services we acquire to new markets. For example, one of our strategies in our enterprise software business is to target the markets in Japan and China for enterprise application software. Starting in late 2004 and continuing through 2005, we are emphasizing the growth of CDC Software Asia Pacific which was formed in 2004 to sell our entire range of enterprise application software products in the Asia Pacific region, including Australia and New Zealand. Among other things, we hired a new president and chief executive officer of CDC Software Asia Pacific during 2004. However, we cannot assure you that we will be successful in our Japan and China strategy; and

	•		While with the completion of our acquisitions of Pivotal and Ross, we have added an additional approximate 3,000 customers to our customer base which on a combined basis totals approximately 3,500 customers which have licensed our enterprise software products worldwide as of December 31, 2004, we may not be successful in our strategy of leveraging upon cross-selling opportunities with respect to our expanded customer base. In addition to our customers not finding our other enterprise software products attractive, it has also been our experience that the revenues which can be generated in a sale of additional products made through a cross-sale is often less than the amount of revenues which would have been generated if the sale had been made by an independent third party software supplier. This is because often the customer views the purchase of the cross-sold software product as only a module to their existing enterprise software solution, rather than a complete standalone software product, and therefore are less willing to pay the full market price for the product than if the sale had been made by an independent third party.

Our inability to achieve organic growth in our businesses will have a material adverse effect on our business, results of operations and financial condition.

Several of our lines of business are quite disparate, and it is difficult to discern significant synergies which limits the amount of integration, cost savings and cross-selling we may be able to achieve between our lines of business.

We are a global company focused on enterprise software and mobile services and applications with additional operations in adverting/marketing activities and business services. Several of our lines of business are quite disparate, and it is difficult to discern significant synergies between some of our different lines of business although we are attempting to realize synergies within our individual lines of business. For example, our enterprise software business focuses on delivering enterprise software applications and related services around the world for enterprise resource planning, supply chain management, customer relationship management, order management systems, human resource management and business intelligence. Our mobile services and applications business focuses upon providing popular news and mobile applications services targeting the consumer market in China through wireless services such as short message service, multimedia message service, wireless application protocol and interactive voice response. Our advertising/marketing business includes a marketing database and marketing support business conducted principally in Australia and New Zealand. Because several of these lines of business are quite distinct, there may be limits to the amount of integration, cost savings and cross-selling we may be able to achieve between the different lines of business.

Our acquisitions require us to implement controls, procedures and policies which divert management’s attention and may increase the costs of our acquisitions, reduce employee morale and impact the operating results of our businesses.

Our acquisitions divert management’s attention from our operations in order to focus upon integrating our acquired businesses. In addition, to realize the benefits of our acquisitions, we need to conform the operational, managerial and financial controls, procedures and policies between our corporate headquarters and the businesses we have acquired, which may divert management’s attention further, increase transaction costs, and reduce employee morale. Significant risks relating to our acquisitions which could cause us to continue to incur transaction costs that may outweigh the benefits of the acquisitions, include:

	•		retaining and integrating key employees and managing employee morale;

	•		integrating or combining different corporate cultures;

	•		effectively integrating products, research and development, sales, marketing and support operations;

	•		maintaining focus on our day-to-day operations;

	•		facing potential claims filed by terminated employees and contractors; and

	•		geographic complexity and adapting to local market conditions and business practices.

Any one of these challenges could strain our management resources. Our failure to integrate and manage our acquired businesses successfully could delay the contribution to profit that we anticipate from these acquisitions, and could have a material adverse effect on our business, results of operations and financial condition.

We may not be able to realize the anticipated cost savings, synergies or revenue enhancements from combining acquired businesses with our operations, and we may incur significant integration costs to achieve these cost savings, synergies or revenue enhancements, which have and could continue to adversely affect our results of operations.

Our ability to realize cost savings, synergies or revenue enhancements may be affected by the extent, timing and efficiency with which we can consolidate operations, reduce overlapping personnel while avoiding labor disputes and achieve compatibility or integrate acquired technology, all of which are difficult to predict. We may not be able to realize cost savings, synergies or revenue enhancements from such integration, and we may not be able to realize such benefits within a reasonable time frame. Realizing these benefits is difficult because historically most of the companies we have acquired have been in poor financial condition.

In addition, our expected cost savings, synergies or revenue enhancements, may be reduced by unexpected costs in connection with our integration efforts or a slowdown in revenue growth or collection of accounts receivable, increased operating losses related to acquired businesses, or accounting charges and adjustments we are required to make as a result of our acquisitions. For example, during 2004, our net income was adversely affected because we were required to record certain acquisition-related expenses, including the following:

	•		amortization of acquired intangibles;

	•		write-off of acquired deferred revenue;

	•		restructuring charges;

	•		stock compensation expenses;

	•		deferred tax expenses; and

•

legal and professional expenses related to the acquisition of subsidiaries.

A number of these non-cash acquisition-related expenses such as amortization of acquired intangibles, deferred tax expense, and stock compensation will continue to adversely affect our results of operations in 2005 and beyond. We will continue to review our assumptions made in accounting for the acquisition of subsidiaries and will make adjustments if required. See Item 5.A. — “Operating and Financial Review and Prospects – Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates – Goodwill and Intangible Assets”, “– Business Combinations”, and “– Deferred Tax Valuation Allowance”. Our quarterly financial information is subject to adjustment pending the completion of our full year audit by our independent auditors. Adjustments to quarterly financial statements and information may be identified when the full year audit work is completed, including purchase price adjustments, which could result in significant changes which may need to be made to quarterly unaudited financial information which we have previously released.

While we have cash and cash equivalents of US$110.2 million and total debt securities of US$179.9 million as of December 31, 2004, much of this balance is held at our China.com subsidiary, and we have limited ability to use these funds at, or for the benefit of, the CDC Corporation parent or our other subsidiaries outside of the China.com chain of subsidiaries.

While we have cash and cash equivalents of US$110.2 million and total debt securities of US$179.9 as of December 31, 2004, US$48.3 million of the cash and cash equivalents and US$94.9 million of the total debt securities are held at China.com (formerly, hongkong.com Corporation), an 81% owned subsidiary listed on the Growth Enterprise Market of the Hong Kong Stock Exchange. Although we have the ability to appoint a majority of the board of directors of China.com, the board of directors of China.com owes fiduciary duties to the shareholders of China.com to act in the best interests of and use the assets of China.com, including the cash and cash equivalents balance and securities, for the benefit of such shareholders. As a result, aside from the board of directors of China.com declaring a dividend to its shareholders for which we would receive a pro rata portion as an 81% shareholder of China.com or a related party inter-company loan or similar transaction from China.com to us which would likely require the approval of the minority shareholders of China.com, we have limited ability to transfer or move the cash, cash equivalents and securities balance to, or to use the amounts of the cash, cash equivalents and securities balance for the benefit of non-China.com subsidiaries which include CDC Corporation at the parent entity level and our enterprise software and business services subsidiaries.

A decrease in the value of our acquired businesses may lead to impairment of our goodwill and other intangible assets and have a material adverse impact on our financial condition.

On January 1, 2002, we began to apply Statement of Financial Accounting Standards, or SFAS, No. 142, which requires that goodwill and intangible assets with indefinite useful lives be reviewed annually for impairment, or more frequently if indications of impairment arise. We have not recorded any impairment charges during 2002, 2003 or 2004. However, we cannot assure you that we will not have to record losses due to impairment of our goodwill and intangible assets in the future. A decrease in the value of our acquired companies may lead to impairment of our goodwill and other intangible assets and have a material adverse impact on our financial condition.

We have significant fixed operating expenses, which may be difficult to adjust in response to unanticipated fluctuations in revenues, and therefore could have a material adverse effect on our operations.

A significant part of our operating expenses, particularly personnel, rent, depreciation and amortization, are fixed in advance of any particular quarter. As a result, an unanticipated decrease in the number or average size of, or an unanticipated delay in the scheduling for, our engagements may cause significant variations in operating results in any particular quarter and could have a material adverse effect on operations for that quarter.

In the near-term, we believe our costs and operating expenses may increase in certain areas as we fund new initiatives and continue to pay for costs related to compliance with the Sarbanes-Oxley Act of 2002. While we will strive to keep our costs and operating expenses in the near-term to be at a level that is in line with our expected revenue, we may not be able to increase our revenue sufficiently to keep pace with any growth in expenditures. As a result, we may be unable to return to profitability in future periods.

Because we rely on local management for many of our localized enterprise software, mobile services and applications, advertising/marketing and business services businesses, our business may be adversely affected if we cannot effectively manage local officers or prevent them from acting in a manner contrary to our interests or failing to act at our direction.

In connection with our strategy to develop our enterprise software, mobile services and applications, advertising/marketing and business services businesses, we have interests in companies in local markets where we have limited experience with operating assets and businesses in such jurisdictions, including enterprise software companies in the United States, Canada and Europe, mobile services and applications companies in the People’s Republic of China, or PRC, advertising/marketing companies in Australia and Singapore, and business services companies in Australia, Korea and the United States. As a result, we rely on our local management with limited oversight. If we cannot effectively manage our local officers and management, or prevent them from acting in a manner contrary to our interests or failing to act at our direction, these problems could have a material adverse effect on our business, financial condition, results of operations and share price.

We are exposed to potential risks in connection with our evaluation of our internal controls systems in order to determine whether we have adequate internal controls procedures in place in accordance with recent legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we are required to furnish an internal controls report of management’s assessment of the design and effectiveness of our internal controls as part of our Annual Report on Form 20-F beginning with the fiscal year ending on or after July 15, 2006. Our independent registered accounting firm is then required to attest to, and report on, management’s assessment.

We are exposed to potential risks from recent legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002. Under the supervision and with the participation of our management, we are evaluating our internal controls systems in order to allow management to report on, and our registered independent public accounting firm to attest to, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act. We are performing the system and process evaluation and testing required in an effort to comply with the management certification and auditor attestation requirements of Section 404. As a result, we have incurred, and will continue to incur, additional expenses and a diversion of management’s time. If we are not able to meet the requirements of Section 404, we might be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission or the Nasdaq National Market. In addition, as a result of the evaluation of our internal controls, we may be required to report internal control material weaknesses. Either of the foregoing could adversely affect our financial results and the market price of our common shares.

Changes to existing accounting pronouncements, including SFAS 123R, or tax laws or practices may cause adverse revenue and earnings fluctuations, affect our reported results of operations, negatively impact our ability to attract and retain employees or affect how we conduct our business.

A change in accounting pronouncements or tax laws or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. On December 16, 2004, the Financial Accounting Standards Board adopted SFAS 123R, “Share Based Payment”. In April 2005, the SEC issued Amendment to Rule 4-01(a) of Regulation S-X Regarding the Compliance Date

for Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, to change the required implementation date for SFAS 123R to fiscal year beginning after June 15, 2005. Accordingly, we are required, starting in or before the first quarter of 2006, to measure compensation costs for all stock based compensation (including stock options and our employee stock purchase plan, as currently constructed) at fair value and take a compensation charge equal to that value. The various methods for determining the fair value of stock options are based upon, among other things, the implied volatility of the underlying stock. The price of our common shares has historically been volatile. Therefore, the adoption of the accounting standard requiring companies to expense stock options could negatively affect our profitability and the trading price of our common shares. Such adoption could also limit our ability to continue to use stock options as an incentive and retention tool, which could, in turn, hurt our ability to recruit employees and retain existing employees. Other new accounting pronouncements or tax laws and changes in interpretations of accounting pronouncements or taxation practice have occurred and may occur in the future. This change to existing rules, or future changes, if any, may adversely affect our reported financial results or the way we conduct our business.

Risks relating to our enterprise software business

The market for enterprise software application products and services is highly competitive. We have entered this market recently, and if we fail to compete effectively, our failure could have a material adverse effect on our business, financial condition and results of operations.

The business information systems industry in general and the enterprise software industry in particular are very competitive and subject to rapid technological change. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical and marketing resources, greater name recognition, larger technical staffs and a larger installed customer base than we do. A number of companies offer products that are similar to our products and that target the same markets. In addition, many of these competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, and to devote greater resources to the development, promotion and sale of their products than we can. Furthermore, because there are relatively low barriers to entry in the software industry, we expect additional competition from other established and emerging companies. Such competitors may develop products and services that compete with our products and services or may acquire companies, businesses and product lines that compete with us. It is also possible that competitors may create alliances and rapidly acquire significant market share. Accordingly, we cannot assure you that our current or potential competitors will not develop or acquire products or services comparable or superior to those that we develop, combine or merge to form significant competitors or adapt more quickly than we can to new technologies, evolving industry trends and changing customer requirements. Competition could cause price reductions, reduced margins or loss of market share, any of which could materially and adversely affect our strategy in this market, and affect our business, operating results and financial condition.

Our major competitors include:

	•		enterprise resource planning (ERP) providers, including Adonix, Epicor, Infor Global Solutions, Microsoft Corporation, Oracle/Peoplesoft, QAD, Inc., SAP, SSA Global Technologies, Inc., and various local providers in the Greater China market such as FlexSystem Holdings Ltd., Kingdee International Software Group Company Limited and UFIDA Software Co. Ltd.;

	•		customer relationship management (CRM) providers, including Chordiant Software, Inc., Epiphany, Inc., Microsoft Corporation, Onyx Software Corporation, Oracle/Peoplesoft, Salesforce.com, SalesLogix (part of Best Software/Sage Group plc), SAP AG and Siebel Systems, Inc.;

	•		supply chain management (SCM) providers, including Aspen Technologies, i2 Technologies, Inc., Manhattan Associates, Manugistics Group, Inc. and MAPICS, Inc. (recently acquired by Infor Global Solutions);

	•		human resource management (HRM) providers, including Oracle/Peoplesoft, SAP AG, and various local providers in the Greater China market, including Cityray Technology (China) Ltd. and UFIDA Software Co. Ltd.;

	•		business intelligence (BI) providers, including Business Objects SA, Cognos, Inc., Hyperion, Inc. and SAS Institute, Inc.; and

	•		large information technology consulting and outsourcing service providers including Accenture Ltd., Cambridge Technology Partners Inc., Cap Gemini, Electronic Data Systems Corporation, IBM Global Services, Infosys Technologies and Wipro Ltd.

Many of these companies are well funded with long operating histories of profitable performance. They possess a number of tangible strengths and advantages, including high quality client lists and high numbers of highly qualified staff, complemented by extensive operating infrastructures. The principal competitive factors in the market for enterprise software application software include product reputation, product functionality, performance, quality of customer support, size of installed base, financial stability, corporate viability, hardware and software platforms supported, price, and timeliness of installation.

As we pursue our strategy of developing our enterprise software business, we are exposed to a variety of risks in this market that may affect our ability to generate revenues from the sale of enterprise application software and related support services.

As we pursue our strategy of developing our enterprise software business, we anticipate that we will continue to generate a significant portion of our revenues in the future from the sale of various enterprise software application packages and related services. Accordingly, any factor that adversely affects fees derived from the sale of such applications would have a material adverse affect on our business, results of operations and performance. For example, in 2001 and continuing through most of 2003, the market for enterprise software application products continued to be negatively impacted by challenging economic conditions in the United States, Europe and Asia. While the market has stabilized, there can be no assurances that this will continue. In addition, while we are committed to the enterprise application software market, if we are not successful in communicating our commitment or a clear strategy, and offering a vision with respect to our product roadmap and technology platforms going forward, customers and potential customers may be less inclined to make significant investments in our enterprise software products. Other such factors which could affect our enterprise software strategy may include:

	•		competition from other products;

	•		flaws in our products;

	•		incompatibility with third party hardware or software products;

	•		negative publicity or valuation of our products and services;

	•		obsolescence of the hardware platforms or software environments on which our products run;

	•		our ability to increasingly move software development capabilities to places like India and China where costs are generally lower, but subjects us to additional risks including competition to hire qualified programmers (and a resultant upward pressure on remuneration costs), turnover risk,

			language barriers, and challenges to remotely manage staff due to time zone differences and distance; and

	•		continuing low level expenditures in the enterprise software market.

Our enterprise software revenues fluctuate significantly from quarter to quarter which may cause volatility in our share price.

A sale of a new license generally requires a customer to make a purchase decision that involves a significant commitment of capital. Many factors have caused and may in the future cause our enterprise software revenue to fluctuate significantly. Some of these factors are:

	•		the timing of significant orders, delivery and implementation of products;

	•		the gain or loss of any significant customer;

	•		the number, timing and significance of new product announcements and releases by us or our competitors;

	•		our ability to acquire or develop (independently or through strategic relationships with third parties), introduce and market new and enhanced versions of our products on a timely basis;

	•		possible delays in the shipment of new or enhanced products and purchasing delays of current products as our customers anticipate new product releases;

	•		order cancellations and shipment rescheduling or delays;

	•		reductions in the rate at which opportunities in our pipeline convert into license agreements,

	•		patterns of capital spending and changes in budgeting cycles by our customers;

	•		market acceptance of new and enhanced versions of our products;

	•		changes in the pricing and the mix of products and services we sell;

	•		seasonal variations in our sales cycle;

	•		the level of product and price competition;

	•		exchange rate fluctuations; and

	•		changes in personnel and related costs.

In addition, we expect that a substantial portion of our enterprise software revenues will continue to be derived from renewals of maintenance contracts from customers of our software applications. These maintenance contracts typically expire on an annual basis, if not renewed, and the timing of cash collections from related revenues varies from quarter to quarter.

Some customers are reluctant to make large purchases before they have had the opportunity to observe how our software performs in their organization, and have opted instead to make their planned purchase in stages or subject to conditions. Additional purchases, if any, may follow only if the software performs as expected. To the extent the number of customers who opt to purchase in stages or subject to conditions increases, it could adversely affect our revenue.

Our failure to successfully introduce, market and sell new products and technologies, enhance and improve existing products in a timely manner, and properly position or price our products, as well as undetected errors or delays in new products or new versions of a product or the failure of anticipated market growth could individually and/or collectively have a material adverse effect on our business, results of operations or financial position.

Our enterprise software products compete in a market characterized by rapid technological advances in hardware and software development, evolving standards in computer hardware and software technology and frequent new product introductions and enhancements. We continually seek to expand and refresh our product offerings to include newer features or products, and enter into agreements allowing integration of third-party technology into our products. The introduction of new products or updated versions of continuing products has inherent risks, including, but not limited to:

	•		product quality, including the possibility of software defects, which could result in claims against us or the inability to sell our software products;

	•		the fit of the new products and features with the customer’s needs, which could result in the customer seeking the product elsewhere;

	•		educating our sales, marketing and consulting personnel to work with the new products and features, which may strain our resources and lengthen sales cycles;

	•		competition from earlier and more established entrants that may have more significant resources than us;

	•		market acceptance of initial product releases;

	•		marketing effectiveness; and

	•		the accuracy of research or assumptions about the nature of customer demand, whereas actual demand could be limited or non-existent.

As we or our competition introduce new or enhanced products, the market’s demand for our older products and older versions of such products declines. Declining demand reduces revenue from additional licenses and reduces maintenance revenue from past purchasers of our software. We must continually upgrade our older products in order for our customers to continue to see value in our maintenance services. If we are unable to provide continued improvements in functionality or move customers with our older products to our newer products, declining maintenance and new license revenue from older products could have a material adverse effect on our enterprise software business. In addition, because we commit substantial resources to developing new software products and services, if the markets for these new products do not develop as anticipated, or demand for our products and services in these markets does not materialize or materializes later than we expect, we will have expended substantial resources and capital without realizing sufficient revenue, and our enterprise software business and operating results could be adversely affected.

The decisions we make about which underlying technology platforms to base our products upon, particularly any eventual migration to a newer technology platform which becomes necessary or advisable to make as older technologies become obsolete and new technologies mature and become more widely accepted, subjects us to risks which could affect our business, results of operations and financial condition.

In our enterprise software line of business, we must make decisions as to which underlying technology platforms to base our products upon. During the natural evolutionary cycle of technology, as older technologies become obsolete and new technologies mature and become more widely accepted, we may eventually need to migrate our products from older technology platforms to new technology platforms. Any decisions we make

with respect to making such a migration, and any such subsequent migration process, subject us to a variety of risks which could affect our business, results of operations and financial condition.

We may not be successful in migrating our products to new technology platforms. In the past, several software companies have been unsuccessful with such migrations for a variety of reasons, such as an inability to adapt the new technology, bugs and errors in the product resulting from a significant rewrite of the software code, the inability to complete the migration process in a timely manner, and dependence upon the functionality and timely release of the new technology platform. In addition, the migration of software products to new technology platforms also subjects existing customers who decide to upgrade to the new technology to risks, such as the functionality of our migration tools which move customers from the old technology platform to the new technology platform and the clarity of documentation for the product on the new technology platform. If customers wish to upgrade, but encounter serious problems in the upgrade process or are not successful in upgrading, it could subject us to unfavorable publicity or customer relationships which could affect future upgrade sales to these or other customers. The risks associated with migrating to new technology platforms also includes the possibility that a customer will view this as an opportunity to review whether to upgrade or instead purchase a replacement solution from another supplier or competitor based on an analysis of the benefits and costs associated with upgrading versus replacement. In addition, as the time approaches for the release of upgraded software products built on new technology platforms, there is a risk that potential customers who might otherwise buy our products will delay their purchases until the new release to take advantage of the new technology, or that some customers who agree to purchase our products will insist on free upgrades or free integration services when the upgrade is available. Any of the these risks could materially affect our business, results of operations and financial condition.

We may not be successful in growing our sales organization and sales channels which would harm our ability to grow our business. In addition, efforts to grow our indirect sales channels expose us to additional risks.

To date, we have sold our solutions primarily through our direct sales force, particularly in the North American market. Our future revenue growth will depend in large part on recruiting, training and retaining direct sales personnel and expanding our indirect distribution channels. These indirect channels include value added resellers, or VARs, original equipment manufacturing, or OEM, partners, systems integrators and consulting firms. We may experience difficulty in recruiting and retaining qualified direct sales personnel and in establishing third-party relationships with VARs, OEM partners, systems integrators and consulting firms. If we are not successful in growing our sales organization and sales channels, it would harm our ability to grow our business. In addition, we are exposed to risk as a result of forming relationships in these indirect channels and with such third-parties in the event such third-parties do not devote sufficient time, attention and resources to learning our products, markets and potential customers or if such third-parties encounter difficulties with their customers involving our products which could then adversely affect our reputation and the reputation of our products in the market.

If we are unable to take advantage of opportunities to market and sell the products and services of our newly-acquired companies such as Ross, Pivotal and IMI, to our customers, distribution channels and business partners in Asia, the value of our investment in Ross, Pivotal and IMI could be significantly diminished.

As part of our strategy, one of the significant anticipated benefits of the acquisitions of Ross, Pivotal and IMI is expanding these businesses in the Asia-Pacific region by leveraging our local expertise and distribution channels. In particular, we believe we can cross-sell and market Ross’, Pivotal’s and IMI’s ERP, CRM and SCM applications and implementation services in growth markets for such software in Asia through CDC Software Asia Pacific. The products and services of Ross, Pivotal and IMI are highly technical, principally servicing market segments and customers in which we traditionally have limited experience, and our salespersons may not be successful in marketing Ross, Pivotal or IMI products and services. In the event that we cannot adapt the Ross, Pivotal or IMI products to the needs of the local markets, or our traditional customers and business partners are not receptive to Ross’, Pivotal’s or IMI’s products and services, we may not realize some of the

expected benefits of our investment in these companies, and the value of our investment could be significantly diminished.

Our strategy of developing industry products for specific industry segments, or micro-verticals, may not be successful which could affect our business, results of operations and financial condition.

Many of our enterprise software products have been tailored to be industry-specific which allow businesses to immediately gain business benefits as the industry-specific customizations have already been completed. For example, with respect to Ross’ products, Ross focuses on the food and beverage, life sciences, chemicals, metals and natural products industries. Pivotal’s products have already been optimized and configured to include CRM products for the financial services (asset management, capital markets, commercial banking and private banking), healthcare provider, homebuilder, and life sciences (medical device manufacturing) markets. IMI’s products have been tailored towards order management, warehouse management and store replenishment for the grocery, specialty goods and pharmaceutical and over-the-counter drugs industries.

This strategy of developing industry products for specific industry segments may not be successful for a variety of reasons due to risks both inside and outside of our control, including the following:

	•		we cannot be certain that the companies in the micro-vertical markets we have selected will find our products attractive;

	•		many of our micro-vertical markets are subject to their own economic cycles, regulatory considerations and other factors which are beyond our control. For example, the homebuilder micro-vertical is sensitive to interest rate movements and the healthcare micro-vertical is subject to significant governmental regulations;

	•		some of our micro-vertical products have only been recently introduced, so do not have a large installed base of users or developed significant recognition in their industry;

	•		we may experience difficulty in recruiting sales, business and technical personnel who have experience in a particular micro-vertical industry;

	•		due to resource constraints, we have a limited number of developers who can focus upon developing for the micro-verticals; and

	•		in the event we decide to devote limited resources into a micro-vertical market, such as by dedicating a sales representative, such a resource may not be available to focus on general sales.

If our strategy of developing industry products for specific micro-vertical markets is not be successful, it could materially adversely affect our business, results of operations and financial condition.

We may not receive significant revenues from our research and development efforts for several years.

Developing, enhancing and localizing software is expensive, and the investment in product development may involve a long payback cycle. In 2004, our research and development expense was US$13.8 million, or approximately 8% of our total revenues. Our future plans include significant additional investments in software research and development and related product opportunities. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. However, we do not expect to receive significant revenues from these investments for several years, if at all.

We have been increasingly migrating software development capabilities for our enterprise application software products to India and China, which subjects us to several risks that may affect our business.

We have been increasingly moving software development capabilities for our enterprise application software products to India and China. Pivotal has established a software development center in Bangalore, India and Ross has established a software development center in Shanghai, China. While we believe the migration of software development capabilities offshore to India and China offers several advantages, including lower software development costs principally due to the relatively lower salaries of programmers in India and China, such offshoring also subjects us to various risks, including the following:

	•		Competition to hire qualified programmers and developers in these local markets;

	•		Risks associated with turnover of programmers and developers, particularly where we have devoted time and resources to train such persons to be familiar with our enterprise application software products;

	•		Challenges due to the need to remotely manage developers and programmers in India and China, particularly when the persons most familiar with the needs of the customer and the desired new functionality and features are not also located in India and China;

	•		Language and other communications barriers, particularly with software development in China; and

	•		Time zone differences which make liaising and communicating with persons in India and China more difficult.

While the vast majority of our professional services engagements associated with the sale and implementation of our enterprise application software products are billed on a time and materials basis, there are certain instances when management may accept fixed price engagements for certain of our products which exposes us to various risks.

While the vast majority of our professional services engagements associated with the sale and implementation of our enterprise application software products are billed on a time and materials basis, management may occasionally accept a fixed price engagement, particularly when management believes by appropriately managing the fixed price engagement we can achieve a greater hourly rate than we normally would when the customer purchases our services by the hour. The nature of a fixed price engagement, however, is such that a failure to estimate accurately the resources and time required for an engagement, to manage client expectations effectively regarding the scope of the services to be delivered for the estimated fees or to complete fixed price engagements within budget, on time and to clients’ satisfaction could expose us to risks associated with cost overruns and penalties. This risk of needing to commit unanticipated additional resources to complete a professional services engagement billed on a fixed price basis could have a material adverse effect on our results of operations.

The holding company structure through which we have invested in IMI is complex, and subjects us to risks, including an obligation to purchase the shares of IMI from IMI’s other shareholder upon the occurrence of certain events which may result in the use of a significant amount of our cash or issuance of a significant number of our shares.

In September 2003, we acquired a 51% interest in Cayman First Tier, the holding company of IMI, an international provider of software to the order management systems sector, in exchange for US$25.0 million to subscribe for new shares in Cayman First Tier. Symphony Technology Group, a Palo Alto, California based

venture capital company holds the remaining 49% in Cayman First Tier. Cayman First Tier holds 100% of the shares of IMI through intermediate holding companies. IMI’s assets include software solutions which it has developed for retailers, wholesalers and consumer goods manufacturers, particularly in the grocery, specialty goods, and pharmaceutical and over-the-counter drugs industries.

Symphony has an option to require us to purchase all of its 49% interest in IMI at any time during the twelve months following the occurrence of unpermitted changes in the composition of IMI’s executive committee, a decision of IMI’s executive committee being overruled by the IMI board, or modifications to the rights, powers or responsibilities of IMI’s executive committee without the approval of the directors appointed by Symphony. The purchase price for Symphony’s interest in IMI would be based on the financial performance of IMI. An exercise by Symphony of its option to require us to purchase its entire 49% interest in IMI may result in the use of a significant amount of our cash or issuance of a significant number of our shares, which may have a material adverse effect on our capital resources and stock price due to actual or perceived dilution. See Item 10.C – “Additional Information – Material Contracts – Expansion through Acquisitions and Partnerships – Cayman First Tier” for additional descriptions of our arrangements in connection with Cayman First Tier.

Risks relating to our mobile services and applications and portal businesses

Each of the mobile services and applications and portal businesses in China is highly competitive. If we fail to compete effectively, our failure could have a material adverse effect on our business, financial condition and results of operations.

We are not the only company providing mobile services and applications, such as SMS, MMS, WAP and IVR, in China. We face intense and increasing competition for subscribers, mobile services and applications, and content from companies such as: Sina Corporation, Sohu.com Inc., NetEase.com Inc., Tom Online Inc., Tencent.com Technology Limited, Linktone Ltd., Mtone Wireless Corporation, Shanda, The9, Kongzhong, Baidu, Yahoo! Instant messenger and Microsoft MSN Messenger, as well as a number of smaller companies that serve China’s mobile services and applications market. In addition, in our portal business, our competition for user traffic, ease of use and functionality include Chinese and/or English language based Web search and retrieval companies, including AltaVista Co., Apple Daily, ChinaByte, FindWhat.com, Google, Inc., HotBot, HotWired Ventures, Lycos, Inc., Mingpao.com, MSN, Netease.com, Inc., Netvigator.com, Overture Services, Inc. (acquired by Yahoo!, Inc.), Shanghai Online, Sina Corporation, Sohu.com, Inc., Tom Online Inc. and Yahoo!, Inc. We may also encounter increased competition from Internet service providers, Web site operators and providers of Web browser software, including Microsoft Corporation or Netscape Communications Corporation, that incorporate search and retrieval features in their products. Our competitors may develop Web search, retrieval services, freemail and community services that are equal or superior to those we offer our users, and may achieve greater market acceptance than our offerings in the area of performance, ease of use and functionality.

Many of our competitors have more experience and longer operating histories in our target markets than us, as well as greater name recognition, larger customer bases and greater financial, technical and marketing resources. We may not be able to compete successfully against our competitors. Our failure to remain competitive may cause us to lose our market share in the mobile services and applications and/or portals business, and our business, financial condition and results of operations may suffer.

We depend primarily on the two mobile network operators in China for delivery of our mobile services and applications, and the termination or alteration of our various contracts with either of them or their provincial or local affiliates could materially and adversely impact our business.

We offer our mobile services and applications to consumers primarily through the two mobile network operators in China, China Mobile and China Unicom, which service nearly all of China’s mobile subscribers. Such dominant market position limits our negotiating leverage with these network operators. If our various

contracts with either network operator are terminated or adversely altered, it may be impossible to find appropriate replacement operators with the requisite licenses and permits, infrastructure and customer base to offer our services, and our business would be significantly impaired. For the year ended December 31, 2004, we derived approximately 13% of our total revenues from our mobile services and applications business, a substantial portion of which was delivered through the mobile network operators.

Delivery of our mobile services and applications is governed by contracts between us and the national, provincial or local affiliates of China Mobile and China Unicom. Each of these contracts is nonexclusive and has a limited term (generally one or two years). We usually 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 terms of these contracts vary, but the mobile network operators are generally entitled to terminate them in advance for a variety of reasons or, in some cases, for no reason at their discretion. For example, several of our contracts with the mobile network operators can be terminated if:

	•		we fail to achieve performance standards established by the applicable mobile network operator from time to time;

	•		we breach our obligations under the contracts, which include, in many cases, the obligation not to deliver content that violates the network operator’s policies and applicable law;

	•		the mobile network operator receives high levels of customer complaints about our mobile services or applications; or

	•		the mobile network operator sends us written notice that it wishes to terminate the contract at the end of the applicable notice period.

We may also be compelled to alter our arrangements with these mobile network operators in ways which materially and adversely affect our business. Our agreements with the mobile network operators are subject to negotiation upon renewal, and we are aware that the mobile network operators have notified other mobile service providers of their intention to revise their revenue sharing arrangements upon the expiration of the existing cooperation agreements. We cannot assure you that mobile network operators will not demand further changes to our revenue sharing arrangements in the future. If any of the mobile network operators decides to change its content or transmission fees or its share of revenue, or does not comply with the terms of the agreements, our revenue and profitability could be materially adversely affected.

The regulators and the mobile network operators in China have imposed unilateral changes in their regulations and policies in the past. Depending upon the nature of these regulatory and policy changes and our ability to implement and adhere to them, our business and financial results could be materially adversely affected.

The regulators in China have unilaterally changed their regulations as applied to third party service providers in the past, and may do so again in the future. For example, in mid 2004, the Ministry of Information and Industry in China began requiring wireless service providers to apply for a nationwide value-added telecommunications services operating license, or a CP license, in order to provide value-added telecommunication services throughout China. China Mobile then issued a notice requiring all service providers to provide evidence of a CP license by October 31, 2004. After October 31, 2004, China Mobile and its subsidiaries ceased working with most of the service providers without CP licenses. The Ministry of Information and Industry has accepted Newpalm’s and Go2joy’s application for a CP license. Although we were able to acquire the required CP licenses in this particular instance without a substantial impact on our business, we may not be able to respond adequately to negative regulatory developments in the future because we are not able to predict any unilateral regulatory changes.

In January 2005, the Chinese State Administration of Radio, Film and Television, or SARFT, which regulates radio and television stations in China, issued a notice prohibiting commercials for mobile services related to “fortune-telling” from airing on radio and television stations effective in February 2005. This notice could also lead to further actions by other Chinese government authorities to prohibit the sale of such fortune-telling related products which could have a material adverse effect on our financial position, results of operations, or cash flows. SARFT or other Chinese government authorities may prohibit the marketing of other mobile services via a channel we depend on to generate revenues, which could have a material adverse effect on our financial position, results of operations or cash flows.

In addition, China Mobile and China Unicom have unilaterally changed their policies as applied to third party service providers in the past, and may do so again in the future. For example, China Mobile banned all cooperative arrangements known as “SMS Website Unions” in July 2003, effectively precluding large service providers from aggregating unregistered websites and utilizing China Mobile’s billing platform to gather fees for these services. In August 2003, China Mobile further banned service providers from using its network to charge customers for services which were deemed by it to be not purely wireless services. Although we were not engaged in these activities and, therefore, these particular policy changes did not impact our business, we may not be able to respond adequately to negative developments in our contractual relationships with China Mobile and China Unicom in the future because we are not able to predict any unilateral policy changes.

China Mobile has imposed penalties on one of our mobile services and applications businesses for breaches and irregularities in the provision of services to users. If penalties are imposed by China Mobile and/or China Unicom in the future with respect to either our past or future activities, our business and financial results could be materially adversely affected.

In August 2004, Go2joy, one of our mobile services and applications units, received notice from China Mobile that China Mobile was imposing sanctions and penalties upon Go2joy and 21 other mobile value added service providers in China for various violations of China Mobile’s requirements. In connection with Go2joy, China Mobile indicated that Go2joy: in Shanxi province had inadvertently charged inactive users; in Hunan province, as a result of an agreement to take on certain services of a content partner, had transferred certain users to its SMS platform without positive confirmation of the users or approval from China Mobile; in Shanxi and Henan provinces had sent inappropriately worded SMS promotional messages to users; and had inadvertently continued to charge some cancelled accounts for SMS services.

The sanctions resulted in temporary suspension of Go2joy’s existing SMS services from August 2004 until February 2005 when Go2joy was able to resume billing for SMS services over China Mobile’s network. In addition, China Mobile temporarily suspended the approval of Go2joy’s application to operate on new platforms until the end of 2004 and suspended the approval of Go2joy’s application to offer new products and services on all existing platforms, such as SMS and IVR, until June 30, 2005. China Mobile also imposed fines of around RMB1.3 million, or approximately US$160,000. The sanctions imposed by China Mobile did not affect Go2joy’s existing IVR services. Under the sanctions, Go2joy was required, among other things, to establish a satisfactory connection with the Mobile Information Service Center, or MISC platform, a centralized service provider monitoring system operated by China Mobile.

China Mobile and China Unicom have a wide range of policies and procedures regarding customer service, quality control and other aspects of the wireless value-added services industry. As the industry has evolved over the last several years, the mobile network operators have refined these policies to improve overall service quality. In addition, acting under the guidance of China’s Ministry of Information Industry, the mobile network operators have begun enforcing their customer service policies more rigorously than in the past and have initiated steps to improve customer service. If enforcement of such policies in the future results in additional penalties, such as being precluded from offering certain services over a mobile network operator’s network or from offering new services for a fixed period, our business and financial results could be materially adversely affected.

In addition, we are also subject to potential liability and penalty for delivering inappropriate content through our mobile value added services. For example, in July 2004, China Mobile temporarily terminated the IVR service of one of our competitors for violating certain operating procedures. One of the violations cited in the notice for temporary termination was that it had provided inappropriate content to its mobile subscribers through its IVR service. The definition and interpretation of inappropriate content in many cases is vague and subjective. We are not sure whether mobile network operators including China Mobile and China Unicom or the Chinese government will find our mobile content inappropriate and therefore prevent us from operating the mobile value added services relating to such content in the future. If they prevent us from offering such services, our profit from mobile values added services will suffer.

We may not be able to adequately respond to other developments in mobile network operator policies, or changes in the manner in which such policies are enforced. Furthermore, because the mobile network operators’ policies are in a state of change at this time and they are highly sensitive to customer complaints (even if the complaints may not have a bona fide basis), we cannot be certain that our business activities will always be deemed in compliance with those policies despite our efforts to 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 mobile network operators’ policies by us, whether inadvertent or not, could result in a material and adverse effect on our revenue and profitability.

In addition to enhanced enforcement of their policies, the mobile operators have been adopting new billing systems and policies which we believe have contributed to declines in our SMS revenue.

China Mobile and China Unicom are adopting new billing systems for 2G services, like SMS, on a province-by-province basis, which require users to make two confirmations to order services via the Internet or mobile phone, enable users to more easily cancel services and prevent service providers from billing inactive users for subscription-based services. As of December 31, 2004, these new billing systems were wholly or partially operational in 14 provinces for China Mobile and 9 provinces for China Unicom. In addition, effective January 1, 2005, China Mobile changed its billing policy so that we can no longer collect revenue with respect to undeliverable MMS messages. Previously, MMS messages that were undeliverable because the recipient’s handset was turned off, out of the network service area or not equipped to handle MMS messages were forwarded to an Internet mailbox, and we were entitled to collect revenue in connection with the messages.

We believe the new billing systems and changes in policies have resulted and may further result in lower mobile services and applications revenues or additional operating costs for us. We cannot assure you that our financial condition and results of operations will not be materially adversely affected by any new system, policy or guideline imposed by the mobile network operators in the future.

Our business could be adversely affected if China Mobile or China Unicom or both begin providing their own mobile services and applications.

Our mobile business may be adversely affected if China Mobile or China Unicom or both decide to terminate our existing revenue-sharing relationship and begin providing their own mobile services and applications to subscribers. In that case, we would not only face enhanced competition, but could be partially or fully denied access to their networks.

If China Mobile or China Unicom fails to bill their customers or to provide billing confirmations for our mobile services and applications, our mobile services and applications revenues could be significantly reduced.

We depend upon China Mobile and China Unicom to maintain accurate records of the fees paid by users and their willingness to pay us. Specifically, the mobile network operators provide us with monthly statements that do not provide itemized information indicating for which mobile services and applications the mobile

network operator has collected fees. As a result, monthly statements that we have received from the mobile network operators cannot be reconciled to our internal records on a segmented basis. In addition, access to the mobile network operators’ internal billing and collection records is subject to the discretion of such operators; we have only limited means to verify the information provided to us independently. Our mobile services and applications revenues could be significantly reduced if these mobile network operators miscalculate the revenues generated from our mobile services and applications and our portion of those revenues.

Our mobile services and applications revenues are affected by billing and transmission failures which are often beyond our control.

We do not collect fees for delivery of our mobile services and applications from China Mobile and China Unicom in a number of instances, including if:

	•		the delivery of our mobile services and applications to a subscriber is prevented because his or her mobile phone is turned off for an extended period of time, the customer’s prepaid phone card has no value or the subscriber has ceased to be a customer of the applicable mobile network operator;

	•		China Mobile or China Unicom experiences technical problems with its network which prevent the delivery of our mobile services and applications to the subscriber;

	•		we experience technical problems with our technology platform that prevents delivery of our mobile services and applications; or

	•		the subscriber refuses to pay for our mobile services and applications due to quality or other problems.

These situations are known in the mobile services and applications industry as billing and transmission failures. We do not expect to recover revenues that are lost due to billing and transmission failures. The failure rate can vary among network operators, and by province, and also have fluctuated significantly in the past. For example, for the year ended December 31, 2004, the average monthly transmission failure rate ranged from 17% to 30%. We do not have any agreements with the mobile network operators that provide that if such differences are greater than a fixed percentage, we have the right to adjust the differences. The mobile network operators have absolute discretion in the adjustment of any difference. Any significant billing and transmission failures therefore will significantly lower our recorded revenues.

Because China Mobile and China Unicom do not provide information showing revenues and transmission information on a service-by-service basis, we can only estimate our actual revenues by service type.

China Mobile’s and China Unicom’s monthly statements to service providers regarding mobile services and applications delivered through their networks currently do not contain revenues and billing and transmission failure information on a service-by-service basis. Although we maintain our own records reporting the mobile services and applications provided, we can only estimate the actual revenues by service type because we are unable to confirm from all provincial operators which services were transmitted but resulted in billing and transmission failures. As a result, we are unable to calculate and monitor service-by-service revenues, margins and other financial information, such as average revenue per user by service and total revenues per user by service, with sufficient precision to allow us to accurately determine which of our mobile services and applications are or may be profitable.

China Mobile is currently implementing the Mobile Information Service Centre, or MISC, a mobile data management platform that records, processes and analyzes information relating to the provision of wireless Internet data services including usage, transmission and billing information. Under the MISC platform, we believe the discrepancy between our revenue estimates and the revenue calculated by China Mobile will be

larger than that in 2004. As the MISC platform permits limited access to China Mobile’s usage and billing records to reconcile the discrepancy, this could lead to lengthy reconciliation negotiations between us and China Mobile and delay our revenue collection. We cannot assure you that any reconciliation negotiation would resolve in our favor or that our results of operations will not be adversely affected as a result.

China Mobile and China Unicom may impose higher service or network fees if we are unable to satisfy customer usage and other performance criteria, thereby reducing our mobile services and applications revenues.

Fees for our mobile services and applications are charged on a monthly subscription or per usage basis. Based on our contractual arrangements, we rely upon China Mobile and China Unicom for both billing of, and collection from, subscribers of fees for our mobile services and applications.

China Mobile and China Unicom generally charge us service fees of 15% to 30% of the revenues generated by our mobile services and applications, respectively. To the extent that the number of messages sent by us over China Mobile’s network exceeds the number of messages our subscribers send to us, we must pay per message channel fees, which decrease in several provinces as the volume of customer usage of our mobile services and applications increases. The number of messages sent by us will exceed those sent by our subscribers, for example, if the subscriber sends us a single message to order a game but we must send that subscriber several messages to confirm his or her order and deliver the game itself. Any increase in China Mobile’s or China Unicom’s network fees and service charges could reduce our gross margins.

China Mobile and China Unicom may not authorize our mobile services and applications to be offered on their networks if we fail to achieve minimum customer usage, revenues and other criteria, thereby adversely affecting our mobile services and applications revenues.

Our business could be adversely affected if we fail to achieve minimum customer usage, revenues and other criteria imposed or revised by China Mobile and China Unicom at their discretion from time to time. China Mobile and China Unicom, through their provincial and local offices, have historically preferred to work only with a small group of the best-performing mobile services and applications providers, based upon the uniqueness of the service offered by each provider, total number of subscribers, usage and revenues generated in the applicable province or municipality, the rate of customer complaints, and marketing expenditures in the applicable province or municipality.

In the future, we may fail to meet the then-current performance criteria that mobile network operators in these or other provinces or municipalities set from time to time. In any such case, our mobile services and applications could be excluded from certain services or from their entire networks at a national, provincial or municipal level, or we could be precluded from introducing new services, which would adversely affect our revenues and growth prospects.

In the event we fail to achieve or maintain a prominent position on the WAP portals of the two principal mobile network operators in China, we may not be able to capture opportunities presented by the expected high growth in the market for WAP services in China which could affect our overall financial condition.

The current practice of both China Unicom and China Mobile is to place the most popular WAP services at the top of the menu on the first page of the list of services available in each service category on their WAP portals. Services at the top of the menu are more accessible to users than other services and, in our experience, are more frequently accessed than those services lower on the menu. This effectively reinforces the position of the most popular services. The placement of services on these menus creates significant competitive advantages for the top-ranked services and significant challenges for newer and less popular services. In the event we fail to achieve or maintain a prominent position on the WAP portals of the two principal mobile network operators in China, we may not be able to capture opportunities presented by the expected high growth in the market for

WAP services in China. This could materially and adversely affect the revenue from our services, and thus our overall financial condition.

Our mobile services and applications and their pricing are subject to approval by China Mobile and China Unicom, and if requested approvals are not granted in a timely manner, our mobile services and applications business could be adversely affected.

We must obtain approval from China Mobile and China Unicom with respect to each mobile service or application that we propose to offer or charge to their subscribers and the pricing for such mobile service or application. No assurance can be given that such approvals will be granted in a timely manner or at all. Moreover, under some of our contracts with the mobile network operators, we cannot change prices more than once every six months or charge prices outside a fixed range. Failure to obtain, or a delay in, obtaining such approvals could place us at a competitive disadvantage in the market and adversely affect our mobile services and applications business.

We rely heavily on certain regions in China for a significant share of our mobile services and applications revenues. An economic downturn or any loss of our contracts with mobile operators in these provinces could have a material adverse effect on our results of operations.

A significant portion of our revenues from mobile services and applications are derived from the provinces of Shandong, Jiangsu and Henan in China. Customers in these regions accounted for approximately half of our total mobile services and applications revenues for the year ended December 31, 2004. As such, our results of operations are susceptible to changes in the economies of these regions. An economic downturn in any one of these regions, or our failure to renew our contracts with either China Mobile or China Unicom in any one of these regions, could reduce our mobile services and applications revenues.

The Chinese government has granted licenses to offer basic wireless telecommunications services in China to third parties with whom we have not yet developed close relationships, and may grant additional licenses to others in the future. If those parties which receive licenses are successful in the mobile services and applications market, but we are unable to establish new arrangements or develop cooperative relationships with them, our mobile services and applications business, revenue and overall financial condition could be adversely affected.

The success of our mobile services and applications business depends on our relationship with China’s mobile network operators. While China Mobile and China Unicom are the largest companies permitted to provide mobile services in China, the Chinese government has granted licenses to offer basic wireless telecommunications services in China to China Network Communications Group Corporation, or China Netcom, and is expected to grant similar licenses to China Telecommunications Corporation, or China Telecom. We have not yet developed close business relationships with those parties as we have done with China Mobile and China Unicom, although our Newpalm unit has started to offer some IVR and SMS services on China Netcom’s platform in the fourth quarter of 2004. If those parties which receive new basic wireless telecommunications licenses are successful in the mobile services and applications market, but we are unable to establish arrangements or develop cooperative relationships with them, our revenue and overall financial condition could be adversely affected if they take market share from China Mobile and China Unicom. It is also possible that China Netcom, China Telecom and any other parties receiving basic wireless telecommunications licenses may decide to offer wireless value-added services created by them, rather than by third party service providers such as our company. In that case, we would be in direct competition with those operators, and our revenue and overall financial condition could be adversely affected if we are not able to compete effectively against them.

If we fail to keep pace with changes in mobile technology, our competitive position and ability to generate revenues could be adversely affected.

While most of our mobile services and applications revenue is still generated through SMS, mobile technology is changing rapidly to support new technologies and platforms, including multimedia messaging service (MMS), wireless application protocol (WAP) and interactive voice response (IVR). Other mobile technologies which support even more complex services are also being developed. We are developing new mobile related products and services for MMS, WAP and IVR, and the success of our new products and services is subject to risks and uncertainties. For example, technical, operational or distribution problems could delay or prevent the introduction of our new products or services. We can provide no assurance that our new products and services will achieve widespread market acceptance or generate meaningful revenue. If we fail to introduce new products and services that offer the latest mobile technology, our competitive position and our ability to generate new revenues could be compromised.

Our mobile services and applications and portal business could be materially adversely affected if the current ownership structure of our Chinese companies that hold ICP licenses is challenged by the Chinese regulatory authorities.

The Chinese government has imposed foreign ownership restrictions and prohibitions on Internet content and telecommunications operations. Laws and regulations in China require all Internet portal and mobile portal operators to obtain an Internet content provider, or ICP, license before they may operate the portals in China. Under current regulations, ICP license holders must be Chinese nationals or domestic Chinese companies. As a result, we cannot be the legal owner of such ICP licenses which are necessary to operate our mobile and portal businesses in China. Currently, each of the three primary business units of China.com has formed domestically registered companies in China to, among other things, be the legal owner of required ICP licenses.

	•		Newpalm has formed Beijing Newpalm Technology Co. Ltd. and Beijing Wisecom Technology Co., Ltd.

	•		The China.com portal unit has formed Beijing China.com Technology Services Co., Ltd.

	•		Go2joy has formed Beijing He He Technology Co., Ltd.

Employees of the respective business units who are Chinese nationals own the shares of the respective domestically registered companies in China. These Chinese nationals, in turn, have entered into trust deed arrangements with respect to the domestically registered companies in China and affiliates of the respective business units under which the Chinese nationals serve as trustees of the trusts, and the business units have formed offshore holding vehicles registered in the British Virgin Islands to be 100% beneficiary of the trusts. For a further description of the corporate structure in China for our China.com subsidiary, see Item 4.C “Information on the Company – Organizational Structure – Corporate Structure in China for our China.com Subsidiary”.

Due to uncertainties relating to the interpretation and application of telecommunications and Internet legislation in China, the authorities in China could, at any time, assert that any part of our existing or future business, or the ownership of the domestically registered companies in China and their ICP licenses through the trust deed arrangements, violate Chinese laws or regulations. If we are found to be in violation of any Chinese law or regulation, the relevant authorities would have broad discretion in imposing penalties, which could include one or more of the following:

	•		levying of fines;

	•		compulsory disgorgement of income for both current and past periods;

	•		revocation of our ICP or business license;

	•		closure or suspension of our China operations; and

	•		compulsory restructuring of our China operations or licensing arrangements.

Any of these actions may disrupt our services in China, may harm our reputation and could have a material adverse effect on our portal and mobile operations in China. In particular, if any of these ICP licenses are revoked or terminated, our Internet content and mobile operations in China that are dependent on such licenses will be discontinued, which will have a material adverse effect on our results of operations and financial condition.

Our business could be materially adversely affected if we cannot provide effective operational control of our mobile services and applications and portal business due to the current ownership structure of our Chinese companies.

As described in the preceding risk factor, we rely upon certain Chinese nationals as the legal owners of the domestically registered companies in China that hold the ICP licenses which are necessary to operate our Internet and mobile businesses in China. Although our indirect subsidiaries are the beneficial owners of these domestically registered companies and such Chinese nationals may be our directors or employees, the rights provided in these trust arrangements are contractual in nature and do not necessarily guarantee operational control. If our trustees fail to perform their obligations, the contractual remedies available in jurisdictions outside China may not provide us with effective control over these domestically registered companies in China due to the uncertainty of enforcing foreign judgments or arbitral awards in China. The loss of effective control over our China operations and licensing would significantly harm our portal and mobile businesses in China.

The dividends, other distributions on equity, service fees, and other payments we may receive from our domestically registered companies in China are subject to restrictions under Chinese law.

The domestically registered companies in China through which we conduct operations for each of China.com’s three primary business units and have an indirect ownership interest through trust deed arrangements are the primary revenue generating entities of each of the primary business units of China.com. Each of China.com’s three primary business units have formed and invested in a wholly foreign owned enterprise, or WFOE, to act as a long term exclusive partner of the domestically registered company in China. WFOEs are limited liability companies established under the Chinese Company Law, the shareholders of which are permitted to be 100% foreign. As the long term exclusive partner of the domestically registered company in China, the respective WFOE provides technical and logistical support for the day to day operations of the domestically registered company in China, including sales and marketing, billing, and administrative services. To facilitate the delivery of the technical and logistical support, the WFOE owns the physical assets, including servers, switches and computers, and employs the technical, sales and administrative personnel necessary to deliver these services. In exchange for such services, the WFOE charges the domestically registered company in China a fee which ranges from 49% to 90% of the gross revenue of the domestically registered company. For a further description of the corporate structure in China for our China.com subsidiary, see Item 4.C “Information on the Company – Organizational Structure – Corporate Structure in China for our China.com Subsidiary”.

If any of our domestically registered companies in China incurs debt in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions. In addition, Chinese law requires that payment of dividends by our domestically registered companies in China can only be made out of their net income, if any, determined in accordance with accounting standards and regulations in China. Under Chinese law, those domestically registered companies are also required to set aside a portion, up to 10% of their after-tax net income each year to fund certain reserve funds, and these reserves are not distributable as dividends. Any limitation on the payment of dividends or service fees by domestically registered companies in China through which China.com primarily conducts its operations could have a material adverse effect on our ability to grow, fund investments, and otherwise operate our mobile services and applications business.

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

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

China Unicom and China Mobile also have their own policies regarding the distribution of inappropriate content by wireless value-added service providers and have recently punished certain providers for distributing inappropriate content, including the imposition of fines and service suspensions. Some of those providers indicated that the mobile operators informed them that certain of their content was construed as too adult-oriented or sexually suggestive. In addition, in June 2004, along with other participants in our industry, we received information and guidance from China Mobile and China Unicom regarding what they consider to be inappropriate content for mobile value-added services. In response, we reviewed our services and removed certain content, including picture downloads, in order to comply with such information and guidance. There can be no assurance that we will not receive future guidance that could compel us to further alter our services.

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

If we are held liable for claims based on information originating from our portal network or communicated through our mobile services and applications, we may incur significant costs contesting such claims or paying damages.

We may face liability for defamation, negligence, copyright, patent or trademark infringement and other claims based on the nature and content of information originating from our portal network or communicated through our mobile services and applications, including our SMS, MMS, WAP and IVR products. Such information could include content and material posted by our registered community members on our message boards, online communities, voting systems, e-mail or chat rooms. By providing technology for hypertext links to third-party websites, we may be held liable for copyright or trademark violations by those third-party sites. Third parties could assert claims against us for losses incurred in reliance on erroneous information distributed by us. Users of our web-based e-mail or SMS, MMS, WAP or IVR products could seek damages for:

	•		unsolicited e-mail or messages;

	•		lost or misplaced messages;

	•		illegal or fraudulent use of e-mail or SMS messages; or

	•		interruptions or delays in service.

We do not carry liability insurance to cover potential claims of this type. We may incur significant costs in investigating and contesting these claims. Any judgment, fine, damage awards or liability imposed on us

could significantly increase our costs. Moreover, our reputation may suffer as a result of these claims, which could reduce traffic on our portal network or reduce our revenues.

If the Chinese government considers our existing licensing structures to be insufficient in meeting compliance requirements with applicable licensing restrictions, or if we fail to comply with changes to these requirements or restrictions, our portal and mobile services and applications businesses could be materially adversely affected.

The Chinese government regulates access to the Internet by imposing strict licensing requirements on Internet service providers, or ISPs. Generally, the provision of different types of infrastructure telecommunication services and value-added telecommunication services is subject to different licensing regimes in China.

While we believe that our current operation complies with all existing laws, rules and regulations in China, there are substantial uncertainties regarding the interpretation of current Internet laws and regulations. It is possible the Chinese government may take a view contrary to ours because there are no well established precedents or clear judicial interpretations to support our interpretations and views of the laws, rules and regulations. Issues, risks and uncertainties relating to government regulation of China’s Internet sector include:

	§		regulations applying to Internet-related services and telecom-related activities. While many aspects of these regulations remain unclear, they purport to limit and require licensing of various aspects of the provision of Internet information services. If these regulations are interpreted to preclude our current ownership structure or business model, our portal and mobile services and applications businesses could be severely impaired; and

	§		the activities of ICPs are subject to regulation by various government authorities in China depending on the specific activities conducted by the ICP as stated by the Ministry of Information and Industry. Various government authorities have enacted several laws and regulations that govern these activities. The areas of regulation include:

	§		online advertising;

	§		online news reporting;

	§		online publishing;

	§		online securities trading;

	§		online gaming;

	§		online broadcasting;

	§		bulletin board service; and

	§		the provision of industry-specific information (e.g., pharmaceutical products) over the Internet, etc.

Other aspects of our online operations may be subject to regulation in the future.

In addition to the regulations promulgated by the Chinese national government, some local governments, such as the Beijing local government, have also promulgated local rules applicable to Internet companies operating within their respective jurisdictions. These local rules may also create additional barriers in relation to the operation of our business.

Our portal business depends substantially on third party content providers and may be adversely affected if we are unable to maintain existing arrangements with these content providers.

We rely on third parties to create traffic and provide content for our portal network to make it more attractive to advertisers and consumers. Our content providers include Xinhua, a major shareholder of CDC, as well as commercial content providers and our registered community members. If Xinhua or these third parties fail to provide us with high quality content, our portal network could lose viewers, subscribers and advertisers and our revenue from these sources would decrease. Our existing relationships with Xinhua and other commercial content providers are not exclusive and may not result in sustained business partnerships or successful service offerings or sustained traffic on our portal network or future revenues. Our purchases of content from Xinhua have not been material in the past.

Regulation of content distributed on the Internet in of the PRC may adversely affect our business.

The PRC has enacted regulations governing Internet access and the distribution of news and other information. The Ministry of Information and Industry has published implementing regulations that subject online information providers to potential liability for content included on their portals and the actions of subscribers and others using their systems, including liability for violation of laws prohibiting the distribution of content deemed to be socially destabilizing. Because many laws, regulations and legal requirements with regard to the Internet in the PRC are relatively new and untested, their interpretation and enforcement of what is deemed to be socially destabilizing by Chinese authorities may involve significant uncertainty.

Under the regulations on telecommunications and Internet information services in China, Internet information service providers are prohibited from producing, duplicating, releasing or distributing any information which falls within one or more of the nine stipulated categories of “undesirable content”. These categories cover any information which:

	•		contravenes the basic principles enshrined in the PRC Constitution;

	•		endangers the security or unity of the State;

	•		undermines the State’s religious policies;

	•		undermines public order or social stability; or

	•		contains obscene, pornographic, violent or other illegal content or information otherwise prohibited by law.

In addition, the legal system in the PRC 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. As a result, it is difficult to determine the type of content that may result in liability. We cannot predict the effect of further developments in the Chinese legal system, particularly with regard to the Internet and the dissemination of news content, including the creation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the pre-emption of local rules and regulations by national laws.

Violations or perceived violations of laws in China arising from information displayed, retrieved from or linked to our portals could result in significant penalties, including a temporary or permanent cessation of our business in China. The Chinese government agencies have announced restrictions on the transmission of state secrets through the Internet. State secrets have been broadly interpreted by Chinese governmental authorities in the past. We may be liable under these pronouncements for content and materials posted or transmitted by users on our message boards, virtual communities, chat rooms or e-mails. If the Chinese government were to take any action to limit or eliminate the distribution of information through our portal network or to limit or regulate any

current or future applications available to users on our portal network, this action could have a material adverse effect on our business, financial condition and results of operations.

Risks relating to our advertising and marketing business

Our strategy to target higher margin services related to database marketing through our subsidiary, Mezzo Business Databases Pty Limited, or Mezzo, is subject to numerous risks, may not be successful, and could therefore limit the amount of advertising/marketing revenues we can generate.

Our advertising/marketing strategy is to target higher margin services related to database marketing. Our Mezzo business in Australia provides business marketing data and marketing support services. Mezzo maintains the IncNet databases as a source of marketing intelligence on medium and large companies and organizations in Australia and New Zealand which are used as a source of information by many business-to-business direct marketers. Our Mezzo business is subject to numerous risks, including the following:

	•		we depend upon the ability of Mezzo to maintain up-to-date datasets, and if Mezzo fails to maintain its databases, its services will be less attractive to customers;

	•		we may not be able to successfully market services in this business segment outside of Australia where the Mezzo business and our datasets are currently located;

	•		we may not be able to attract larger clients with correspondingly larger marketing budgets due to the limited size and scope of our current operational base in Australia;

	•		we face competition from companies that have developed large datasets and established related products and services, such as Acxiom and D&B, affiliated with The Dun & Bradstreet Corporation;

	•		we rely upon channel partners to distribute our databases to end-users, and should those channel partners determine to use other databases or stop or reduce their distribution in our market, this could result in a loss of expected revenues; and

	•		we may suffer continued reductions in revenues and profits as a result of the application of anti-spamming legislation in Australia (in particular, the Spam Act 2003 (Cth)) that could continue to reduce the distribution potential of our databases.

Risks relating to our business services business

A substantial percentage of our business services engagements are billed on a fixed price basis which may be subject to cost overruns if we do not accurately estimate the costs of these engagements or if clients change the scope of a project.

A substantial percentage of our business services engagements consists of individual, non-recurring, short-term projects billed on a fixed price basis as distinguished from a method of billing on a time and materials basis. At times this requires us to commit unanticipated additional resources to complete business services engagements, which may result, and has in the past resulted, in losses on certain engagements. Our failure to obtain new business services business in any given quarter or estimate accurately the resources and time required for an engagement, to manage client expectations effectively regarding the scope of the services to be delivered for the estimated fees or to complete fixed price engagements within budget, on time and to clients’ satisfaction (particularly if a client changes the scope of the project) could expose us to risks associated with cost overruns and penalties, any of which could have a material adverse effect on our business, results of operations and financial condition.

Our clients could unexpectedly terminate their contracts for our services which could result in a loss of expected revenues and additional expenses for redeployment of staff and resources.

The standard terms for many of our business services contracts include a down payment of a relatively low percentage of the fee at the commencement of the contract with the balance of the payments subject to the achievement of specific milestones and deliverables. We generally do not require collateral for accounts receivable. The final payment is not due until completion of successful user acceptance testing. However, most of our business services contracts can be cancelled by the client with limited advance notice and without significant penalty. Termination by any client of a contract for our services could result in a loss of expected revenues, additional expenses for redeployment of staff and resources that were allocated to the terminated engagement, and underutilized employees and resources. The unexpected cancellation or significant reduction in the scope of any of our large business services projects could have a material adverse effect on the business of our business services companies, particularly those companies which depend upon a relatively small number of key clients for a substantial portion of their business. Should any of those key clients unexpectedly terminate their contracts for our services or determine to use other service providers for some of their services, this could result in a significant loss of revenues for such companies which, in turn, could have a material adverse effect on our business, results of operations and financial condition.

Our business services contracts may expose us to potential litigation and liabilities.

Our business services and advertising businesses involve services agreements with customers, some of which do not have disclaimers or limitations on liability for special, consequential and incidental damages, or do not have caps or have relatively high caps on the amounts its customers can recover for damages. Some of our subsidiaries do not carry professional indemnity or other insurance covering our exposure to any liability for any claims or breaches under the customer contracts. While there are no current material claims or litigation in connection with the service contracts, there can be no assurance that future claims will not arise. Any claim under customer contracts could subject us to litigation and give rise to substantial liability for damages, including special, consequential or incidental, that could materially and adversely affect our business and financial condition.

Failure by third party suppliers to provide us with software and hardware components could affect our ability to operate our business services business.

In several of our business services units and in CDC Software Asia Pacific, we depend on third party suppliers of software and hardware components. For our various business units, we rely on components that are sourced from key suppliers, including Best Software, Inc., Business Objects S.A., Cisco Systems, Inc., Intel Corporation, Interactive Intelligence, Inc., International Business Machines Corporation, LSI Logic Corporation, Macrovison Corporation, Microsoft Corporation, Network Appliance, Inc., Oracle Corporation, Siebel Systems Inc., and Sun Microsystems Corporation. Any failure or delay on the part of our suppliers may prevent us from receiving the components, products and support we need to conduct our operations. Our inability to develop alternative sources for the software and hardware we need to operate our business may materially and adversely affect our operating efficiency and results of operations.

Each of our business services businesses face intense competition. If we fail to compete effectively, our failure could have a material adverse effect on our business financial condition and results of operation.

Each of our business services businesses, many of which are smaller in size and operate in localized regional markets (such as Australia, Korea, and the northeast United States) face intense competition. A significant portion of the revenues from some of our business services companies is obtained through key software owners who use our businesses as channel partners on a non-exclusive basis. Should any of those key

partners decide to sell their software or provide services directly into our market, or use other service providers, this could result in a loss of expected revenues.

In addition, many of our existing competitors, as well as a number of potential new competitors, have longer operating histories in each of our target business services markets, greater name recognition, larger customer bases and greater financial, technical and marketing resources when compared to us. For example, as our business evolves to place greater emphasis on outsourced software development and support services, we will face competition from many of the large Asia Pacific-based outsourcing firms such as Infosys Technologies Ltd and Wipro Ltd. Any of our present or future competitors may provide products and services that provide significant performance, price, creative or other advantages over those offered by us. We can provide no assurance that we will be able to compete successfully against our current or future competitors, particularly as markets continue to consolidate, change or mature.

Risks relating to our intellectual property, personnel and network

We may be unable to protect or enforce our own intellectual property rights adequately and may be involved in future litigation over our use of technology rights.

We have acquired and are increasingly developing our own intellectual property. Recent acquisitions of a significant amount of intellectual property have resulted from the following:

	•		the recent purchase of Ross, which possesses intellectual property principally consisting of ERP and SCM software applications for the food and beverage, life sciences, chemicals, metals and natural products industries;

	•		the recent purchase of Pivotal, which possesses intellectual property principally consisting of a complete set of highly flexible CRM software applications;

	•		the purchase of IMI, which possesses intellectual property principally consisting of order management software solutions for complex retail, wholesale, consumer goods, and distribution operations;

	•		the purchase of OpusOne Technologies, which possesses intellectual property principally consisting of proprietary enterprise software related applications for use in human resources, payroll administration and attendance tracking;

	•		the purchase of Executive Suite, which possesses intellectual property principally consisting of business intelligence and analytics software products; and

	•		the purchase of the URLs, includingwww.china.com andwww.hongkong.com.

We regard the protection of our trademarks, service marks, copyrights, trade secrets, domain names, and other intellectual property rights as crucial to our success. We rely on a combination of copyright, trade secret and trademark laws, confidentiality procedures, contractual provisions and other similar measures to protect our proprietary information and technology. We do not currently hold any patents nor do we have any patent applications pending. There can be no assurance that any copyrights or trademarks held by us will not be challenged or determined to be invalid. In addition to the protection generally available to unregistered trademarks under the laws of many jurisdictions, we also protect our trademarks through registration primarily in the United States and Canada, although we do seek such protection elsewhere in selected key markets

As part of our confidentiality procedures, we have policies of entering into non-disclosure and confidentiality agreements with our employees, consultants, corporate alliance members, customers and

prospective customers. We also enter into license agreements with respect to our technology, documentation and other proprietary information. These licenses are nonexclusive and generally perpetual. We provide for source code escrow arrangements under some of our license agreements. Despite the efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain the use of our products or technology that we consider proprietary and third parties may attempt to develop similar technology independently.

Protection may not be available in every country in which our intellectual property and technology is used. Some countries, such as the People’s Republic of China, may not protect our proprietary rights to the same extent as in the United States and Canada. In particular, software piracy has been an issue in China for many software publishers, although we believe the complexity of our software products and the need to customize, maintain and upgrade such products mitigates the risk of software piracy. We also anticipate that companies that develop software applications will be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. As a result, we may become involved in these claims. Furthermore, we must also protect our trademarks, service marks, copyrights, trade secrets, domain names, and other intellectual property rights in an increasing number of jurisdictions, a process that is expensive and difficult, and may not be successful in every location. Policing the unauthorized use of our licensed technology is difficult as are the steps necessary to prevent the misappropriation or infringement of our licensed technology. In addition, litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Any of these claims, with or without merit, could result in costly litigation, divert our management’s time, attention and resources, delay our product shipments or require us to enter into royalty or license agreements. If a claim of product infringement against us is successful, our business and operating results could be seriously harmed. There can be no assurance that protection of our proprietary rights will be adequate or that our competitors will not independently develop similar technology.

Most of our products do not contain license management functionality, or contain only limited license management functionality. Because some of our license agreements are for named-user licenses in which only a certain limited number of named individuals are permitted to use the software for which the license is granted, if our customers do not accurately report the number of users using our products or we cannot accurately track the number of users of our products at a customer site, we face the potential of lost revenues if the customer has a greater number of users than for which they have purchased licenses. License agreement provisions, such as requesting customers to perform annual self audits of the number of users at a customer site, provide only limited protection and are retrospective.

We currently sub-license and distribute the intellectual property and technology of third parties. As we continue to develop intellectual property and introduce new products and services that require new technology, we anticipate that we may need to obtain licenses for additional third party technology. We cannot provide assurance that these existing and additional technology licenses will be or will continue to be available to us on commercially reasonable terms, if at all. In addition, it is possible that in the course of using new technology, we or our agents acting on our behalf may inadvertently breach the technology rights of third parties and face liability for our breach. Our inability to obtain these technology licenses or avoid breaching third party technology rights could require us to obtain substitute technologies of lower quality or performance standards or at greater cost which could delay or compromise the introduction of new products and services, and could materially adversely affect our business and financial condition.

We are subject to possible infringement claims, which could be time consuming and costly to defend, divert management’s attention and resources or cause product shipment delays.

We expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors in our various industry segments grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time consuming and costly to defend, divert management’s attention and resources, cause product shipment delays or require us or our subsidiaries to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all, and may require the payment of substantial amounts of money. In the event of a successful product infringement claim against us or our failure or inability to license the infringed or similar technology, our business, operating results and financial condition could be materially adversely affected.

We are exposed to product liability claims, which could be time consuming and costly to defend, divert management’s attention and could have a material adverse effect on our business, operating results and financial condition.

Our enterprise software license agreements with our customers typically contain provisions designed to limit exposure to potential product liability claims. Any such claims, with or without merit, could be time consuming and costly to defend and divert management’s attention and resources. Some of our subsidiaries carry insurance to protect against certain of these claims. It is possible, however, that the limitation of liability provisions contained in our license agreements may not be effective as a result of U.S. or foreign laws or ordinances enacted in the future or because of judicial decisions, and that liability insurance may not be available, or that coverage for specific claims may be denied. Although we have not experienced any material product liability claims to date, our sale and support of products may entail the risk of such claims. A successful product liability claim brought against us could materially adversely affect our business, operating results and financial condition.

We rely on key personnel. In the event we lose the services of key employees, it may be costly and time consuming for us to locate other personnel with the required skills and experience.

Our success depends on the continued efforts of our board members, our senior management and our technical, research and development, services and support, marketing and sales personnel. These persons may terminate their association or employment with us, or they may be terminated by us, at any time. During 2004 and early 2005, we experienced changes in our senior management and the senior management at Ross, Pivotal and Newpalm for a variety of reasons, including medical reasons, retirement, and resignations to pursue other career opportunities. Loss of the services of key members of senior management or experienced personnel in our key revenue producing businesses can be disruptive and causes uncertainty. Until March 2004, we had split the role of chairman and chief executive officer between Dr. Raymond Ch’ien and Mr. Peter Yip, respectively. From April 2004 to present both positions have been undertaken by Dr. Ch’ien which increases our reliance upon Dr. Ch’ien. An inability to attract or retain additional qualified board members, senior managers or personnel in a timely manner, or health, family or other personal problems of key personnel could have a material adverse effect on our business, financial condition, results of operations and share price.

The process of hiring employees with the combination of skills and attributes required to implement our business strategy can be extremely competitive and time-consuming. We compete for a limited number of qualified individuals with more established companies with greater resources that may offer more attractive compensation or employment conditions. As a result, we may be unable to retain or integrate existing personnel or identify and hire additional qualified personnel. Furthermore, our success depends upon our ability to retain or replace the members, particularly the independent members, of our board of directors.

We have entered into indemnification agreements with our directors and officers which generally do not explicitly state our maximum obligation under these agreements. If we were to incur a loss in connection with these arrangements, it could affect our business, operating results and financial condition.

In order to attract the service of our directors and officers, we have entered into indemnification agreements with our directors and officers that may require us to indemnify our directors and officers against liabilities that may arise by reason of their status or service as directors or officers, and to advance their expenses incurred as a result of any legal proceeding against them as to which they could be indemnified. Generally, the maximum obligation under such indemnifications is not explicitly stated and, as a result, the overall amount of these obligations cannot be reasonably estimated. If we were to incur a loss in connection with these arrangements, it could affect our business, operating results and financial condition.

We have relied on stock options to compensate our employees. In the event employees do not consider their options as valuable compensation, we may need to provide additional compensation at additional expense.

We have granted stock options to many of our employees in lieu of additional salary. Some of our employees may not consider their options to be valuable compensation, and we may need to provide additional compensation, in the form of additional salary, bonuses or equity, in an effort to retain those existing employees. Our inability to retain our employees, particularly our senior officers, and key sales, technical, research and development, services, marketing and other service personnel in our key revenue producing businesses could have a material adverse effect on our business, financial condition, results of operations and share price.

Our computer networks are vulnerable to hacking, viruses, spamming and other disruptions which may cause us to lose key clients, expose us to liability for our clients’ losses, or prevent us from securing future business.

Inappropriate use of our Internet services or errors or omissions in processing instructions or data available in our computer system or databases could jeopardize the security of confidential information stored in our computer system, which may cause us to lose key clients, expose us to liability for our clients’ losses and prevent us from securing future business, any of which could have a material adverse effect on our business, financial condition, results of operations and share price.

Inappropriate use of the Internet includes attempting to gain unauthorized access to information or systems (commonly known as cracking or hacking) and repeated transmission of unsolicited e-mail messages (commonly known as e-mail bombing or spamming). Our current policies, procedures and configurations for managing our systems, including our computer servers, may not be adequate to protect our facilities and the integrity of our user and customer information. Although we implement security measures to protect our facilities and the integrity of our user and customer information, such measures could be ineffective or circumvented.

Alleviating problems caused by computer viruses or other inappropriate uses or security breaches may require interruptions, delays or cessation in our services, in addition to the outages that occur in our systems from time to time for various reasons, including power interruptions, errors in instructions, equipment inadequacy, capacity and other technical problems. We do not carry errors and omissions or other insurance covering losses or liabilities caused by computer viruses, security breaches or spamming attacks. Compromises or breaches in the security or integrity of our facilities or customer or user information, or inappropriate use of our Internet services, could subject us to litigation and could adversely affect our customer base, business, share price, results of operation and financial condition.

We rely on software and hardware systems that are susceptible to failure, and in the event of service operations or other related problems, our operating efficiency and results of operations may be adversely affected.

Any system failure or inadequacy that interrupts our services or increases the response time of our services could reduce user satisfaction, future traffic and our attractiveness to advertisers and consumers. We also depend on Internet service providers and other Web site operators in Greater China and elsewhere that have experienced significant system failures and electrical outages in the past. Our users have experienced difficulties due to system failures that were unrelated to our systems and services. There can be no assurance that our technologies, services and products will not experience interruptions or other related problems, which could affect our operating efficiency and results of operations.

We have limited backup systems and redundancy. We do not have a disaster recovery plan in the event of damage from fire, natural disasters, power loss, telecommunications failures, break-ins and similar events. We may experience a complete system shut-down if any of these events were to occur. To improve performance and to prevent disruption of our services, we may have to make substantial investments to deploy additional servers or one or more copies of our Web sites to mirror our online resources. Because we carry property insurance with low coverage limits, our coverage may not be adequate to compensate us for our losses. If we do not increase our capacity and our redundancy, these constraints could have a material adverse effect on our business, results of operations and financial condition.

Political, Economic and Regulatory Risks

There are economic risks associated with doing business in the People’s Republic of China which could adversely affect our business.

A significant part of our current revenues are, and a significant part of our future revenues are expected to be, derived from the market in the PRC. The economy in the PRC differs from the economies of most developed countries in many respects, including:

	•		amount of government involvement;

	•		level of development;

	•		growth rate;

	•		control of foreign exchange; and

	•		allocation of resources.

While the economy in the PRC has experienced significant growth in the past twenty years, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.

The economy in the PRC has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. It also exercises significant control over

economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.

A change in currency exchange rates could increase our costs relative to our revenues thereby potentially adversely affecting our financial condition, results of operations and increasing market risk.

Substantially all of our revenues, expenses and liabilities are denominated in either Australian dollars, British pounds, Canadian dollars, Euros, Hong Kong dollars, renminbi, Singapore dollars, South Korean won, Swedish Kronas, or U.S. dollars. However, our quarterly and annual financial results are reported in U.S. dollars. In the future, we may also conduct business in additional foreign countries and generate revenues, expenses and liabilities in other foreign currencies. As a result, we are subject to the effects of exchange rate fluctuations with respect to any of these currencies and the related interest rate fluctuations. We have not entered into agreements or purchase instruments to hedge our exchange rate risks although we may do so in the future.

Increased Sino-U.S. political tension may make our company less attractive to investors and clients.

The relationship between the United States and the PRC is subject to sudden fluctuation and periodic tension. For example, relations may be compromised if the U.S. becomes a more vocal advocate of Taiwan. Any weakening of relations between the U.S. and China could have a material adverse effect on our business. Anti-U.S. or anti-China sentiment could make our company and our shares less attractive since we are listed in the United States. Changes in political conditions in China and changes in the state of Sino-U.S. relations are difficult to predict and could adversely affect our operations or cause the Greater China market to become less attractive to investors and clients.

Hostilities involving the United States and/or terrorist attacks could harm our business.

Our operations could be negatively impacted if there are additional terrorist attacks or threats of terrorist attacks, or if hostilities involving the United States escalate. In the past, terrorist attacks, including attacks on the United States and internationally, have had a significant impact on global economic conditions and our operations. Further, as a result of past terrorist attacks and hostilities involving the United States, we believe many of our customers and potential customers have been much more cautious in setting and spending against their capital expenditure budgets. Subsequent terrorist acts and/or the threat of future terrorist attacks or escalation of hostilities involving the United States or other countries could adversely affect the growth rate of our revenue and have an adverse effect on our business, financial condition or results of operations. In addition, any escalation in these events or similar future events may disrupt our operations or those of our customers, distributors and suppliers, which could adversely affect our business, financial condition or results of operations.

Risks relating to treasury management

Our entry into banking facilities with Fortis Bank, DBS Bank, and Standard Chartered Bank exposes us to interest rate, market and credit risks when we borrow funds from these facilities to make other investments.

We have entered into repurchase facilities with Fortis Bank and DBS Bank and a collateralized credit facility with Standard Chartered Bank. We refer to these facilities together as the banking facilities. The banking facilities allow us to borrow, in aggregate, up to US$500 million on such terms as we and the banks may mutually agree. The facilities were established to provide us with a source of reasonably priced capital to give us the flexibility to finance operational working capital and acquisitions, as well as our treasury management program, without having to liquidate our investment portfolio at short notice. A description of the terms under which we may borrow under these banking facilities may be found under Item 5.B – “Operating and Financial Review and Prospects – Liquidity and Capital Resources – Future Cash Requirements and Sources of Liquidity – Lines of Credit.” These banking facilities expose us to interest rate, market and credit risks when we borrow

funds from these facilities to make other investments. A more detailed description of these risks may be found under Item 11 – “Quantitative and Qualitative Disclosures about Market Risk”.

Further, because we have purchased, as of December 31, 2004, approximately US$10.0 million of debt securities with drawdowns under our repurchase facilities, we are subject to risk associated with investment leverage. Since the base rate (Libor) of our drawdowns are reset periodically, in rising interest rate environments, we run the risk that our borrowing rate might exceed any interest income that we receive from the debt securities purchased with the proceeds of draw downs from the repurchase facilities. Any such negative interest rate differential, or “negative carry”, could lead to material adverse effect on our financial results.

Risks Relating to our Class A Common Shares

Our share price could be adversely affected if our major strategic shareholders materially change their holdings in our shares, particularly if the share holdings are not disposed of in an orderly manner.

As of March 31, 2005, Xinhua, through a wholly-owned subsidiary, owned 7,362,734 of our common shares, or approximately 6.6% of our total outstanding share capital. As of March 31, 2005, Asia Pacific Online Limited, or APOL, owned 19,452,028 of our common shares, or approximately 17.5% of our total outstanding share capital. APOL is owned by the spouse of Mr. Peter Yip, CDC’s former chief executive officer and a current Vice Chairman of the Board of Directors, and by a trust established for the benefit of Mr. Yip’s children. There is no guarantee that Xinhua or APOL will continue to hold our shares going forward for any length of time. If Xinhua or APOL disposes, or if our investors expect Xinhua or APOL to dispose of, a substantial portion of its holdings in CDC at any time, it could adversely affect our share price. For more information regarding the shareholdings of Xinhua and APOL, see Item 7.A – “Major Shareholders and Related Party Transactions – Major Shareholders”.

A small group of our existing shareholders controls a significant percentage of our common shares, and their interests may differ from other shareholders.

As of March 31, 2005, APOL has beneficial ownership of approximately 17.5% of our common shares and Xinhua, through a wholly-owned subsidiary, owned approximately 6.6% of our total outstanding share capital. Accordingly, these shareholders, particularly if they act together, will have significant influence in determining the outcome of any corporate transaction or other matter submitted to shareholders for approval, including:

	•		mergers, consolidations and other business combinations which under the law of the Cayman Islands requires the approval of at least 75% of the shares voting at the meeting;

	•		election or non-election of directors which under the law of the Cayman Islands requires the approval of a simple majority of the shares voting at the meeting;

	•		removal of directors which under the law of the Cayman Islands requires the approval of at least 66²/₃% of the shares voting at the meeting; and

	•		amendments to CDC’s memorandum and articles of association which under the laws of the Cayman Islands requires the approval of at least 66²/₃% of the shares voting at the meeting.

As a result, these shareholders, if they act together, may be able to effectively prevent a merger, consolidation or other business combination, elect or not elect directors, prevent removal of a director and prevent amendments to our memorandum and articles of association.

For more information regarding the shareholdings of Xinhua and APOL, see Item 7.A – “Major Shareholders and Related Party Transactions – Major Shareholders”.

Our share price has been, and may continue to be, extremely volatile, which may not be attractive to investors.

The trading price of our common shares has been, and is likely to continue to be, extremely volatile. During the period from July 12, 1999, the date we completed our initial public offering, or IPO, to December 31, 2002, the closing price of our shares ranged from US$1.86 to US$73.4375, adjusted for our two stock splits. From January 1, 2003 to December 31, 2004, the closing price of our shares ranged from a low of US$2.73 per share on March 11, 2003 to a high of US$14.46 per share on July 14, 2003. On April 15, 2005, our shares closed at a new 52-week low of US$2.40 per share. There is no assurance that our share price will not fall below its historic or yearly low.

The trading price of our Class A common shares is subject to significant volatility in response to, among other factors:

	•		investor perceptions of our business, the market performance of our peer companies in the enterprise software businesses, mobile services and applications business, business services, Greater China portal and advertising and marketing activities business in general;

	•		our significant acquisitions, partnerships, joint ventures or capital commitments;

	•		trends and developments in all the markets in which we compete;

	•		variations in our operating results;

	•		our new product or service offerings;

	•		changes in our financial estimates by financial or industry analysts;

	•		technological innovations;

	•		litigation;

	•		changes in pricing made by us, our competitors or providers of alternative services;

	•		the depth and liquidity of the market for our shares; and

	•		general economic and other factors.

In addition, the trading price of our common shares has experienced extreme price and volume fluctuations. These fluctuations often have been unrelated or disproportionate to our operating performance. Broad market, political and industry factors may also decrease the price of our common shares, regardless of our operating performance. Securities class-action litigation and regulatory investigations often have been instituted against companies following steep declines in the market price of their securities.

We are a “foreign private issuer”, and have disclosure obligations different from those of other U.S. domestic reporting companies.

We are a foreign private issuer and, as a result, obtain relief from certain of the requirements imposed upon U.S. domestic issuers by the Securities and Exchange Commission. For example, we are not required to issue quarterly reports or proxy statements. We are allowed six months to issue annual reports instead of three, and we are not required to disclose executive compensation reports that are as detailed as U.S. domestic issuers.

Our directors and officers are not required to report equity holdings under Section 16 of the Securities Act of 1933, as amended, although we do file reports under Section 13 of the Securities Exchange Act of 1934, as amended, if and when applicable. As a foreign private issuer, we are also exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors, although we are still subject to the antifraud and antimanipulation rules of the Securities and Exchange Commission, such as Rule 10b-5. In general, because various of the disclosure obligations on us as a foreign private issuer are less stringent than those required by other U.S. domestic reporting companies, our shareholders should not expect to receive an equivalent amount of disclosure from us as from other U.S. domestic reporting companies. We are however, in general, liable for violations of the rules and regulations of the Securities and Exchange Commission which do apply to us as a foreign private issuer, any of which violations could affect our business, results of operations and financial condition.

We may incur significant costs to avoid being considered an investment company under the Investment Company Act of 1940.

We may incur significant costs and management time to avoid investment company status under the Investment Company Act of 1940. Based upon an analysis of our assets as at December 31, 2004 and income for the year 2004 and the manner in which we intend to operate our business, we do not believe we will be considered an investment company. The determination of whether we will be an investment company will be based primarily upon the composition and value of our assets, which are subject to change, particularly when market conditions are volatile. As a result, we could inadvertently become an investment company in the future. It is not feasible for us to be regulated as an investment company because application of Investment Company Act regulations are inconsistent with our strategy of actively managing, operating and promoting collaboration among our businesses.

We are classified as a passive foreign investment company, or PFIC, which will subject our U.S. investors to adverse tax rules.

Based upon an analysis of our assets as at December 31, 2004 and income for the year 2004, during 2004, we were a PFIC for United States federal income tax purposes. We have substantial passive assets in the form of cash and cash equivalents and treasury instruments, and can provide no assurance that we will not continue to be classified as a PFIC for 2005 or any future tax year. The determination of whether we would continue to be a PFIC would be principally based upon:

	•		the composition of our assets, including goodwill, the amount of which will depend, in part, on our total net assets and the market value of our Treasury portfolio, which is subject to change; and

	•		the amount and nature of our income from time to time.

We have limited control over these variables. To the extent we do have control over these variables, we may take steps to reduce the material and adverse effect that our PFIC classification may have on our share price.

Since we are a PFIC, U.S. investors will be subject to adverse United States federal income tax consequences. For further discussion regarding our status as a PFIC, see Item 10.E – “Additional Information – Taxation – Tax Consequences of U.S. Holders – Passive Foreign Investment Company Status”. U.S. investors are strongly urged to consult their own tax advisors regarding the application of the PFIC rules to their particular circumstances.

Substantial amounts of our common shares are eligible for future sale, which could adversely affect the market price of our shares.

Sales of substantial amounts of our Class A common shares in the public market could adversely affect the market price for our shares. As of March 31, 2005, we had 110,965,246 Class A common shares issued and outstanding, substantially all of which may be sold pursuant to an effective registration statement under the Securities Act or an applicable exemption from registration thereunder, including Rule 144, which permits resales of securities subject to limitations (including trading volume) depending on the holding period of such securities.

In addition, as we continue to issue and register shares to fulfill our contractual and acquisition-related obligations, and as our employees and other grantees have been or are granted additional options to purchase our shares, additional shares will be available-for-sale in the public market. We have also granted options to certain of our shareholders, directors and officers to purchase our shares, the vesting of which options may be accelerated upon an occurrence of a change-of-control event. As a result, additional shares may be available-for-sale in the public market. The availability or perceived availability of additional shares could have a dilutive and negative impact on the market price of our shares.

In the future, we also may issue additional shares, convertible notes or warrants to purchase our shares, in connection with acquisitions and our efforts to expand our business. Shareholders could face further dilution from any future share issuances.

Anti-takeover provisions in our charter documents may adversely affect the rights of holders of our common shares

Our memorandum and articles of association include provisions that could limit the ability of others to acquire control of CDC, modify our structure or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of CDC in a tender offer or similar transaction.

For example, our board of directors is divided into three classes, each having a term of three years, with the term of one class expiring each year. This provision would delay the replacement of a majority of our directors and would make changes to the board of directors more difficult than if such provision was not in place. In addition, our board of directors has the authority, without further action by our shareholders, to issue up to 5,000,000 preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our Class A common shares. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control or make removal of management more difficult. If our board of directors issues preferred shares, the price of our Class A common shares may fall and the voting and other rights of the holders of our Class A common shares may be adversely affected.

Our shareholders may face difficulties in protecting their interests because we are incorporated under Cayman Islands law.

Our corporate affairs are governed by our memorandum and articles of association, by the Companies Law and the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors 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 and from English common law, the decisions of whose courts are of persuasive authority but are not binding on a court in the

Cayman Islands. Cayman Islands law in this area may conflict with jurisdictions in the United States. As a result, our public shareholders may face more difficulties in protecting their interests in the face of actions against the management, directors or our controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States. For instance a class action lawsuit may not be available to our shareholders as a vehicle for litigating securities matters against us in the Cayman Islands. In addition, shareholder derivative actions may generally not be brought by a minority shareholder in the Cayman Islands.

If you are not a registered shareholder and do not hold greater than 10,000 shares, you may not receive our proxy materials or other corporate communications.

CDC is a Cayman Islands company and as such, we only need to distribute our proxy materials to our registered shareholders. Our proxy materials are delivered to all of our registered shareholders. We offer electronic delivery of proxy materials to our registered shareholders, and we mail proxy materials to each registered owner who has not opted to receive materials electronically. You are a registered shareholder if you have an account with our transfer agent, The Bank of New York, and if you hold a stock certificate evidencing your ownership of our common shares. You are a beneficial shareholder if a brokerage firm, bank trustee or other agent holds your common shares. However, your name would not appear anywhere on our records, but rather the name of the broker, bank or other nominee appears on our records as retained by our transfer agent, The Bank of New York. Although we only need to distribute our proxy materials to registered shareholders under Cayman Islands law, we also distribute proxy materials to beneficial shareholders who hold greater than 10,000 of our shares. In an effort to maintain cost effectiveness, we have, and will continue to, mail the proxy materials to those beneficial shareholders who hold greater than 10,000 of our shares. If you are not a registered shareholder and do not hold greater than 10,000 of our shares, you may not receive our proxy materials or other corporate communications. Therefore, if you are a beneficial shareholder and want to ensure that you do receive proxy materials, you are urged to become a registered owner. If you have questions on how to do so, we encourage you to contact your broker or bank to find out how to do so and you may also contact us.

There is uncertainty as to our shareholders’ ability to enforce civil liabilities in Australia, the Cayman Islands, Hong Kong, the People’s Republic of China and Sweden.

We are a Cayman Islands company and a substantial majority of our assets are located outside the United States. A substantial portion of our current operations is conducted outside the United States in countries such as Australia, Hong Kong, the PRC and Sweden. In addition, a majority of our directors and officers are nationals and/or residents of countries other than the United States. All or a substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. In addition, there is uncertainty as to whether the courts of Australia, the Cayman Islands, Hong Kong, the PRC, Sweden and other jurisdictions would recognize or enforce judgments of United States courts obtained against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or be competent to hear original actions brought in Australia, the Cayman Islands, Hong Kong, the PRC, Sweden, or other jurisdictions against us or such persons predicated upon the securities laws of the United States or any of its states.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion of our financial condition and results of operations together with our consolidated financial statements and the related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from those anticipated in these forward-looking statements as a result of factors including, but not limited to, those set forth under Item 3.D. of this Annual Report, “Key Information – Risk Factors” and Item 11 of this Annual Report, “Quantitative and Qualitative Disclosures About Market Risk”.

A. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Products and services

We are a global company focused on enterprise software and mobile services and applications with additional operations in advertising/marketing activities and business services.

Primary Lines of Business

	•		Enterprise Software. Our enterprise software business is a global provider of enterprise software applications and related services. Our products are designed to support and automate the processes of an organization to achieve company-wide integration of business and technical information across multiple divisions and organizational boundaries, such as finance, manufacturing, logistics, human resources, marketing, sales and customer service, by utilizing common databases and programs that share data real time across multiple business functions. Our products seek to help companies worldwide fulfill their business growth objectives through increased operational efficiencies, improved profitability, strengthened customer relationships and improved regulatory compliance.

	•		Mobile Services and Applications.Our mobile services and applications business provides popular news and mobile applications services targeting the consumer market in China. We offer wireless services including SMS (Short Message Service), MMS (Multimedia Message Service), WAP (Wireless Application Protocol) and IVR (Interactive Voice Response). We have established strong local direct connectivity with provincial mobile network operators in 29 provinces, which facilitates the marketing and promotional activities of our wireless services. Our mobile services and applications business is primarily operated through Newpalm and Go2joy, both of which are held through our subsidiary, China.com.

Additional Operations

	•		Advertising/marketing.Our advertising/marketing business encompasses a range of businesses, including our Internet media business which is focused on online entertainment and Internet products and services that target users in China via our portal network (www.china.com and www.hongkong.com). This segment also includes a marketing database and diverse marketing support business conducted principally in Australia and New Zealand through Mezzo Business, and a Singapore-based travel trade publisher and organizer serving the travel and tourism industry in the Asia Pacific region operated by TTG.

	•		Business Services.Our business services companies provide program management, outsourcing services, application development and on-going support services using a range of technologies.

These services are principally offered through our subsidiaries, Ion Global, Ascent SGI, Praxa and PK Information Systems.

Our business model has evolved away from a pan-Asian Internet company over the past two years in large part through strategic acquisitions and investments. In the enterprise software area, we made two significant acquisitions in 2004. In February 2004, we acquired Pivotal, an international CRM software provider. In August 2004, we completed the acquisition of Ross, an internationally established process manufacturing ERP software provider. In the mobile services and applications business, in May 2004 we acquired Go2joy, a mobile services and applications provider in China. The contribution of Pivotal, Ross and Go2joy to our consolidated financial statements, combined with a full year of contribution in 2004 from companies acquired in 2003, have resulted in a significant increase in annual revenues in 2004 as compared to 2003.

Competitive advantages

Our competitive advantages in our major segments are:

Software

	•		We offer a range of enterprise software products which enable businesses to increase revenues, margins and customer loyalty.

	•		We have developed industry products for specific industry segments (“micro-verticals”).

	•		Our products can be implemented rapidly, can be easily customized and are relatively easy to learn, all of which help to yield a low total cost of ownership but high return on investment.

	•		Our products can be scaled with the needs of our customers.

Mobile Services and Applications

	•		We have integrated mobile and portal platforms.

	•		We have a scalable, high-margin business model which allows us to deliver our products to a large mobile subscriber base quickly and at a low cost.

	•		We have extensive China-wide network coverage with direct local connectivity with China Mobile in 28 provinces and with China Unicom in 26 provinces.

	•		Our management team has extensive experience in the mobile data applications market in China

Key trends and uncertainties affecting our revenue and results of operations

The following trends are currently affecting our revenue and results of operations:

•

Improving economic conditions– Our operating performance for any period of time is impacted by global macroeconomic trends. An important factor affecting our ability to generate revenue is the effect of general economic conditions on our customers’ willingness to spend on our products and services. Over the past year as economic conditions have gradually improved, our customers have been more willing to invest in software products and services. It is not certain, however, whether economic conditions will continue to improve or whether enterprises will increase spending on enterprise software, business services, or our other product offerings in the near term. Although the global economy impacts all of our businesses, the Chinese economy in particular has an impact on

			our mobile services and applications business. There can be no assurance that growth of the Chinese economy will be steady or that any slow down will not have a negative effect on our business. The Chinese economy affects our results as customer spending on mobile services and applications depends on customers in less economically developed provinces of China being able to achieve income levels that allow them to spend on our services.

	•		Software technology changes– Our enterprise software products compete in a market characterized by rapid technological advances in hardware and software development, evolving standards in computer hardware and software technology and frequent new product introductions and enhancements. We continually seek to expand and refresh our product offerings to include newer features or products, and enter into agreements allowing integration of third-party technology into our products. Expanding and refreshing our product offerings impacts our results of operations because of continuing high levels of investment required in research and development.

	•		Changes in operating practices of the mobile operators in China– Recent changes in policies or guidelines of the mobile operators such as the change to new billing systems for 2G services which require users to make two confirmations to order services via the Internet or mobile phone, enable users to more easily cancel services and prevent service providers from billing inactive users for subscription-based services, or the recent change in billing policy on undeliverable MMS messages have resulted in and may further result in lower mobile services and applications revenues or additional operating costs for us.

	•		Higher operating expenses– We will continue to incur significant operating expenses in the foreseeable future as a result of (i) recurring acquisition-related expenses including amortization of acquired intangibles and stock compensation expense; (ii) research and development required to keep our enterprise software business competitive; and (iii) targeted investments in certain businesses such as our Portal and CDC Software Asia Pacific.

	•		Lower interest income– Interest income, which has historically had a significant positive impact on our results, is expected to continue to decrease as a result of (i) continuing acquisitions and investments in our business which have reduced the overall cash balance over the past three years and will continue to reduce cash balances in 2005 and (ii) a continuation of our strategy of reducing the overall tenure of our investments in debt securities to shorter-term, highly rated securities.

	•		Higher non-cash tax expense– In 2004, we incurred significant deferred tax expenses resulting from the utilization of deferred tax assets related to net operating loss carryforwards at Ross and Pivotal for which a valuation allowance had been made on acquisition. If future events allow us to realize more of our deferred tax assets than expected, an adjustment to these deferred tax assets would result in a reduction of goodwill and higher tax expense.

We believe the following uncertainties exist regarding our results:

	•		Ability to Integrate the Operations of Businesses Acquired –Our ability to realize cost savings, synergies or revenue enhancements may be affected by the extent, timing and efficiency with which we can consolidate operations, reduce overlapping personnel, and achieve compatibility or integrate acquired technology, all of which are difficult to predict. We may not be able to realize cost savings, synergies or revenue enhancements from such integration, and we may not be able to realize such benefits within a reasonable time frame.

	•		Ability to Increase Revenues –Although our revenue base has increased significantly as a result of the Ross, Pivotal and Go2joy acquisitions in 2004 and the Newpalm, Praxa and IMI acquisitions in

			2003, if we are unable to continue to grow our revenues or experience a decline in revenues, our results will be negatively affected. Our ability to grow revenue depends on a number of factors including the speed with which we adapt to new technologies and introduce new products, regulatory actions, and the actions taken by our competitors. In our software business, our failure to successfully introduce, market and sell new products and technologies, enhance and improve existing products in a timely manner, and properly position or price our products, as well as undetected errors or delays in new products or new versions of a product or the failure of anticipated market growth could individually and/or collectively have a material adverse effect on our business, results of operations or financial position. In our mobile services and applications business, the imposition of fines or other penalties, such as a temporary suspension of service, for violation of current or future PRC laws, rules or regulations regarding Internet related services and telecom related activities, such as that experienced by our Go2joy subsidiary during 2004, can have a significant impact on our ability to generate incremental revenues.

	•		Ability to Manage Costs– Our cost base has also increased significantly as a result of the Ross, Pivotal and Go2joy acquisitions in 2004 and the Newpalm, Praxa and IMI acquisitions in 2003. In addition, we may incur significant integration costs which have and could continue to adversely affect our results of operations. If we are unable to manage costs and reduce operating expenses, our results will be adversely affected.

	•		Future Acquisitions– In the future, we may make additional acquisitions and could incur additional integration costs and acquisition-related charges which affect our results, including amortization of acquired intangible assets, deferred tax expense, write-offs of acquired deferred revenue, stock compensation expense, and restructuring expenses.

Effect of acquisitions

During 2003 and 2004, we made the following material business acquisitions, the results of which have been consolidated from the respective dates of acquisition:

Enterprise Software


Acquired company		Acquisition date
Industri-Matematik International Corp. (“IMI”)		September 2003

Pivotal Corporation (“Pivotal”)		February 2004

Ross Systems, Inc. (“Ross”)		August 2004

Business Services


Acquired company		Acquisition date
Praxa Limited (“Praxa”)		February 2003

PK Information Systems Pty Ltd. (“PK Information Systems”)		August 2003

Mobile Services and Applications


Acquired company		Acquisition date

Palmweb Inc. (holds Newpalm (China) Information Technology Co., Ltd. (“Newpalm”))		April 2003


Group Team Investments Limited (holds Beijing He He Technology Co. Ltd. (“Go2joy”))		May 2004

Operating segments

From January 1, 2004, we operated our business along five segments: (i) Software, (ii) Business Services, (iii) Mobile Services and Applications, (iv) Advertising/marketing, and (v) Others. This is a change from our segments in 2003 which were: (i) Software and Consulting Services, (ii) Mobile Services and Applications, (iii) Advertising and Marketing Activities, and (iv) Other Income. We also now include the operations of our portal in the Advertising/marketing segment. All comparative figures for prior periods have been adjusted accordingly.

Discontinued operations

As we have discontinued the operations of certain subsidiaries over the past three years, historical comparative amounts within the statements of operations for the years presented in the following sections have been reclassified to reflect only the results of our continuing operations as of December 31, 2004.

Results of Operations

Certain historical comparative amounts within the statements of operations have been reclassified to conform with the current year’s presentation due to the adoption of the new reporting segments and discontinued operations as described above.

The following table summarizes our historical results of operations in U.S. dollars and as percentages of total revenues for the years ended December 31, 2002, 2003 and 2004.


	Year ended December 31,
	2002						2003					2004
				(in thousands of U.S. dollars, except percentages)
													[Restated (2)]
Revenues
Software	$	3,526			15	%	$	12,891		17	%		$	107,879		59	%
Business services		10,148			45	%		37,242		48	%			39,391		22	%
Mobile services and applications		—			—			16,876		22	%			23,694		13	%
Advertising/marketing		7,527			33	%		8,841		11	%			11,709		6	%
Others		1,599			7	%		2,001		2	%			10		—

		22,800			100	%		77,851		100	%			182,683		100	%

Cost of revenues
Software		(1,328	)		(6	%)		(9,357	)	(12	%)			(43,240	)	(24	%)
Business services		(4,544	)		(20	%)		(22,072	)	(28	%)			(26,750	)	(15	%)
Mobile services and applications		—			—			(2,247	)	(3	%)			(4,597	)	(2	%)
Advertising/marketing		(4,477	)		(19	%)		(4,312	)	(6	%)			(4,645	)	(2	%)
Others		(676	)		(3	%)		(889	)	(1	%)			—		—

		(11,025	)		(48	%)		(38,877	)	(50	%)			(79,232	)	(43	%)

Gross margin and gross margin %		11,775			52	%		38,974		50	%			103,451		57	%
Selling, general and administrative expenses		(22,476	)		(99	%)		(31,785	)	(41	%)			(80,419	)	(44	%)
Research and development expenses		—			—			—		—				(13,825	)	(7	%)
Depreciation and amortization expenses		(9,515	)		(42	%)		(6,954	)	(9	%)			(12,276	)	(7	%)
Restructuring expenses		—			—			—		—				(3,387	)	(2	%)

Total operating expenses		(31,991	)		(141	%)		(38,739	)	(50	%)			(109,907	)	(60	%)


	Year ended December 31,
	2002						2003					2004
				(in thousands of U.S. dollars, except percentages)
Operating income/(loss)		(20,216	)		(89	%)		235		—				(6,456	)	(3	%)

Interest income		23,631			104	%		13,412		17	%			9,653		5	%
Interest expense		(2,461	)		(11	%)		(1,070	)	(1	%)			(1,895	)	(1	%)
Gain/(loss) on disposal of available-for-sale securities		(163	)		(1	%)		4,599		6	%			167		—
Gain/(loss) on disposal of subsidiaries and cost investments		(66	)		—			(1,263	)	(2	%)			549		—
Other non-operating gains		508			2	%		934		1	%			—		—
Other non-operating losses		(288	)		(1	%)		(148	)	—				—		—
Impairment of cost investments and available-for-sale securities		(5,351	)		(23	%)		—		—				(1,362	)	(1	%)
Share of income/(loss) in equity investees		682			3	%		(124	)	—				(308	)	—

Total other income		16,492			73	%		16,340		21	%			6,804		3	%


Income/(loss) before income taxes		(3,724	)		(16	%)		16,575		21	%			348		—

Income tax benefits/(income taxes)		162			1	%		598		1	%			(7,541	)	(4	%)

Income/(loss) before minority interests		(3,562	)		(15	%)		17,173		22	%			(7,193	)	(4	%)
Minority interests in losses/(income) of consolidated subsidiaries		248			1	%		(2,257	)	(3	%)			(1,000	)	(1	%)

Income/(loss) from continuing operations		(3,314	)		(14	%)		14,916		19	%			(8,193	)	(4	%)

Discontinued operations
Loss from operations of discontinued subsidiaries, net of related tax expense/(benefit)		(15,462	)		(68	%)		(1,519	)	(2	%)			(190	)	—
Gain/(loss) on disposal/dissolution of discontinued subsidiaries, net		545			2	%		2,127		3	%			(950	)	(1	%)

Net income/(loss)	$	(18,231	)		(80	%)	$	15,524		20	%		$	(9,333	)	(5	%)


(1)		In 2004, we changed our reporting segments from the previous segmentation of software and consulting services, mobile services and applications, advertising and marketing activities and other income, to the current segmentation of software, business services, mobile services and applications, advertising/marketing and others. In addition, we discontinued the operations of certain subsidiaries in the software, business services, advertising/marketing, and others segments. In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the operating results of the discontinued operating units, net of related tax, were retroactively reclassified as a loss from operations of discontinued subsidiaries, net of tax, in the consolidated statements of operations. As a result, the results of the continuing operations of 2002 and 2003 were reclassified to conform to the 2004 presentation.

(2)		Refer to Note 2(y) to the Consolidated Financial Statements.

Year ended December 31, 2004 compared to year ended December 31, 2003

We recorded a net loss of US$9.3 million in 2004, on US$182.7 million of revenues from continuing operations, including acquisitions. For 2004, US$107.9 million of revenues were derived from software, US$39.4 million from business services, US$23.7 million from mobile services and applications, US$11.7 million from advertising and marketing activities, and US$0.01 million from others. The following discussion gives an overview of the performance of our business in key areas during 2004 as compared to 2003:

Revenues by business segment

The table below sets forth the revenues from our principal business segments in US dollars and as percentages of our total revenues for the periods indicated:


	Year ended December 31,
	2002					2003				2004
			(in thousands of U.S. dollars, except percentages)
Revenues
Software	$	3,526		15	%	$	12,891	17	%		$	107,879	59	%
Licenses		893		4	%		1,157	2	%			28,748	16	%
Maintenance and consulting services		2,633		11	%		11,734	15	%			79,131	43	%
Business services		10,148		45	%		37,242	48	%			39,391	22	%
IT products		—		—			6,083	8	%			2,083	1	%
Consulting services		10,148		45	%		31,159	40	%			37,308	21	%
Mobile services and applications		—		—			16,876	22	%			23,694	13	%
Advertising/marketing		7,527		33	%		8,841	11	%			11,709	6	%
Others		1,599		7	%		2,001	2	%			10	—

	$	22,800		100	%	$	77,851	100	%		$	182,683	100	%

Our total revenues increased from US$22.8 million in 2002 to US$77.9 million in 2003 and to US$182.7 million in 2004, representing increases of 241% between 2002 and 2003 and 135% between 2003 and 2004. Our top 10 customers accounted for 14%, 28% and 20% of our revenues for 2002, 2003 and 2004, respectively. No single customer accounted for 10% or more of the revenues during any of 2002, 2003 or 2004.

The increase in revenues during 2004 was principally a result of the acquisitions of Ross, Pivotal and Go2joy, as well as a full year of results from Newpalm, Praxa, PK Information Systems and IMI each of which we acquired in 2003. The following table below sets forth the revenues contributed by our material acquired subsidiaries by principal business segments for the years ended December 31, 2003 and 2004:


	Year ended December 31,
	2003		2004
	(in thousands of US$)
Revenues
Software —IMI, Ross, Pivotal	$	11,223	$	105,432
Business services –Praxa, PK Information Systems		23,489		23,000
Mobile services and applications —Newpalm, Go2joy		16,876		23,694

	$	51,588	$	152,126

Software

We generate software revenues from the sale of a diverse portfolio of enterprise application software products, and the maintenance and consulting services related to those products. Software revenues increased by US$95.0 million, or 737%, from US$12.9 million in 2003 to US$107.9 million in 2004 due principally to the acquisitions of Pivotal and Ross in 2004 and a full year of IMI’s results which we acquired in September 2003. Collectively, these three companies contributed total revenues of US$105.4 million in 2004. As a percentage of total revenues, this segment generated 59% of revenues during 2004, increasing from 17% during 2003. We expect revenues from this segment to increase in 2005 with the consolidation of a full year of results from Pivotal and Ross.

License revenues were US$28.7 million in 2004, up US$27.6 million from US$1.2 million in 2003 primarily as a result of our acquisitions in the software segment. Maintenance and consulting services revenues were US$79.1 million in 2004, up US$67.4 million from US$11.7 million in 2003, also as a result of acquisitions. As a percentage of total software revenues, license revenues comprised 27% in 2004 compared to 9% in 2003, and maintenance and consulting services revenues comprised 73% in 2004 compared to 91% in 2003.

Business services

We generate business services revenues from information technology services, eBusiness consulting and web development and outsourcing. Business services revenues increased by US$2.1 million, or 6%, from US$37.2 million during 2003 to US$39.4 million during 2004 due primarily to improved revenues at PK Information Systems in Australia and our web integration businesses in Korea and San Francisco which was partly offset by lower revenue due to the closure of unprofitable offices in Australia, Singapore, Hong Kong, the United Kingdom and China. This segment generated 22% of revenues during 2004, decreasing from 48% during 2003. The decline in the percentage of overall revenues was primarily a result of the increase in total revenue after the acquisitions of Ross and Pivotal.

IT product revenues were US$2.1 million in 2004, down US$4.0 million from US$6.1 million in 2003 as our business services companies continue to focus on provision of services rather than a mix of product and service sales. Consulting services revenues were US$37.3 million in 2004, up US$6.1 million from US$31.2 million in 2003. As a percentage of total business services revenues, IT product revenues comprised 5% of revenues in 2004 compared to 16% in 2003, and consulting services revenues comprised 95% of revenues in 2004 compared to 84% in 2003.

Mobile services and applications

We generate mobile services and applications revenues by providing a comprehensive suite of mobile data applications, including dating, chatting, fortune telling, entertainment, information-related content and community services to mobile subscribers in China utilizing SMS, MMS, WAP and IVR services. Mobile services and applications revenues increased by US$6.8 million, or 40%, to US$23.7 million during 2004 from US$16.9 million during 2003. The increase in revenues was attributable to the full year of Newpalm’s results and the acquisition of Go2joy. This segment generated 13% of revenues during 2004, decreasing from 22% during 2003 due to the increased amount of software revenues relative to total revenues.

Our product mix has shifted in 2004 as we introduced new types of services in the areas of IVR and MMS. In 2003, sales of SMS services generated 97% of mobile services and applications revenues with the remaining 3% generated by WAP services. For the year ended December 31, 2004, SMS contributed 81% of mobile services and applications revenues, while revenues from IVR, WAP and MMS provided 10%, 7% and 2%, respectively.

Mobile services and applications revenues were negatively impacted in the second half of 2004 by tighter regulatory controls and enforcement by the mobile operators. Various service providers, including Go2joy, were sanctioned during this period. In 2005, we expect that the mobile services and applications business in China will stabilize and that our revenue mix will include larger contributions from MMS, WAP and IVR services as compared to 2004. Revenues from this segment should increase in 2005, primarily due to the change as of January 1, 2005 from a net basis of presentation (excluding the portion of the mobile services and applications revenue paid to the mobile operators) to a gross basis of presentation (including the portion of the mobile services and applications revenue paid to the mobile operators as an addition to revenues and as an additional cost of revenues) in response to significant changes in operations of the mobile services and applications business in China. The changes include (i) beginning in 2005 a large portion of our revenues are being generated on a new transmission platform which requires direct confirmation of every service ordered by customers and makes it clear to customers that we are responsible for providing such services; (ii) a substantial increase in direct advertising of our services; (iii) enhanced ability to select suppliers due to a shift from primarily using internally-produced content to purchasing content; and (iv) changes in mobile operators’ practices such as shifting their credit risk to us by taking an additional percentage of revenues from the arrangement to cover expected bad debts. Based on these recent changes, we have changed our revenue

presentation to the gross method on a prospective basis as of January 1, 2005. Operating income and net income remain the same whether we record revenue on a gross or net basis.

Advertising/marketing

We derive advertising and marketing services revenues from our Internet media business which is focused on online entertainment and Internet products and services that target users in China via our portal network, marketing database and support services, and online and print advertising. Advertising and marketing activities revenues increased by US$2.9 million, or 32%, to US$11.7 million during 2004 from US$8.8 million during 2003. The increase in advertising and marketing activities revenues is primarily attributable to increased Portal revenue as a result of targeted investments made in 2004 to establish the Portal as an influential player in China, as well as increased revenues in both our marketing database and support services business in Australia and our travel trade publishing business in Singapore. This segment generated 6% of our revenues during 2004, decreasing from 11% during 2003. The decline in advertising and marketing services revenues as a percentage of total revenues is attributable primarily to the increase in software revenue after the acquisitions of Ross and Pivotal.

Others

Revenues from other products and services we offer to our clients decreased to US$0.01 million for the year ended December 31, 2004 from US$2.0 million in 2003. The decrease was primarily a result of scaling down the activities of underperforming and/or unprofitable businesses in 2004.

Cost of revenues by business segment

The table below sets forth the cost of revenues from our principal business segments in US dollars and as percentages of our total revenues for the periods indicated:


	Year ended December 31,
	2002				2003				2004
	(in thousands of US$, except percentages)
Cost of revenues
Software	$	1,328	6	%	$	9,357	12	%	$	43,240	24	%
Licenses		445	2	%		362	1	%		3,486	2	%
Maintenance and consulting services		883	4	%		8,995	11	%		39,754	22	%
Business services		4,544	20	%		22,072	28	%		26,750	15	%
IT products		—	—			5,318	7	%		1,879	1	%
Consulting services		4,544	20	%		16,754	21	%		24,871	14	%
Mobile services and applications		—	—			2,247	3	%		4,597	2	%
Advertising and marketing activities		4,477	19	%		4,312	6	%		4,645	2	%
Others		676	3	%		889	1	%		—	—

	$	11,025	48	%	$	38,877	50	%	$	79,232	43	%

Total cost of revenues increased by US$40.4 million, or 104%, from US$38.9 million in 2003 to US$79.2 million in 2004. The increase in 2004 was principally a result of the acquisitions of Pivotal and Ross and a full year of consolidation of results from IMI and Newpalm. The increase in cost of revenues was lower than the increase in revenues due to the fact that the newly acquired revenues had a higher gross profit margin compared to our existing products.

The following table below sets forth the cost of revenues contributed by material acquired subsidiaries by principal business segments for the years ended December 31, 2003 and 2004:


	Year ended December 31,
	2003		2004
	(in thousands of US$)
Cost of revenues
Software —IMI, Ross, Pivotal	$	7,706	$	42,455
Business services –Praxa, PK Information Systems		16,152		16,230
Mobile services and applications— Newpalm, Go2joy		2,247		4,597

	$	26,105	$	63,282

Software

Cost of revenues from software sales increased by US$33.9 million, or 362%, to US$43.2 million for the year ended December 31, 2004 from US$9.4 million in 2003, principally as a result of the acquisitions of Pivotal and Ross and a full year of results from IMI. Collectively, cost of revenues for Ross, Pivotal and IMI were US$42.5 million in 2004. As a percentage of software revenues, cost of revenues for software decreased to 40% in 2004 from 73% in 2003 mainly due to the addition of Ross and Pivotal, and decreases in cost of revenues at our existing software businesses.

Cost of revenues for license sales were US$3.5 million in 2004, up US$3.1 million from US$0.4 million in 2003 primarily as a result of our acquisitions in the software segment. Cost of revenues for maintenance and consulting services was US$39.8 million in 2004, up US$30.8 million from US$9.0 million in 2003. As a percentage of total license revenues, cost of license revenues comprised 12% in 2004 compared to 31% in 2003. As a percentage of total maintenance and consulting services revenues, cost of maintenance and consulting services revenues comprised 50% in 2004 compared to 77% in 2003.

Business services

Cost of revenues from business services increased by US$4.7 million, or 21%, to US$26.8 million for the year ended December 31, 2004 from US$22.1 million in 2003, primarily as a result of the increase in consulting services revenues for the business. As a percentage of business services revenues, our cost of revenues increased to 68% in 2004 from 59% in 2003 mainly due to a drop in the gross margin percentage at Praxa.

Cost of revenues for IT product sales were US$1.9 million in 2004, down US$3.4 million from US$5.3 million in 2003 primarily as a result of our business services companies focusing on provision of services in 2004. Cost of revenues for consulting services was US$24.9 million in 2004, up US$8.1 million from US$16.8 million in 2003. As a percentage of total IT product revenues, cost of IT product revenues comprised 90% of the total in 2004 compared to 87% in 2003. As a percentage of total consulting services revenues, cost of consulting services revenues comprised 67% in 2004 compared to 54% in 2003.

Mobile services and applications

Cost of revenues from mobile services and applications increased by US$2.4 million, or 105%, to US$4.6 million in 2004 from US$2.2 million in 2003. This increase was primarily a result of the inclusion of a full year of Newpalm’s cost of revenues. Although this segment contributed 13% of total revenues in 2004, its gross margin of 81% resulted in cost of revenues of only US$4.6 million, or only 6% of total cost of revenues for the company during 2004. We anticipate that the cost of revenues from this segment will increase in 2005, primarily due to the change as of January 1, 2005 from a net basis to a gross basis of presentation as discussed above. This change will also cause a decrease in gross profit percentage, although the absolute amount of gross profit will not change. In addition, we anticipate that cost of revenues will increase at a slightly higher rate than the expected growth in revenues due to competitive pressures and pricing erosion in the marketplace.

Advertising/marketing

Cost of revenues from advertising and marketing increased by US$0.3 million, or 8%, to US$4.6 million during 2004, from US$4.3 million during 2003. The rate of increase was lower than the rate of revenue increase primarily as a result of revenues from our Portal which has a high gross margin. An additional contributing factor was a slightly higher margin contribution from the travel-related revenue from TTG. Consequently, as a percentage of advertising and marketing revenues, cost of revenues decreased to 40% in 2004 from 49% in 2003.

Others

We recorded no cost of revenues from other revenue sources for the year ended December 31, 2004 compared to US$0.9 million in 2003. The decrease is a result of scaling down the activities of underperforming and/or unprofitable businesses in 2004.

Operating expenses

Total operating expenses rose by US$71.2 million, or 184%, for the year ended December 31, 2004 to US$109.9 million, from US$38.7 million in 2003. The increase was primarily due to the Ross and Pivotal acquisitions during 2004, a full year of IMI’s operating expenses in the software segment, the acquisition of Go2joy in 2004 and a full year of Newpalm’s operating expenses in the mobile services and applications segment. Operating expenses were also impacted by acquisition-related expenses, including amortization of acquired intangibles, restructuring expenses, and stock compensation expense.

We expect that amortization expenses and research and development expenses will increase in 2005 when we have a full year of intangible amortization and research and development expenses related to our 2004 acquisitions.

Selling, general and administrative expenses (SG&A expenses)

SG&A expenses increased by US$48.6 million, or 153%, to US$80.4 million in the year ended December 31, 2004. The rise in SG&A expenses was principally a result of the acquisitions of Ross and Pivotal in 2004, a full year of IMI’s SG&A expenses in the software segment, the acquisition of Go2joy in 2004 and a full year of Newpalm’s SG&A expenses in the mobile services and applications segment. Collectively, Ross, Pivotal and IMI contributed US$42.2 million of SG&A expenses during 2004. Newpalm and Go2joy contributed US$7.3 million of SG&A expenses during 2004.

As a percentage of revenues, SG&A increased to 44% in 2004 from 41% in 2003. The increase in SG&A expenses as a percentage of revenues is attributable primarily to the impact of the acquisition of Pivotal and inclusion of a full year of Newpalm’s results, both of which have high SG&A expenses as a percent of revenue.

Research and development expenses

Research and development expenses were US$13.8 million in 2004, principally a result of the acquisitions of Ross and Pivotal in 2004 and inclusion of a full year of IMI’s results. We did not incur any research and development expenses in 2003.

Depreciation and amortization

Depreciation and amortization expenses increased by US$5.3 million, or 77%, from US$7.0 million in 2003 to US$12.3 million in 2004. The increase was primarily due to the increase in amortization expenses of

acquired intangible assets as a result of the acquisitions of Pivotal and Ross, which collectively contributed an additional US$4.1 million of amortization expenses in 2004.

Restructuring expenses

Restructuring expenses were US$3.4 million in 2004 compared to nil in 2003. During the year ended December 31, 2004, we recorded restructuring costs of US$3.4 million in the restructuring expenses line in the statement of operations related to IMI and Praxa Limited. At IMI, restructuring costs of US$2.9 million were comprised of US$1.9 million related to terminations of employees, US$0.5 million for write-off of acquired software, US$0.4 million related to closure of offices, and US$0.1 million in other costs. At Praxa Limited, restructuring costs of US$0.5 million were comprised of US$0.3 million for terminations of employees, US$0.2 in contract exit fees and other costs. IMI is part of the software segment and Praxa Limited is part of the business services segment. We have completed these restructuring actions and no additional costs are expected to be incurred in connection with this restructuring. The costs incurred in 2004 are the cumulative costs relating to the respective restructuring actions.

Interest income

Interest income decreased to US$9.7 million for the year ended December 31, 2004 from US$13.4 million in 2003. The reduction was principally the result of the following factors: (i) acquisition of new businesses during 2004 which reduced the overall cash balance during the year as compared to 2003; (ii) lower prevailing interest rates in 2004 compared to 2003; and (iii) a continuation of our strategy of reducing the overall tenor of our investments in debt securities to shorter-term securities. On a quarterly basis, our interest income ranged from approximately US$1.9 million to US$2.8 million.

As of December 31, 2004, we had generated nearly all of our interest income from US$179.9 million in debt securities. During 2005, we intend to continue executing our strategy of reducing our investments in long-term debt and transitioning to shorter-term, callable debt in anticipation of rising interest rates in the future.

The treasury management program in 2004 involved investments in debt securities that were funded with our credit facilities. For further information on our credit facilities and their related risks, see Item 5.B — “Operating and Financial Review and Prospects – Liquidity and Capital Resources”.

The weighted average interest rates on short-term borrowings as of December 31, 2003 and 2004 were 1.4% and 2.0% per annum, respectively.

Interest expense

Interest expense increased to US$1.9 million for the year ended December 31, 2004 from US$1.1 million in 2003. This increase in interest expense was principally due to an increase in short-term loans.

Other gains and losses

Gain on disposal of available-for-sale securities was US$0.2 million for the year ended December 31, 2004 compared to US$4.6 million in 2003. We recorded a gain on disposal of subsidiaries and cost investments of US$0.5 million for the year ended December 31, 2004, compared to a loss of US$1.3 million in 2003. We had no other non-operating gains or losses in 2004, compared to a non-operating gain of US$0.9 million and a non-operating loss of US$0.1 million in 2003. We recorded US$1.4 million of impairment on available-for-sale securities and cost investments in 2004 compared with no impairments in 2003. We recorded a loss of US$0.3 million for our share of losses in equity investees in 2004 compared to US$0.1 million in 2003.

Income taxes

We recorded US$7.5 million of income tax expenses for the year ended December 31, 2004, as compared to an income tax benefit of US$0.6 million in 2003. The significant change was principally a result of deferred tax expenses of US$6.2 million arising from the utilization of deferred tax assets related to net operating loss carryforwards at Ross and Pivotal for which a valuation allowance had been made on acquisition.

Net income/(loss)

We generated a full year net loss of US$9.3 million in 2004 compared to net income of US$15.5 million in 2003, which represented a US$24.9 million, or 160%, decrease from 2003. The principal factors contributing to the loss were (i) expenses related to the acquisitions in 2004 and 2003, including amortization of acquired intangibles, restructuring expenses, deferred tax expenses and stock compensation expenses; (ii) an increase in operating expenses primarily as a result of acquisitions; and (iii) a decrease in other income as a result of impairment of investments and available-for-sale securities as well as lower interest income. While we plan to pursue cost reduction efforts during 2005, we expect our operating results in 2005 to be negatively affected by costs incurred for targeted investments in certain businesses and the impact of acquisition-related expenses, such as stock compensation and amortization of amortizable intangible assets. We are also subject to numerous risks. For further discussion regarding risks involved to our continued profitability, see Item 3.D — “Key Information — Risk Factors — Risks Relating to CDC Corporation – Risks Relating to Our Overall Business — We have incurred losses in prior periods, may incur losses in the future and cannot provide any assurance that we can achieve or sustain profitability”.

During 2004, we generated net loss from discontinued operations of US$0.2 million compared to US$1.5 million during 2003. We recorded a net loss on disposal/dissolution of such discontinued operations of US$1.0 million in 2004 and a net gain of US$2.1 million in 2003.

Year ended December 31, 2003 compared to year ended December 31, 2002

Revenues

Total revenues for the year ended December 31, 2003 increased 241% to US$77.9 million from US$22.8 million in 2002, principally as a result of the acquisition of IMI in the software segment, the acquisitions of Praxa and PK Information Systems in the business services segment, and the acquisition of Newpalm in the mobile services and applications segment.

Software

Software revenues for the year ended December 31, 2003 increased by US$9.4 million or 266% to US$12.9 million from US$3.5 million in 2002. The increase was attributable to revenues from IMI which we acquired in September 2003 and which contributed US$11.2 million of the 2003 revenues, with the rest relating to a full year of sales by OpusOne, which we acquired in March 2002.

Business services

Business services revenues increased by US$27.1 million, or 267%, to US$37.2 million for the year ended December 31, 2003 from US$10.1 million in 2002. The significant increase in business services revenues was primarily attributable to the acquisitions of Praxa and PK Information Systems, which contributed US$23.5 million of revenue from their respective dates of acquisition to December 2003.

Mobile services and applications

Mobile services and applications revenues were US$16.9 million for the year ended December 31, 2003 and nil for the year ended December 31, 2002. This segment was introduced in the second quarter of 2003 as a result of the acquisition of Newpalm in April 2003. During 2003, Newpalm recorded a rapid increase in paid SMS subscriptions, from approximately 2.2 million at the start of 2003 to approximately 5.5 million at the end of the year.

Advertising/marketing

Advertising and marketing revenues increased by US$1.3 million, or 17%, to US$8.8 million for the year ended December 31, 2003 from US$7.5 million in the same period of 2002. The general increase in advertising and marketing activities revenue between 2002 and 2003 is attributable primarily to an additional US$0.7 million contributed by our Mezzo business in Australia and US$0.6 million contributed by TTG, our Singapore-based travel publication business.

Others

Revenues from other products and services we offer to our clients increased to US$2.0 million for the year ended December 31, 2003, up from US$1.6 million for the year ended December 31, 2002.

Cost of revenues

Total cost of revenues increased by US$27.9 million, or 253%, to US$38.9 million for the year ended December 31, 2003, up from US$11.0 million in 2002. The increase was principally a result of the acquisition of IMI in the software segment, the acquisitions of Praxa and PK Information Systems in the business services segment, and the acquisition of Newpalm in the mobile services and applications segment.

Software

Cost of revenues from software sales increased by US$8.0 million, or 605%, to US$9.4 million for the year ended December 31, 2003 from US$1.3 million in 2002. As a percentage of software revenues, our cost of revenues was 73% in 2003, compared to 38% in 2002. The increase was principally a result of the acquisition of IMI.

Business services

Cost of revenues from business services increased by US$17.5 million, or 386%, to US$22.1 million for the year ended December 31, 2003 from US$4.5 million in 2002, primarily as a result of the Praxa and PK Information Systems acquisitions, which contributed US$16.2 million to cost of revenues. As a percentage of business services revenues, our cost of revenues increased to 59% in 2003 from 45% in 2002, mainly due to the lower margin of the outsourcing revenue from Praxa.

Mobile services and applications

Cost of revenues from mobile services and applications was US$2.2 million for the year ended December 31, 2003 compared to nil in 2002, representing a gross margin of 87% due to the high margin of subscription revenues for mobile value added services in China.

Advertising/marketing

Cost of revenues from advertising and marketing decreased by US$0.2 million, or 4%, to US$4.3 million for the year ended December 31, 2003 from US$4.5 million in 2002. Although advertising and marketing revenues increased compared to 2002, cost of revenues as a percentage of advertising and marketing

revenues decreased to 49% in 2003 from 59% in 2002 due to improvement in gross margins by TTG which more than offset a slight margin decline in the Mezzo business.

Others

Cost of revenues from other revenue sources increased by US$0.2 million, or 32%, to US$0.9 million for the year ended December 31, 2003 from US$0.7 million in 2002. The increase was in line with the corresponding increase in revenue. As a percentage of other revenues, cost of revenue increased slightly to 44% in 2003 from 42% in 2002.

Operating expenses

Total operating expenses rose by 21% for the year ended December 31, 2003 to US$38.7 million, from US$32.0 million in 2002. The increase was principally a result of the IMI, Praxa and Newpalm acquisitions, offset by reductions in costs across the remainder of our businesses.

Selling, general and administrative expenses (SG&A expenses)

SG&A expenses increased by US$9.3 million, or 41%, to US$31.8 million for the year ended December 31, 2003 from US$22.5 million in 2002. As a percentage of total revenues, our SG&A expenses decreased to 41% of revenues in 2003 from 99% of revenues in 2002. The decrease in SG&A expenses as a percentage of revenues is attributable to several factors, including the following:

	•		the ongoing implementation of cost control measures in our ongoing businesses, in particular, reductions in our workforce; and

	•		a more rapid increase in revenues as a result of the acquisitions of Newpalm, Praxa and IMI which, in general, have higher net margins than our existing operations. During 2003, Newpalm, Praxa and IMI had SG&A expenses of US$3.7 million, US$5.3 million and US$2.8 million, respectively, although these companies contributed US$16.9 million, US$22.3 million and US$11.2 million of our revenues, respectively, during 2003.

Depreciation and amortization

Depreciation and amortization expenses decreased by US$2.6 million, or 27%, to US$7.0 million for the year ended December 31, 2003 from US$9.5 million in 2002. This decrease reflected the slowdown in investment in new property and equipment during the course of the years 2002 and 2003, as well as the increasing percentage of fully depreciated fixed assets. However, this decrease was partially offset by the increase in amortization expenses of intangible assets as a result of the acquisition of Praxa, Newpalm and IMI which collectively contributed an additional US$1.9 million of amortization expenses in 2003.

Impairment of goodwill and intangible assets

There was no impairment of goodwill and intangible assets in 2003 or in 2002 based on our impairment tests performed in accordance with SFAS 142. See Item 5.A — “Operating and Financial Review and Prospects — Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates — Goodwill and intangible assets”.

Interest income

Interest income decreased by US$10.2 million, or 43%, to US$13.4 million for the year ended December 31, 2003 from US$23.6 million in 2002. This decrease was attributable to several factors, including:

	•		lower overall prevailing interest rates in 2003 as compared to 2002;

	•		implementation of a more conservative investment strategy of buying shorter term securities with higher credit ratings and lower yields;

	•		lower overall cash levels in 2003 due to our acquisition activities; and

	•		a decrease in our holding of long-term range accrual notes.

On a quarterly basis, our interest income ranged from approximately US$2.9 million to US$4.0 million.

The treasury management program in 2003 involved investments in debt securities that were funded with credit facilities, such as our Global Master Repurchase Agreement with Fortis Bank and our Total Return Swap Transaction Agreement with DBS Bank (collectively, “2003 credit facilities”). Under our 2003 credit facilities we may borrow up to US$401.6 million on such terms as the banks and we may mutually agree. These arrangements do not have termination dates, but are reviewed annually for renewal. For further information on our repurchase facilities and their related risks, see Item 5.B — “Operating and Financial Review and Prospects – Liquidity and Capital Resources”.

The weighted average interest rates on short-term borrowings as of December 31, 2002 and 2003 were 2.1% and 1.4%, respectively.

Interest expense

Interest expense decreased by US$1.4 million, or 57%, to US$1.1 million for the year ended December 31, 2003 from US$2.5 million in 2002. This decrease in interest expense was principally due to a reduction in aggregate borrowings under our repurchase facilities and a decline in average interest rates during the same period.

Other gains and losses

Gain on disposal of available-for-sale securities was US$4.6 million for the year ended December 31, 2003 as compared to a loss on disposal of US$0.2 million in 2002. We had a loss on disposal of subsidiaries and cost investments of US$1.3 million in 2003 compared to a loss of US$0.1 million in 2002. We recorded other non-operating gains of US$0.9 million and losses of US$0.1 million in 2003, compared to non-operating gains of US$0.5 million and losses of US$0.3 million in 2002. We recorded a share of losses in equity investees of US$0.1 million in 2003 compared with a share of income of US$0.7 million in 2002. There was no impairment of cost investments and available-for-sale securities in 2003 compared to an impairment of US$5.4 million in 2002.

Net income/(loss)

For the year ended December 31, 2003, we recognized a net income of US$15.5 million compared to a net loss of US$18.2 million in 2002. The principal contributors to our profitability were (i) ongoing cost reduction exercises across key markets and operations, including strategic headcount reductions; (ii) the acquisition of businesses that contributed profit in 2003, principally Newpalm; and (iii) interest income and gains on disposal of available-for-sale securities.

During 2003, we generated net income from continuing operations of US$14.9 million compared to a net loss from continuing operations of US$3.3 million during 2002. The major factors behind the increase in net income from continuing operations were a net contribution of US$10.9 million attributable to the Praxa and Newpalm acquisitions and US$4.6 million of gains arising from the disposal of securities during 2003.

During 2003, we generated net loss from discontinued operations of US$1.5 million compared to net loss from discontinued operations of US$15.5 million during 2002. Net gain from disposals of such discontinued operations resulted in a net gain of US$2.1 million in 2003 and US$0.5 million in 2002.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, goodwill and intangible assets, business combinations, capitalization of software costs, investments, accounts receivable and allowance for doubtful accounts, deferred tax valuation allowance, stock based compensation, and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in note 2 to our 2004 audited financial statements, included elsewhere in this Annual Report.

We believe the following critical accounting policies are some of the more critical judgment areas in the application of our accounting policies that affect our financial condition and results of operations.

Revenue recognition

We generate revenues from four primary sources: software, business services, mobile services and applications, and advertising and marketing services. We recognize revenue in accordance with US GAAP. The specific literature that we follow in connection with revenue recognition is the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104Revenue Recognition, the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2,Software Revenue Recognition, as amended by SOP 98-9Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions, FASB Emerging Issues Task Force (“EITF”) 00-21,Revenue Arrangements with Multiple Deliverables, and in certain instances EITF No. 99-19,Reporting Revenue Gross as a Principal versus Net as an Agentand SOP 81-1,Accounting for Performance of Construction-Type and Certain Production-Type Contracts.

We recognize revenue when there is persuasive evidence of an arrangement, the product has been shipped and title has passed or the services have been delivered, the price is fixed or determinable and collectibility is probable. If an acceptance period is required, we recognize revenues upon the earlier of customer acceptance or the expiration of the acceptance period. Our agreements with customers, resellers and distributors do not contain product return rights. If the fee is not fixed or determinable due to the existence of extended payment terms, revenue is recognized periodically as payments become due, provided all other conditions for revenue recognition are met.

In addition to these basic criteria, the following are the specific revenue recognition policies we follow for each major stream of revenue by reporting segment.

Software

We generate software revenues from the sale of software licenses, and the maintenance and services for such software licenses. Such sales often include a combination of software consulting and integration services, implementation training and maintenance services. We allocate the arrangement fee in these multi-element arrangements to each individual element using its relative fair value as based on vendor specific objective

evidence (“VSOE”). VSOE is typically determined by the customary price charged for each element when sold separately after the application of any standard approved discount. In the case of an element not yet sold separately, VSOE is the price established by authorized management if it is probable that the price, once established, will not change before market introduction. Where fair value exists for all undelivered elements of the arrangement but not the delivered elements, we apply the “residual” method of accounting and defer revenue allocated to the undelivered elements while recognizing the residual revenue allocated to the delivered elements. In the absence of VSOE for any undelivered element, we defer the entire arrangement fee and recognize revenue when all undelivered elements are delivered assuming all other basic criteria for revenue recognition have been met. We generally recognize revenues from services separately from license fees revenues because the service arrangements qualify as “service transactions” as defined by SOP 97-2. The factors considered in determining whether the revenues should be accounted for separately include the nature of the services and whether the services are essential to the functionality of the licensed product, availability of services from other vendors, and the impact of payment timing on the realizability of the software license fee.

Software license revenues are normally generated through licensing with end-users, value-added resellers (“VARs”) and distributors, and through the sale of the software with or incorporating third-party products. VARs and distributors do not have rights of return, price protections, rotation rights, or other features that would preclude revenue recognition. When software licenses are sold indirectly to end-users through VARs, we recognize as revenue only the net fee receivable upon sell-through to the end-user. License revenues from distributors are calculated at an agreed upon percentage of the distributors’ net selling price to the end-user. We typically do not earn any portion of fees for services provided by the distributor to the end-user. We earn maintenance fees based on an agreed upon percentage of the maintenance fees that the distributor earns from the end-user.

When software licenses are sold incorporating third-party software products or sold with third-party products that complement our software, we recognize as revenue the gross amount of sales of third-party products. The recognition of gross revenue is in accordance with criteria established in EITF 99-19 because we are ultimately responsible for the fulfillment and acceptability of the products purchased, have full latitude in establishing pricing and assume all credit and general inventory risks.

Revenues related to consulting and integration services and the provision of training services for software products are deferred and recognized as the services are delivered, assuming all other basic criteria for revenue recognition have been met.

Revenues related to maintenance agreements on software products are deferred and recognized ratably over the terms of the agreements which are normally one year.

We make provisions for discounts and rebates to customers and other adjustments in the same period in which the related revenues are recorded. Such provisions are calculated after considering relevant historical data.

Recognition of revenues from the licensing of our software products requires management judgment with respect to determination of fair values and in determining whether to use the gross versus net method of reporting for certain types of revenue. The timing of our revenue recognition could differ materially if we were to incorrectly determine the fair value of the undelivered elements in an arrangement for which we are using the “residual” method. The composition of revenues and cost of revenues would change if we made a different assessment on the gross versus net method of reporting sales of software licenses which incorporate third-party software products.

Business services

We generate business services revenues from information technology services, eBusiness consulting, web development and outsourcing.

We recognize revenues from time and materials outsourcing contracts as the services are delivered assuming all other basic criteria for revenue recognition have been met.

We recognize revenues from the design, development and integration of Internet web sites and mobile phone devices using contract accounting based on either client acceptance of completed milestones or using the cost-to-cost percentage-of-completion method. We use the cost-to-cost method based on hours incurred as a percentage of the total estimated hours to complete the project because our historical experience has demonstrated that it produces a reliable indication of the progress on each engagement. We regularly reevaluate estimates of total projected contract costs and revise them if appropriate. Any adjustments to revenues due to changes in estimates are accounted for in the period of the change in estimate. When estimates indicate that a loss will be incurred on a contract upon completion, a provision for the expected loss is recorded in the period in which the loss becomes evident. Historically, we have not experienced material losses on fixed-price contracts. The majority of our contracts are short term in duration, and the use of the completed contract method would not result in a material difference in the timing of revenue recognition. Some projects include acceptance clauses requiring customers’ sign-off at the conclusion of the projects. Historically, we have not experienced projects where sign-off or acceptance has been withheld by a customer resulting in a material loss on a project. Recognition of revenues using contract accounting requires judgment with respect to the method used. The timing of our revenue recognition could differ if we were to use a different methodology for estimating progress to completion, such as an output method based on milestones for contracts where we currently use an input method such as hours incurred.

Revenues from Internet web site maintenance agreements are deferred and recognized ratably over the terms of the related agreements, which are usually for periods of six months or one year.

Mobile services and applications

We generate mobile services and applications revenues from a comprehensive suite of mobile data applications, including dating, chatting, fortune telling, entertainment, information-related content and community services to mobile subscribers in China utilizing SMS, MMS, WAP and IVR services. We rely on mobile network operators in China to bill mobile phone users for our subscription fees. We have revenue sharing arrangements with China Mobile and China Unicom under which we receive 70% to 85% of the subscription fee collected from a mobile subscriber, with the balance being retained by the mobile operators. In addition to our charges, the mobile operators separately charge their subscribers RMB0.10 to RMB1.00 for every SMS, MMS or WAP message sent. These amounts are collected by the mobile operators and are not shared with us.

Mobile services and applications revenues are recognized in the month in which the services are performed, provided that all other basic criteria for revenue recognition have been met. The mobile operators provide statements after month-end indicating the amount of fees that were charged to users for mobile services and applications services that we provided during that month and the portion of fees that are due to us in accordance with our contractual arrangements with the mobile operators. We typically receive these statements within 30 to 90 days following month-end, and we typically receive payment within 30 to 90 days following receipt of the statement. We also maintain an internal system that records the number of messages sent to and messages received from mobile users. Generally, there are differences between the expected value of delivered messages based on our system records and our portion of the fees confirmed by the mobile operators for the delivered messages. These differences may result from the user’s phone being turned off, problems with the mobile operators’ networks or our billing system or other issues which prevent delivery of our services to users. These are known in the industry as billing and transmission failures. We do not recognize revenues for services which result in billing and transmission failures. Billing and transmission failures can vary significantly from month to month, province to province and between mobile operators. At the end of each reporting period, where an operator fails to provide us with a monthly statement confirming the amount of charges billed to their mobile phone users for that month, we use the information generated from our internal system and historical data to make estimates of the billing and transmission failures and accrue as revenue the estimated amount of

collectable mobile services and applications fees. If an actual discrepancy varies significantly from our estimate, it could result in an overstatement or understatement of revenues and costs of revenues.

We are also required to pay some of our content providers either monthly fee or a percentage of the revenue received from or confirmed by the mobile operators, with or without a minimum guaranteed payment, with respect to services incorporating the content providers’ products. In calculating the fees payable to these providers, we reduce the amount of the fee payable by our estimate of account billing and transmission failures which may have been applicable to the services incorporating these products. If we receive confirmation of billing or transmission failures which differ from our estimate after we make payments, we do not ask for refunds, make additional payments, or make adjustments with respect to fees payable for future periods. If the assumptions we use in making such estimates prove inaccurate, we may have paid, and may continue to pay, fees to such providers which are disproportionate to the amount we have been paid for the services.

Mobile services and applications revenues are recognized net of the mobile phone operator’s share of revenue and uncollectible amounts because we consider the mobile operators to be the primary obligors. Additional factors supporting this assessment are the fact that the mobile operators set maximum prices that we can charge and that the mobile operators also have the right to set requirements and procedures associated with using their platform. We have historically relied on the mobile operators to advertise our services, and customers were not necessarily aware the services to which they were subscribing were being provided by us because they did not receive confirmations after subscribing to such services. This situation has changed in 2005 as a result of (i) beginning in 2005, a large portion of our revenues are being generated on a new transmission platform which requires direct confirmation of every service ordered by customers and makes it clear to customers that we are responsible for providing such services; (ii) a substantial increase in direct advertising of our services; (iii) enhanced ability to select suppliers due to a shift from primarily using internally-produced content to purchasing content; and (iv) changes in mobile operators’ practices such as shifting their credit risk to us by taking an additional percentage of revenues from the arrangement to cover expected bad debts. Based on these recent changes, we have changed our revenue presentation to the gross method on a prospective basis as of January 1, 2005. Operating income and net income remain the same whether we record revenue on a gross or net basis.

Recognition of mobile services and applications revenues requires judgment with respect to the estimation of revenues not yet confirmed by the mobile operators at the end of a period, and whether to use the gross versus net method of reporting revenue. The company regularly re-evaluates its EITF 99-19 assessment as the mobile services environment continues to evolve with the transition to new platforms and significant changes in the operating practices of the network operators. The composition of revenues and cost of revenues would change if we made a different assessment on the gross versus net basis of reporting. Our estimates also rely to some extent on our historical experience. We believe we have the ability to make reasonable estimates. However, material differences in the amount and timing of our revenue and cost of revenue could result during any period because of differences between the actual billing and transmission failure rate per the mobile operators’ statements and our estimates based on our internal records and historical experience, or if we were to use a different methodology for estimating the billing and transmission failure rate applicable to unconfirmed revenues. In the future we may also change our estimation methodology based on future experience or if there are changes in the manner in which the mobile operators confirm revenue.

Advertising/marketing

We derive advertising and marketing services revenues from consulting services, marketing database and support services, online and print advertising, and our Internet media business which is focused on online entertainment and Internet products services that target users in China via our portal network.

project timetable. Revenues from time and materials outsourcing contracts are recognized as the services are delivered, assuming all other basic criteria for revenue recognition have been met.

Database and marketing support services include list rental, database development and supply, data analysis and call center services. Revenue is recognized when the service or list has been delivered assuming all other basic criteria for revenue recognition have been met.

Revenues from online banner advertising in which customers’ advertisements are placed on web sites for a set period of time or a set number of impressions are recognized in the period in which the advertisement is displayed as the lesser of the ratio of impressions delivered over total guaranteed impressions or ratably over the term of the contract. Impressions are defined as the number of times that an advertisement appears on a selected web page. Sponsorship revenues from advertisements placed on our own or affiliated companies’ web sites are recognized ratably over the term of contracts, assuming all other basic criteria for revenue recognition have been met.

Advertising revenues arising from direct mailing or placement of print advertising are recognized when the advertisements are sent or published, assuming all other basic criteria for revenue recognition have been met.

Goodwill and intangible assets

Our long-lived assets include goodwill and other intangible assets. Goodwill represents the excess of cost over the fair value of net tangible and identifiable intangible assets of acquired businesses. Goodwill and intangible assets deemed to have indefinite lives are not amortized. All other intangible assets are amortized over their estimated useful lives.

Goodwill is assigned to reporting units based on the reporting unit classification of the entity to which the goodwill is attributable. We have determined our reporting units based on an analysis of our operating segments. In 2004, after acquiring Ross and Pivotal, we performed an assessment of our businesses and sub-divided our reporting units into additional reporting units based on (a) the nature of products and services; (b) the nature of the production process; (c) the type and class of customers; (d) the method to distribute products or provide services; and (e) the nature of regulatory environment. We reallocated goodwill among the new reporting units based on the relative fair value of each new reporting unit compared to the fair value of the reporting unit in which it was classified before the sub-division.

Intangible assets represent trademarks and service marks; uniform resource locators (“URLs”); software applications and programs; customer base and contracts; and business licenses and partnership agreements. Intangible assets are carried at cost less accumulated amortization. Amortization is computed using the straight-line method over the estimated useful lives of the respective assets. The estimated useful lives of the intangible assets are as follows:


		Trademarks and service marks		Indefinite

		URLs		20 years

		Software applications and programs		2 to 15 years

		Customer base and contracts		1 to 10 years

		Business licenses and partnership agreements		1 to 7 years

We test goodwill and intangible assets with an indefinite useful life for impairment on an annual basis as of December 31, and between annual tests when an event occurs or circumstances change that could more likely than not reduce the fair value of goodwill below its carrying value. This testing, carried out using the

guidance and criteria described in SFAS No. 142,Goodwill and Other Intangible Assets, compares carrying values to fair values at the reporting unit level and, when appropriate, the carrying value of these assets is reduced to fair value. Factors that could trigger an impairment charge include, but are not limited to, significant changes in our overall business or in the manner or use of the acquired assets, underperformance against projected future operating results, and significant negative industry or economic trends. Any impairment losses recorded in the future could have a material adverse impact on our financial condition and results of operations for the periods in which such impairments occur.

During 2003 and 2004, we performed the required impairment tests on goodwill and intangibles with an indefinite useful life and were not required to record any impairment. Management judgment is required with respect to the identification of reporting units based on our internal reporting structure that reflects the way we manage our business or operations, assigning assets and liabilities to reporting units, and assigning goodwill to reporting units. Significant judgment is also required to estimate the fair value of reporting units including estimating future cash flows, determining appropriate discount rates, estimating the applicable tax rates, projecting future industry trends and market conditions, and making other assumptions. The use of different estimates and assumptions could materially affect the determination of fair value for each reporting unit. If we change our estimates and assumptions in the future based on changes in our overall business or in the manner or use of the acquired assets, underperformance against projected future operating results, or significant negative industry or economic trends, such changes might result in an impairment charge.

We also annually review and adjust the carrying value of amortized intangible assets if facts and circumstances suggest they may be impaired. If this review indicates that amortized intangible assets may not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the carrying value of intangible assets will be reduced by the estimated shortfall in discounted cash flows. Management judgment is required in the assessment of useful lives of amortized intangibles, and our estimates of future cash flows require judgment based on our historical and anticipated results and are subject to many factors including our assessment of the discount rate used and the amounts and timing of future cash flows. During 2003 and 2004, we performed the required impairment reviews and were not required to record any material impairment on amortized intangible assets. The use of different estimates and assumptions might have resulted in an impairment charge, or might result in an impairment charge in the future. As of December 31, 2004, US$73.2 million of our identifiable intangible assets were subject to amortization.

Business combinations

We have made a number of acquisitions and may make strategically important acquisitions in the future. When recording an acquisition, we allocate the purchase price of the acquired company to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. We have obtained independent appraiser valuation reports to assist in determining the fair values of identifiable intangibles, including acquired technology, customer lists and trademarks. These valuations require us to make significant estimates and assumptions which include future expected cash flows from license sales and customer contracts and acquired technologies, discount rates, and assumptions regarding the period of time the acquired technology or customer relationships will continue. Such assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions and estimates.

In addition, acquired deferred revenue is recognized at fair value to the extent it represents a legal obligation assumed by us in accordance with EITF 01-03,Accounting in a Business Combination for Deferred Revenue of an Acquiree.We consider service contracts and post-contract customer support contracts to be legal obligations of the acquired entity. We estimate the fair value of acquired deferred revenue based on prices paid by willing participants in recent exchange transactions. At December 31, 2003 and 2004 we had deferred revenue balances of US$9.4 million and US$34.3 million, respectively, which is primarily from our acquisitions during 2003 and 2004. Management judgment is also required in determining an appropriate fair value for

deferred revenue. If the fair values we determined for deferred revenues acquired in 2004 were lower, our revenue for the year would have been lower.

Capitalization of software costs

We capitalize computer software product development costs incurred in developing a product once technological feasibility has been established and until the product is available for general release to customers in accordance with SFAS No. 86,Accounting for the Costs of Software to be Sold, Leased, or Otherwise Marketed. We evaluate realizability of the capitalized amounts based on expected revenues from the product over the remaining product life. Where future revenue streams are not expected to cover remaining unamortized amounts, we either accelerate amortization or expense the remaining capitalized amounts. Amortization of such costs is computed as the greater of the amount calculated based on (1) the ratio of current product revenues to projected current and future product revenues or (2) the straight-line basis over the expected economic life of the product (not to exceed five years). Software costs related to the development of new products incurred prior to establishing technological feasibility or after general release are expensed as incurred. When technological feasibility of the underlying software is not established until substantially all product development is completed, including the development of a working model, we expense the costs of such development because the impact of capitalizing such costs would not be material.

Management judgment is required with respect to the determination of technological feasibility and the determination of the expected product revenues used to assess realizability of the capitalized amounts. If we were to determine that technological feasibility occurs at a different stage of the process, we may capitalize more or less software development costs. If our assumptions about realizability were to change, our reported operating expenses could increase in the short-term by any amounts we write off. As of December 31, 2003 and 2004, capitalized software development costs were US$0.7 million and US$3.5 million respectively, and related accumulated amortization totaled US$0.3 million and US$0.5 million respectively.

Investments

Debt and equity investments in available-for-sale securities are stated at fair value. Unrealized holding gain or loss, net of tax, on available-for-sale securities is reported in other comprehensive income/(loss) and is included in a separate component of shareholders’ equity. Realized gains and losses and any decline in fair value judged to be other-than-temporary on available-for-sale securities are included in gain/(loss) on disposal of available-for-sale securities and impairment of available-for-sale securities, respectively. Gains or losses on sales of investments and amounts reclassified from accumulated other comprehensive income to earnings are computed based upon specific identification. Interest on securities classified as available-for-sale is included in interest income.

When determining whether an impairment of investments exists or a decline in value of an available-for-sale security is other-than-temporary, we evaluate evidence to determine whether the realizable value is less than the current market price for the securities. Such information may include the investment’s financial performance, the near term prospects of the investment, the current and expected future financial condition of the investment’s issuer and industry, and our investment intent. A sustained decline in the market value of a quoted security for six months is generally indicative of an other-than-temporary impairment. Management judgment is required in determining fair value of investments, and in determining whether an impairment is other-than-temporary. The use of different estimates and assumptions could affect the determination of fair value for each investment, and could result in an impairment charge.

All other investments for which we do not have the ability to exercise significant influence (generally, when we have an investment of less than 20% ownership and no representation on the company’s board of directors) and for which there is not a readily determinable fair value, are accounted for using the cost method. Dividends and other distributions of earnings from equity investees or investments, if any, are included in

income when declared. We periodically evaluate the carrying value of our investments accounted for under the cost method of accounting and any impairment is included in the consolidated statement of operations.

Accounts receivable and allowance for doubtful accounts

As we have operations in many countries, there are variations in our credit terms between countries and between revenue segments. The allowance for doubtful accounts is established based on our credit control policies. Allowances are made based upon regular reviews of all significant outstanding invoices, and we make specific provisions for bad debts if there is strong evidence showing that the receivable is not likely to be recoverable. In addition, invoices not specifically reviewed are provided for at differing rates, based upon the age of the receivable. Generally, when an account receivable is 90, 120 or 180 days overdue, we establish a provision for bad debts equal to 25%, 50% and 100% of the amount of the accounts receivable, respectively. The determination of these rates is based upon our historical collection experience and assessment of the economic environment in which the customer is situated. If our assessment and the data used to calculate the allowance for doubtful accounts does not reflect our actual ability to collect outstanding receivables, or if the financial condition of our customers were to deteriorate resulting in their potential inability to make payments, additional provisions for doubtful accounts may be needed, and future results of operations could be materially affected.

Deferred tax valuation allowance

We record a valuation allowance to reduce our deferred tax assets if, based on an estimate of our future taxable income, it is more likely than not that some portion, or all of, our deferred tax assets will not be realized. As of December 31, 2003 and 2004, we had deferred tax assets of US$59.4 million and US$145.5 million, respectively. We have provided a valuation allowance of US$58.8 million and US$130.0 million as of December 31, 2003 and 2004, respectively, to cover our deferred tax assets. Our largest deferred tax asset item relates to our loss carryforwards. If future events, such as a sustained trend of profitability in companies with a history of generating losses, allow us to realize more of our deferred tax assets than the previously recorded net amount, an adjustment to the deferred tax asset would increase our net income when those events occur, except with respect to acquired companies for which the realization of pre-acquisition deferred tax assets through a reduction of valuation allowance would reduce goodwill and would increase deferred tax expense. At December 31, 2004, a maximum of US$64.6 million of the valuation allowance for which tax benefits are subsequently recognized will be allocated to reduce goodwill.

Stock-based compensation

We currently account for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion (“APB”) No. 25,Accounting for Stock Issued to Employees, and comply with the disclosure provisions of SFAS 123,Accounting for Stock-Based Compensationand related interpretations. We and our subsidiary China.com have granted stock options to certain employees in accordance with our respective stock option plans. Under APB 25, stock compensation expense is recognized over the vesting period of the stock options based on the difference, if any, between the fair value of our and China.com’s shares at the grant date and the exercise price of the stock option. We use the accelerated expense attribution method under FASB Interpretation No. 28Accounting for Stock Appreciation Rights and Other Variable Stock Option Award Plansto recognize the stock compensation expense. We grant stock options with an exercise price equal to the fair market value on the date of grant and, accordingly, no compensation expense is recorded for stock options except for options which were issued as part of acquisitions. When the recently issued SFAS No. 123RShare-Based Paymentpertaining to accounting treatment for employee stock options takes effect, we will be required to treat the fair value of the stock options granted to employees as compensation expense, which could have a material adverse impact on our operating results.

Contingencies

We regularly assess the estimated impact and probability of various uncertain events, or contingencies, and account for such events in accordance with SFAS No. 5,Accounting for Contingencies. Under SFAS 5, contingent losses must be accrued if available information indicates it is probable that the loss has been or will be incurred given the likelihood of the uncertain event, and the amount of the loss can be reasonably estimated.

Management judgment is required in deciding the amount and timing of accrual of a contingency. For example, legal proceedings are inherently uncertain, and in order to determine the amount of any reserves required, we assess the likelihood of any adverse judgments or outcomes in pending and threatened litigation, as well as potential ranges of probable losses. As of December 31, 2004 we had US$0.6 million accrued for legal contingencies. We use internal and external experts, as necessary, to help estimate the probability that a loss has been incurred and the amount or range of the loss. A determination of the amount of loss accrual required for these contingencies is made after analysis of each individual matter. The amount of such accruals may change in the future due to changes in approach or new developments in each case.

Impact of Certain Recently Issued Accounting Standards

In March 2004, the EITF reached a consensus on Issue 03-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 provides new guidelines for the evaluation and determination of whether a loss on certain investments is other-than-temporary and requires certain additional disclosures pertaining to unrealized investment losses in a company’s financial statements. The effective date of the evaluation and measurement criteria of EITF 03-1 have been delayed pending the issuance of additional implementation guidance by the FASB. The additional disclosure requirements, however, remain effective for annual periods ending after December 15, 2004. Management continues to monitor the FASB’s progress and does not currently expect the adoption of the evaluation and measurement criteria, once issued, to have a material impact on our consolidated results of operations or financial position.

In December 2004, the FASB issued SFAS 123 (revised 2004) (“SFAS 123-R”),Share-Based Payment to replace SFAS 123,Accounting for Stock-Based Compensationand APB Opinion No. 25,Accounting for Stock Issued to Employees. In April 2005 the Securities and Exchange Commission issuedAmendment to Rule 4-01(a) of Regulation S-X Regarding the Compliance Date for Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”to change the required implementation date for SFAS 123-R to fiscal years beginning after June 15, 2005. SFAS 123-R requires, among other things, that all share-based payments to employees, including grants of stock options, be measured based on their grant-date fair value and recognized as expense in the financial statements. Pro forma disclosure is no longer an alternative. Unless observable market prices exist, the grant-date fair value is estimated using an appropriate option-pricing model as determined by management. Management must also make certain assumptions about employee exercise habits and forfeiture rates, and select an appropriate amortization methodology for recognizing compensation expense. The Statement requires either a modified prospective or retrospective method of adoption. Under the modified prospective method, compensation expense will be recorded in the financial statements for (i) all awards granted after adoption of SFAS 123-R; and (ii) the future vesting of awards outstanding as of the date of adoption of SFAS 123-R. Under the modified retrospective method, companies may elect to restate their previously issued financial statements to provide consistency across all periods presented. Management believes the adoption of SFAS 123-R will have a material impact on our consolidated results of operations and earnings per share when it is adopted.

In December 2004, the FASB issued SFAS 153,Exchanges of Nonmonetary Assets, which amends APB 29,Accounting for Nonmonetary Transactions, to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Under SFAS 153, exchanges of nonmonetary assets that do not have commercial substance should be measured based on the fair values of the assets exchanged. The provisions of this Statement

are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2004. The adoption of SFAS 153 is not expected to have a significant impact on our consolidated financial statements.

Liquidity and Capital Resources

The table below sets forth the summary of our cash flows for the periods indicated:


	Year ended December 31, in thousands of US dollars
	2002			2003			2004
Net cash provided by (used in) operating activities	$	15,926		$	13,195		$	10,790
Net cash provided by (used in) investing activities		(8,830	)		118,119			3,629
Net cash provided by (used in) financing activities		5,237			(108,959	)		40,246
Effect of exchange rate changes on cash		—			—			33
Net increase (decrease) in cash and cash equivalents		12,333			22,355			54,698
Cash and cash equivalents at beginning of period		20,820			33,153			55,508

Cash and cash equivalents as at end of period	$	33,153		$	55,508		$	110,206

During 2004, we generated positive operating cash flows. Our cash and cash equivalents increased to US$110.2 million as of December 31, 2004 from US$55.5 million as of December 31, 2003, primarily as a result of increased short-term debt and positive cash flows from our operating activities including interest income from our available-for-sale debt securities. At December 31, 2004, we held US$179.9 million in available-for-sale debt securities, the majority of which are issued by U.S. government-sponsored enterprises, which mature at various dates through 2008. Our total debt was US$63.8 million at December 31, 2004 compared to US$26.8 million at December 31, 2003.

Sources and uses of cash for the year ended December 31, 2004

Operating activities

Our net cash provided by operating activities was US$10.8 million for 2004, compared with US$13.2 million for 2003. Our cash flows from operating activities decreased by 18% principally as a result of the following:

	•		Net loss— We incurred a net loss of US$9.3 million for 2004 compared to net income of US$15.5 million in 2003, representing a US$24.9 million year-over-year decrease. This decrease was due to (i) an increase in operating expenses, such as research and development expenses and restructuring expenses as a result of acquisitions; (ii) a decrease in other income as a result of impairments and lower interest income; and (iii) non-cash expenses related to our acquisitions in 2003 and 2004 which did not impact cash flows, including amortization of acquired intangibles, write-off of acquired deferred revenues, deferred tax expense and stock compensation expense.

	•		Accounts receivable— Our accounts receivable balances increased due to the acquisitions of Ross and Pivotal.

Other factors that impacted the year-over-year change in cash flows relating to operating activities included the following that had a positive impact on cash flows for the year:

	•		Deferred revenues— Our deferred revenues increased from higher software license and service billings after the acquisitions of Ross and Pivotal.

	•		Accounts payable, tax payable, and other liabilities— Certain of our payables balances increased after the acquisitions of Ross and Pivotal.

Investing activities

Net cash provided by investing activities was US$3.6 million for 2004, compared with US$118.1 million for 2003. Large outflows in 2004 include payments of US$112.7 million for purchases of subsidiaries, net of cash acquired, and US$80.3 million for purchases of available-for-sale securities. These decreases in cash were offset by US$212.1 million generated by maturity/disposal of available-for-sale securities. The large inflow in 2003 was primarily a result of proceeds from disposal of available-for-sale securities, net of purchases of available-for-sale securities.

Financing activities

Net cash provided by financing activities was US$40.2 million in 2004, compared with net cash used in financing activities of US$109.0 million for 2003. Cash used during 2004 consisted primarily of new loans of US$87.5 million offset by loan repayments of US$51.4 million.

Future cash requirements and sources of liquidity

Future cash requirements

In the future, we expect that our primary cash requirements will be to fund working capital including payment of contractual obligations and research and development expenses, repay debts, and fund contingent consideration payable for certain of our acquisitions.

The following table summarizes our contractual obligations as of December 31, 2004:


	Payments due by period, in thousands of US dollars
	Total		Less than 1		1 -3 years		3-5 years		More than 5
			year						year
Operating lease obligations (1)	$	55,420	$	14,124	$	17,245	$	10,319	$	13,732
Short-term debt obligations		52,215		52,215		—		—		—
Current portion of long-term debt obligations		11,566		11,566		—		—		—
Pension liability		2,387		910		1,477		—		—

Total	$	121,588	$	78,815	$	18,722	$	10,319	$	13,732

(1) Operating lease obligations consist of future minimum payments under non-cancelable operating leases.

In other areas, we expect our primary cash requirements for fiscal 2005 to be as follows:

	•		Acquisitions— We made a cash payment of US$12.4 million during the second quarter of 2005 in connection with the first of two earnout payments required under our arrangements to acquire Go2joy. We will have to make additional earnout payments in the future relating to the acquisitions of Go2joy, OpusOne and other entities. Such earnout payments will be based on the performance of the acquired entities for specified periods of time.

	•		Debt repayments— During the first quarter of 2005, we used cash of US$35.1 million to repay loans. The terms for the remaining US$28.7 million were renegotiated. Repayment will be due in 2006.

	•		Investments in our business— In 2005, we will be spending on targeted investments in certain businesses such as CDC Software Asia Pacific and our Portal, as well as investing in research and development required to keep our software business competitive.

Future sources of liquidity

We believe that cash flows from operating activities, combined with our existing cash and cash equivalents of US$110.2 million and our available-for-sale debt securities of US$179.9 million as of December 31, 2004, the majority of which will mature at various dates through 2008, will be sufficient to meet our future cash requirements described above.

The following table summarizes the expected maturity dates of our debt securities as of December 31, 2004:


	Expected maturities, in thousands of US dollars
			Less than						More than
	Total		1 year		1-3 years		3-5 years		5 years
Unsecured fixed rate debt securities	$	94,239	$	16,955	$	39,973	$	37,311	$	—
Unsecured variable rate debt securities		9,900		—		—		—		9,900
Secured fixed rate debt securities		75,800		3,025		35,995		36,780		—

Total	$	179,939	$	19,980	$	75,968	$	74,091	$	9,900

Our ability to meet our expected cash requirements will depend on our ability to generate cash in the future, which is subject to financial, competitive, economic, regulatory and other factors that are beyond our control. If we do not generate sufficient cash from operations or do not otherwise have sufficient cash and cash equivalents, we may need to borrow against our lines of credit or issue other long- or short-term debt or equity, if the market and the terms of our existing debt instruments permit.

Lines of credit

We have primary lines of credit with three commercial banks through collateralized credit and repurchase facilities (collectively, “banking facilities”), which in the aggregate allow us up to US$500 million of available borrowing capacity. In August 2001, we entered into a Global Master Repurchase Agreement with Fortis Bank to establish a repurchase facility which enables us to draw down up to US$250.0 million in short-term funding. In addition, another repurchase facility with similar terms was negotiated in August 2002 with DBS Bank, allowing us additional access of up to US$150.0 million for a three-year term. A third facility, a US$100.0 million collateralized credit facility was opened with Standard Chartered Bank in August 2004. These banking facilities were established to provide us with a source of reasonably priced capital to give us flexibility to finance operational working capital and acquisitions, as well as our treasury management program, without having to liquidate our investment portfolio at short notice. Since these banking facilities only allow us to borrow a percentage of our deposited collateral (usually 85%), our true borrowing power will be significantly less than the stated available credit line of US$500 million, and our borrowing power would be affected if the value of our collateral were to decline. As of December 31, 2004, the carrying value of securities available for deposit as collateral was US$104.2 million. At December 31, 2004, the unused portion of our lines of credit was US$438.9 million.

Under our repurchase facilities, a drawdown requires us to sell certain debt securities to the bank at a certain price, and the bank agrees to sell back to us the same securities at the same purchase price at a later date. During the period of the drawdown, the bank has agreed to pay us any income generated by coupons in respect of the sold debt securities. In return, we have agreed to pay interest to the bank at Libor plus a spread. As of December 31, 2004, our cost of borrowing was Libor plus 0.20% for the Fortis Repurchase Agreement and Libor plus 0.35% for the DBS Bank Swap Agreement. Under the collateralized credit facility with Standard Chartered Bank, in order for us to draw upon the facility, we are required to deposit collateral which we may subsequently borrow against. At no time are our borrowings under the facility to exceed the collateral deposited. During the period of the borrowing, Standard Chartered Bank will maintain a charge over the collateral, but will continue to pay us any income associated with the collateral. In return, we have agreed to pay interest at Libor

plus 0.30%. In February 2005, this rate was renegotiated to Libor plus 0.20%. See Item 11 - “Quantitative and Qualitative Disclosures About Market Risk”.

Except for bank loans of US$25.1 million and US$61.1 million due under our lines of credit as of December 31, 2003 and 2004, respectively, these arrangements do not have termination dates, but are reviewed annually for renewal. We believe our lines of credit provide us with an important source of backup liquidity.

Restrictions on our liquidity

While we have cash and cash equivalents of US$110.2 million and total debt securities of US$179.9 as of December 31, 2004, US$48.3 million of the cash and cash equivalents and US$94.9 million of the total securities are held at China.com, an 81% owned subsidiary listed on the Growth Enterprise Market of the Hong Kong Stock Exchange. Although we have the ability to appoint a majority of the board of directors of China.com, the board of directors of China.com owes fiduciary duties to the shareholders of China.com to act in the best interests of and use the assets of China.com, including the cash and cash equivalents balance and securities, for the benefit of such shareholders. As a result, aside from the board of directors of China.com declaring a dividend to its shareholders for which we would receive a pro rata portion as an 81% shareholder of China.com or a related party inter-company loan or similar transaction from China.com to us which would likely require the approval of the minority shareholders of China.com, we have limited ability to transfer or move the cash, cash equivalents and securities balance to, or to use the amounts of the cash, cash equivalents and securities balance for the benefit of, CDC Corporation at the parent entity level or our other subsidiaries outside of the China.com chain of subsidiaries.

In addition to US$110.2 million of cash and cash equivalents at December 31, 2004, we hold US$3.9 million of restricted cash which is pledged for banking facilities. Restricted debt securities comprise US$75.8 million of our total debt securities of US$179.9 million at December 31, 2004 as such securities are pledged as collateral pursuant to drawdowns under our credit and repurchase facilities.

Uncertainties regarding our liquidity

We believe the following uncertainties exist regarding our liquidity:

	•		Ability to Grow Revenues and Manage Costs— Both our revenue and cost base have increased significantly as a result of the Ross, Pivotal and Go2joy acquisitions in 2004 and the Newpalm, Praxa and IMI acquisitions in 2003. If we are unable to continue to grow our revenues or experience a decline in revenues, or if we are unable to manage costs and reduce operating expenses, our ability to generate positive cash flows from operating activities in a sufficient amount to meet our cash needs would be adversely affected.

	•		Integrating the Operations of Acquired Businesses —Integration of our recently acquired businesses could affect our liquidity as continuing integration of the businesses and operations into ours may require significant cash resources.

	•		Future Acquisitions— Our existing cash and cash equivalents and net cash provided by operating activities may be insufficient if we face unanticipated cash needs such as the funding of a future acquisition. In addition, if we acquire a business in the future that has existing debt, our cash requirements for servicing debt may increase.

Fair value of financial instruments

The total fair values of available-for-sale equity securities in listed companies as of December 31, 2003 and 2004 were US$0.6 million and US$0.5 million, respectively, based on the market values of publicly traded shares as of December 31, 2003 and 2004.

The total fair values of our available-for-sale debt securities as of December 31, 2003 and 2004 were US$313.3 million and US$179.9 million, respectively, based on the market values of publicly traded debt securities and the estimated fair values of unlisted debt securities, as determined by management having regard to the prices of the most recent reported sales and purchases of the securities as of December 31, 2003 and 2004.

The carrying amount of cash and cash equivalents, restricted cash, accounts receivable, deposits, prepayments and other receivables, accounts payable, other payables, purchase consideration payable, accrued liabilities, short-term debts and long-term debt approximate their fair values because of their short maturity.

The fair value of our US$25.0 million loan to Symphony, see Item 10.C. — “Additional Information — Material Contracts — Symphony Note”, was estimated to be US$23.4 million and US$24.6 million at December 31, 2003 and 2004, respectively, based on discounting the future cash flows, considering borrowing rates available for loans with similar terms and maturity at December 31, 2003 and 2004.

The carrying amount of the variable portion of our variable long-term bank loans approximate their fair value because the interest rates of the loans are close to the prevailing bank interest rate.

Research and Development, Patents and Licenses, etc.

In 2004, as a result of the acquisitions of Ross and Pivotal, we incurred significant research and development expenses. As discussed in Item 5.A — “Operating and Financial Review and Prospects — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Capitalization of software costs”, we capitalize certain software development costs and expense others. During 2002, 2003 and 2004, research and development costs recorded in the statements of operations represented approximately nil, nil, and 7% of revenues, respectively. During 2002, 2003 and 2004, research and development costs in total, including costs which were capitalized, represented approximately nil, 1%, and 9% of revenues, respectively. As part of our overall strategy to develop and introduce more proprietary products to sell across our business lines and service offerings, we anticipate that our research and development costs may increase on an absolute basis, but not as a percentage of overall revenues.

Trend Information

Our focus on the enterprise software and mobile services and applications industries has positioned us within industry sectors which continued to undergo rapid change over the course of fiscal 2004.

In the software segment, we made progress during 2004 in achieving scale through acquisitions of Pivotal and Ross. Pivotal’s CRM front-office software and Ross’s comprehensive, modular suite of enterprise software have enlarged our product portfolio; however, we believe it will take several quarters for us to leverage the synergies that we consider are inherent within our enlarged software businesses, and we expect 2005 overall to be a year of continued integration and focus on operational improvements. We will continue to execute our software strategy through targeted investments in our CDC Software Asia Pacific business and through entering strategic partnerships with leading software vendors. Our priority is to grow our existing revenue base, and we only plan to make further software acquisitions if they are strategically compelling.

In the mobile services and applications segment, the operating environment for the MVAS sector was challenging in 2004, with sanctions and new policies imposed by the regulators and mobile operators. Our Short Message Service (SMS) business was seriously impacted. We expect regulatory volatility to remain a

characteristic of China’s mobile and communications industry for some time to come, so being nimble and able to proactively manage risks are essential factors of business sustainability. The addition in May 2004, of Go2joy, a mobile SMS services and applications provider in China, provided a boost to our revenue growth in a rapidly growing sector of the mobile services and applications market in China. Go2joy provides an additional distribution platform for our MVAS products, given its exclusive partnership with the state-owned national TV station in China. In the future, we may add investments in mobile services and applications related companies which will allow us to broaden our service offerings, subscriber base, or platform capabilities.

In 2005, we expect continued growth in revenue in the software, business services, mobile services and applications, and advertising/marketing segments as a result of organic growth, targeted investments in CDC Software Asia Pacific and content development, developing strategic partnerships, and sponsorship programs for our portal. However, we expect our business services and advertising/marketing revenues to decline in 2005 as a percentage of total revenues, principally due to the acquisitions made in the enterprise software and mobile services and applications segments in 2004.

In light of the many risks and uncertainties surrounding our company and the geographies and markets in which we operate, shareholders, investors and prospective investors should keep in mind that we cannot guarantee that the forward-looking statements described in this Annual Report will or can materialize.

Off-balance Sheet Arrangements

We do not have any outstanding derivative financial instruments, nor have we entered into any financial guarantees or other commitments to guarantee the payment obligations of any unconsolidated third parties. We do not have any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangements that serve as credit, liquidity or market risk support to such an entity. Finally, we do not have any variable interest in any 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.

Tabular Disclosure of Contractual Obligations

See Item 5.B — “Operating and Financial Review and Prospects — Liquidity and Capital Resources - - Future cash requirements and sources of liquidity” above.

Safe Harbor

See “General Introduction — Forward-Looking Statements”.

ITEM 15. CONTROLS AND PROCEDURES

An evaluation of the effectiveness of our disclosure controls and procedures was carried out under the supervision and with the participation of our management as at the reporting date prior to the filing of our 2004 Annual Report on Form 20-F.

Subsequent to such evaluation, we have continued the process of documenting and testing our internal control procedures in preparation of our becoming subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Act”). Beginning with our Annual Report on Form 20-F for the year ending December 31, 2006, we will be required under Section 404 of the Act to provide annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm addressing these assessments.

In connection with such process of preparing for the Act, we identified an error in the final computation of minority interests for 2004. The error occurred as certain 2004 post-closing adjustments reflected in the 2004 consolidated financial statements were not included in the final calculation of minority interests. The error resulted in an overstatement of minority interests in income of consolidated subsidiaries and net loss for the year ended December 31, 2004 by US$1.2 million. The correction of this error reflects non-cash adjustments to minority interests, accumulated deficit, total shareholders’ equity, minority interests in losses/(income) of consolidated subsidiaries, income/(loss) from continuing operations, net income/(loss), basic and diluted earnings/(loss) per share from continuing operations, basic and diluted earnings/(loss) per share and comprehensive income/(loss). See note 2(y) to the consolidated financial statements contained in this report for additional information regarding the restatement.

During the period covered by this report, there were no significant changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As a result of the discovery of the error noted above, we have taken a series of steps to strengthen our internal control over financial reporting in light of the above material weakness and ineffectiveness of controls and procedures at the reporting date, including recording certain entries at the individual business unit level rather than at the consolidated level, and adding additional levels of review during the financial statement close process.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. We will continue to improve the design and effectiveness of our disclosure controls and procedures to the extent necessary in the future to provide our senior management with timely access to such material information, and to correct any deficiencies that we may discover in the future.

ITEM 18. FINANCIAL STATEMENTS

We have appended our Consolidated Financial Statements as of and for the year ended December 31, 2004 on pages F-1 to F-61 of this annual report.

ITEM 19. EXHIBITS


No.		Description

1.1		Conformed copy of the Amended and Restated Memorandum of Association.***

1.2		Conformed copy of Amendment No. 1 to the Amended and Restated Memorandum of Association.****

1.3		Conformed copy of the Amended and Restated Articles of Association.***

1.4		Conformed copy of Amendment No. 1 to the Amended and Restated Articles of Association.****

2(a).1		1999 Employee Stock Option Plan, as amended.*

2(a).2		2004 Employee Share Purchase Plan.**

2(a).3		Ross Systems, Inc. 1998 Incentive Stock Plan (assumed by CDC Corporation)*****

4.(a).1		Share Purchase Agreement by and between CDC Mobile Media Corporation, hongkong.com Corporation and Palmweb Inc., dated March 14, 2003.⁺⁺⁺⁺⁺⁺

4.(a).2		Agreement and Plan of Merger among chinadotcom corporation, CDC Software Holdings, Inc. and Ross Systems, Inc., dated as of September 4, 2003.⁺⁺

4.(a).3		Transition and Stock Vesting Agreement among chinadotcom corporation, CDC Software Holdings, Inc., Ross Systems, Inc. and J. Patrick Tinley dated as of September 4, 2003.⁺⁺

4.(a).4		Transition and Stock Vesting Agreement among chinadotcom corporation, CDC Software Holdings, Inc., Ross Systems, Inc. and Robert B. Webster dated as of September 4, 2003.⁺⁺

4.(a).5		Series B Preferred Share Purchase Agreement by and between Cayman First Tier and chinadotcom Capital Limited, dated September 8, 2003.⁺⁺⁺

4.(a).6		Shareholders Agreement by and among Cayman First Tier, Symphony Technology II-A, L.P. and chinadotcom Capital Limited, dated September 8, 2003.⁺⁺⁺

4.(a).7		Voting Agreement by and among Cayman First Tier, Symphony Technology II-A, L.P. and chinadotcom Capital Limited, dated September 8, 2003.⁺⁺⁺

4.(a).8		Put Option Agreement by and among Cayman First Tier, Symphony Technology II-A, L.P. and chinadotcom Capital Limited, dated September 8, 2003.⁺⁺⁺

4.(a).9		Amended and Restated Memorandum and Articles of Association of Cayman First Tier, adopted of September 4, 2003.⁺⁺⁺


No.		Description

4.(a).10		Executive Committee Charter of Cayman First Tier, adopted September 4, 2003.⁺⁺⁺

4.(a).11		Revolving Credit Agreement by and between Cayman First Tier and chinadotcom Capital Limited, dated September 8, 2003.⁺⁺⁺

4.(a).12		Revolving Credit Agreement by and between Symphony Enterprise Solutions, S.ar.l and and chinadotcom Capital Limited, dated September 8, 2003.⁺⁺⁺

4.(a).13		Amendment to Agreement and Plan of Merger signed between chinadotcom corporation, CDC Software Holdings, Inc. and Ross Systems, Inc., dated October 3, 2003.⁺

4.(a).14		Guaranty dated as of September 8, 2003 from chinadotcom corporation.⁺

4.(a).15		Amended and Restated Memorandum and Articles of Association of Cayman First Tier adopted November 14, 2003.^y

4.(a).16		Amended and Restated Executive Committee Charter of Cayman First Tier adopted November 14, 2003.^y

4.(a).17		Second Amendment to the Agreement and Plan of Merger among chinadotcom corporation, CDC Software Holdings, Inc. and Ross Systems, Inc., dated January 7, 2004.^yy

4.(a).18		Arrangement Agreement by and among Pivotal Corporation, chinadotcom corporation, a Cayman Islands corporation and CDC Software Corporation, dated December 6, 2003.^yy

4.(a).19		Notice of Extraordinary General Meeting to be held on February 23, 2004 and Management Information Circular and Notice of Hearing of Petition for Arrangement under the British Columbia Company Act relating to a proposed arrangement involving Pivotal Corporation and Its Common Shareholders and Its Optionholders and CDC Software Corporation, dated January 20, 2004.^yy

4.(a).20		Amended and Restated Arrangement Agreement by and among Pivotal Corporation, chinadotcom corporation, a Cayman Islands corporation and CDC Software Corporation, dated January 19, 2004.^yy

4.(a).21		Third Amendment to the Agreement and Plan of Merger among chinadotcom corporation, CDC Software Holdings, Inc. and Ross Systems, Inc., dated April 29, 2004.^+++++++

4.(a).22		Amendment to Share Purchase Agreement by and among CDC Australia Limited, Praxa Limited, Mantech International Corporation and Mantech Australia International Inc. dated February 10, 2003.^yyyy

4.(a).23		Amendment to Preferred Stockholder Agreement by and among chinadotcom corporation, Ross Systems, Inc. and Benjamin W. Griffith, III dated January 31, 2004.^+++++++


No.		Description

4.(a).24		Share Purchase Agreement among Group Team Investments Limited, the Related Entity, Easybay Management Inc., Lu Dong and Chen Hang, Jane Lin, chinadotcom Mobile Interactive Corporation (only with respect to certain sections of the Agreement) and CDC International Mobile Limited dated February 25, 2004^yyyy

4.(a).25		Amendment Agreement Relating to Share Purchase Agreement among Group Team Investments Limited, the Related Entity, Easybay Management Inc., Lu Dong and Chen Hang, Jane Lin, chinadotcom Mobile Interactive Corporation (only with respect to certain sections of the Agreement) and CDC International Mobile Limited dated March, 2004^yyyy

4.(b).1		Cooperation Agreement on Short Message Services between China Unicom, Sichuan, and Beijing Newpalm Technology Co. Ltd.^yyy

4.(b).2		Monternet SMS Cooperation Agreement.^yyy

4.(c).1		Amended and Restated Executive Services Agreement (Executive Chairman) effective as of April 27, 2004, by and between china.com Corporation Limited and Dr. Raymond Kuo-Fung Ch’ien.^yyyy

4.(c).2		Executive Services Agreement (Chief Executive Officer) effective as of April 27, 2004, by and between china.com Corporation Limited and Dr. Raymond Kuo-Fung Ch’ien.^yyyy

6.		Details of how EPS information is calculated can be found in Note 20 to our Consolidated Financial Statements.

8.		List of principal subsidiaries of the Company.^yyyy

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.(a).1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.^

13.(a).2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.^

15.(a).1		Consent of Ernst & Young^

15.(a).2		Consent of PricewaterhouseCoopers LLP^


*		Incorporated by reference to our registration statement on Form S-8 (File No.: 333-11288) filed with the Commission on December 7, 2000.

**		Incorporated by reference to our registration statement on Form S-8 (File No.: 333-123666) filed with the Commission on March 30, 2005.

***		Incorporated by reference to our current report on Form 6-K (File No. 000-30134) filed with the Commission on September 18, 2002.


****		Incorporated by reference to our current report on Form 6-K (File No. 000-30134) filed with the Commission on May 20, 2005.

*****		Incorporated by reference to our registration statement on Form S-8 (File No.: 333-118619) filed with the Commission on August 27, 2004.

⁺		Incorporated by reference to our registration statement on Form F-4 (File No. 333-109493) filed with the Commission on October 6, 2003.

⁺⁺		Incorporated by reference to our current report on Form 6-K (File No. 000-30134) filed with the Commission on September 5, 2003.

⁺⁺⁺		Incorporated by reference to our current report on Form 6-K (File No. 000-30134) filed with the Commission on September 15, 2003.

⁺⁺⁺⁺⁺⁺		Incorporated by reference to Amendment No. 2 to our registration statement on Form F-4 (File No. 333-109493) filed with the Commission on January 21, 2004.

^+++++++		Incorporated by reference to Amendment No. 4 to our registration statement on Form F-4 (File No. 333-109493) filed with the Commission on May 7, 2004.

^y		Incorporated by reference to our current report on Form 6-K (File No. 000-30134) filed with the Commission on December 11, 2003.

^yy		Incorporated by reference to our current report on Form 6-K (File No. 000-30134) filed with the Commission on January 8, 2004.

^yyy		Incorporated by reference to our registration statement on Form F-4/A (File No. 333-109493) filed with the Commission on January 21, 2004.

^yyyy		Incorporated by reference to our annual report on Form 20-F (File No. 000-30134) filed with the Commission on June 30, 2005.

^		Filed herewith.

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F/A and that it has duly caused and authorized the undersigned to sign this amendment to its Annual Report on its behalf on this 11th day of October, 2005.


		CDC CORPORATION

		/s/ Steven Chan
		Steven Chan
		Acting Chief Executive Officer

chinadotcom corporation

INDEX TO FINANCIAL STATEMENTS


		Pages
Report of Independent Registered Public Accounting Firm		F-2 – F-3

Consolidated Balance Sheets as of December 31, 2003 and 2004		F-4

Consolidated Statements of Operations for the years ended December 31, 2002, 2003 and 2004		F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2003 and 2004		F-6

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2002, 2003 and 2004		F-7 – F-9

Notes to Consolidated Financial Statements		F-10 – F-61

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of
chinadotcom corporation

We have audited the accompanying consolidated balance sheets of chinadotcom corporation and subsidiaries as of December 31, 2003 and 2004, and the related consolidated statements of operations, cash flows and shareholders’ equity for each of the three years in the period ended December 31, 2004. 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 did not audit the consolidated financial statements of IMI Global Holdings Ireland Limited, a 51% owned subsidiary acquired in September 2003, and its subsidiaries for the period ended December 31, 2003 which statements reflect total assets constituting 4.0% and total revenues constituting 14.4% of the related 2003 consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for IMI Global Holdings Ireland Limited and its subsidiaries, is based solely on the report of the other auditors.

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. We were not engaged to perform an audit of the Company’s 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 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, and evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of chinadotcom corporation and subsidiaries at December 31, 2003 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with United States generally accepted accounting principles.

As more fully described in note 2(y), the 2004 consolidated financial statements have been restated.

/s/ Ernst & Young

Hong Kong

March 9, 2005, except for notes 2(o), 2(y), 4(g), 20 and 30(ii), as to which the date is October 4, 2005

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of
chinadotcom corporation

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, changes in stockholder’s deficit and of cash flows present fairly, in all material respects, the financial position of IMI Global Holdings Ireland Limited and its subsidiaries (the “Company”) at December 31, 2003 and the results of their operations and their cash flows for the period from September 9, 2003 through December 31, 2003 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 statements based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States), which 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 audit provides a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Philadelphia, PA

February 9, 2004

F-3

chinadotcom corporation

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands of U.S. dollars, except number of shares and per share data)


	December 31,			December 31,
	2003			2004
				(Restated)
ASSETS

Current assets:
Cash and cash equivalents	$	55,508		$	110,206
Restricted cash		238			3,886
Accounts receivable (net of allowance of $2,816 for 2003 and $4,784 for 2004)		16,562			43,521
Deposits, prepayments and other receivables		10,461			10,012
Available-for-sale debt securities		262,745			94,259
Available-for-sale equity securities		—			527
Restricted available-for-sale debt securities		19,213			75,780
Deferred tax assets		240			502
Properties held for sale		—			2,992

Total current assets		364,967			341,685

Loans receivable		27,000			25,000
Interest receivable		—			878
Property and equipment, net		7,210			7,617
Goodwill		81,427			189,552
Intangible assets		28,880			81,121
Investments in equity investees		434			4,016
Investments under cost method		609			220
Available-for-sale debt securities		19,400			9,900
Restricted available-for-sale debt securities		11,896			—
Available-for-sale equity securities		590			—
Deferred tax assets		305			—
Other assets		3,336			4,342


Total assets	$	546,054		$	664,331


LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	7,800		$	13,697
Other payables		4,602			4,219
Purchase consideration payable		39,835			14,728
Accrued liabilities		16,098			36,875
Accrued pension liability, current portion		798			910
Short-term bank loans		15,199			52,215
Long-term bank loans, current portion		171			11,566
Deferred revenue		9,357			34,261
Income tax payable		656			2,532

Total current liabilities		94,516			171,003

Deferred tax liabilities		1,618			4,696
Long-term bank loans, net of current portion		11,456			—
Accrued pension liability, net of current portion		2,272			1,477
Other liabilities		—			322

Minority interests		45,746			45,883

Contingencies and commitments (note 29)

Shareholders’ equity:
Class A common shares, $0.00025 par value – Authorized: 800,000,000 shares; Issued and outstanding: 101,588,009 shares as of December 31, 2003 and 110,893,180 shares as of December 31, 2004		25			28
Additional paid-in capital		614,721			673,476
Treasury stock - 1,766,552 shares as of December 31, 2003 and 1,766,552 shares as of December 31, 2004		( 4,067	)		(4,067	)

Accumulated deficit		(218,893	)		(228,226	)
Accumulated other comprehensive loss		(1,340	)		(261	)

Total shareholders’ equity		390,446			440,950


Total liabilities and shareholders’ equity	$	546,054		$	664,331

The accompanying notes form an integral part of these consolidated financial statements.

F-4

chinadotcom corporation

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands of U.S. dollars, except number of shares and per share data)


	Year ended			Year ended			Year ended
	December 31,			December 31,			December 31,
	2002			2003			2004
							(Restated)
Revenues:
Software
Licenses	$	893		$	1,157		$	28,748
Maintenance and consulting services		2,633			11,734			79,131
Business services
IT products		—			6,083			2,083
Consulting services		10,148			31,159			37,308
Mobile services and applications		—			16,876			23,694
Advertising/marketing		7,527			8,841			11,709
Others		1,599			2,001			10

Total revenues		22,800			77,851			182,683

Cost of revenues:
Software
Licenses		(445)			(362)			(3,486)
Maintenance and consulting services		(883	)		(8,995	)		(39,754	)
Business services
IT products		—			(5,318)			(1,879)
Consulting services		(4,544	)		(16,754	)		(24,871	)
Mobile services and applications		—			(2,247	)		(4,597	)
Advertising/marketing		(4,477	)		(4,312	)		(4,645	)
Others		(676	)		(889	)		—

Total cost of revenues		(11,025	)		(38,877	)		(79,232	)

Gross profit		11,775			38,974			103,451

Operating expenses:
Selling, general and administrative expenses		(22,476	)		(31,785	)		(80,419	)
Research and development expenses		—			—			(13,825	)
Depreciation and amortization expenses		(9,515	)		( 6,954	)		(12,276	)
Restructuring expenses		—			—			(3,387	)

Total operating expenses		(31,991	)		(38,739	)		(109,907	)

Operating income/(loss)		(20,216	)		235			(6,456	)

Other income/(expenses):
Interest income		23,631			13,412			9,653
Interest expense		(2,461	)		(1,070	)		(1,895	)
Gain/(loss) on disposal of available-for-sale securities		(163	)		4,599			167
Gain/(loss) on disposal of subsidiaries and cost investments		(66	)		(1,263	)		549
Other non-operating gains		508			934			—
Other non-operating losses		(288	)		(148	)		—
Impairment of cost investments and available-for-sale securities		(5,351	)		—			(1,362	)
Share of income/(losses) in equity investees		682			(124	)		(308	)

Total other income		16,492			16,340			6,804

Income/(loss) before income taxes		(3,724	)		16,575			348
Income tax benefits/(income taxes)		162			598			(7,541	)

Income/(loss) before minority interests		(3,562	)		17,173			(7,193	)
Minority interests in losses/(income) of consolidated subsidiaries		248			(2,257	)		(1,000	)

Income/(loss) from continuing operations		(3,314	)		14,916			(8,193	)

Discontinued operations:
Loss from operations of discontinued subsidiaries, net of related tax expense/(benefit) of $322 for 2002, $(90) for 2003 and nil for 2004		(15,462	)		(1,519	)		(190	)
Gain/(loss) on disposal/dissolution of discontinued subsidiaries, net		545			2,127			(950	)


Net income/(loss)	$	(18,231	)	$	15,524		$	(9,333	)


Basic and diluted earnings/(loss) per share from continuing operations	$	( 0.03	)	$	0.14		$	(0.08	)

Basic and diluted earnings/(loss) per share	$	( 0.18	)	$	0.15		$	(0.09	)

The accompanying notes form an integral part of these consolidated financial statements.

F-5

chinadotcom corporation

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands of U.S. dollars, except number of shares and per share data)


	Year ended			Year ended			Year ended
	December 31,			December 31,			December 31,
	2002			2003			2004
							(Restated)
OPERATING ACTIVITIES:

Net income/(loss)	$	(18,231	)	$	15,524		$	(9,333	)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
Minority interests in income/(losses) of subsidiaries		(1,036	)		2,204			1,000
Loss on disposal/write-off of property and equipment		1,732			127			1,055
Loss/(gain) on disposal of available-for-sale securities		158			(4,599	)		(167	)
Loss/(gain) on disposal of subsidiaries and cost investments		(428	)		(2,596	)		401
Amortization of intangible assets		1,183			3,571			10,960
Expenses settled by issuance of shares		—			—			1,612
Depreciation		11,340			5,293			3,721
Stock compensation expenses		309			328			2,051
Share of losses/(income) in equity investees		(682	)		115			308
Impairment of cost investments and available-for-sale securities		5,351			—			1,362
Gain in value of derivative instruments		(571	)		—			—
Deferred tax expense		—			—			5,897

Changes in operating assets and liabilities:
Accounts receivable		7,191			9,486			(12,585	)
Deposits, prepayments and other receivables		10,909			3,144			3,545
Other assets		(252	)		1,794			(11	)
Accounts payable		(1,107	)		(7,413	)		88
Other payables		4,824			(8,505	)		(444	)
Accrued liabilities		(3,968	)		(4,006	)		(6,372	)
Deferred revenue		(66	)		(557	)		6,419
Amounts due to related parties		(730	)		(715	)		—
Income tax payable		—			—			1,644
Accrued pension liability		—			—			(683	)
Other liabilities		—			—			322

Net cash provided by operating activities	$	15,926		$	13,195		$	10,790


INVESTING ACTIVITIES:
Purchases of subsidiaries, net of cash acquired	$	(4,587	)	$	(13,446	)	$	(112,724	)
Purchases of property and equipment		(5,471	)		(1,551	)		(3,661	)
Acquisition of equity investees		—			—			(4,000	)
Purchases of available-for-sale securities		(660,599	)		(424,667	)		(80,314	)
Purchases of intangible assets		(8,800	)		(2,355	)		(4,705	)
Issuance of loans		—			(27,000	)		—
Purchases of promissory notes and warrants		(7,000	)		—			—
Collection of promissory notes and warrants		—			6,878			—
Proceeds from disposal of available-for-sale securities		675,728			580,607			212,053
Proceeds from disposal of property and equipment		1,386			381			663
Proceeds/(cash disbursements) from disposal of subsidiaries		(652	)		(2,349	)		(529	)
Proceeds from disposal of cost investments		—			1,750			494
Decrease/(increase) in restricted cash		1,165			(129	)		(3,648	)

Net cash provided by/(used in) investing activities	$	(8,830	)	$	118,119		$	3,629


FINANCING ACTIVITIES:
Issuance of share capital	$	724		$	8,585		$	4,061
Proceeds from bank loans		125,278			15,015			87,537
Repayment of bank loans		(116,349	)		(121,388	)		(51,352	)
Purchases of treasury stock		(4,416	)		(11,171	)		—

Net cash provided by/(used in) financing activities	$	5,237		$	(108,959	)	$	40,246

Effect of exchange differences on cash		—			—			33

Net increase in cash and cash equivalents	$	12,333		$	22,355		$	54,698
Cash and cash equivalents at beginning of year		20,820			33,153			55,508

Cash and cash equivalents at end of year	$	33,153		$	55,508		$	110,206


Interest paid	$	2,632		$	519		$	1,348

Non-cash activities:
Class A common shares issued for settlement of other payables		—			—		$	3,036
Reissuance of treasury stock for the acquisition of subsidiaries		—		$	2,810			—
Reissuance of treasury stock for settlement of employee stock ownership plan obligations	$	24			—			—
Class A common shares and stock options issued as consideration for the acquisition of subsidiaries	$	—		$	39,835		$	49,610

The accompanying notes form an integral part of these consolidated financial statements.

F-6

chinadotcom corporation

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Amounts in thousands of U.S. dollars, except number of shares)


																Accumulated						Total
							Additional									other						shareholders’
	Number			Common			paid-in			Treasury			Comprehensive			comprehensive			Accumulated			equity/
	of shares			shares			capital			stock			income/(loss)			income/(loss)			deficit			(deficit)
	(’000)
Balance at January 1, 2002		102,692		$	26		$	613,460		$	—					$	(7,439	)	$	(216,186	)	$	389,861

Exercise of employee stock options		296			—			724			—		$	—			—			—			724

Redemption of shares		—			—			—			(4,416	)		—			—			—			(4,416	)

Retirement of shares		(1,692	)		(1	)		(4,153	)		4,154			—			—			—			—

Reissuance of treasury stock for non-cash transactions		—			—			—			24			—			—			—			24

Stock compensation expenses on options granted		—			—			309			—			—			—			—			309

Unrealized gains, net of unrealized losses on available-for- sale securities		—			—			—			—			3,849			3,849			—			3,849

Minority interests’ share of unrealized gains, net of unrealized losses on available-for-sale securities		—			—			—			—			(484	)		(484	)		—			(484	)

Foreign currency translation adjustments		—			—			—			—			661			661			—			661

Less: reclassification adjustment for losses, net of gains included in net loss		—			—			—			—			5,403			5,403			—			5,403

Net loss for the year		—			—			—			—			(18,231	)		—			(18,231	)		(18,231	)

Comprehensive income/(loss)													$	( 8,802	)


Balance at December 31, 2002		101,296		$	25		$	610,340		$	( 238	)				$	1,990		$	(234,417	)	$	377,700

The accompanying notes form an integral part of these consolidated financial statements.

F-7

chinadotcom corporation
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Amounts in thousands of U.S. dollars, except number of shares)


																Accumulated						Total
							Additional									other						shareholders’
	Number			Common			paid-in			Treasury			Comprehensive			comprehensive			Accumulated			equity/
	of shares			shares			capital			stock			income/(loss)			income/(loss)			deficit			(deficit)
	(’000)
Balance at January 1, 2003		101,296		$	25		$	610,340		$	( 238	)				$	1,990		$	(234,417	)	$	377,700

Exercise of employee stock options		2,592			1			8,584			—		$	—			—			—			8,585

Redemption of shares		—			—			—			(11,171	)		—			—			—			(11,171	)

Retirement of shares		( 2,300	)		(1	)		(5,749	)		5,750			—			—			—			—

Reissuance of treasury stock for non-cash transactions		—			—			1,218			1,592			—			—			—			2,810

Stock compensation expenses on options granted		—			—			328			—			—			—			—			328

Unrealized gains, net of unrealized losses on available-for sale securities		—			—			—			—			644			644			—			644

Minority interests’ share of unrealized losses, net of unrealized gains on available-for-sale securities		—			—			—			—			184			184			—			184

Foreign currency translation adjustments		—			—			—			—			186			186			—			186

Less: reclassification adjustment for gains, net of losses included in net income		—			—			—			—			( 4,344	)		(4,344	)		—			(4,344	)

Net income for the year		—			—			—			—			15,524			—			15,524			15,524

Comprehensive income/(loss)													$	12,194


Balance at December 31, 2003		101,588		$	25		$	614,721		$	(4,067	)				$	(1,340	)	$	(218,893	)	$	390,446

The accompanying notes form an integral part of these consolidated financial statements.

F-8

chinadotcom corporation
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Amounts in thousands of U.S. dollars, except number of shares)


													Accumulated						Total
					Additional								other						shareholders’
	Number		Common		paid-in		Treasury			Comprehensive			comprehensive			Accumulated			equity/
	of shares		shares		capital		stock			income/(loss)			income/(loss)			deficit			(deficit)
	(’000)									(Restated)						(Restated)			(Restated)
Balance at January 1, 2004		101,588	$	25	$	614,721	$	(4,067	)				$	(1,340	)	$	(218,893	)	$	390,446

Exercise of employee stock options		1,068		1		4,060		—		$	—			—			—			4,061

Issuance of shares for non cash transactions		8,237		2		50,455		—			—			—			—			50,457

Stock compensation expenses on options granted		—		—		4,240		—			—			—			—			4,240

Unrealized losses, net of unrealized gains, on available-for-sale securities		—		—		—		—			(593	)		(593	)		—			(593	)

Minority interests’ share of unrealized losses, net of unrealized gains on available-for-sale securities		—		—		—		—			53			53			—			53

Foreign currency translation adjustments		—		—		—		—			1,345			1,345			—			1,345

Less: reclassification adjustment for losses, net of gains included in net loss		—		—		—		—			274			274			—			274

Net loss for the year (Restated)		—		—		—		—			(9,333	)		—			(9,333	)		(9,333	)

Comprehensive income/(loss) (Restated)		—		—		—		—		$	(8,254	)		—			—			—


Balance at December 31, 2004 (Restated)		110,893	$	28	$	673,476	$	(4,067	)				$	(261	)	$	(228,226	)	$	440,950

The accompanying notes form an integral part of these consolidated financial statements.

F-9

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

1. ORGANIZATION AND BASIS OF PRESENTATION

chinadotcom corporation (“CDC” or the “Company”) is a global company focusing on enterprise software and mobile services and applications, with additional operations in advertising/marketing activities and business services. The Company offers the following products and services to customers in Hong Kong, Taiwan and the People’s Republic of China (“Greater China”) and other parts of Asia, Australia, North America, South America, the United Kingdom and the rest of Europe:

Primary lines of business

	•		Software. The Company offers a broad range of software solutions for mid-sized enterprises internationally. The software suite includes ERP (Enterprise Resource Planning), CRM (Customer Relationship Management), SCM (Supply Chain Management), OMS (Order Management Systems), HRM (Human Resources and Payroll Management) and BI (Business Intelligence) products.

	•		Mobile Services and Applications. The Company’s mobile services and applications business provides news and mobile applications services targeting the consumer market in China. It offers wireless services including SMS (Short Message Service), IVR (Interactive Voice Response), MMS (Multimedia Message Service) and WAP (Wireless Application Protocol).

Additional operations

	•		Advertising/Marketing. The Company’s advertising/marketing business encompasses a range of businesses, including a portal network, a marketing database and marketing support service conducted principally in Australia and New Zealand, and a Singapore based travel trade publisher and trade exhibition organizer.

	•		Business Services. The Company’s business services offering includes information technology services, eBusiness consulting, web development and outsourcing in Hong Kong, Australia, Korea, and the United States (the “U.S.”). The Company’s business services companies provide program management, outsourcing services, application development and ongoing support services using a wide range of technologies.

The Company was incorporated in the Cayman Islands in June 1997 as a company with limited liability.

The consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)

Principles of consolidation

The accompanying consolidated financial statements include the accounts of the Company and its majority-owned or controlled subsidiaries that are not considered variable interest entities and all variable interest entities for which the Company is the primary beneficiary, after eliminations of all material inter-company accounts, transactions and profits.

F-10

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(b)

Use of estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

(c)

Cash and cash equivalents

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Except for the restricted cash disclosed in note 5, none of the Company’s cash and cash equivalents is restricted as to withdrawal or use.

(d)

Property and equipment and depreciation

Buildings, leasehold improvements, furniture and fixtures, office equipment, computer equipment and motor vehicles are stated at cost less accumulated depreciation. Maintenance, repairs and minor renewals are expensed as incurred. Depreciation is computed using the straight-line method over the assets’ estimated useful life. No depreciation is provided on freehold land, which is stated at cost. The estimated useful lives of the property and equipment are as follows:


Buildings		25 years
Leasehold improvements		Over the lesser of the lease term and the estimated useful life
Furniture and fixtures		1 to 10 years
Office equipment		3 to 5 years
Computer equipment		1 to 3 years
Motor vehicles		3 years

(e)

Software development costs

The Company capitalizes computer software product development costs incurred in developing a product once technological feasibility has been established and until the product is available for general release to customers. The Company evaluates realizability of the capitalized amounts based on expected revenues from the product over the remaining product life. Where future revenue streams are not expected to cover remaining unamortized amounts, the Company either accelerates amortization or expenses the remaining capitalized amounts. Amortization of such costs is computed as the greater of the amount calculated based on (1) the ratio of current product revenues to projected current and future product revenues or (2) the straight-line basis over the expected economic life of the product (not to exceed five years). Software costs related to the development of new products incurred prior to establishing technological feasibility or after general release are expensed as incurred. When technological feasibility of the underlying software is not established until substantially all product development is completed, including the development of a working model, the Company expenses the costs of such development because the impact of capitalizing such costs would not be material.

As of December 31, 2003 and 2004, capitalized computer software development costs were $660 and $3,478, respectively, and related accumulated amortization totaled $273 and $501, respectively.

F-11

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(e)

Software development costs (continued)

Amortization of software development costs is included in cost of revenues and totaled nil, $273 and $228 for the years ended December 31, 2002, 2003 and 2004, respectively.

(f)

Goodwill and intangible assets

Goodwill represents the excess of cost over the fair value of net tangible and identifiable intangible assets of acquired businesses. Intangible assets deemed to have indefinite useful lives and goodwill are not amortized. All other intangible assets are amortized over their estimated useful lives.

Goodwill is assigned to reporting units based on the reporting unit classification of the entity to which the goodwill is attributable. The Company has determined its reporting units based on an analysis of its operating segments. In 2004, after acquiring Ross Systems, Inc. and Pivotal Corporation, the Company performed an assessment of its businesses and sub-divided its reporting units into additional reporting units based on (a) the nature of products and services; (b) the nature of the production process; (c) the type and class of customers; (d) the method to distribute products or provide services; and (e) the nature of regulatory environment. The Company reallocated goodwill among the new reporting units based on the relative fair value of each new reporting unit compared to the fair value of the reporting unit in which it was classified before the sub-division.

The Company’s intangible assets represent trademarks and service marks; uniform resource locators (“URLs”); software applications and programs; customer base and contracts; and business licenses and partnership agreements. Intangible assets are carried at cost less accumulated amortization. Amortization is computed using the straight-line method over the estimated useful lives of the respective assets. The estimated useful lives of the intangible assets are as follows:


Trademarks and service marks		Indefinite
URLs		20 years
Software applications and programs		2 to 15 years
Customer base and contracts		1 to 10 years
Business licenses and partnership agreements		1 to 7 years

Goodwill and intangible assets with indefinite useful lives are subject to annual impairment testing using the guidance and criteria described in Statement of Financial Accounting Standards (“SFAS”) 142,Goodwill and Other Intangible Assets. This testing compares the carrying values to fair values at the reporting unit level and, when appropriate, the carrying value of these assets is reduced to fair value. During 2003 and 2004, the Company performed the required impairment tests and was not required to record any impairment on goodwill or intangible assets with indefinite useful lives.

The Company also annually reviews and adjusts the carrying value of amortized intangible assets if the facts and circumstances suggest they may be impaired. If this review indicates that amortized intangible assets may not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the carrying value of intangible assets will be reduced by the estimated shortfall in discounted cash flows.

F-12

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(g)

Investments

Debt and equity investments in available-for-sale securities are stated at fair value. Unrealized holding gains or losses, net of tax, on available-for-sale securities are reported in other comprehensive income/(loss) and are included in a separate component of shareholders’ equity. Realized gains and losses and any declines in fair value judged to be other-than-temporary on available-for-sale securities are included in gain/(loss) on disposal and impairment, respectively, in the Company’s consolidated statement of operations. Gains or losses on sale of investments and amounts reclassified from accumulated other comprehensive income to earnings are computed based upon specific identification. Interest on securities classified as available-for-sale securities is included in interest income.

When determining whether an impairment of investments exists or a decline in value of an available-for-sale security is other-than-temporary, the Company evaluates evidence to support a realizable value in excess of the current market price for the securities. Such information may include the investment’s financial performance (including such factors as earnings trends, dividend payments, asset quality and specific events), the near term prospects of the investment, the current and expected financial condition of the investment’s issuer, and the Company’s investment intent. A sustained decline in the market value of a quoted security for six months is generally indicative of an other-than-temporary impairment.

The following were the aggregate amounts of unrealized losses for available-for-sale debt and equity securities and the aggregate fair values of such securities as of December 31, 2004. All had been in a continuous unrealized loss position for less than twelve months.


	Unrealized		Fair
	loss		value
Debt securities	$	1,158	$	123,606
Equity securities	$	35	$	131

At December 31, 2004, fifteen of the twenty-seven available-for-sale debt and equity securities held by the Company were in an unrealized loss position. Of these, the Company impaired seven securities that had been below their fair value for more than six months but less than twelve months.

The Company’s investments in equity investees for which its ownership exceeds 20% or for which the Company owns less than 20% but has the ability to exercise significant influence, but which are not majority-owned, are accounted for using the equity method. Under the equity method, the Company’s proportionate share of each equity investee’s net income or loss and amortization of any identifiable intangibles arising from the investment is included in “share of income/(losses) in equity investees”.

All other investments for which the Company does not have the ability to exercise significant influence (generally, when the Company has an investment of less than 20% ownership and no representation on the company’s board of directors) and for which there is not a readily determinable fair value, are accounted for using the cost method. Dividends and other distributions of earnings from investees, if any, are included in income when declared. The Company periodically evaluates the carrying value of its investments accounted for under the cost method of accounting and any impairment is included in the Company’s consolidated statement of operations.

F-13

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(h)

Impairment of long-lived assets

Long-lived assets (other than goodwill) are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset (other than goodwill) exceeds the sum of the undiscounted cash flows expected to result from the asset’s use and eventual disposition. An impairment loss is measured as the amount by which the carrying amount exceeds the fair value of the asset.

(i)

Foreign currency translation

Foreign currency transactions are translated at the applicable rates of exchange prevailing at the transaction dates. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange prevailing at that date. Exchange differences are included in the Company’s consolidated statement of operations, except for intercompany foreign currency transactions that are of a long-term investment nature which are reported as translation adjustments. During the year ended December 31, 2004, $429 was transferred from cumulative foreign currency translation adjustments and included in the consolidated statement of operations as a result of the sale of an investment in a foreign operation.

The functional currency of the Company is the United States dollar. The functional currencies of the Company’s subsidiaries outside Hong Kong are either the respective local currencies or the United States dollar. The financial statements of the Company’s subsidiaries have been translated into United States dollars in accordance with SFAS 52, Foreign Currency Translation. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Amounts in the Company’s consolidated statement of operations have been translated using the average exchange rates for the year. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income/(loss).

(j)

Advertising expenses

Advertising expenses are charged to the Company’s consolidated statement of operations when incurred and are included in the “selling, general and administrative expenses” line item.

(k)

Shipping and handling

Costs related to shipping and handling are included in cost of revenues for all periods presented.

F-14

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(l)

Revenue recognition

The Company recognizes revenues in accordance with U.S. generally accepted accounting principles. The specific literature that the Company follows in connection with revenue recognition includes the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104,Revenue Recognition, the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2,Software Revenue Recognition, as amended by SOP 98-9 Modification of SOP 97-2,Software Revenue Recognition, With Respect to Certain Transactions,Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force (“EITF”) 00-21,Revenue Arrangements with Multiple Deliverables, and in certain instances EITF 99-19,Reporting Revenue Gross as a Principal versus Net as an Agent, and SOP 81-1,Accounting for Performance of Construction-Type and Certain Production-Type Contracts.

The Company recognizes revenue when it has persuasive evidence of an arrangement, the product has been shipped and title has passed or the services have been delivered, the price is fixed or determinable and collectibility is probable. If an acceptance period is required, revenues are recognized upon the earlier of customer acceptance or the expiration of the acceptance period. The Company’s agreements with its customers, resellers and distributors do not contain product return rights. If the fee is not fixed or determinable due to the existence of extended payment terms, revenue is recognized periodically as payments become due, provided all other conditions for revenue recognition are met.

In addition to these basic criteria, there are specific revenue recognition policies for each major stream of revenue by reportable segment.

Software

Revenue from the sale of software products often includes a combination of software, consulting and integration services, and the provision of training and maintenance services. The Company allocates the arrangement fee in these multi-element arrangements to each individual element using its relative fair value as based on vendor specific objective evidence (“VSOE”). Where fair value exists for all undelivered elements of the arrangement but not the delivered elements, the Company applies the “residual” method of accounting and defers revenue allocated to the undelivered elements while recognizing the residual revenue allocated to the delivered elements. In the absence of VSOE for any undelivered element, the Company defers the entire arrangement fee and recognizes revenue when all undelivered elements are delivered, assuming all other basic criteria for revenue recognition have been met.

When software licenses are sold indirectly to end-users through VARs, the Company recognizes as revenue only the net fee receivable upon sell-through to the end-user. License revenues from distributors are calculated at an agreed upon percentage of the distributors’ net selling price to the end-user. The Company does not typically earn any portion of fees for services provided by the distributor to the end-user. The Company earns maintenance fees based upon an agreed upon percentage of the maintenance fees that the distributor earns from the end-user.

F-15

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(l)

Revenue recognition (continued)

Software (continued)

When software licenses incorporating third-party software products are sold or sold with third-party products that complement the software, the Company recognizes as revenue the gross amount of sales of third-party products.

Revenues related to maintenance agreements on software products are deferred and recognized ratably over the terms of the agreements which are normally one year.

Provisions for discounts are made and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period in which the related revenues are recorded. Such provisions are calculated after considering relevant historical data.

Business services

Revenues from time and materials outsourcing contracts are recognized as the services are delivered assuming all other basic criteria for revenue recognition have been met.

Revenues from the design, development and integration of Internet web sites and mobile phone devices are recognized using contract accounting based on either client acceptance of completed milestones or using the cost-to-cost percentage-of-completion method based on hours incurred. Some projects include acceptance clauses requiring customers’ sign-off at the conclusion of the projects. Historically, the Company has not experienced projects where sign-off or acceptance has been withheld by a customer resulting in a material loss on a project.

Revenues from Internet web site maintenance agreements are deferred and recognized ratably over the terms of the related agreements which are usually for periods of six months or one year.

Mobile services and applications

Mobile services and applications (“MVAS”) revenues are recognized in the month in which the services are performed, assuming all other basic criteria for revenue recognition have been met. The Company records revenues on a monthly basis based upon confirmations from the network operators. At the end of each reporting period, where an operator fails to provide the Company with a monthly statement confirming the amount of charges billed to their mobile phone users for that month, the Company uses information generated from its own internal system and historical financial data to make estimates of the billing reconciliation rate and collectible MVAS fees, and revenues are accrued accordingly.

MVAS revenues are recognized net of the mobile phone operator’s share of revenue and uncollectible amounts because the Company considers the network operators to be the primary obligors. The Company regularly re-evaluates its EITF 99-19 assessment as the mobile services environment continues to evolve with the transition to new platforms and significant changes in the operating practices of the network operators.

F-16

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(l)

Revenue recognition (continued)

Advertising/marketing

Advertising and marketing consulting services revenues for fixed price contracts are recognized upon completion of contractual milestones which are specified in the contracts along with pricing, payment terms and project timetable. Revenues from time and materials outsourcing contracts are recognized as the services are delivered, assuming all other basic criteria for revenue recognition have been met.

Database and marketing support services include list rental, database development and supply, data analysis and call center services. Revenue is recognized when the service or list has been delivered, assuming all other basic criteria for revenue recognition have been met.

Revenues from online banner advertising in which customers’ advertisements are placed on web sites for a set period of time or a set number of impressions are recognized in the period in which the advertisement is displayed as the lesser of the ratio of impressions delivered over total guaranteed impressions or ratably over the term of the contract. Impressions are defined as the number of times that an advertisement appears on a selected web page. Sponsorship revenues from advertisements placed on the Company’s own or affiliated companies’ web sites are recognized ratably over the term of contracts, assuming all other basic criteria for revenue recognition have been met.

(m)

Deferred revenue

Deferred revenue represents cash received for software, business services and advertising and marketing services in advance of services being rendered. The Company reports deferred revenue as a liability on the balance sheet when there is a contractual obligation as at the balance sheet date to provide services or software product to the customer but the services have not yet been completed or product has not yet been delivered, and thus no recognition of revenue has taken place.

(n)

Income taxes

Income taxes are determined under the liability method as required by SFAS 109,Accounting for Income Taxes. Income tax expense is based on pre-tax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance based on the amount of tax benefits that, based on available evidence, are not expected to be realized.

F-17

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(o)

Stock compensation expenses

The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion (“APB”) No. 25,Accounting for Stock Issued to Employees, and related Interpretations, and complies with the disclosure provisions of SFAS 123,Accounting for Stock-Based Compensation. The Company and one of its subsidiaries, hongkong.com Corporation, a 81% owned subsidiary, granted stock options to certain of their employees in accordance with their respective stock option plans. Under APB 25, stock compensation expense is recognized over the vesting period of the stock options based on the difference, if any, between the fair value of the underlying Company’s/hongkong.com Corporation’s shares at the date of grant and the exercise price of the stock options. The Company uses the accelerated expense attribution method under FASB Interpretation No. 28,Accounting for Stock Appreciation Rights and Other Variable Stock Option Award Plans,to recognize the stock compensation expense. Had the Company determined the stock compensation expense based on the fair value at the grant date of the stock options under SFAS 123, the Company’s net income would have been reduced as indicated below:


	Year ended			Year ended			Year ended
	December 31,			December 31,			December 31,
	2002			2003			2004
							(Restated)
Net income/(loss):
As reported	$	(18,231	)	$	15,524		$	(9,333	)
Add: Stock compensation expense included in net income/(loss)		309			328			2,051
Deduct: Stock compensation expense determined under fair value method		(15,924	)		(4,886	)		(14,706	)

Pro forma	$	(33,846	)	$	10,966		$	(21,988	)

Basic earnings/(loss) per share:
As reported	$	(0.18	)	$	0.15		$	(0.09	)
Pro forma	$	(0.33	)	$	0.11		$	(0.21	)

Diluted earnings/(loss) per share:
As reported	$	(0.18	)	$	0.15		$	(0.09	)
Pro forma	$	(0.33	)	$	0.11		$	(0.21	)

F-18

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(o)

Stock compensation expenses (continued)

For the purpose of the pro forma disclosures above, the estimated fair value of the options is amortized to expense over the options’ vesting period.

The following table sets forth the inputs used in the Black-Scholes option pricing model to determine the SFAS 123 compensation expense for the years ended December 31, 2002, 2003 and 2004:

Year ended

December 31,

2002

2003

2004

Range of U.S. risk-free interest rates

2.65% to 6.69%

2.08% to 6.69%

2.08% to 6.77%

Weighted expected life of options

5 years

Range of volatility

38% to 167%

75% to 165%

Dividend yield

nil

(p)

Earnings/(loss) per share

The Company computes earnings/(loss) per share in accordance with SFAS 128,Earnings Per Share. Under the provisions of SFAS 128, basic earnings or loss per share is computed by dividing the net income or loss available to common shareholders for the year by the weighted average number of common shares outstanding during the year. Diluted earnings or loss per share is computed by dividing the net income or loss for the year by the weighted average number of common and common equivalent shares outstanding during the year. Common equivalent shares, composed of incremental common shares issuable upon the exercise of stock options, are included in diluted earnings or loss per share to the extent that such shares are dilutive.

(q)

Repurchase agreements

Debt securities sold under agreements to repurchase are classified as secured borrowings. Agreements with the third parties specify the third parties’ rights to request additional collateral. Both parties monitor the fair value of the underlying securities as compared with the related receivable or payable, including accrued interest, and may request a cash transfer at least equal to that net exposure as necessary.

(r)

Accounts receivable and allowance for doubtful accounts

Accounts receivable are carried at their original amount less an estimate made for uncollectible amounts. The Company does not charge interest on receivables.

(s)

Loans receivable

Loans receivable are stated at amortized cost less the allowance for loan losses, loan origination fees (net of direct costs), commitment fees and purchase premiums or discounts. Interest on loans is credited to income as it is earned. Premiums are amortized and discounts are accreted over the life of the loans using the interest method.

F-19

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(t)

Comprehensive income/(loss)

Comprehensive income/(loss) includes net earnings or loss as well as additional other comprehensive income/(loss). The Company’s other comprehensive income/(loss) consists of unrealized gains and loss on available-for-sale securities and foreign currency translation, all recorded net of tax.

(u)

Gain on issuance of shares by subsidiaries

When a subsidiary sells its shares to unrelated parties at a price in excess of its book value, the Company’s net investment in that subsidiary increases. If at that time the subsidiary is not a newly-formed, non-operating entity, nor a research and development, start-up or development stage company, nor is there question as to the subsidiary’s ability to continue in existence, the Company records the increase as a non-operating gain in the Company’s consolidated statement of operations. Otherwise, the increase is reflected in “effect of subsidiaries’ equity transactions” in the Company’s consolidated statement of shareholders’ equity.

(v)

Retirement costs

Retirement costs relating to defined benefit plans are actuarially determined based on assumptions concerning the future events that will determine the amount and timing of the benefit payments. Contributions relating to defined contribution plans are made based on a percentage of the employees’ salaries and are included in the Company’s consolidated statement of operations as they become payable.

(w)

Derivative instruments

SFAS 133,Accounting for Derivative Instruments and Hedging Activities, as modified by SFAS 149,Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities, requires all contracts which meet the definition of a derivative to be recognized in the Company’s consolidated financial statements as either assets or liabilities and recorded at fair value. Changes in the fair value of derivative financial instruments are either recognized periodically in the Company’s consolidated statement of operations or in the Company’s consolidated statement of shareholders’ equity as a component of other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. Changes in fair values of derivatives not qualified as hedges are reported in the Company’s consolidated statement of operations. The estimated fair values of derivative instruments are determined at discrete points in time based on the relevant market information. These estimates are calculated with reference to the market rates using industry standard valuation techniques.

F-20

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(x)

Impact of recently issued accounting standards

In March 2004, the EITF reached a consensus on Issue No. 03-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 provides new guidelines for the evaluation and determination of whether a loss on certain investments is other-than-temporary and requires certain additional disclosures pertaining to unrealized investment losses in a company’s financial statements. The effective date of the evaluation and measurement criteria of EITF 03-1 has been delayed pending the issuance of additional implementation guidance by the FASB. The additional disclosure requirements, however, remain effective for annual periods ending after December 15, 2004. Management continues to monitor the FASB’s progress and does not currently expect the adoption of the evaluation and measurement criteria, once issued, to have a material impact on the Company’s consolidated results of operations or financial position.

In December 2004, the FASB issued SFAS 123 (revised 2004) (“SFAS 123-R”),Share-Based Payment,to replace SFAS 123,Accounting for Stock-Based Compensation,and APB 25,Accounting for Stock Issued to Employees. SFAS 123-R requires, among other things, that all share-based payments to employees, including grants of stock options, be measured based on their grant-date fair value and recognized as expense in the financial statements. Pro forma disclosure is no longer an alternative. Unless observable market prices exist, the grant-date fair value is estimated using an appropriate option-pricing model as determined by management. Management must also make certain assumptions about employee exercise habits and forfeiture rates, and selects an appropriate amortization methodology for recognizing compensation expense. SFAS 123-R requires either a modified prospective or retrospective method of adoption. Under the modified prospective method, compensation expense will be recorded in the financial statements for (i) all awards granted after the adoption of SFAS 123-R and (ii) future vesting of awards outstanding as of the date of adoption of SFAS 123-R. Under the modified retrospective method, companies may elect to restate their previously issued financial statements to maintain consistency across all periods presented. The provisions of SFAS 123-R are effective for interim or annual reporting period that begins on June 15, 2005. Management believes that the adoption of SFAS 123-R will have a material impact on the Company’s consolidated results of operations and earnings per share when it is adopted.

In December 2004, the FASB issued SFAS 153,Exchanges of Nonmonetary Assets, which amends APB 29,Accounting for Nonmonetary Transactions,to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Under SFAS 153, exchanges of nonmonetary assets that do not have commercial substance should be measured based on the fair values of the assets exchanged. The provisions of SFAS 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2004. The adoption of SFAS 153 is not expected to have a significant impact on the Company’s consolidated results of operations or financial position.

F-21

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(y)

Restatement

Subsequent to the issuance of the consolidated financial statements for the year ended December 31, 2004 that were filed with the U.S. Securities and Exchange Commission on June 30, 2005, the Company made an adjustment to the minority interests for a calculation error which resulted in an overstatement of minority interests in income of consolidated subsidiaries by US$1,227.

A summary of the effect of the restatement is as follows:


	Year ended December 31, 2004
	As					As
	reported			Restatement		restated

Minority interests in income of consolidated subsidiaries	$	(2,227	)	$	1,227	$	(1,000	)
Loss from continuing operations	$	(9,420	)	$	1,227	$	(8,193	)
Net loss	$	(10,560	)	$	1,227	$	(9,333	)

Basic and diluted loss per share from continuing operations	$	(0.09	)	$	0.01	$	(0.08	)
Basic and diluted loss per share	$	(0.10	)	$	0.01	$	(0.09	)


	December 31, 2004
	As						As
	reported			Restatement			restated

Minority interests	$	47,110		$	(1,227	)	$	45,883
Accumulated deficit	$	(229,453	)	$	1,227		$	(228,226	)
Total shareholders’ equity	$	439,723		$	1,227		$	440,950

3. CHANGES IN THE PRESENTATION OF COMPARATIVE FINANCIAL STATEMENTS

Subsequent to the year ended December 31, 2003, the Company’s operating segments have been changed from software and consulting services, mobile services and applications, advertising and marketing activities, and other income to software, business services, mobile services and applications, advertising/marketing, and others. The Company believes that this new segment classification is more representative of the Company’s business strategies and reflects the Company’s current internal reporting practices.

Due to the change of operating segments and the discontinued operations of certain components, certain comparative amounts have been reclassified to conform with the current year’s presentation.

F-22

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

4. BUSINESS COMBINATIONS

(a)

Praxa Limited (“Praxa”)

On February 12, 2003, the Company acquired a 100% equity interest in Praxa through the acquisition of the entire issued share capital of Praxa. In accordance with SFAS 141,Business Combinations, this acquisition has been accounted for under the purchase method of accounting and the results of Praxa’s operations have been included in the Company’s consolidated financial statements since the date of acquisition. Praxa’s core business is the provision of information technology products and services in the form of outsourcing, application development and support, and systems integration in Australia and Asia. The acquisition of Praxa is expected to increase the number of clients for its low-cost China-based outsourcing platform and to extend the distribution network of the Company’s own software products to Australia.

The purchase price was approximately $3,567 in cash.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.


Current assets	$	4,552
Property and equipment, net		1,061
Goodwill		3,589
Intangible assets *		1,996
Other assets		193

Total assets acquired		11,391


Current liabilities		(7,292	)
Deferred tax liabilities		(532	)

Total liabilities assumed		(7,824	)


Net assets acquired	$	3,567


*		The weighted average useful life of all amortizable identifiable intangible assets acquired, which represented customer base, is approximately 5 years.

Goodwill of $3,589 was assigned to the business services segment and such goodwill is not deductible for tax purposes. The estimated fair value of the intangible assets was derived from a valuation from an independent third party.

(b)

Palmweb Inc. (“Palmweb”)

In April 2003, hongkong.com Corporation acquired a 100% equity interest in Palmweb through the acquisition of the entire issued share capital of Palmweb. In accordance with SFAS 141, this acquisition has been accounted for under the purchase method of accounting and the results of operations of Palmweb and its subsidiary and variable interest entities (collectively the “Palmweb Group”) have been included in the Company’s consolidated financial statements since the date of acquisition. Palmweb is primarily engaged in the provision of MVAS in Mainland China. The acquisition enabled the Company to enter the MVAS market in Mainland China.

F-23

chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

4. BUSINESS COMBINATIONS (continued)

(b) Palmweb Inc. (“Palmweb”) (continued)

The total purchase consideration, including amounts to be paid to certain employees of Palmweb as further detailed below, is as follows:

	-		initial cash consideration of $14,000; and

	-		earnout cash consideration which is equal to the aggregate of (i) an amount equal to the audited net income of the Palmweb Group for the year ended December 31, 2003 multiplied by 3.56918 and (ii) an amount equal to the audited net income of the Palmweb Group for the year ended December 31, 2004 multiplied by 1.13982; less the amount already paid (the “Contingent Consideration”). The total purchase consideration is subject to a maximum of $55,000.

The initial cash consideration of $14,000 was paid in April 2003. The Contingent Consideration based on the audited net income of the Palmweb Group for the year ended December 31, 2003 was finalized at $41,000 and was paid in February 2004. Of the Contingent Consideration, $39,835 has been accounted for as an adjustment of the purchase price, and the remaining $1,165 was accounted for as compensation for employees’ services for the year ended December 31, 2003.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.


Current assets	$	7,058
Property and equipment, net		402
Goodwill		47,704
Intangible assets *
Customer base		2,064
Software applications and programs		104
Business licenses and partnership agreements		654
Other assets		66

Total assets acquired		58,052


Current liabilities		( 3,286	)
Deferred tax liabilities		( 931	)

Total liabilities assumed		( 4,217	)


Net assets acquired	$	53,835


*		The weighted average useful life of all amortizable identifiable intangible assets acquired is approximately 3 years. The weighted average useful life of the customer base and software applications and programs is approximately 2 years, and the weighted average useful life of the business licenses and partnership agreements is approximately 6 to 7 years.

Goodwill was assigned to the mobile services and applications segment and such goodwill is not deductible for tax purposes. The estimated fair value of the intangible assets was derived from a valuation from an independent third party.

F-24

chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

4. BUSINESS COMBINATIONS (continued)

On September 9, 2003, the Company acquired a 51% equity interest in Cayman First Tier, an investment holding company organized in the Cayman Islands which owns 100% of IMI. In accordance with SFAS 141, this acquisition has been accounted for under the purchase method of accounting and the results of Cayman First Tier group have been included in the Company’s consolidated financial statements since the date of acquisition. IMI is a leading provider of supply chain management solutions in North America and Europe. Supply chain management software is considered by the Company as an important component of a broad enterprise resource planning product and service offering, and forms part of the Company’s strategic software initiative. The remaining 49% equity interest is held by Symphony Technology Group (“Symphony”), a Palo Alto, California-based private equity firm focused on enterprise software and services, which previously owned 100% of IMI Symphony has an option to sell to the Company all of its 49% interest in IMI at any time during the twelve months following the occurrence of unpermitted changes in the composition of IMI’s executive committee being overruled by the IMI board, or modifications to the rights, powers or responsibilities of IMI’s executive committee without the approval of the directors appointed by Symphony. The purchase price for Symphony’s interest in IMI is based on the financial performance of IMI, and is set at a fixed multiple of IMI’s annual revenues. In consideration for the 51% interest, the Company has agreed to invest $25,000 into Cayman First Tier, and has also agreed to finance loan facilities for Cayman First Tier and Symphony Enterprise Solutions, S.ar.L., a wholly-owned subsidiary of Cayman First Tier of up to an aggregate of $25,000. All the funds provided to Cayman First Tier are intended to be used primarily for further expansion in the supply chain management software sector via acquisitions, strategic investments and organic growth.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.


Current assets	$	36,363
Property and equipment, net		1,689
Goodwill		15,802
Intangible assets *
Customer base		2,629
Software applications and programs		2,434
Other assets		2,184

Total assets acquired		61,101


Current liabilities		(26,178	)
Minority interests		( 9,923	)

Total liabilities assumed		(36,101	)


Net assets acquired	$	25,000


*		The weighted average useful life of all amortizable identifiable intangible assets acquired is approximately 7 years. The weighted average useful life of the customer base is 10 years, and the weighted average useful life of the software applications and programs is approximately 4 years.

Goodwill of $15,802 was assigned to the software segment and such goodwill is not deductible for tax purposes.

F-25

chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

4. BUSINESS COMBINATIONS (continued)

(d) Pivotal Corporation (“Pivotal”)

On February 25, 2004, the Company acquired a 100% equity interest in Pivotal through the acquisition of the entire issued share capital of Pivotal. In accordance with SFAS 141,Business Combinations, this acquisition has been accounted for under the purchase method of accounting and the results of Pivotal’s operations have been included in the Company’s consolidated financial statements since the date of acquisition. Pivotal is a developer of customer relationship management software solutions in Canada. The acquisition of Pivotal is expected to complement the Company’s existing portfolio of proprietary software solutions.

The total purchase price was comprised of $35,925 in cash, 1,846,429 CDC Class A common shares valued at $21,363 at the date of acquisition, CDC stock options issued in exchange for vested in-the-money Pivotal stock options with a total value of $481, and transaction costs of $348.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.


Current assets	$	13,791
Property and equipment, net		1,500
Goodwill		46,217
Intangible assets *
Customer base and contracts		11,183
Software applications and programs		8,963
Trademarks		4,476
Other assets		987

Total assets acquired		87,117


Current liabilities		(29,000	)

Total liabilities assumed		(29,000	)


Net assets acquired	$	58,117


*		The weighted average useful life of all amortizable identifiable intangible assets acquired is 5 years. The weighted average useful life of the customer base and contracts is 5 years, and the weighted average useful life of the software applications and programs is 5 years. Trademarks have an indefinite useful life.

The goodwill was assigned to the software segment and such goodwill is not deductible for tax purposes. The estimated fair value of the intangible assets was derived from a valuation from an independent third party.

F-26

chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

4. BUSINESS COMBINATIONS (continued)

(e) Group Team Investments Ltd. (“Group Team”)

On May 20, 2004, the Company acquired a 100% equity interest in Group Team through the acquisition of its entire issued share capital. The principal assets of Group Team are its investment in Beijing He He IVR Mobile Technology Limited (“Beijing He He IVR”), which is held through another wholly-owned subsidiary, and its interest in Beijing He He Technology Co., Ltd. (“Beijing He He”). In accordance with SFAS 141, this acquisition has been accounted for under the purchase method of accounting and the results of Group Team’s consolidated operations have been included in the Company’s consolidated financial statements since the date of acquisition. Group Team through Beijing He He IVR and Beijing He He is engaged in the provision of MVAS to mobile phone subscribers in The People’s Republic of China (“PRC” or “Mainland China”). As a result of the acquisition, the Company is expected to expand its MVAS operations in Mainland China.

Pursuant to the share purchase agreement, the total purchase consideration is as follows:

	-		initial cash consideration of $9,600; and

	-		earnout cash consideration which is equal to the aggregate of (i) an amount equal to the audited net income of Group Team’s consolidated operations for the year ended December 31, 2004 multiplied by 9.9 at 50% and (ii) an amount equal to audited net income of Group Team’s consolidated operations for the year ending December 31, 2005 multiplied by 9.9 at 15%. The total purchase consideration is not to exceed $60,000.

The initial cash consideration of $9,600 was paid in April 2004. The first earnout cash consideration of $12,559 was accrued at December 31, 2004 and paid in April 2005. The second earnout cash consideration to be paid in 2006, if any, will be recorded as goodwill.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.


Current assets	$	3,026
Property and equipment, net		453
Goodwill		15,693
Intangible assets *
Partnership agreements and business licenses		4,003
Customer base		150
Software applications and programs		58
Other assets		21

Total assets acquired		23,404


Current liabilities		( 1,245	)

Total liabilities assumed		( 1,245	)


Net assets acquired **	$	22,159


*		The weighted average useful life of all amortizable identifiable intangible assets acquired is approximately 4 years. The weighted average useful life of the partnership agreements and business licenses is approximately 4 years and the weighted average useful life of the customer base and software applications and programs is approximately 2 years.

**		Based on the initial cash consideration of $9,600 payable at the date of acquisition and the first earnout cash consideration of $12,559 accrued at December 31, 2004, which was recorded as goodwill.

F-27

chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

4. BUSINESS COMBINATIONS (continued)

(e) Group Team Investments Ltd. (“Group Team”) (continued)

The goodwill was assigned to the mobile services and applications segment and such goodwill is not deductible for tax purposes. The estimated fair value of the intangible assets was derived from a valuation from an independent third party.

Subsequent to the acquisition, the investment was transferred on August 18, 2004 to hongkong.com Corporation, a 81% owned subsidiary of the Company. This deemed disposal resulted in a gain on deemed disposal of $253 for the year ended December 31, 2004.

(f) Ross Systems, Inc. (“Ross”)

On August 26, 2004, the Company acquired a 100% equity interest in Ross through the acquisition of the entire issued share capital of Ross. In accordance with SFAS 141, this acquisition has been accounted for under the purchase method of accounting and the results of Ross’ operations have been included in the Company’s consolidated financial statements since the date of acquisition. Ross’ core business is the provision of enterprise software products to mid-market clients. The acquisition of Ross is expected to expand the Company’s enterprise software product portfolio.

The total purchase price was comprised of $40,707 in cash, 6,111,117 CDC Class A common shares valued at $26,584 at the date of acquisition (120,848 shares valued at $526 remained unpaid as of December 31, 2004), CDC stock options issued in exchange for vested in-the-money Ross stock options with a total value of $1,708, and transaction costs of $1,129.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.


Current assets	$	14,001
Property and equipment, net		2,609
Goodwill		44,804
Intangible assets *
Customer base and contracts		6,600
Software applications and programs		19,600
Trademarks		3,400
Other assets		62

Total assets acquired		91,076


Current liabilities		( 20,948	)

Total liabilities assumed		( 20,948	)


Net assets acquired	$	70,128


*		The weighted average useful life of all amortizable identifiable intangible assets acquired is 7 years. The weighted average useful life of the customer base and contracts is 7 years, and the weighted average useful life of the software applications and programs is 7 years. Trademarks have an indefinite useful life.

Goodwill was assigned to the software segment and such goodwill is not deductible for tax purposes. The estimated fair value of the intangible assets was derived from a valuation from an independent third party.

F-28

chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

4. BUSINESS COMBINATIONS (continued)

(g) Unaudited pro forma consolidated financial information

The following unaudited pro forma consolidated financial information reflects the Company’s consolidated results of operations for the years ended December 31, 2003 and 2004 as if the acquisitions of Pivotal, Group Team and Ross had occurred as at January 1, 2003 and January 1, 2004, respectively. These pro forma results have been prepared for information purposes only and do not purport to be indicative of what the Company’s consolidated results of operations would have been had the acquisitions of these subsidiaries actually taken place on January 1, 2003 and 2004, respectively, and may not be indicative of future results of operations.


				Year ended
	Year ended			December 31,
	December 31,			2004
	2003			(Restated)
	(unaudited)			(unaudited)

Revenue	$	183,868		$	224,089
Net loss	$	(2,995	)	$	(34,373	)
Basic and diluted loss per share	$	(0.03	)	$	(0.32	)

The difference in the pro forma and audited net income/(loss) for the years ended December 31, 2003 and 2004 is primarily due to the inclusion of the results of operations of the acquired subsidiaries from the beginning of the respective years of acquisition and for the immediately preceding comparable year as though the corresponding business combinations had been completed at the beginning of that year, net of the additional amortization of corresponding purchased amortizable intangible assets for the years ended December 31, 2003 and 2004.

5. RESTRICTED CASH

At December 31, 2003 and 2004, cash of $238 and $3,886, respectively, was pledged for banking facilities of the Company.

6. ACCOUNTS RECEIVABLE


	December 31,			December 31,
	2003			2004

Accounts receivable:
Amounts billed	$	18,058		$	41,744
Unbilled		1,320			6,561


		19,378			48,305
Allowance for doubtful accounts		( 2,816	)		( 4,784	)


Net	$	16,562		$	43,521

F-29

chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

6. ACCOUNTS RECEIVABLE (continued)


	Year ended			Year ended			Year ended
	December 31,			December 31,			December 31,
	2002			2003			2004

Allowance for doubtful accounts:
Balance at beginning of year	$	6,538		$	4,139		$	2,816
Additions		4,296			2,297			5,607
Write-offs, net of recoveries		( 6,695	)		( 3,620	)		( 3,639	)


Balance at end of year	$	4,139		$	2,816		$	4,784

Unbilled receivables represent the recognized sales value of performance relating to software and business services and these amounts had not been billed and were not billable to the customers at the balance sheet date. The balances will be billed upon the fulfillment of certain conditions agreed between the parties.

7. AVAILABLE-FOR-SALE DEBT SECURITIES

In 2002, 2003 and 2004, the Company recorded impairment losses on certain available-for-sale debt securities of approximately $5,000, nil and $990, respectively. At December 31, 2002, 2003 and 2004, the Company evaluated the length of time and extent to which the market value of certain of its securities had been less than their cost, as well as the financial condition and performance of the issuer and the Company’s intention and ability to hold such securities to recovery or maturity. The Company recorded an impairment on those securities for which the decrease in fair value of the debt securities was determined to be other-than-temporary.


	December 31,			December 31,
	2003			2004

Debt obligations issued by corporations and U.S. federally supervised/chartered organizations:
Amortized cost	$	313,219		$	180,783
Net unrealized gain/(loss) *		35			(844	)


Estimated fair value		313,254			179,939
Restricted debt securities pledged for banking facilities		(31,109	)		(75,780	)


Non-restricted	$	282,145		$	104,159


*		The net unrealized gain/(loss) consisted of the gross unrealized gain of $34 (2003: $1,471) and the gross unrealized loss of $878 (2003: $1,436).

For the years ended December 31, 2002, 2003 and 2004, the gross realized gain amounts were $1,258, $6,834 and $218, respectively, and the gross realized loss amounts were $1,166, $5,356 and $208, respectively.

F-30

chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

7. AVAILABLE-FOR-SALE DEBT SECURITIES (continued)

Non-restricted available-for-sale debt securities consist of:


	December 31,		December 31,
	2003		2004

Current	$	262,745	$	94,259
Non-current		19,400		9,900


	$	282,145	$	104,159

At December 31, 2004, all the available-for-sale debt securities were carried at market value and temporary unrealized gains and losses at December 31, 2004 were reported in other comprehensive income/(loss).

All available-for-sale debt securities held by the Company have maturity terms ranging from one to ten years. At December 31, 2003 and 2004, the Company’s debt securities had maturity dates falling due as follows:


	December 31,		December 31,
	2003		2004

Maturity date
One year or less	$	30,322	$	19,980
Over one year to five years		233,342		150,059
Over five years to ten years		49,590		9,900


	$	313,254	$	179,939

Included in total available-for-sale debt securities owned as of December 31, 2003 and 2004 were debt securities with a market value of $31,109 and $75,780, respectively, which were segregated and secured in accordance with the Company’s lines of credit as further detailed in note 13.

8. LOANS RECEIVABLE

The balance of loans receivable as of December 31, 2004 relates to a $25,000 loan to Symphony, a minority shareholder of a subsidiary of the Company, Cayman First Tier (the holding company incorporated in the Cayman Islands which owns 100% of an operating subsidiary, IMI). The loan bears interest at 3% per annum and is repayable in November 2007. The loan is secured by a pledge from Symphony in favor of Cayman First Tier of all of Symphony’s right, title and interest in Symphony’s 49% interest in Cayman First Tier.

The balance of loans receivable as of December 31, 2003 was comprised of (i) a $2,000 loan to Pivotal, which was not a subsidiary until February 25, 2004 and (ii) the $25,000 loan to Symphony.

F-31

chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

9. PROPERTY AND EQUIPMENT


	December 31,			December 31,
	2003			2004

Freehold land	$	1,348		$	—
Buildings		1,348			—
Leasehold improvements		2,156			2,449
Furniture and fixtures		301			1,116
Office equipment		1,740			1,950
Computer equipment		26,754			29,640
Motor vehicles		511			480


		34,158			35,635
Less: Accumulated depreciation		(26,948	)		(28,018	)


	$	7,210		$	7,617

Depreciation expense was $11,340, $5,293 and $3,721 for the years ended December 31, 2002, 2003 and 2004, respectively. The Company’s land and buildings were classified as held for sale as of December 31, 2004 as described in note 28.

10. GOODWILL

The changes in the carrying amount of goodwill for the years ended December 31, 2003 and 2004 are as follows:


						Mobile
				Business		services and		Advertising/
	Software			services		applications		marketing		Total

Balance as of January 1, 2003	$	7,561		$	—	$	—	$	4,455	$	12,016
Goodwill acquired during the year		21,063			—		47,704		879		69,646
Less: Goodwill written off related to sale/dissolution of business units		(235	)		—		—		—		(235	)


Balance as of December 31, 2003		28,389			—		47,704		5,334		81,427

Reallocation of goodwill		(16,105	)		16,105		—		—		—


Balance as of January 1, 2004		12,284			16,105		47,704		5,334		81,427
Goodwill acquired during the year		92,471			—		15,693		324		108,488
Less: Goodwill written off related to sale/dissolution of business units		(363	)		—		—		—		(363	)


Balance as of December 31, 2004	$	104,392		$	16,105	$	63,397	$	5,658	$	189,552

The software and consulting services segment in 2003 has been renamed as the software segment due to a change in segments at the beginning of 2004. Goodwill in the software and consulting services segment at December 31, 2003 amounting to $28,389 was reallocated between the software segment and the business services segment based on relative fair values.

F-32

chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

11. INTANGIBLE ASSETS

The following table summarizes the Company’s amortized intangible assets, net, as of December 31:


	2003							2004
	Gross							Gross
	carrying		Accumulated					carrying		Accumulated
	amount		amortization			Net		amount		amortization			Net

URLs	$	16,956	$	(1,688	)	$	15,268	$	16,956	$	(2,543	)	$	14,413
Software applications and programs		6,585		(813	)		5,772		38,426		(5,624	)		32,802
Customer base and contracts		9,303		(2,098	)		7,205		27,727		(6,163	)		21,564
Business licenses and partnership agreements		654		(78	)		576		5,708		(1,307	)		4,401


	$	33,498	$	(4,677	)	$	28,821	$	88,817	$	(15,637	)	$	73,180

These intangibles are amortized on a straight-line basis over the estimated economic lives of the assets. The Company had trademarks not subject to amortization with carrying values of $59 and $7,941 as of December 31, 2003 and 2004, respectively.

Amortization expense was $1,183, $3,571 and $10,960 for the years ended December 31, 2002, 2003 and 2004, respectively. The following table summarizes the estimated amortization expense for each of the following five years based on the current amount of intangible assets subject to amortization:


Year ended December 31:
2005	$	12,712
2006	$	11,151
2007	$	10,877
2008	$	9,558
2009	$	7,099

No material impairment of the identified intangible assets was recorded for the years ended December 31, 2002, 2003 and 2004.

12. AVAILABLE-FOR-SALE EQUITY SECURITIES


	December 31,			December 31,
	2003			2004

Cost	$	813		$	411
Net unrealized gain/(loss) *		(223	)		116


Market value	$	590		$	527


*		For the year ended December 31, 2004, the net unrealized gain/(loss) consisted of gross unrealized gain of $151 (2003: $103) and gross unrealized loss of $35 (2003: $326).

For the years ended December 31, 2002, 2003 and 2004, the gross realized gain was $243, $3,545 and $166, respectively, and the gross realized loss was $498, $424 and $9, respectively.

F-33

chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

12. AVAILABLE-FOR-SALE EQUITY SECURITIES (continued)

At the balance sheet date, the Company evaluated the length of time and extent to which the market value of certain of its securities had been in an unrealized loss position as well as the financial condition and performance of the issuer of the equity securities and concluded that no impairment was other-than-temporary. The Company recorded a loss of $255, a gain of $3,121 and a gain of $157 on the sale of available-for-sale equity securities in 2002, 2003 and 2004, respectively.

13. CREDIT ARRANGEMENTS

Under the line of credit arrangements with three banks, Fortis Bank, DBS Bank and Standard Chartered Bank, the Company may borrow up to $500,000 on such terms as the Company and the banks mutually agree upon. Except for bank loans of $61,073 to be repaid in 2005, these arrangements do not have termination dates but are reviewed annually for renewal. At December 31, 2004, the unused portion of the credit lines was $438,927.

The Company’s line of credit with Fortis Bank is a repurchase agreement pursuant to which the Company sold certain debt securities to the bank at a discounted price, and the bank agreed to sell the same debt securities back to the Company at that same price at the termination of the agreement. Throughout the term of the agreement, Fortis Bank will pay to the Company any income associated with the debt securities and the Company will pay to the bank interest calculated using the London Inter-Bank Offered Rate (“LIBOR”) plus 0.2% per annum. The Company’s line of credit with DBS Bank works in the same manner as the line of credit with Fortis Bank; however the rate the Company must pay to DBS Bank is LIBOR plus 0.35% per annum.

In 2004, the Company entered into a collateralized credit facility agreement with Standard Chartered Bank under which the Company deposits debt securities as collateral in exchange for cash. During the term of the agreement, the bank maintains a charge on such debt securities. The bank will pay to the Company any income associated with the collateralized debt securities and the Company shall pay to the bank interest calculated using the LIBOR plus 0.3% per annum.

In connection with the credit lines granted to the Company, the Company maintained compensating balances of $238 and $3,886 in cash at December 31, 2003 and 2004, respectively, and pledged available-for-sale debt securities with a net book value of $31,109 and $75,780 at December 31, 2003 and 2004, respectively.

The weighted average interest rates on short-term borrowings as of December 31, 2003 and 2004 were 1.4% and 2.0% per annum, respectively.

F-34

chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

14. LONG-TERM BANK LOANS

Long-term bank loans consist of the following:


	December 31,			December 31,
	2003			2004

LIBOR + 1.75% mortgage loan	$	777		$	718
7.72% mortgage loan		777			775
LIBOR + 0.35% total return swap transaction loan		10,073			10,073


		11,627			11,566
Less: Current portion		(171	)		(11,566	)


	$	11,456		$	—

Maturities of long-term debts for the five years following December 31, 2004 are $11,566 in 2005 and nil thereafter.

Freehold land and buildings with a carrying amount of $2,806 at December 31, 2003 and $2,992 at December 31, 2004 were pledged as collateral to secure the mortgage loans. Debt securities with a fair value of $11,896 at December 31, 2003 and $11,683 at December 31, 2004 were pledged as collateral to secure the total return swap transaction loan.

15. ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)

The components of accumulated other comprehensive income/(loss) are as follows:


	Unrealized
	gains/(losses)			Foreign
	on available-			currency
	for-sale			translation
	securities			adjustments			Total

Balance at December 31, 2002	$	3,365		$	(1,375	)	$	1,990

Unrealized gains, net of unrealized losses of available-for-sale securities		644			—			644
Minority interests’ share of unrealized losses, net of unrealized gains on available-for-sale securities		184			—			184
Foreign currency translation adjustments		—			186			186
Less: reclassification adjustment for gains, net of losses included in net income		(4,344	)		—			(4,344	)


Balance at December 31, 2003	$	(151	)	$	(1,189	)	$	(1,340	)
Unrealized losses, net of unrealized gains on available-for-sale securities		(593	)		—			(593	)
Minority interests’ share of unrealized losses, net of unrealized gains on available-for-sale securities		53			—			53
Foreign currency translation adjustments		—			1,345			1,345
Less: reclassification adjustment for losses, net of gains included in net loss		274			—			274


Balance at December 31, 2004	$	(417	)	$	156		$	(261	)

F-35

chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

16.

SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION

The Company incurred the following expenses which are not separately reflected in the consolidated statements of operations:


	Year ended		Year ended		Year ended
	December 31,		December 31,		December 31,
	2002		2003		2004
Minimum rental expenses under operating leases	$	4,198	$	3,086	$	9,593
Advertising expenses	$	930	$	580	$	2,249
Defined contribution retirement plans expenses	$	1,423	$	2,922	$	3,459

17.

RELATED PARTY TRANSACTIONS

In addition to the transactions and balances detailed elsewhere in these financial statements, the Company had the following material transactions with related parties during the years ended December 31, 2002, 2003 and 2004:

(a)

24/7 Real Media, Inc.

24/7 Real Media, Inc. (formerly known as 24/7 Media, Inc. and hereafter referred to as “24/7”) was a shareholder of the Company in 2001 and had a License and Software Agreement with the Company from October 1998 to September 2001 under which 24/7 granted to the Company a non-exclusive license to use certain 24/7 software products to serve advertisements on the Internet and an exclusive license to use the “24/7 Media” trademark in the Asian market. The Company also had an equity interest in 24/7 Media Asia Limited, a then wholly-owned subsidiary of 24/7.

In June 2001, the Company demanded from 24/7 Media Asia Limited the repayment of a portion of loans that the Company had extended to 24/7 Media Asia Limited. In January 2002, 24/7 Media Asia Limited completed a rights issue whereby it issued and allotted additional equity shares to all shareholders participating in the rights issue as a means to settle the loan demand. While the Company participated in this rights issue, 24/7 chose not to participate in this rights issue and therefore, 24/7’s interest in 24/7 Media Asia Limited was effectively diluted. The Company’s interest in 24/7 Media Asia Limited increased to approximately 98% while 24/7’s interest declined to under 2%.

In February 2003, 24/7 filed suit in Federal District Court in New York against the Company to enforce obligations allegedly owed under certain arrangements with 24/7 The Company contested these allegations and, in May 2003, obtained an order compelling arbitration of the claims, at the International Chamber of Commerce, or the ICC. In 2003, 24/7 ceased to be a related party.

In June 2004, the Company reached a settlement with 24/7 settling all outstanding claims between the parties. The settlement resulted in a net expense of $1,612 comprised of a $3,036 expense as a result of the issuance of 400,000 CDC Class A common shares to 24/7 offset by a release of provisions and payables due to 24/7 of $1,424.

F-36

chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

17.

RELATED PARTY TRANSACTIONS (continued)

(b)

Golden Tripod Limited

In June 2001, the Company signed contracts with entities affiliated with the Liaison Office of the Central People’s Government in HKSAR (formerly known as XinHua News Agency, or “Xinhua”), Golden Tripod (Holdings) Limited, or Golden Tripod, and Xinhua News Agency Shanghai Branch, or Shanghai Xinhua, to acquire 30% of the shares of Xin Hua Asia Pacific TV (H.K.) Center Limited, a company 51% owned by Golden Tripod and 49% owned by Shanghai Xinhua, as well as to form a 50% owned joint venture in the PRC. The Company paid $500 as a deposit after the contracts had been signed. As certain conditions precedent for the joint venture were not met during the course of 2001, the Company terminated the transaction and made a bad debt provision for the full deposit amount at the end of the year. The Company obtained a refund amounting to $348 in 2003.

For the years ended December 31, 2002, 2003 and 2004, the Company paid management fees of $293, $137 and $132, respectively, to Golden Tripod Limited, an entity affiliated with Xinhua, one of the Company’s major shareholders, for the provision of general management services to the Company, including consultancy fees of consultants provided by Golden Tripod Limited.

(c)

Asia Pacific Online Limited (“APOL”)

APOL is a Cayman Islands company that is 50% owned by the spouse of Peter Yip, who acted as the chief executive officer of the Company for the years ended December 31, 2002, 2003 and 2004, and 50% owned by a trust set up for the benefit of Mr. Yip’s children. In January 2002, the Company entered into a service agreement with APOL (the “January 2002 Services Agreement”). Under this agreement, the Company agreed to provide an annual management fee of $0.001 and reimburse expenses incurred up to $270 annually for the provision of general management services principally consisting of the provision of full-time services by Mr. Yip to act as the Company’s chief executive officer. The January 2002 Services Agreement was renewed in 2003. APOL is the owner of 11,835,686 Class A common shares of the Company and has exercisable options to purchase additional 2,456,442 Class A common shares of the Company. These options include options to purchase 200,000 Class A common shares of the Company granted on June 3, 2003 at an exercise price of $4.95 per share, 100,000 Class A common shares of the Company granted on June 14, 2003 at an exercise price of $5.16 per share, and 600,000 Class A common shares of the Company granted on March 25, 2004 at an exercise price of $8.25. In addition, Mr. Yip has exercisable options to purchase 190,000 Class A common shares of the Company. Mr. Yip’s spouse also owns 4,444,900 Class A common shares of the Company.

Mr. Yip acted as the Company’s chief executive officer in each of the years of 2002, 2003 and 2004.

(d)

New World TMT Limited (formerly known as New World Infrastructure Limited)

In October 2000, the Company entered into an agreement to acquire a 50.3% interest in Wealth Corporation Limited at an aggregate consideration of $9,300 consisting of $6,800 of the Company’s Class A common shares to purchase shares from the selling shareholders, and $2,500 in cash to purchase newly issued shares. The selling shareholders of Wealth Corporation Limited included New World TMT Limited, a former shareholder of the Company which as of October 2002 held approximately 11.4% of the Company’s Class A common shares, and received approximately $1,400 worth of the Company’s Class A common shares as consideration for its shares in Wealth Corporation Limited. Wealth Corporation Limited operated a web site which sold travel products and services, such as airline tickets and hotel accommodations, to corporations and travel agencies in the PRC. The acquisition was based upon a strategy to build a Greater China online and off-line travel capability which focused on the tour-group market.

F-37

chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

17.

RELATED PARTY TRANSACTIONS (continued)

(d)

New World TMT Limited (formerly known as New World Infrastructure Limited) (continued)

As a result of the deteriorating financial performance of Wealth Corporation Limited in 2002, the Company de-emphasized the development of its online travel business in Greater China and sought to recover some of its original investment in the company. The Company entered into negotiations with the other shareholders of Wealth Corporation Limited, including New World TMT Limited, and in November 2002, the parties agreed to permit the Company to reduce its shareholding to 19.9% through a share repurchase by Wealth Corporation Limited. Wealth Corporation Limited was not profitable at such time and the shareholders agreed to value the company based upon the cash balances of the company. As a result of the consummation of the share repurchase, the Company reduced its shareholding to 19.9% for a payment from Wealth Corporation Limited of $1,000 in November 2002.

In January 2003, New World TMT Limited ceased to be one of the Company’s shareholders following the sale of its entire shareholding in the Company in the open market, as well as in privately negotiated transactions with the Company, APOL and Dr. Raymond Ch’ien, the Company’s executive chairman. The number of Class A common shares of the Company purchased from New World TMT Limited were 4,468,560 by the Company, 4,300,000 by APOL and 200,000 by Dr. Ch’ien. Accordingly, New World TMT Limited ceased to be a related party of the Company thereafter.

(e)

AOL Time Warner Inc. (“AOL”)

During the year ended December 31, 2001, the Company paid advertising fees totaling $3,500 to AOL, a then shareholder of the Company, for the provision of Internet advertising services to the Company. In addition, the Company paid AOL $3,700 for computer software from PurchasePro.com, Inc., a strategic alliance partner of AOL. In other matters involving AOL, the Company sought the return of $2,200 spent by the Company under a software development agreement among AOL, CIC Holding Limited, the then holding company of the Company, and the Company. Under the terms of the software development agreement dated February 1, 2000, the Company agreed to provide AOL with $2,200 to finance the development of AOL software which could be utilized in the China market. The Company entered into the software development agreement in anticipation of a joint venture between AOL and the Company to develop consumer interactive services for the China market. No joint venture arrangement with AOL was ever entered into, and AOL never delivered a software product to the Company. In addition, the Company sought the return of $3,500 in connection with an agreement to purchase advertising services from AOL as well as the return of $3,700 in connection with the PurchasePro.com, Inc. computer software for which the Company paid AOL. These amounts were expensed under selling, general and administrative expenses in March 2001.

In July 2003, the Company reached a settlement with AOL involving all claims between the two companies and their affiliates as summarized above. The Company also agreed with AOL to cancel AOL’s two warrants to acquire additional shares in the Company. The Company currently has no remaining operational, strategic or other agreements with AOL. According to public filings, as of September 2003, AOL disposed of its entire holding of the Company’s shares. Accordingly, AOL has ceased to be a related party of the Company thereafter.

F-38

chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

17.

RELATED PARTY TRANSACTIONS (continued)

(f)

Harry Edelson lawsuit against the Company

In connection with the Harry Edelson, a former director of the Company, lawsuit against the Company, the Company is paying the costs of outside counsel retained to represent Raymond Ch’ien and Peter Yip in this matter. Further details of the lawsuit are described in note 29(b). For the year ended December 31, 2004, the Company paid $201 for such fees.

18.

VARIABLE INTEREST ENTITIES

The MVAS and Internet content services are subject to foreign ownership restrictions in the PRC. To comply with the PRC laws and regulations that prohibit or restrict foreign ownership of telecommunications and other information services within the PRC, the Company provides substantially all of its MVAS services and Internet portal services through its variable interest entities (“VIEs”). These VIEs are owned by certain employees of the Company who are PRC citizens (the “Nominees”). The Company funds the capital invested in these companies via interest-free loans to these PRC employees. These loans are eliminated in consolidation along with the capital of the VIEs. As of December 31, 2003 and 2004, the total amount of interest-free loans to the Nominees was approximately $487 and $4,868, respectively. The Company has not pledged any assets as collateral for the obligations of any of the VIEs and the creditors of the VIEs do not have recourse to the general credit of the Company.

The Company has entered into various contractual arrangements with the Nominees. Such contractual arrangements establish and facilitate the Company’s control over the operations of each of these VIEs. Under these contractual arrangements, each of the Nominees declares and undertakes that he or she holds equity interests in the relevant VIEs in trust for the Company. Each of these Nominees also undertakes to transfer his or her ownership in these entities to designees of the Company at any time for the amount of loans outstanding. These Nominees are also required to execute proxies to the designated representatives of the Company at the request of the Company to enable such representatives to attend and vote at shareholders’ meetings of these VIEs. Through these contractual arrangements, the Company is able to cause the individuals designated by it to be appointed as the directors and senior management of each of the VIEs.

The Company has also entered into exclusive technical service agreements with the VIEs under which the Company provides technical and other services to the VIEs in exchange for substantially all the net income of the VIEs. The technical services provided by the Company to the VIEs, as the case may be, relate to, among others, technologies in respect of mobile value-added services and Internet content services, application software for network servers, system solutions, technical training and content development and design.

The following is a summary of the VIEs of the Company at December 31, 2004. All have been consolidated by the Company in accordance with FASB Interpretation No. 46(R) because the Company is the primary beneficiary. As of December 31, 2003 and 2004, the aggregate accumulated losses of all VIEs, including a VIE disposed of in 2004, were approximately $468 and $679, respectively, and have been reflected in the Company’s consolidated financial statements. The entities mentioned below have been organized under the laws of the PRC with Chinese names and do not have official English names.

F-39

chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

18.

VARIABLE INTEREST ENTITIES (continued)

(a)

Beijing Newpalm Information Technology Co., Ltd.

Beijing Newpalm Information Technology Co., Ltd. (“Beijing Newpalm”) is a PRC company which provides MVAS services in Mainland China via third party network operators under its telecommunications value-added services license. Beijing Newpalm is 50% owned by a director of hongkong.com Corporation and 50% owned by a PRC employee of the Company. The registered capital of Beijing Newpalm is $1,217.

(b)

Beijing Wisecom Information Technology Co., Ltd.

Beijing Wisecom Information Technology Co., Ltd. (“Beijing Wisecom”) is a PRC company which provides MVAS services in Mainland China via third party network operators under its telecommunications value-added services license. Beijing Wisecom is 50% owned by a director of hongkong.com Corporation and 50% owned by a PRC employee of the Company. The registered capital of Beijing Wisecom is $1,217.

(c)

Beijing China Net Communication Technology Service Ltd.

Beijing China Net Communication Technology Service Ltd. (“Beijing China Net”) is a PRC company which operates the portal “www.china.com” under its Internet content company license and sells the online advertising space to advertisers or their agents. Beijing China Net is 40% owned by a director of hongkong.com Corporation, who is the general manager of Beijing China Net, and the remaining 60% is owned by two PRC employees of the Company who own 40% and 20%, respectively. The registered capital of Beijing China Net is $1,217.

(d)

Beijing He He

Beijing He He is a PRC company which provides MVAS services in Mainland China via third party network operators under its telecommunications value-added services license. Beijing He He is owned by two PRC employees of the Company who own 50% each. The registered capital of Beijing He He is $1,217.

19.

INCOME TAXES

Under the current tax laws of the Cayman Islands, the Company and its subsidiaries are not subject to tax on income or capital gains, and no Cayman Islands withholding tax is imposed upon payments of dividends by the Company to its shareholders. The subsidiaries in all geographical regions are governed by the respective local income tax laws with statutory tax rates ranging from 0% to 40%.

F-40

chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

19.

INCOME TAXES (continued)

Significant components of the provision for income taxes are as follows:


	Year ended			Year ended			Year ended
	December 31,			December 31,			December 31,
	2002			2003			2004
Current tax expense/(benefit) allocated to:
Continuing operations	$	(162	)	$	(26	)	$	1,644
Discontinued operations		322			(90	)		—

		160			(116	)		1,644
Deferred tax expense/(benefit) allocated to:
Tax benefits allocated to goodwill of acquired entities		—			—			5,897
Others		—			(572	)		—

Continuing operations		—			(572	)		5,897


Total income tax provision/(benefit)	$	160		$	(688	)	$	7,541


International:
Current	$	160		$	(116	)	$	1,568
Deferred		—			(572	)		5,239

United States:
Current		—						—
		76
Deferred		—			—			658


Total income tax provision/(benefit)	$	160		$	(688	)	$	7,541

F-41

chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

19.

INCOME TAXES (continued)

Income/(loss) before provision for income taxes consists of the following:


	Year ended			Year ended			Year ended
	December 31,			December 31,			December 31,
	2002			2003			2004
International	$	(2,781	)	$	16,995		$	(464	)
United States		(943	)		(420	)		812


Income/(loss) before income taxes	$	(3,724	)	$	16,575		$	348

Deferred tax liabilities and assets are comprised of the following:


	December 31,			December 31,
	2003			2004
Deferred tax liabilities:
Acquired intangible assets	$	(770	)	$	(17,647	)
Capitalized software		—			(1,248	)
Accelerated depreciation allowances		(848	)		—
Others		—			(748	)



Total deferred tax liabilities		(1,618	)		(19,643	)


Deferred tax assets:
Net operating loss carryforwards		58,353			126,340
Book and tax base differences on assets		—			6,177
Research and development		—			5,144
Deferred revenue		—			2,652
Accruals and reserves		248			4,634
Others		752			506


Gross deferred tax assets		59,353			145,453
Valuation allowance for deferred tax assets		(58,808	)		(130,004	)


Total net deferred tax assets		545			15,449


Net deferred tax liabilities	$	(1,073	)	$	(4,194	)

Current deferred tax assets are $240 and $502 as of December 31, 2003 and 2004, respectively. Non-current deferred tax assets are $305 and nil as of December 31, 2003 and 2004, respectively. Non-current deferred tax liabilities are $1,618 and $4,696 as of December 31, 2003 and 2004, respectively.

F-42

chinadotcom corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

19.

INCOME TAXES (continued)

The reconciliation of income taxes computed at the respective statutory tax rates to the effective income tax provision recorded is as follows:


	Year ended			Year ended			Year ended
	December 31,			December 31,			December 31,
	2002			2003			2004
Income tax expense/(benefit) computed at the respective statutory rates	$	453		$	(3,482	)	$	3,523
Changes in tax rates		384			(1,181	)		(79	)
Tax holiday/concession		—			(2,806	)		(4,077	)
Non-deductible items		108			3,903			4,038
Non-taxable items		(308	)		(1,271	)		(752	)
Change in valuation allowance affecting provision for income taxes		(799	)		4,239			4,888


Total income tax expense/(benefit) from continuing operations	$	(162	)	$	(598	)	$	7,541


Total income tax expense/(benefit) from discontinued operations	$	322		$	(90	)	$	—

Benefits from operating losses not recorded from discontinued operations amounted to $4,139, $177 and $28 for the years ended December 31, 2002, 2003 and 2004, respectively.

Due to its history of losses, the Company does not believe that sufficient objective and positive evidence currently exists to conclude that the recoverability of certain of its deferred tax assets is more likely than not. Consequently, the Company has provided a valuation allowance of $58,808 and $130,004 as of December 31, 2003 and 2004, respectively, to cover its net deferred tax assets. The valuation allowance for deferred tax assets has increased by $71,196 in 2004. The increase was primarily due to the effect of the Ross and Pivotal acquisitions. A maximum of $64,630 of the valuation allowance for which tax benefits are subsequently recognized will be allocated to reduce goodwill.

At December 31, 2004, the Company had net operating loss carryforwards of approximately $405,355 for income tax purposes, $155,926 of which will expire from 2005 to 2025 and $249,429 of which can be carried forward indefinitely.

F-43

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

19.

INCOME TAXES (continued)

NewPalm (China) Information Technology Company Limited (“NewPalm”), a subsidiary of Palmweb established in the PRC, is governed by the Income Tax Laws of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws (the “PRC Income Tax Laws”). Pursuant to the PRC Income Tax Laws, NewPalm is subject to corporate income tax at a rate of 33% (30% state income tax plus 3% local income tax). Upon fulfilling certain criteria, NewPalm is entitled to certain PRC corporate income tax exemptions. During the year ended December 31, 2004, NewPalm received a confirmation from the relevant tax authorities that it would be fully exempt from PRC corporate income tax for the 2003 fiscal year. Management believes that the necessary criteria for tax exemption have been met for the year ended December 31, 2004 and accordingly, no provision for PRC corporate income tax has been made for the year. The tax concessions were $2,806 and $3,547 for the years ended December 31, 2003 and 2004, respectively, and the per share effects were approximately $0.03 and $0.03 for the years ended December 31, 2003 and 2004, respectively. The corporate income tax exemption of NewPalm for future periods is not certain as of December 31, 2004 and the effect of the future tax exemptions will be recognized when the approval has been obtained from the relevant tax authorities.

Beijing He He IVR established in the PRC, is governed by the PRC Income Tax Laws. Under the PRC Income Tax Laws, foreign investment enterprises satisfying certain criteria receive preferential tax treatment. Because Beijing He He IVR has obtained the status of “new high technology enterprise” and is registered and operating in the Beijing Zhongguancun Science Park, it is entitled to a reduced corporate income tax rate of 15% upon expiry of its tax holiday period. Beijing He He IVR was granted a “tax holiday” for exemption of PRC corporate income tax for three years starting from 2003 and is entitled to a 50% tax reduction, subject to official approval from the relevant PRC tax authority, for three consecutive years starting from 2006. The tax concession was $191 for the year ended December 31, 2004, and the per share effect was approximately nil for the year ended December 31, 2004.

Pivotal Bangalore Software Development Private Limited (“Pivotal India”), a subsidiary of Pivotal Corporation established in India, is subject to Indian corporate income tax at a rate of 35%. Upon fulfilling certain criteria, Pivotal India is entitled to certain Indian corporate income tax exemptions due to its status as a “100% Software Export Oriented Unit” located in the Bangalore Software Technology Park. Management believes that the necessary criteria for tax exemption have been met for the full year of 2004 and accordingly, no provision for Indian corporate income tax has been made for the year. The tax concession was $339 for the year ended December 31, 2004 and the per share effect was approximately nil for the year ended December 31, 2004. The corporate income tax exemption is available for the first 10 years following the incorporation of Pivotal India on October 22, 2002. Management believes that Pivotal India will fulfill the necessary criteria for tax exemption in future periods. The effect of the future tax exemptions will be recognized when the fulfillment of such criteria is ascertained.

F-44

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

20.

BASIC AND DILUTED EARNINGS/(LOSS) PER SHARE

The following table sets forth the computation of basic and diluted earnings/(loss) per share:


	Year ended			Year ended		Year ended
	December 31,			December 31,		December 31,
	2002			2003		2004
						(Restated)
Numerator for basic and diluted earnings/(loss) per share:
Income/(loss) from continuing operations	$	(3,314	)	$	14,916	$	(8,193	)
Income/(loss) from discontinued operations, net of gain on disposal/dissolution		(14,917	)		608		(1,140	)


Income/(loss) attributable to common shareholders	$	(18,231	)	$	15,524	$	(9,333	)


Denominator for basic earnings/(loss) per share:
Weighted average number of shares after adjusting for share splits		102,269,735			100,532,594		105,898,392


Denominator for basic earnings/(loss) per share:
Weighted average number of shares after adjusting for share splits		102,269,735			100,532,594		105,898,392
Effect of dilutive securities:
Dilutive common shares equivalent		—			2,666,827		—


Denominator for diluted earnings/(loss) per share:
Weighted average number of shares after adjusting for share splits		102,269,735			103,199,421		105,898,392


Basic earnings/(loss) per share:
Earnings/(loss) from continuing operations	$	(0.03	)	$	0.14	$	(0.08	)
Earnings/(loss) from discontinued operations		(0.15	)		0.01		(0.01	)


Earnings/(loss) attributable to common shareholders	$	(0.18	)	$	0.15	$	(0.09	)


Diluted earnings/(loss) per share:
Earnings/(loss) from continuing operations	$	(0.03	)	$	0.14	$	(0.08	)
Earnings/(loss) from discontinued operations		(0.15	)		0.01		(0.01	)


Earnings/(loss) attributable to common shareholders	$	(0.18	)	$	0.15	$	(0.09	)

The computation of diluted earnings/(loss) per share did not assume the conversion of the Company’s warrants for 2002 and 2003 and its stock options for 2002 and 2004 because their inclusion would have been antidilutive.

F-45

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

21.

DISCONTINUED OPERATIONS

The Company reviews all business units monthly and analyzes the (i) cash flow performance; (ii) profitability; and (iii) viability of the business units.

These reviews are conducted in the context of the overall strategic direction of the Company. If a business unit is not profitable, has negative cash flows, does not appear to have growth potential or a path to profitability, and does not fit with the overall Company’s strategy, management may discontinue it either through sale to a third party (“disposal”) or liquidation/closure (“dissolution”) of the business.

During the years ended December 31, 2002 and 2003 the Company discontinued the operations of certain subsidiaries, primarily in the business services and advertising/marketing segments under the new segment classification, while certain discontinued subsidiaries were included in the others segment. During 2004, the Company sold and closed down certain unprofitable subsidiaries, primarily in the software and advertising/marketing segments, while certain discontinued subsidiaries were included in the others segment.

The following table sets forth the balance sheet and statement of operations information, including the Company’s net gain/(loss) on disposal/dissolution, for operations discontinued during the years ended December 31, 2002, 2003 and 2004:


	December 31,		December 31,		December 31,
	2002		2003		2004

Total assets as of the date of disposal/dissolution	$	2,019	$	7,266	$	2,177
Total liabilities as of the date of disposal/dissolution	$	2,564	$	7,936	$	418


	Year ended			Year ended			Year ended
	December 31,			December 31,			December 31,
	2002			2003			2004

Revenues	$	21,211		$	11,581		$	864
Pretax loss	$	(15,140	)	$	(1,609	)	$	(190	)
Net loss	$	(15,462	)	$	(1,519	)	$	(190	)
Net gain/(loss) on disposal/dissolution	$	545		$	2,127		$	(950	)

F-46

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

22.

FINANCIAL INSTRUMENTS

The total fair values of available-for-sale equity securities in listed companies as of December 31, 2003 and 2004 were approximately $590 and $527, respectively, based on the market values of publicly traded shares as of December 31, 2003 and 2004.

The total fair values of available-for-sale debt securities as of December 31, 2003 and 2004 were $313,254 and $179,939, respectively, based on the market values of publicly traded debt securities and the estimated fair values of unlisted debt securities, as determined by the management of the Company having regard to the prices of the most recent reported sales and purchases of the securities as of December 31, 2003 and 2004.

The fair value of the Company’s $25,000 loan to Symphony (refer to note 8) was estimated to be $23,419 and $24,564 at December 31, 2003 and 2004, respectively, based on discounting the future cash flows, considering borrowing rates available for loans with similar terms and maturity at December 31, 2003 and 2004.

The carrying amount of the variable portion of the Company’s variable long-term bank loans approximate their fair value because the interest rates of the loans are close to the prevailing bank interest rate.

In October 2002, the Company entered into a promissory note and warrant purchase agreement with Sagent Technology Inc. (“Sagent”), a NASDAQ listed company, whereby the Company paid $7,000 cash to Sagent for a promissory note and 8,000 warrants to purchase Sagent’s common shares for investment purposes. The fair values of the promissory note and the warrants were included in the Company’s consolidated balance sheet. The Company recognized a $571 gain in the value of the warrants, which was included in the other non-operating gains for the year ended December 31, 2002. The Company determined the estimated fair value amounts of those instruments by using available market information and commonly accepted valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company or holders of the instruments could realize in a current market exchange. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair values. The promissory note was settled and the warrants were cancelled during 2003.

23.

CONCENTRATION OF RISKS

Concentration of credit risk:

The Company focuses on enterprise software and mobile services and applications, with additional operations in advertising/marketing and business services. Products and services are offered in the Greater China and other parts of Asia, Australia, North America, South America, the United Kingdom and the rest of Europe.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, investments, accounts receivable, loans receivable and other receivables. The maximum amount of loss would be $97,442 if the counterparties for non-government sponsored entity security investments, accounts receivable, loans receivable and other receivables failed to perform.

F-47

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

23.

CONCENTRATION OF RISKS (continued)

Concentration of credit risk (continued):

The Company maintains cash and cash equivalents and investments with various financial institutions in the countries in which it operates. The Company has its policy to limit exposure to any one institution. The Company performs periodic evaluations of the relative credit standing of those financial institutions that are considered in the Company’s investment strategy. The Company does not require collateral on these financial instruments.

Concentration of credit risk with respect to trade accounts receivable is limited due to the large number of entities comprising the Company’s customer base. The Company generally does not require collateral for trade accounts receivable.

Concentration of business risk:

Revenue has been derived from a number of clients that use the Company’s services. The top 10 customers accounted for 14%, 28% and 20% of the Company’s revenue for the years ended December 31, 2002, 2003 and 2004, respectively.

Dependence on mobile telecommunication operators:

The Company offers mobile services and applications to customers primarily through the two mobile network operators in China, China Mobile Communications Corporation and China United Telecommunications Corporation, which service most of China’s mobile subscribers. Such dominant market position limits the Company’s negotiating leverage with these network operators. If the Company’s various contracts with either network operator are terminated or adversely altered, it may be impossible to find appropriate replacement operators with the requisite licenses and permits, infrastructure and customer base to offer the services, and the business would be significantly impaired. For the year ended December 31, 2004, the Company derived 13% of its total revenues from mobile services and applications business, a substantial portion of which was derived using the networks of the mobile network operators.

Current vulnerability due to certain concentrations:

The Company’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for the past 20 years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC’s political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.

The PRC has recently enacted new laws and regulations governing Internet access and the provision of online business, economic and financial information. Current or proposed laws aimed at limiting the use of online services to transmit certain materials could, depending upon their interpretation and application, result in significant potential liability to the Company, as well as additional costs and technological challenges in order to comply with any statutory or regulatory requirements imposed by such legislation. Additional legislation and regulations that may be enacted by the PRC government could have an adverse effect on the Company’s business, financial condition and results of operations.

F-48

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

23.

CONCENTRATION OF RISKS (continued)

Current vulnerability due to certain concentrations (continued):

The PRC Renminbi, or RMB, is not freely convertible into foreign currencies. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted daily by the People’s Bank of China. However, the unification of the exchange rates does not imply the convertibility of RMB into United States dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts.

24.

SHARE CAPITAL

Pursuant to the Articles of Association of the Company, the holder of each Class A common share is entitled to one vote on all matters upon which the Class A common share is entitled to vote. The Board of Directors has the authority, without further action by the shareholders, to issue up to five million preferred shares in one or more series and to fix the designations, powers, preference, privileges and relative participatory, optional or special rights and the qualifications, limitation or restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights of common shares. No preferred shares have been issued.

The following table sets forth the number and price range of shares issued during the years ended December 31, 2002, 2003 and 2004 from the exercise of stock options granted to employees, and the number and price range of shares repurchased and retired during the years ended December 31, 2002, 2003 and 2004:


	Year ended		Year ended		Year ended
	December 31,		December 31,		December 31,
	2002		2003		2004

Class A common shares issued for exercise of stock options		296,492		2,591,646		1,068,473
Range of purchase prices per share	$	2.03 to $2.5266	$	1.89 to $9.00	$	0.4314 to $7.0

Class A common shares repurchased		1,764,555		4,468,560		—
Range of repurchase prices per share	$	1.92 to $3.24	$	2.50		—

Repurchased Class A common shares retired		1,692,001		2,300,000		—
Range of retirement prices per share	$	2.334 to $2.826	$	2.50		—

During the year ended December 31, 2004, 7,836,698 Class A common shares of the Company were issued at prices ranging from $4.35 to $11.57 per share for the acquisition of subsidiaries.

During the year ended December 31, 2004, 400,000 Class A common shares of the Company were issued at $7.59 per share for the settlement of claims.

The redemption premiums on the repurchased shares were deducted from additional paid-in capital.

F-49

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

25.

STOCK-BASED COMPENSATION

(a)

Stock options

The Company applies APB 25 in accounting for stock options granted to employees. Accordingly, compensation expense is recorded for the difference between the fair value of shares at date of grant and the exercise price of the stock options.

Pursuant to the 1999 Stock Option Plan (the “Plan”), options may be granted to employees of and consultants and advisors to the Company and its subsidiaries for the purchase of up to an aggregate of 12 million Class A common shares. During 2000, options for the purchase of an additional 8 million Class A common shares were made available, which increased the options available for grant to employees of and consultants and advisors to the Company and its subsidiaries for the purchase of Class A common shares to 20 million. The Plan is administered by a committee of the Board of Directors, which will determine, at its discretion, the number of shares subject to each option granted and the related exercise price and option period. Incentive stock options, as defined by the U.S. Internal Revenue Code of 1986, as amended, and non-qualified stock options may be granted under the Plan.

The following table summarizes information concerning outstanding and exercisable options at December 31, 2004.


	Options outstanding						Options exercisable
			Weighted-		Weighted-				Weighted
			average		average				average
			remaining		exercise				exercise
Exercise	Numbers		contractual		price		Numbers		price
price range ($)	outstanding		life (in years)		per share ($)		exercisable		per share ($)

0.43-0.95		134,464		9.65		0.56		102,867		0.49
1.06-1.99		495,835		8.72		1.79		346,934		1.85
2.07-2.98		1,358,820		6.95		2.73		1,282,592		2.75
3.02-3.80		822,134		7.52		3.41		435,096		3.38
4.04-5.00		4,686,486		7.47		4.60		2,362,275		4.90
5.01-9.87		4,501,703		8.70		6.72		1,638,105		6.58
10.19-19.13		313,075		4.90		13.77		254,928		14.30
21.62-29.92		174,060		5.39		24.48		174,060		24.48
32.13-48.41		22,480		5.19		39.03		22,480		39.03
56.00-67.13		22,240		5.26		61.09		22,240		61.09


		12,531,297						6,641,577

F-50

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

25.

STOCK-BASED COMPENSATION (continued)

(a)

Stock options (continued)

A summary of the Company’s stock option activities and related information for the years ended December 31, 2002, 2003 and 2004 is as follows:


	2002
							Weighted-
							average
	Available			Options			exercise
	for grant			outstanding			price

Outstanding at the beginning of the year		6,998,268			14,065,911		$	6.66
Granted		(1,648,960	)		1,648,960			2.44
Forfeited		4,083,536			(4,083,536	)		7.27
Exercised		—			(296,492	)		2.42


Outstanding at the end of the year		9,432,844			11,334,843		$	5.94


Exercisable at the end of the year					7,686,104


Weighted-average grant-date fair value of options granted during the year				$	2.00


	2003
							Weighted-
							Average
	Available			Options			exercise
	for grant			outstanding			price

Outstanding at the beginning of the year		9,432,844			11,334,843		$	5.94
Granted		( 2,217,343	)		2,217,343			5.40
Forfeited		2,832,962			(2,832,962	)		7.89
Exercised		—			(2,591,646	)		3.32


Outstanding at the end of the year		10,048,463			8,127,578		$	5.94


Exercisable at the end of the year					5,648,618


Weighted-average grant-date fair value of options granted during the year				$	4.23

F-51

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

25.

STOCK-BASED COMPENSATION (continued)

(a)

Stock options (continued)


	2004
							Weighted-
							average
	Available			Options			exercise
	for grant			outstanding			price

Outstanding at the beginning of the year		10,048,463			8,127,578		$	5.94
Granted		(6,742,407	)		6,742,407			5.55
Forfeited		1,270,215			(1,270,215	)		9.07
Exercised		—			(1,068,473	)		3.80


Outstanding at the end of the year		4,576,271			12,531,297		$	5.60


Exercisable at the end of the year					6,641,577


Weighted-average grant-date fair value of options granted during the year				$	4.35

Pursuant to resolutions adopted by the Board of Directors in December 2000, the vesting of certain of the Company’s options was accelerated such that vesting would be changed from an annual basis to a quarterly basis upon the lapse of 12 months from the date of grant. Based on the historical and expected employee turnover and the expected market price of the Class A common shares, the Company estimated that the number of options the employees will ultimately retain that would have been otherwise forfeited was minimal for the years ended December 31, 2002, 2003 and 2004.

In January 2002, the Company granted to APOL additional stock options to purchase up to 200,000 Class A common shares with an exercise price of $2.82 per share and a quarterly vesting schedule over the one-year term of the new services agreement and the right to accelerate existing share options upon a change of control of the Company.

In January 2003, the Company renewed the management services agreement with APOL under the terms of the agreement. In addition, the Company granted to APOL additional stock options to purchase up to 200,000 Class A common shares of the Company as of June 3, 2003 with an exercise price of $4.95 per share, and further stock options to purchase up to 100,000 Class A common shares of the Company as of June 16, 2003, with an exercise price of $5.16 per share. Both grants had a quarterly vesting schedule over the one-year term of the new services agreement and the right to accelerate existing share options upon a change of control of the Company.

On March 25, 2004 the Company granted to APOL stock options to purchase up to 600,000 Class A common shares of the Company with an exercise price of $8.25 per share. This grant will vest in equal installments at years end from 2004 to 2006.

(b)

2004 Employee Share Purchase Plan

During 2004, the Company established and implemented an employee share purchase plan, which was qualified as a non-compensatory plan under Section 423 of the U.S. Internal Revenue Code. The plan allows qualified employees to purchase Class A common shares during the relevant six-month plan period. Qualifying employees are allowed to purchase up to 1,000 Class A common shares for each plan period. The maximum number of Class A common shares, issuable under the plan is 2,000,000, and a maximum of 300,000 shares will be available for issuance during each plan period.

F-52

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

26.

EMPLOYEE BENEFIT PLANS

IMI, a subsidiary of the Company acquired in 2003, provides retirement benefits for substantially all employees in the United States and in foreign locations. In the United States, the United Kingdom and the Netherlands, IMI sponsors defined contribution plans. In addition, IMI’s Swedish subsidiary (“IMAB”) has a supplemental defined contribution plan for certain key management employees. Contributions by IMI relating to its defined contribution plans for the post-acquisition period ended December 31, 2003 amounted to $1,004, and contributions for the year ended December 31, 2004 amounted to $2,022.

IMAB also participates in several pension plans (non-contributory for employees) which cover substantially all employees of its Swedish operations. The plans are in accordance with a nationally-agreed standard plan administered by a national organization, Pensionsregisteringsinstitute (“PRI”). The plan has been frozen and moved to the Swedish government for administration and distribution. Benefits are not paid by IMAB, but by the Swedish government. The level of benefits and actuarial assumptions used to account for the pension plan are calculated and established by the PRI and are solely based on the fully funded value of the predetermined pension payoff amount that was prescribed when the plan was transferred to the Swedish government during 2001. Accordingly, IMAB will not change benefit levels or actuarial assumptions. The Company accounts for pensions in accordance with SFAS 87,Employers’ Accounting for Pensionsand SFAS 132(R),Employers’ Disclosures about Pensions and Other Postretirement Benefits (Revised). IMAB is financing these plans via premiums paid to Alecta, the Swedish National Pension Organization. The pension book reserve will, in the future, only increase with an interest component. The plan has no liabilities other than its benefit obligations, which is a fixed amount to be repaid through 2007. IMAB expects to pay $910 to the plan during 2005, and the remaining amount of $1,477 will be paid in 2006 and 2007.

The net periodic benefit cost for IMAB’s defined benefit pension plan in Sweden includes the following components:


	Post-acquisition		Year ended
	period ended December 31,		December 31,
	2003		2004

Service cost	$	—	$	—
Interest cost		61		133


Net periodic benefit cost	$	61	$	133

The following table sets forth the change in the benefit obligations for IMAB’s defined benefit plans in Sweden:


	Post-acquisition			Year ended
	period ended December 31,			December 31,
	2003			2004

Change in benefit obligations:
Benefit obligations - - at beginning of year/at date of acquisition	$	3,608		$	3,070
Service cost		—			—
Interest cost		61			133
Actuarial gains		(286	)		(386	)
Settlements		(895	)		(641	)
Effect of foreign currency exchange rate changes		582			211


Benefit obligations at end of year	$	3,070		$	2,387

F-53

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

26.

EMPLOYEE BENEFIT PLANS (continued)

The following table sets forth the plans’ funded status and the actuarial present value of benefit obligations as of December 31, 2003 and 2004:


	December 31,		December 31,
	2003		2004

Unfunded status	$	3,070	$	2,387

Comprised of:
Long-term liability portion	$	2,272	$	1,477
Short-term liability portion	$	798	$	910

The following assumptions were used to determine IMAB’s obligations under the Swedish plans:


	December 31,			December 31,
	2003			2004
Discount rate		5.3	%		5.1	%
Rate of increase in salaries		3.0	%		2.0	%
Inflation rate		2.0	%		0.4	%

27.

RESTRUCTURING COSTS

During the year ended December 31, 2004, the Company recorded restructuring costs of $3,387 under “restructuring expenses” in the Company’s consolidated statement of operations related to IMI and Praxa. At IMI, restructuring costs of $2,862 were comprised of $1,866 related to terminations of employees, $482 for write-off of acquired software, $414 related to closure of offices, and $100 in other costs. At Praxa, restructuring costs of $525 were comprised of $345 for terminations of employees, $129 in contract exit fees, and $51 in other costs. IMI is part of the software segment and Praxa is part of the business services segment. The Company has completed these restructuring actions and no additional costs are expected to be incurred in connection with this restructuring. The costs incurred in 2004 are the cumulative costs relating to the respective restructuring actions. No restructuring costs were recorded in 2002 or 2003.

28.

PROPERTIES HELD FOR SALE

At December 31, 2004, the Company classified a building and the related land with a carrying amount of $2,992 as held for sale. The land and building are held by an inactive subsidiary classified under the others segment, and are no longer required for business operations. The Company is actively marketing the property through an agent and expects to complete the sale within one year. The assets are stated at carrying value which is less than fair value less cost to sell.

F-54

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

29.

CONTINGENCIES AND COMMITMENTS

Contingencies

(a)

Class action lawsuit against the Company

A class action lawsuit was filed in the United States District Court, Southern District of New York on behalf of purchasers of the securities of the Company, between July 12, 1999 and December 6, 2000, inclusive. The complaint charges the Company, Lehman Brothers, Inc. (“Lehman Brothers”), Bear, Stearns & Co., Inc. (“Bear Stearns”), BancBoston Robertson Stephens (“Robertson Stephens”), Merrill Lynch, Pierce Fenner & Smith Inc. (“Merrill Lynch”), Raymond Ch’ien, Peter Yip, Zhou Shun Ao, and David Kim with violations of Sections 11, 12(a) (2) and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.

On July 12, 1999, the Company commenced an initial public offering of 4,200 of its shares of common stock at an offering price of $20 per share (excluding the effect of two separate two-for-one stock splits), (the “CDC IPO”). In connection therewith, the Company filed a registration statement, which incorporated a prospectus (the “Prospectus”), with the Securities and Exchange Commission. The complaint alleges that the Prospectus was materially false and misleading because it failed to disclose, among other things, that (i) the Underwriter Defendants (Lehman Brothers, Bear Stearns, Robertson Stephens and Merrill Lynch) had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the Underwriter Defendants allocated to those investors material portions of the restricted number of the Company’s shares issued in connection with the CDC IPO; and (ii) the Underwriter Defendants had entered into agreements with customers whereby the Underwriter Defendants agreed to allocate the Company’s shares to those customers in the CDC IPO in exchange for which the customers agreed to purchase the Company’s additional shares in the aftermarket at pre-determined prices.

In June 2003, the plaintiffs announced a proposed settlement with the Company and other issuer defendants. The proposed settlement provides that the insurers of all settling issuers will guarantee that the plaintiffs recover $1,000,000 from non-settling defendants, including the investment banks that acted as underwriters in those offerings. In the event that the plaintiffs do not recover $1,000,000, the insurers for the settling issuers will make up the difference. Under the proposed settlement, the maximum amount that could be charged to the Company’s insurance policy in the event that the plaintiffs recovered nothing from the investment banks would be approximately $3,900. The Company believes that the insurance coverage is sufficient to cover the maximum amount that the Company may be responsible for under the proposed settlement. The independent members of the Board of Directors of the Company approved the proposed settlement at a meeting held in June 2003. It is possible, however, that the parties may not reach agreement on the final settlement documents or that the United States Federal District Court may not approve the settlement in whole or in part, in which event litigation could continue, and the Company could be liable for significant judgment awards if a final judgment is rendered against the Company. No provision has been made for any expenses that might arise as a result of the class action lawsuit.

F-55

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

29.

CONTINGENCIES AND COMMITMENTS (continued)

Contingencies (continued)

(a)

Class action lawsuit against the Company (continued)

The class action lawsuit against each of Raymond Ch’ien, Peter Yip, Zhou Shun Ao, and David Kim has been dismissed. The management of the Company considers the outcome of any judgment on the lawsuit with respect to the Company to be quite uncertain and any expenditure from the lawsuit is not estimable. Consequently, no provision has been made for any expenses that may arise from the class action lawsuit.

(b)

Harry Edelson lawsuit against the Company

In October 2003, Harry Edelson, a former member of the Company’s Board of Directors, brought an action against the Company and other members of the Company’s Board of Directors, including Raymond Ch’ien and Peter Yip, seeking injunctive relief and monetary damages in connection with alleged violations of the Securities Exchange Act of 1934, as amended, in connection with his failure to be re-elected to the board at the Company’s 2003 annual general meeting. In February 2004, Mr. Edelson appealed a decision by the District Court of the Northern District of Illinois to dismiss the action which the Appeals Court denied in April 2005. Mr. Edelson has appealed the decision by the appeals court. In the interim, in February 2004, Mr. Edelson brought an amended action against the Company based upon the same allegations seeking monetary damages. Discovery in the amended action is expected to continue until September 2005. The Company believes that the actions brought by Mr. Edelson are without merit and the Company intends to vigorously defend itself against such actions. The management of the Company considers the outcome of any judgment on the lawsuit with respect to the Company to be uncertain and the amount of any expenditure from the lawsuit is not estimable.

(c)

Herkemij & Partners Knowledge B.V.

On April 29, 2004, Herkemij & Partners Knowledge B.V. (“Herkemij Knowledge”) filed a civil action against the Company’s subsidiaries, Ross Systems and Ross Nederland B.V. (“Ross Nederland”), alleging that Ross Systems and Ross Nederland developed a software program named iProject using documentation and source code from Herkemij Knowledge’s copyrighted Project Administration and Control System. The action includes counts for copyright infringement, misappropriation of trade secrets, and unfair competition and seeks, among other things, injunctive relief, damages totaling $5,000 to $10,000, and payment of royalties. In September 2004, the case against Ross Nederland was dismissed for the lack of personal jurisdiction, and in February 2005, a hearing was held in which the judge in a court of California refused to dismiss the case against Ross Systems, but transferred the case to the Northern District Court of Georgia in Atlanta. The Company believes that the action is without merit, and intends to vigorously defend itself against such action. The management of the Company considers the outcome of any judgment on the lawsuit with respect to the Company to be uncertain and the amount of any expenditure from the lawsuit is not estimable.

F-56

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

29.

CONTINGENCIES AND COMMITMENTS (continued)

Contingencies (continued)

(d)

Others

In addition, the Company is a defendant in various matters of litigation generally arising out of the normal course of business. Although it is difficult to predict the ultimate outcome of these cases, management believes, based on discussions with the Company’s legal counsels, that any ultimate liabilities would not materially affect the Company’s financial position, results of operations or cash flows.

Commitments

(a)

Operating lease commitments

As of December 31, 2004, the Company had future minimum lease payments under non-cancelable operating leases as follows:


Year ended December 31,
2005	$	14,124
2006		10,291
2007		6,954
2008		5,303
2009		5,016
Thereafter		13,732


	$	55,420

The Company recorded rental expenses of $9,593 and recorded sublease income of $3,370 for the year ended December 31, 2004. As of December 31, 2004, the Company had future minimum rentals to be received under subleases of $9,598.

(b)

Capital commitments

In addition to the second earnout cash consideration payable for Group Team as further detailed in note 4(e) the Company will be required to make additional earnout payments in the future relating to the acquisitions of OpusOne Technologies International Inc. and other entities. Such earnout payments will be based on the performance of the acquired entities for specified periods of time.

F-57

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

30.

SEGMENT INFORMATION

Description of Products and Services by Segment

As explained in note 3, the Company changed its operating segments at the beginning of 2004 and the Company now has four reportable segments: software, business services, mobile services and applications, and advertising/marketing. The Company believes that this new segment classification is more representative of the Company’s business strategies and reflects the Company’s current internal reporting practices. The Company also now excludes goodwill, intangible assets and related amortization, and other acquisition related expenses from its reportable segments and includes such items in the reconciling line for corporate and other unallocated amounts. The Company also now uses net income/(loss) as the measure of segment profit or loss. Comparable periods have been restated to reflect the changes in segmentation. The businesses operated by the four reportable segments are described in note 1. The Company has also included disclosures of its others segment which includes the results of operations of a few small subsidiaries, and a reconciling line for corporate and other unallocated amounts. No operating segments have been aggregated.

Due to the change of operating segments and the discontinued operations of certain components, comparative amounts have been reclassified to conform with the current year’s presentation.

Information about Segment Profit or Loss and Segment Assets

The Company evaluates performance and allocates resources based on revenues and net income/loss. The following items are included in the evaluation of segment performance: revenues from external customers, depreciation and amortization (excluding amortization of purchased intangibles), net interest income/expense, income tax benefit/expense and net income/loss. Information about assets and liabilities other than total segment assets is not reported separately for each segment because this information is not produced internally. The accounting policies of the reportable segments are the same as those described in note 2. All transactions between segments have been eliminated.

Factors Management Used to Identify the Enterprise’s Reportable Segments

The Company’s reportable segments are business units that offer different services. The reportable segments are each managed separately and are evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance.

F-58

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

30.

SEGMENT INFORMATION (continued)

(i)

Segment information by business segment:


	Year ended		Year ended		Year ended
	December 31,		December 31,		December 31,
	2002		2003		2004

Segment revenues from external customers:
Software	$	3,526	$	12,891	$	107,879
Business services		10,148		37,242		39,391
Mobile services and applications		—		16,876		23,694
Advertising/marketing		7,527		8,841		11,709
Others		1,599		2,001		10

		22,800		77,851		182,683
Corporate and other unallocated amounts		—		—		—


Total consolidated revenues	$	22,800	$	77,851	$	182,683


	Year ended		Year ended		Year ended
	December 31,		December 31,		December 31,
	2002		2003		2004

Segment depreciation and amortization:
Software	$	219	$	482	$	1,947
Business services		1,015		993		966
Mobile services and applications		—		260		434
Advertising/marketing		4,336		1,979		295
Others		3,086		1,998		175


		8,656		5,712		3,817
Corporate and other unallocated amounts		859		1,242		8,459


Total consolidated depreciation and amortization	$	9,515	$	6,954	$	12,276


	Year ended			Year ended			Year ended
	December 31,			December 31,			December 31,
	2002			2003			2004

Segment interest income/(expense):
Software	$	—		$	(99	)	$	585
Business services		(1,198	)		(1,194	)		(33	)
Mobile services and applications		—			27			168
Advertising/marketing		(379	)		(430	)		67
Others		(105	)		6,295			3,909


		(1,682	)		4,599			4,696
Corporate and other unallocated amounts		22,852			7,743			3,062


Total consolidated net interest income	$	21,170		$	12,342		$	7,758

F-59

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

30.

SEGMENT INFORMATION (continued)

(i)

Segment information by business segment (continued):


	Year ended			Year ended			Year ended
	December 31,			December 31,			December 31,
	2002			2003			2004

Segment income tax expense/(benefit):
Software	$	—		$	224		$	316
Business services		(42	)		191			893
Mobile services and applications		—			(288	)		(392	)
Advertising/marketing		(121	)		43			175
Others		1			(374	)		2


		(162	)		(204	)		994
Corporate and other unallocated amounts		—			(394	)		6,547


Total consolidated income tax expense/(benefit)	$	(162	)	$	(598	)	$	7,541


	Year ended			Year ended			Year ended
	December 31,			December 31,			December 31,
	2002			2003			2004
							(Restated)
Segment net income/(loss):
Software	$	(670	)	$	(114	)	$	9,730
Business services		1,443			3,134			(260	)
Mobile services and applications		—			10,563			11,568
Advertising/marketing		(4,914	)		(782	)		16
Others		(2,150	)		(831	)		(5,620	)

		(6,291	)		11,970			15,434
Corporate and other unallocated amounts		(11,940	)		3,554			(24,767	)


Total consolidated net income/(loss)	$	(18,231	)	$	15,524		$	(9,333	)

F-60

chinadotcom corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of U.S. dollars, except number of shares, number of options and per share data)

30.

SEGMENT INFORMATION (continued)

(i)

Segment information by business segment (continued):


	December 31,		December 31,
	2003		2004

Segment assets:
Software	$	15,136	$	86,751
Business services		21,109		18,235
Mobile services and applications		17,510		24,089
Advertising/marketing		933		8,206
Others		10,750		7,252


		65,438		144,533
Corporate and other unallocated amounts		480,616		519,798


Total consolidated assets	$	546,054	$	664,331

(ii)

Segment information by geographical segment:


	Year ended		Year ended		Year ended
	December 31,		December 31,		December 31,
	2002		2003		2004
Segment revenues from external customers:
Australia	$	2,783	$	26,818	$	29,655
Greater China		7,053		24,479		32,542
Korea		662		1,647		3,643
Singapore		5,489		5,858		6,072
Europe (excluding United Kingdom)		—		7,654		39,176
United Kingdom		1,750		2,495		10,857
North America		5,063		8,900		60,061
South America		—		—		677


Total consolidated revenues	$	22,800	$	77,851	$	182,683

Revenues are attributed to countries based on the location of customers.


	December 31,		December 31,
	2003		2004
Segment long-lived assets:
Australia	$	1,223	$	651
Greater China		1,486		1,912
Korea		49		57
Singapore		152		201
Europe (excluding United Kingdom)		—		1,184
United Kingdom		2,823		4
North America		1,477		3,608


Total consolidated long-lived assets	$	7,210	$	7,617

F-61

INDEX TO EXHIBITS


No.		Description

1.1		Conformed copy of the Amended and Restated Memorandum of Association.***

1.2		Conformed copy of Amendment No. 1 to the Amended and Restated Memorandum of Association.****

1.3		Conformed copy of the Amended and Restated Articles of Association.***

1.4		Conformed copy of Amendment No. 1 to the Amended and Restated Articles of Association.****

2.(a).1		1999 Employee Stock Option Plan, as amended.*

2.(a).2		2004 Employee Share Purchase Plan.**

2(a).3		Ross Systems, Inc. 1998 Incentive Stock Plan (assumed by CDC Corporation)*****

4.(a).1		Share Purchase Agreement by and between CDC Mobile Media Corporation, hongkong.com Corporation and Palmweb Inc., dated March 14, 2003.⁺⁺⁺⁺⁺⁺

4.(a).2		Agreement and Plan of Merger among chinadotcom corporation, CDC Software Holdings, Inc. and Ross Systems, Inc., dated as of September 4, 2003.⁺⁺

4.(a).3		Transition and Stock Vesting Agreement among chinadotcom corporation, CDC Software Holdings, Inc., Ross Systems, Inc. and J. Patrick Tinley dated as of September 4, 2003.⁺⁺

4.(a).4		Transition and Stock Vesting Agreement among chinadotcom corporation, CDC Software Holdings, Inc., Ross Systems, Inc. and Robert B. Webster dated as of September 4, 2003.⁺⁺

4.(a).5		Series B Preferred Share Purchase Agreement by and between Cayman First Tier and chinadotcom Capital Limited, dated September 8, 2003.⁺⁺⁺

4.(a).6		Shareholders Agreement by and among Cayman First Tier, Symphony Technology II-A, L.P. and chinadotcom Capital Limited, dated September 8, 2003.⁺⁺⁺

4.(a).7		Voting Agreement by and among Cayman First Tier, Symphony Technology II-A, L.P. and chinadotcom Capital Limited, dated September 8, 2003.⁺⁺⁺

4.(a).8		Put Option Agreement by and among Cayman First Tier, Symphony Technology II-A, L.P. and chinadotcom Capital Limited, dated September 8, 2003.⁺⁺⁺

4.(a).9		Amended and Restated Memorandum and Articles of Association of Cayman First Tier, adopted of September 4, 2003.⁺⁺⁺

4.(a).10		Executive Committee Charter of Cayman First Tier, adopted September 4, 2003.⁺⁺⁺


No.		Description

4.(a).11		Revolving Credit Agreement by and between Cayman First Tier and chinadotcom Capital Limited, dated September 8, 2003.⁺⁺⁺

4.(a).12		Revolving Credit Agreement by and between Symphony Enterprise Solutions, S.ar.l and and chinadotcom Capital Limited, dated September 8, 2003.⁺⁺⁺

4.(a).13		Amendment to Agreement and Plan of Merger signed between chinadotcom corporation, CDC Software Holdings, Inc. and Ross Systems, Inc., dated October 3, 2003.⁺

4.(a).14		Guaranty dated as of September 8, 2003 from chinadotcom corporation.⁺

4.(a).15		Amended and Restated Memorandum and Articles of Association of Cayman First Tier adopted November 14, 2003.^y

4.(a).16		Amended and Restated Executive Committee Charter of Cayman First Tier adopted November 14, 2003.^y

4.(a).17		Second Amendment to the Agreement and Plan of Merger among chinadotcom corporation, CDC Software Holdings, Inc. and Ross Systems, Inc., dated January 7, 2004.^y^y

4.(a).18		Arrangement Agreement by and among Pivotal Corporation, chinadotcom corporation, a Cayman Islands corporation and CDC Software Corporation, dated December 6, 2003.^y^y

4.(a).19		Notice of Extraordinary General Meeting to be held on February 23, 2004 and Management Information Circular and Notice of Hearing of Petition for Arrangement under the British Columbia Company Act relating to a proposed arrangement involving Pivotal Corporation and Its Common Shareholders and Its Optionholders and CDC Software Corporation, dated January 20, 2004.^y^y

4.(a).20		Amended and Restated Arrangement Agreement by and among Pivotal Corporation, chinadotcom corporation, a Cayman Islands corporation and CDC Software Corporation, dated January 19, 2004.^y^y

4.(a).21		Third Amendment to the Agreement and Plan of Merger among chinadotcom corporation, CDC Software Holdings, Inc. and Ross Systems, Inc., dated April 29, 2004.⁺⁺⁺⁺⁺⁺⁺

4.(a).22		Amendment to Share Purchase Agreement by and among CDC Australia Limited, Praxa Limited, Mantech International Corporation and Mantech Australia International Inc. dated February 10, 2003.^y^y^y^y

4.(a).23		Amendment to Preferred Stockholder Agreement by and among chinadotcom corporation, Ross Systems, Inc. and Benjamin W. Griffith, III dated January 31, 2004.^+++++++

4.(a).24		Share Purchase Agreement among Group Team Investments Limited, the Related Entity, Easybay Management Inc., Lu Dong and Chen Hang, Jane Lin, chinadotcom Mobile Interactive Corporation (only with respect to certain sections of the Agreement) and CDC International Mobile Limited dated February 25, 2004^y^y^y^y

F-63


No.		Description

4.(a).25		Amendment Agreement Relating to Share Purchase Agreement among Group Team Investments Limited, the Related Entity, Easybay Management Inc., Lu Dong and Chen Hang, Jane Lin, chinadotcom Mobile Interactive Corporation (only with respect to certain sections of the Agreement) and CDC International Mobile Limited dated March, 2004^y^y^y^y

4.(b).1		Cooperation Agreement on Short Message Services between China Unicom, Sichuan, and Beijing Newpalm Technology Co. Ltd.^y^y^y

4.(b).2		Monternet SMS Cooperation Agreement.^yyy

4.(c).1		Amended and Restated Executive Services Agreement (Executive Chairman) effective as of April 27, 2004, by and between china.com Corporation Limited and Dr. Raymond Kuo-Fung Ch’ien.^y^y^y^y

4.(c).2		Executive Services Agreement (Chief Executive Officer) effective as of April 27, 2004, by and between china.com Corporation Limited and Dr. Raymond Kuo-Fung Ch’ien.^y^y^y^y

6.		Details of how EPS information is calculated can be found in Note 20 to our Consolidated Financial Statements.

8.		List of principal subsidiaries of the Company.^y^y^y^y

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.(a).1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.^

13.(a).2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.^

15.(a).1		Consent of Ernst & Young^

15.(a).2		Consent of PricewaterhouseCoopers LLP^


*		Incorporated by reference to our registration statement on Form S-8 (File No.: 333-11288) filed with the Commission on December 7, 2000.

**		Incorporated by reference to our registration statement on Form S-8 (File No.: 333-123666) filed with the Commission on March 30, 2005.

***		Incorporated by reference to our current report on Form 6-K (File No. 000-30134) filed with the Commission on September 18, 2002.

****		Incorporated by reference to our current report on Form 6-K (File No. 000-30134) filed with the Commission on May 20, 2005.

*****		Incorporated by reference to our registration statement on Form S-8 (File No.: 333-118619) filed with the Commission on August 27, 2004.

⁺		Incorporated by reference to our registration statement on Form F-4 (File No. 333-109493) filed with the Commission on October 6, 2003.

⁺⁺		Incorporated by reference to our current report on Form 6-K (File No. 000-30134) filed with the Commission on September 5, 2003.


⁺⁺⁺		Incorporated by reference to our current report on Form 6-K (File No. 000-30134) filed with the Commission on September 15, 2003.

⁺⁺⁺⁺⁺⁺		Incorporated by reference to Amendment No. 2 to our registration statement on Form F-4 (File No. 333-109493) filed with the Commission on January 21, 2004.

^+++++++		Incorporated by reference to Amendment No. 4 to our registration statement on Form F-4 (File No. 333-109493) filed with the Commission on May 7, 2004.

^y		Incorporated by reference to our current report on Form 6-K (File No. 000-30134) filed with the Commission on December 11, 2003.

^y^y		Incorporated by reference to our current report on Form 6-K (File No. 000-30134) filed with the Commission on January 8, 2004.

^y^y^y		Incorporated by reference to our registration statement on Form F-4/A (File No. 333-109493) filed with the Commission on January 21, 2004.

^y^y^y^y		Incorporated by reference to our annual report on Form 20-F (File No. 000-30134) filed with the Commission on June 30, 2005.

^		Filed herewith.

F-65

CDC (CHINA) Inactive 20-F/A2004 FY Annual report (foreign) (amended)