20-F 1 h01302e20vf.htm SHANDA INTERACTIVE ENTERTAINMENT LIMITED SHANDA INTERACTIVE ENTERTAINMENT LIMITED
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
     
o   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
OR
     
o   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report                     .
Commission file number: 000-50705
SHANDA INTERACTIVE ENTERTAINMENT LIMITED
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
No. 1 Office Building
No. 690 Bibo Road
Pudong New Area
Shanghai 201203, People’s Republic of China
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
     
(Title of each class)   (Name of each exchange on which registered)
American Depositary Shares, each representing
2 ordinary shares, par value $0.01 per share
  The NASDAQ Global Market
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 143,208,848 ordinary shares, par value $0.01 per share.
     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes      þ No
     If this report is an annual or transaction report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
o Yes      þ No
     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.
þ Yes      o No
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
o Large accelerated filer      þ Accelerated filer      o Non-accelerated filer
     Indicate by check mark which financial statement item the registrant has elected to follow:
o Item 17      þ Item 18
     If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes      þ No
 
 

 


 

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 EX-4.69 ONLINE GAME SOFTWARE SUBLICENSE AGREEMENT
 EX-4.70 ONLINE GAME SOFTWARE SUBLICENSE AGREEMENT
 EX-4.71 ONLINE GAME SOFTWARE SUBLICENSE AGREEMENT
 EX-4.72 ONLINE GAME SOFTWARE SUBLICENSE AGREEMENT
 EX-4.73 ONLINE GAME SOFTWARE SUBLICENSE AGREEMENT
 EX-4.74 ONLINE GAME SOFTWARE SUBLICENSE AGREEMENT
 EX-4.75 ARENA SOFTWARE III LICENSING AGREEMENT
 EX-4.76 UNIFIED PLATFORM VERIFICATION SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.77 UNIFIED PLATFORM VERIFICATION SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.78 UNIFIED PLATFORM CERTIFICATION SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.79 JINGLING SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.80 JINGLING SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.81 JINGLING SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.82 PHYSICAL CARD ONLINE SALES SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.83 PHYSICAL CARD ONLINE SALES SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.84 PHYSICAL CARD ONLINE SALES SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.85 VIRTUAL CARD ONLINE SALES SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.86 VIRTUAL CARD ONLINE SALES SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.87 VIRTUAL CARD ONLINE SALES SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.88 DEBIT CARD AND CREDIT CARD ONLINE SALES SYSTEM SOFTWARE LICENSING
 EX-4.89 DEBIT CARD AND CREDIT CARD ONLINE SALES SYSTEM SOFTWARE LICENSING
 EX-4.90 DEBIT CARD AND CREDIT CARD ONLINE SALES SYSTEM SOFTWARE LICENSING
 EX-4.91 EQUIPMENT MANAGEMENT PLATFORM SOFTWARE LICENSING AGREEMENT
 EX-4.92 EQUIPMENT MANAGEMENT PLATFORM SOFTWARE LICENSING AGREEMENT
 EX-4.93 EQUIPMENT MANAGEMENT PLATFORM SOFTWARE LICENSING AGREEMENT
 EX-4.94 OCTOPOD SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.95 OCTOPOD SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.96 OCTOPOD SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.97 USER PLATFORM SOFTWARE LICENSING AGREEMENT
 EX-4.98 USER PLATFORM SOFTWARE LICENSING AGREEMENT
 EX-4.99 USER PLATFORM SOFTWARE LICENSING AGREEMENT
 EX-4.100 REMOTE DESKTOP SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.101 REMOTE DESKTOP SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.102 REMOTE DESKTOP SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.103 GRAPH SUPERVISION SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.104 GRAPH SUPERVISION SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.105 GRAPH SUPERVISION SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.106 SERVER LOCAL VERIFICATION SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.107 SERVER LOCAL VERIFICATION SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.108 SERVER LOCAL VERIFICATION SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.109 EXTERNAL APPLICATION SUPERVISION SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.110 EXTERNAL APPLICATION SUPERVISION SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.111 EXTERNAL APPLICATION SUPERVISION SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.112 HIDS SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.113 HIDS SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.114 HIDS SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.115 GAMEMASTER SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.116 GAMEMASTER SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.117 GAMEMASTER SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.118 KANGAROO SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.119 KANGAROO SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.120 KANGAROO SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.121 COBWEB SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.122 COBWEB SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.123 COBWEB SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.124 NETVIEW SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.125 NETVIEW SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.126 NETVIEW SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.127 EVENT PLATFORM SOFTWARE LICENSING AGREEMENT
 EX-4.128 EVENT PLATFORM SOFTWARE LICENSING AGREEMENT
 EX-4.129 EVENT PLATFORM SOFTWARE LICENSING AGREEMENT
 EX-4.130 NETWORK LOG SUPERVISION SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.131 NETWORK LOG SUPERVISION SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.132 NETWORK LOG SUPERVISION SYSTEM SOFTWARE LICENSING AGREEMENT
 EX-4.133 BUSINESS SUPPORT SYSTEM LICENSE AGREEMENT
 EX-4.134 BUSINESS SUPPORT SYSTEM LICENSE AGREEMENT
 EX-4.135 BUSINESS SUPPORT SYSTEM LICENSE AGREEMENT
 EX-4.136 TERMINATION AGREEMENT
 EX-4.137 TERMINATION AGREEMENT
 EX-4.138 TERMINATION AGREEMENT
 EX-4.139 STRATEGIC CONSULTING SERVICE AGREEMENT
 EX-4.140 STRATEGIC CONSULTING SERVICE AGREEMENT
 EX-4.141 STRATEGIC CONSULTING SERVICE AGREEMENT
 EX-4.142 TECHNICAL SUPPORT AGREEMENT
 EX-4.143 TECHNICAL SUPPORT AGREEMENT
 EX-4.144 TECHNICAL SUPPORT AGREEMENT
 EX-4.145 WEBSITE DEVELOPMENT AGREEMENT
 EX-8.1 LIST OF SUBSIDIARIES
 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-13.1 CERTIFICATION OF CEO REQUIRED BY RULE 13(A)-14(B)
 EX-13.2 CERTIFICATION OF CFO REQUIRED BY RULE 13(A)-14(B)

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Introduction
CONVENTIONS WHICH APPLY TO THIS FORM
     Except where the context otherwise requires and for purposes of this form only:
    “we,” “us,” “our company” and “our” refer to Shanda Interactive Entertainment Limited, its predecessor entities and subsidiaries, and, in the context of describing our operations, also include our PRC-incorporated affiliates, including Shanghai Shanda Networking Co., Ltd., or Shanda Networking, Nanjing Shanda Networking Co., Ltd., or Nanjing Shanda, and Hangzhou Bianfeng Networking Co., Ltd., or Hangzhou Bianfeng;
 
    in certain instances, Shanda Networking, Nanjing Shanda, and Hangzhou Bianfeng are referred to collectively as “our PRC operating companies”;
 
    in certain instances, Shanda Networking is referred to as “Shanghai Shanda Internet Development Co., Ltd.”, which is an alternative English translation of its Chinese name;
 
    “China” or “PRC” refers to the People’s Republic of China, excluding Taiwan, Hong Kong and Macau; and
 
    all references to “RMB” or “Renminbi” are to the legal currency of China and all references to “U.S. dollars,” “dollars” and “US$” are to the legal currency of the United States.
     This form contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader. Unless otherwise noted, all translations from Renminbi to U.S. dollars were made at the noon buying rate in The City of New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York, or the noon buying rate, as of December 29, 2006 which was RMB7.8087 to US$1.00. We make no representation that the Renminbi amounts referred to in this form could have been or could be converted into U.S. dollars at any particular rate or at all. On June 22, 2007, the noon buying rate was RMB7.622 to US$1.00.

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Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not Applicable
Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable
Item 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
     The following selected consolidated statement of operations data for the five years ended December 31, 2006 and the consolidated balance sheet data as of December 31, 2003, 2004, 2005 and 2006 have been derived from our audited consolidated financial statements, which have been audited by PricewaterhouseCoopers Zhong Tian CPAs Limited Company, an independent registered public accounting firm. The report of PricewaterhouseCoopers Zhong Tian CPAs Limited Company on our consolidated financial statements as of December 31, 2005 and 2006 and for each of the three years in the period ended December 31, 2006 is included elsewhere in this annual report on Form 20-F. Our selected consolidated statement of operations data for the year ended December 31, 2002 and 2003 and our consolidated balance sheets as of December 31, 2002, 2003 and 2004 have been derived from our audited consolidated financial statements, which are not included in this annual report on Form 20-F. You should read the selected consolidated financial data in conjunction with those financial statements and the related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report on Form 20-F. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results do not necessarily indicate our results expected for any future periods.
                                                 
    For the year ended December 31,  
    2002     2003     2004(4)     2005     2006  
    (in thousands, except per share and per ADS data)  
    RMB     RMB     RMB     RMB     RMB     US$(1)  
Consolidated Statements of Operations and Comprehensive Income Data
                                               
Net revenues:
                                               
Online game net revenues:
                                               
MMORPGs
    326,127       580,315       994,664       1,255,341       1,240,096       158,810  
Casual
          8,313       214,513       402,968       302,800       38,777  
Other revenues
    94       11,352       89,548       238,302       111,564       14,287  
 
                                               
Total net revenues
    326,221       599,980       1,298,725       1,896,611       1,654,460       211,874  
Cost of revenue
    (122,081 )     (233,701 )     (471,184 )     (614,427 )     (689,805 )     (88,338 )
 
                                               
Gross profit
    204,140       366,279       827,541       1,282,184       964,655       123,536  
Operating expenses
    (41,516 )     (153,106 )     (316,579 )     (660,285 )     (587,023 )     (75,176 )
 
                                               
Income from operations
    162,624       213,173       510,962       621,899       377,632       48,360  
Interest income and investment income
    1,112       13,531       63,171       23,127       97,104       12,436  
Amortization of convertible debt issuance cost
                (3,524 )     (18,492 )     (17,490 )     (2,240 )
Other income (expense), net
    (1,371 )     61,152       83,656       174,903       133,913       17,149  
 
                                               
Income before income tax expenses, equity in loss of affiliated companies, minority interests
    162,365       287,856       654,265       801,437       591,159       75,705  
Income tax expenses
    (23,077 )     (18,647 )     (38,941 )     (96,711 )     (36,489 )     (4,673 )
Equity in loss of affiliated companies.
                (4,180 )     (544,268 )     (26,227 )     (3,358 )
Minority interests
          3,641       (1,661 )     4,825       767       98  
 
                                               
Net income
    139,288       272,850       609,483       165,283       529,210       67,772  
 
                                               

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    For the year ended December 31,  
    2002     2003     2004     2005     2006  
    (in thousands, except per share and per ADS data)  
Earnings per Share Data:
  RMB     RMB     RMB     RMB     RMB     US$(1)  
Accretion for preferred shares
          (24,963 )                        
Income attributable to preferred shareholders
          (48,358 )     (82,479 )                  
Income attributable to ordinary shareholders
    139,288       199,529       527,004       165,283       529,210       67,772  
Earnings per share, basic
    1.39       2.14       4.32       1.17       3.71       0.48  
Earnings per share, diluted
    1.39       2.07       4.05       1.13       3.66       0.47  
Earnings per ADS, basic(2)
    2.78       4.28       8.64       2.34       7.42       0.96  
Earnings per ADS, diluted(2)
    2.78       4.14       8.10       2.26       7.32       0.94  
                                                 
                                                 
    As of December 31,  
    2002     2003     2004(4)     2005     2006  
    (in thousands, except per share and per ADS data)  
    RMB     RMB     RMB     RMB     RMB     US$(1)  
Consolidated Balance Sheets Data:
                                               
Cash and cash equivalents
    177,040       598,922       3,123,971       949,622       1,291,901       165,444  
Working capital(3)
    99,080       459,445       3,200,918       2,742,420       956,672       122,514  
Total assets
    404,695       928,978       4,291,164       4,470,453       5,145,117       658,895  
Total liabilities
    258,629       303,661       2,774,386       2,829,205       2,724,813       348,945  
Minority interests
          2,716       6,879       3,389       2,910       373  
 
                                   
Total shareholders’ equity
    146,066       622,601       1,509,899       1,637,859       2,417,394       309,577  
 
                                   
 
(1)   Translations of RMB amounts into U.S. dollars were made at a rate of RMB7.8087 to US$1.00, the noon buying rate in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York on December 29, 2006.
 
(2)   Each ADS represents two ordinary shares.
 
(3)   Working capital represents total current assets less total current liabilities.
 
(4)   Certain reclassification have been made to the consolidated financial statements of the year ended December 31, 2006 to confirm to the current year presentation.
EXCHANGE RATE INFORMATION
     The following table sets forth information regarding the noon buying rates in Renminbi and U.S. dollars for the periods indicated.
                                 
    Renminbi per U.S. Dollar Noon Buying Rate  
    Average(1)     High     Low     Period End  
2002
    8.2770       8.2800       8.2669       8.2800  
2003
    8.2770       8.2800       8.2272       8.2769  
2004
    8.2770       8.2773       8.2765       8.2765  
2005
    8.1826       8.2765       8.0702       8.0702  
 
                       
2006
    7.9579       8.0702       7.8041       7.8087  
 
                       
                 
    Renminbi per U.S. Dollar  
    Noon Buying Rate  
    High     Low  
December 2006
    7.8350       7.8041  
January 2007
    7.8127       7.7705  
February 2007
    7.7632       7.7410  
March 2007
    7.7454       7.7232  
April 2007
    7.7345       7.7090  
May 2007
    7.7065       7.6463  
 
           
June 2007 (through June 22)
    7.668       7.6175  
 
           
 
(1)   Annual averages are calculated using month-end rates.
 
    Source: Federal Reserve Bank of New York
     On June 22, 2007 the noon buying rate was RMB 7.622 to US$1.00.

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B. CAPITALIZATION AND INDEBTEDNESS
Not applicable
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable
D. RISK FACTORS
Risks Relating to our Business
We are substantially dependent on two online games, which accounted for approximately 70.3% of our net revenues in 2006 and which may have a finite commercial lifespan.
     We are dependent upon The Legend of Mir II, or Mir II, and The World of Legend, or Woool, for the majority of our revenue. In 2006, Mir II and Woool accounted for approximately 46.6% and 23.7% of our net revenues, respectively. These and other online games may, however, have finite commercial life spans. We believe that Mir II and Woool, which we commercially launched in the fourth quarter of 2001 and the third quarter of 2003, respectively, have already entered the mature stages of their lifecycles. Revenues from Mir II sequentially decreased in the third and fourth quarters of 2005, and revenues from Woool sequentially decreased in the fourth quarter of 2005 and first quarter of 2006. While the adoption of our new come-stay-play model in 2006 has reversed the decreasing trend in revenue, we cannot assure you that revenues will not continue to decline in the future. In order to maximize the lifespan of Mir II and Woool, we work with our licensors and rely upon in-house efforts to continuously enhance, expand and upgrade Mir II and Woool to include new features. If we fail to do so, revenue generated by Mir II and Woool may decline. Nonetheless, we expect to continue to derive a substantial portion of our net revenues from Mir II and Woool through at least 2007. Accordingly, our business, financial condition and results of operations would be materially and adversely affected by any occurrence that leads to a continued downward trend in revenue generated by Mir II and Woool, including but not limited to:
    any reduction in purchases of in-game items or value-added services by Mir II or Woool users or any decrease in the popularity of either game in the China market due to intensifying competition or other factors;
 
    loss of our rights to operate either of these games due to a termination of necessary licenses or other reasons;
 
    failure to make improvements, updates or enhancements to Mir II or Woool in a timely manner; or
 
    any lasting or prolonged server interruption due to network failures or other factors or any other adverse developments specific to Mir II or Woool.
If we are unable to consistently license or develop additional successful online games, our business, financial condition and results of operations may be materially and adversely affected.
     In order to maintain our long-term profitability and operational success, we must continue to license or develop new online games that are attractive to our users to replace our existing online games as they reach the end of their commercial lifespan.
     Our ability to license successful online games will depend on our ability to identify games that will appeal to our users, the availability of such games at acceptable costs, our ability to compete effectively to attract the licensors of such games, and our ability to obtain government approvals required for the licensing and operation of such games. It is, however, difficult at the testing phase to determine which online games will appeal to our users. In addition, many of the games that are licensed by overseas developers were not designed specifically for China’s online game market, further complicating the task of identifying or implementing games that will appeal to our users. Moreover, due to

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increased competition among online game operators in China, upfront license fees for licensed games have increased and most licensors are demanding guaranteed minimum royalty payments. We may be unable to fully recover upfront and minimum royalty licensing costs if a licensed game is not popular among users.
     Our ability to internally develop successful online games will depend on our ability to anticipate changing consumer tastes and preferences, to adopt new technologies, to attract, retain and motivate talented online game developers and to effectively execute online game development plans. Internal online game development requires substantial initial investment prior to commercial launch of the games as well as a significant commitment of future resources to produce upgrades and expansion packs. As with the licensing costs for third-party games, we may be unable to fully recover development costs if the games are not popular among users.
     We cannot be certain that the games we license from third parties or internally develop will be attractive to users, will be viewed by the regulatory authorities as complying with content restrictions, will be launched as scheduled or will be able to compete with games operated by our competitors. If we are not able to consistently license or develop online games with continuing appeal to users, our future profitability and growth prospects will decline.
If we are unable to maintain stable relationships with the overseas licensors of our online games, we may experience difficulties in the continued operation of our existing licensed games, the extension of existing licenses and the granting of licenses for new games.
     We need to maintain stable working relationships with our overseas licensors in order to ensure the continued smooth operation of our licensed online games and our continued access to new online game licenses. In 2006, we derived approximately 63.1% of our net revenues from online games that were licensed from third parties. We are dependent upon our licensors for the provision of technical support necessary for the operation of the licensed games as well as expansion packs and upgrades that help to sustain interest in a game among online users. In addition, certain marketing activities often require the consent of our licensors. Moreover, certain of our licenses may be terminated upon the occurrence of certain events, such as our material breach of the license. If a licensed game is successful during its initial term of operation, we may be required to negotiate with our licensors to extend that term of operation. For example, one of our successful casual games, BNB, is licensed from a third party with its license agreement expiring in September 2008. We may not be able to renew this license agreement with the licensor on commercially acceptable terms or at all. Our ability to maintain stable working relationships with our overseas licensors also influences our ability to license new online games developed by the same or other licensors. If we are unable to maintain stable relationships with our overseas licensors, our financial condition and results of operations may be materially and adversely affected.
We or our licensors may be subject to intellectual property infringement claims, which may force us to incur substantial legal expenses and, if determined adversely against us or our licensors, may materially disrupt our business.
     We cannot be certain that internally developed or licensed online games and other interactive entertainment content do not and will not infringe upon patents, copyrights, trademarks or other intellectual property rights held by third parties. For example, we were subject to litigation with respect to our operation of our in-house developed game Woool when Actoz and Wemade filed copyright infringement and unfair competition claims against us in the Beijing First Intermediate People’s Court. These claims were settled in February 2007. For more details about the Actoz and Wemade litigation please see “Legal Proceedings” in Item 8 “Financial Information”. Of the fourteen games that we commercially operated as of December 31, 2006, seven are internally developed and seven are licensed form third parties. In connection with our EZ initiative, we also cooperate with numerous service and content providers that supply interactive entertainment content, such as movies, music, news and information. We or any of our licensors may become subject to legal proceedings and claims from time to time relating to the intellectual property of others. If we or our licensors are found to have violated the intellectual property rights of others, we may be required to pay damages and be enjoined from using such intellectual property, and we may incur new or additional licensing fees if we wish to continue using the infringing content, or be forced to develop or license alternatives. In addition, we may incur substantial expenses in defending against these third party infringement claims, regardless of their merit.
Negative publicity in China regarding online games could lead to additional government regulations that may have a material and adverse impact on our business, financial condition and results of operations.

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     The media in China has reported incidents of violent crimes allegedly inspired by or in connection with online games. In addition, incidences of excessive online game playing and allegations that online games distract students and interfere with their education have also been reported in the media. This negative publicity regarding the online game industry has led to several regulatory initiatives and could lead to additional regulation in the future. For example, in July 2005, the Ministry of Culture and the Ministry of Information Industry jointly issued an opinion which requires online game operators to develop systems and softwares for identity certification, to implement anti-addiction modifications to game rules and to restrict players under eighteen years of age from playing certain games. In addition, in August 2005, the State Administration of Press and Publications, or SAPP, proposed an online game anti-addiction system that would have reduced and eliminated experience points that a user can accumulate after three and five hours of consecutive playing, respectively. On April 5, 2007, the GAPP, Ministry of Education, Chinese Communist Party Central Committee Office of Social Ethics, Ministry of Public Security, Ministry of Information Industry, Central Committee of Chinese Communist Youth League, All-China Women’s Federation and China Working Committee for Future Generations issued The Circular on Implementation of Online Game Anti-addiction System for Protecting Physical and Mental Well-being of Minors, or the April 5 Circular. The April 5Circular has two annexes, Annex I: Online Game Anti-addiction System Development Standard and Annex II: Real Identity Verification Procedure for Online Game Anti-addiction System. According to the April 5 Circular and its annexes, online game players will be required to register with their real names and identity card numbers. The anti-addiction system will only be applied to players that are under eighteen years of age. The April 5 Circular provides that the online game operators shall develop the anti-addiction system with real identity verification functions in accordance with the Online Game Anti-addiction System Development Standard and Real Identity Verification Procedure for Online Game Anti-addiction System during the period from April 5, 2007 to June 15, 2007, test the system during the period from June 15, 2007 to July 15, 2007 and then formally implement the system beginning from July 16, 2007. Violation of the April 5 Circular may incur regulatory sanctions, including monetary fines, forced termination of online game operations and recovation of our licenses needed for operations. The formal implementation of the anti-addiction system and other regulations which may be mandated in response to negative publicity could have a material and adverse impact on our business, financial condition and results of operations.
We face significant competition which could reduce our market share and adversely affect our business, financial condition and results of operations.
     The online game market in China is increasingly competitive. Our results of operations to date may be a result, in part, of a first-mover advantage which may not continue to be available to us. A significant number of competitors have entered the online game business in China. We expect more companies to enter the market and we expect a wider range of online games to be introduced to the China market. Competition from other online game operators, both based in China as well as overseas, is likely to increase in the future. Other online game operators or developers, such as China-based Netease, The9, Zhengtu, Perfect Space and 9you, as well as overseas-based Electronic Arts, NCsoft and Nexon, are current, or potential future, competitors. As the online game industry in China is relatively new and constantly evolving, our current or future competitors may compete more successfully as the industry matures. In particular, any of these competitors may offer products and services that provide significant performance, price, creativity or other advantages over those offered by us. These products and services may weaken the market strength of our brand name and achieve greater market acceptance than ours. Furthermore, any of our current or future competitors may be acquired by, receive investments from or enter into other commercial relationships with, larger, well-established and well-financed companies and therefore obtain significantly greater financial, marketing and game licensing and development resources than we have. In addition, increased competition in the online game industry in China could make it difficult for us to retain existing users and attract new users. Moreover, game consoles that have achieved significant successes in markets other than China have not yet formally entered the market in China due to regulatory and other concerns. If these game consoles, many of which are strengthening their online game features, formally enter the market in China, we would face additional competition. We also compete with other forms of entertainment, such as television and movies. If we are unable to compete effectively in China’s online game market as well as China’s entertainment market, our business, financial condition and results of operations could be materially and adversely affected.
We may not be able to successfully implement our growth strategies, including our EZ initiative, which may materially and adversely affect our business, financial condition and results of operations.

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     In 2005, as part of our transition from a pure online game operator to an interactive entertainment media company, we introduced the EZ initiative as an integral part of our home strategy. The EZ initiative involves broadening our interactive entertainment services and content offerings as well as introducing new media platforms over which to deliver our expanded service and content offerings to end users. Our EZ initiative includes introducing new products and services for which there are no established markets. Our ability to successfully implement our EZ initiative will depend upon our success in educating consumers on the value of these new products and services. Many consumers in China may, nonetheless, regard some of the new products as too expensive. In addition, we lack experience and expertise with respect to some of the EZ series products and services. For example, we do not have experience or expertise in distribution, marketing, inventory management or warranty support for consumer electronic products. Although in executing the EZ initiative we will cooperate with consumer electronics manufactures that do have such experience and expertise, our lack of such knowledge internally may prove to be a material disadvantage. We cannot assure you that we will be able to deliver the new EZ series products and services on a commercially viable basis or in a timely manner, or at all. Moreover, execution of the EZ initiative requires a significant amount of managerial time and energy. Pursuit of the EZ initiative, and other growth strategies, may divert senior management’s focus away from our core online game business to the detriment of such business. If we are unable to successfully implement our growth strategies, our revenue and profitability will not grow as we expect, which may have a material and adverse effect on our business, financial condition and results of operations.
The recent change to the revenue model for our leading MMORPGs may reduce the amount of revenue that otherwise would have been generated by these games, thereby negatively affecting our financial condition and results of operations.
     In late November 2005, we replaced the pay-to-play revenue model with a “Come-Stay-Pay,” or CSP, revenue model for three of our leading MMORPGs: Mir II, Woool and Magical Land. We have since adopted this revenue model for our casual games and most of our MMORPGs. Under the CSP revenue model, end users are able to play the basic functions of these MMORPGs for free and may choose to purchase in-game value-added services, including certain in-game items and premium features, which enhance the game experience. We have licensed a number of new games, including but not limited to ArchLord, Kong Fu Masters and LaTale, which will all be operated under the CSP model. In 2006, net revenue generated from games operated under the CSP model accounted for 92.0% of our net revenue. Although we believe this new revenue model has initially shown promising results and will benefit our company in the long run, we cannot assure that it will ultimately be successful, or that it will not have a negative impact on our financial condition and results of operations. Any material reduction in revenue would have a material and adverse affect on our financial condition and results of operations.
There are risks associated with our pursuit of growth through acquisitions and strategic investments.
     In recent years we have pursued, and in the future we may continue to pursue, growth through acquisitions and strategic investments. We acquired or invested in eight businesses in 2004 and 2005 with a total value of US$421.0 million. In May 2005, we completed the second step of a two-step acquisition of Shanghai Haofang Online Information Technology Co., Ltd., or Haofang, at a total purchase price of US$56.0 million. In February 2005, we completed our purchase of an approximately 19.5% stake in SINA Corp., or SINA, at a total purchase price of US$227.6 million. In February 2005, we also completed the purchase of a 29% stake in Actoz, increasing our total stake to approximately 38.1%, at a total purchase price at US$106.1 million. In 2006 and 2007, we purchased additional Actoz shares on the open market and increased our total stake to approximately 49.48% as of June 22, 2007. In July 2004, we acquired Hangzhou Bianfeng Software Co., Ltd., or Bianfeng, at a total purchase price of US$20.0 million. For more information on our acquisitions, see “Recent Acquisitions” in Item 5 “Operating and Financial Review and Prospects” and “History and Development of the Company ” in Item 4 “Information on the Company”. These acquired or invested companies operate businesses that complement our core online game business or represent related but new lines of business. We may, however, fail to realize the synergies contemplated at the time of executing these transactions, which could negatively impact our financial condition and results of operations. For example, we completed the purchase of our controlling stake in Actoz, the co-owner of Mir II, in February 2005, for a total consideration of RMB878million (US$106.1 million), which represented an 81% premium over the open market price at the time that we entered into the purchase agreement in October 2004. In the fourth quarter of 2005, however, we recorded a non-cash impairment charge of RMB521.5 million (US$64.6 million) to reflect the fair value of our 38.1% stake in Actoz. We recognized the impairment charge primarily as a result of the continued decline in royalties payable to Actoz from our operation of Mir II in China. The decision to recognize impairment was also influenced by

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the decline in market price for shares of Actoz, which in the fourth quarter of 2005 was determined to be other than temporary, mainly due to the continued decline in Mir II royalties. In addition, as of December 31, 2006, the goodwill and intangibles relating to Haofang amounted to approximately RMB400 million (US$51.28 million). In accordance with SFAS No. 142, goodwill and intangible assets are tested for impairment at the reporting unit level annually or when there are indicators of impairment. Haofang experienced substantial year over year decline in profit and revenue in 2006. Additionally, the founders and key management of Haofang left the company during the first half of 2006. Our management obtained an independent valuation to ascertain the fair value of Haofang as of October 31, 2006. Based on the valuation report and their own assessment, our management concluded that there was no impairment in the carrying value of Haofang for 2006. We will continuously monitor the operation of Haofang for any impairment indicators. If the actual cashflow for 2007 does not reflect our management’s current estimates, an impairment in this investment may be necessary for 2007. Additional risks associated with acquisitions and strategic investments include the following:
    It may be difficult to assimilate the operations and personnel of an acquired business into our own business;
 
    Management information and accounting systems of an acquired business must be integrated into our current systems;
 
    Our management must devote its attention to assimilating the acquired business, which diverts attention from other business concerns; and
 
    We may be unable to complete transactions that we initiate.
     We cannot assure you that we will have the ability to effectively integrate the operation of the acquired companies into our own and achieve the synergies contemplated at the time of entering into these transactions. If we are unable to achieve the synergies contemplated at the time of acquiring these businesses, the carrying value of the acquired companies may not be recoverable. We are required by U.S. GAAP to review the impairment of goodwill at least on an annual basis. If an impairment is determined and charged to the earnings in our financial statements, our financial condition and results of operations may be materially and adversely affected.
While we believe that we currently have adequate internal control procedures in place, we are still exposed to potential risks from legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.
     This annual report does not include an attestation report by our registered public accounting firm regarding internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report. We will be required to include an attestation report from our registered public accounting firm in our annual report for the fiscal year ending on December 31, 2007. However, we cannot assure that we will be able to provide a registered public accounting firm’s attestation report on internal control over financial reporting in our annual report on Form 20-F for the fiscal year ending on December 31, 2007. If we fail to implement the requirements of Section 404 in a timely manner or with adequate compliance, our registered public accounting firm may be unable to provide a written attestation as to the effectiveness of our internal controls over financial reporting and we may be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur significant costs in improving our internal control system and the hiring of additional personnel. Any such action could increase our costs relative to our revenues, thereby reducing our operating margins and could negatively affect the market price of our ADSs.

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Operation of pirate game servers and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.
     We continue to face challenges from pirate game servers, which are game servers that operate unauthorized copies of our online games and permit users to play those games without purchasing pre-paid game cards from us. We have detected the operation by pirate servers of unauthorized copies of various of our leading games. In September 2002, for example, we discovered that the server-end software of Mir II was unlawfully released into the China market. This software leak enabled unauthorized third parties to set up local server networks to operate Mir II, which we believe continue to divert a significant number of users of one of our most popular online games away from us. Although we have made efforts to shutdown pirate servers across China, the intellectual property enforcement regime in China is not as robust as that of the United States, and we continue to face considerable challenges when attempting to enforce our intellectual property rights. Enforcement actions generally require cooperation from local authorities, which are not always willing to use their limited resources to enforce the intellectual property rights of national corporations against individuals or companies in their districts. In addition, detailed comparisons of software codes and litigation proceedings are often necessary to enforce our intellectual property rights, which sometimes result in substantial costs. Despite our efforts to shutdown pirate servers, we believe that a significant number of pirate game servers continue to operate unauthorized copies of our online games. The continued operation of our leading games by pirate game servers, or the operation of any new games that we may introduce by pirate servers, may materially and adversely affect our business, financial condition and results of operations.
Undetected programming errors or defects in our games and the proliferation of cheating programs could materially and adversely affect our business, financial condition and results of operations.
     Our games may contain undetected programming errors or other defects. In addition, parties unrelated to us may develop Internet cheating programs that enable our users to acquire superior features for their game characters that they would not have otherwise. Furthermore, certain cheating programs could cause the loss of a character’s superior features acquired by a user. The occurrence of undetected errors or defects in our games, and our failure to discover and disable cheating programs affecting the fairness of our game environment, could disrupt our operations, damage our reputation and detract from the game experience of our users. As a result, such errors, defects and cheating programs could materially and adversely affect our business, financial condition and results of operations.
     Unexpected network interruptions, security breaches or computer virus attacks could have a material adverse effect on our business, financial condition and results of operations.
     Any failure to maintain the satisfactory performance, reliability, security and availability of our network infrastructure may cause significant harm to our reputation and our ability to attract and maintain users. We maintain a distributed server network architecture with third party service providers hosting servers in more than one hundred cities throughout China. Most of the servers handling log in, and all servers handling billing and data backup matters for us, are hosted and maintained by third party service providers in Shanghai. We do not maintain full backup for our server network hardware. Major risks involved in such network infrastructure include:
    any break-downs or system failures resulting in a sustained shutdown of all or a material portion of our servers, including failures which may be attributable to sustained power shutdowns, or efforts to gain unauthorized access to our systems causing loss or corruption of data or malfunctions of software or hardware; and
 
    any disruption or failure in the national backbone network, which would prevent our users outside Shanghai from logging on to any of our games or other content, or playing the games, for which the servers are all located in Shanghai.
     In the past, our server network has experienced unexpected outages for several hours and occasional slower performance in a number of locations in China as a result of failures by third party service providers. Our network systems are also vulnerable to damage from fire, flood, power loss, telecommunications failures, computer virus, hackings and similar events. Any network interruption or inadequacy that causes interruptions in the availability of our games or deterioration in the quality of access to our games could reduce our users’ satisfaction. In addition, any

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security breach caused by hacking, which involve efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses could have a material adverse effect on our business, financial condition and results of operations. We do not maintain insurance policies covering losses relating to our systems and we do not have business interruption insurance.
Any failure to maintain a stable and efficient distribution and payment network could have a material and adverse impact on our business, financial condition and results of operations.
     Online payment systems in China are in a developmental stage and are not as widely available or acceptable to consumers in China as in the United States. As a result, we rely heavily on a multi-layer distribution and payment network composed of third party distributors for our sales to, and collection of payment from, our users. As we do not enter into long-term agreements with any of our distributors, we cannot assure you that we will continue to maintain favorable relationships with them. If we fail to maintain a stable and efficient distribution and payment network, our business, financial condition and results of operations could be materially and adversely affected.
The limited use of personal computers in China and the relatively high cost of Internet access with respect to per capita gross domestic product may limit the development of the Internet in China and impede our growth.
     Although the use of personal computers in China has increased in recent years, the penetration rate for personal computers in China is much lower than in the United States. In addition, despite a decrease in the cost of Internet access in China due to a decrease in the cost of personal computers and the introduction and expansion of broadband access, the cost of personal Internet access, in contrast with Internet access through Internet cafes, remains relatively high in comparison to the average per capita income in China. In addition, the PRC government has recently promulgated regulations to curb the growth of internet cafes. See Item 3.D. “Risk Factors—Risks Relating to Regulation of the Internet and to Our Structure—The PRC government has announced its intention, and has begun, to intensify its regulation of Internet cafes, which are currently the primary venue for our users to play online games. Intensified government regulation of Internet cafes could restrict our ability to maintain or increase our revenues and expand our customer base.” The limited use of personal computers in China and the relatively high cost of personal Internet access may limit the growth of our business. Furthermore, any Internet access or telecommunications fee increase could reduce the number of users that play our online games.
Our business could suffer if we do not successfully manage our growth.
     Our recent growth has placed significant strain on our management, operational, financial and other resources. For example, the total number of our employees increased from 562 as of December 31, 2003 to 1,429 as of December 31, 2004, and to 2,392 as of December 31, 2005. During 2006, we reduced the total number of our employees to 1,906 as of December 31, 2006 in order to streamline operations and reduce costs. In addition, certain of our directors, officers and key employees that have recently joined our company will need time to learn our business and successfully integrate themselves into our company. In addition, as a result of our growth we need to continue to develop and expand our financial and management controls and our reporting systems and procedures. We cannot assure you that we will be able to efficiently or effectively manage the growth of our operations, and any failure to do so may limit our future growth and materially and adversely affect our business, financial condition and results of operations.
We depend on our key personnel, and our business and growth prospects may be severely disrupted if we lose their services.
     Our future success is heavily dependent upon the continued service of our key executives and other key employees. In particular, we rely on the expertise, experience and leadership ability of Tianqiao Chen, our founder, controlling shareholder and chief executive officer, in our business operations, and rely on his personal relationships with our employees, the relevant regulatory authorities, our game and service suppliers and Shanda Networking. We also rely on a number of key technology officers and staff for the development and operation of our online games. In addition, as we expect to focus increasingly on the development of our own online games, we will need to continue attracting and retaining skilled and experienced online game developers to maintain our competitiveness.

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     If one or more of our key personnel are unable or unwilling to continue in their present positions, we may not be able to easily replace them and may incur additional expenses to recruit and train new personnel, our business could be severely disrupted, and our financial condition and results of operations could be materially and adversely affected. Furthermore, since our industry is characterized by high demand and intense competition for talent, we may need to offer higher compensation and other benefits in order to attract and retain key personnel in the future. We cannot assure you that we will be able to attract or retain the key personnel that we will need to achieve our business objectives. Furthermore, we do not maintain key-man life insurance for any of our key personnel.
The discontinuation of any of the preferential tax treatments or the government financial incentives currently available to us in the PRC could materially and adversely affect our business, financial condition and results of operations.
     Certain of our PRC companies, including Shengqu, Shanda Networking, Hangzhou Bianfeng and Nanjing Shanda, enjoy preferential tax treatments, in the form of reduced tax rates or tax holidays, provided by the PRC government or its local agencies or bureaus. These four subsidiaries, Shengqu, Shanda Networking, Hangzhou Bianfeng and Nanjing Shanda benefit from a 15% preferential income tax rate. In addition, Shengqu was granted an income tax exemption for 2003 and 2004, followed by a three year tax holiday during which it is subject to a 7.5% preferential income tax rate; in the second quarter of 2006, Hangzhou Bianfeng was granted an income tax exemption for 2005; and in the third quarter of 2005, Nanjing Shanda was granted an income tax exemption for 2005 and 2006. After receiving approval for tax exemption treatment, the income tax already paid in 2005 by Hangzhou Bianfeng and Nanjing Shanda prior to receipt of approval was reversed in the second quarter of 2006 and and in the third quarter of 2005, respectively. As a result of these preferential tax treatments, our effective income tax rate for 2006 was 6.2%.
     On March 16, 2007, the National People’s Congress of the PRC, or NPC, passed the new PRC Enterprise Income Tax Law, or New EIT Law, which will come into effect on January 1, 2008 and will replace the existing enterprise income tax laws applicable separately to foreign invested enterprises and domestic invested enterprises. After the New EIT Law becomes effective on January 1, 2008, both foreign invested enterprises, which are currently subject to preferential tax treatments, and domestic invested enterprises, which are currently subject to a standard enterprise income tax rate of 33%, will be subject to the unified enterprise income tax rate of 25% under the New EIT Law. Preferential enterprise income tax rate of 15% and 20% are made available to recognized high-tech enterprises and qualified small-scale enterprises under the New EIT Law respectively. In addition, the New EIT Law sets a general withholding tax rate of 20% on China-sourced income, such as dividends, interest, rent, royalties, capital gains, and other items, received by non-resident enterprises.
     The New EIT Law provides that enterprises established before March 16, 2007 remain eligible for lower enterprise income tax rates offered under the current tax laws and regulations. However, such enterprises will be subject to a transitional phase out period of 5 years starting from January 1, 2008 during which their rates will gradually increase to the standard rate of 25% under the New EIT Law. Enterprises established before March 16, 2007 that are eligible for tax exemptions and reductions may continue to enjoy such tax preferential treatments until those tax preferential treatments expire. It is anticipated that detailed implementing rules and supporting interpretive circulars of the New EIT Law will be issued by the State Council and relevant government authorities in the next few months. The New EIT Law and any other changes to our effective tax rate could have a material and adverse effect on our business, financial condition and results of operations.
     In 2004, 2005 and 2006 we also received aggregate government financial incentives of RMB88.1 million, RMB137.3 million and RMB83.9 million (US$10.7 million), respectively, which were calculated with reference to taxable revenue and taxable income. For Shengqu and Shanda Networking, incentives granted with reference to taxable revenue on which we pay business tax have a term of 3 years and for incentives granted with reference to taxable income on which we pay income tax have a term of 8 years. For Shengqu and Shanda Networking, the term of the government financial incentives for taxable revenues expired as of December 31, 2005 and December 31, 2004, respectively. The government financial incentives were reduced substantially in 2006 and for all subsequent years. Eligibility conditions for the government financial incentives we receive require that we continue to meet a number of financial and non-financial criteria and our continued qualification is further subject to the discretion of the municipal government. Moreover, the central government or municipal government could determine at any time to immediately eliminate or reduce these government financial incentives, generally with prospective effect. If we had not received

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these government financial incentives in 2004, our income before income tax expenses, equity in loss of affiliated companies, and minority interests would have been RMB566.2 million, a decrease of 13.5% from the reported amount. If we had not received these government financial incentives in 2005, our income before income tax expenses, equity in loss of affiliated companies, and minority interests would have been RMB664.1 million, a decrease of 17.1% from the reported amount. If we had not received these government financial incentives in 2006, our income before tax expenses, equity in loss of affiliated companies and minority interests would have been RMB507.3 million (US$65.0 million), a decrease of 14.2% from the reported amount. As the receipt of these government financial incentives are subject to periodic time lags and inconsistent municipal government practice on payment times, for so long as we continue to receive these government financial incentives, our net income in a particular quarter may be higher or lower relative to other quarters based on the potentially uneven receipt by us of these government financial incentives in addition to any business or operating related factors we may otherwise experience.
     We cannot assure you that we will continue to enjoy these preferential tax treatments or government financial incentives in the future. The discontinuation or reduction of these preferential tax treatments or government financial incentives could materially and adversely affect our business, financial condition and results of operations. Please see Item 5 for a discussion of the duration of these preferential tax treatments or government financial incentives.
We may become a passive foreign-investment company, or PFIC, which could result in adverse U.S. tax consequences to U.S. investors.
     Based upon projected composition of our income and valuation of our assets, including goodwill, we believe we are not a passive foreign investment company, or PFIC, and do not expect to become one in the future, although there can be no assurance in this regard. If, however, we were or were to become a PFIC, such characterization could result in adverse U.S. tax consequences to you if you are a U.S. investor. For example, if we are a PFIC, our U.S. investors will become subject to increased tax liabilities under U.S. tax laws and regulations and will become subject to burdensome reporting requirements. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, we will be classified as a PFIC for U.S. tax purposes if either: (i) 75% or more of our gross income in a taxable year is passive income, or (ii) the average percentage of our assets by value in a taxable year which produce or are held for the production of passive income (which includes cash) is at least 50%. The calculation of the value of our assets will be based, in part, on the quarterly market value of our shares and ADSs, which is subject to change.
     We cannot assure you that we will not be a PFIC for 2007 or any future taxable year. For more information on the U.S. tax consequences to you that would result from our classification as a PFIC, please, see the subsection “Taxation” included in Item 10 “Additional Information”.
We may be required to take significant actions that are contrary to our business objectives to avoid being deemed an investment company as defined under the Investment Company Act.
     Generally, the Investment Company Act provides that a company is not an investment company and is not required to register under the Investment Company Act as an investment company if:
    the company is primarily engaged, directly or through a wholly-owned subsidiary or subsidiaries, in a business or businesses other than those of investing, reinvesting, owning, holding or trading in securities; and
 
    40% or less of the fair market value of the company’s assets is represented by investment securities.
     We believe that we are engaged primarily in the businesses of, among other things, developing and operating online games. In addition, less than 40% of the fair market value of our assets is represented by investment securities. As a result, we believe, that we are not an investment company as that term is defined under the Investment Company Act. We may, however, be required to take significant actions that are contrary to our business objectives to avoid being deemed an investment company in the future. We may, for example, need to hold a significant portion of our assets and invest portions of our cash flows in low-yielding investments or we may need to acquire additional income

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or loss generating assets that we might not otherwise have acquired. In addition, we may need to sell all or a portion of our minority investments in Actoz, or forego opportunities to acquire minority interests in other companies that could be important to our strategy.
     The Investment Company Act also contains substantive regulations with respect to investment companies including restrictions on their capital structure, operations, transactions with affiliates and other matters which would be incompatible with our operations. If we were to be deemed an investment company in the future, we would, among other things, effectively be precluded from making public offerings in the United States. We could also be subject to other adverse consequences.
Changes to existing accounting pronouncements, including SFAS 123R, taxation rules, including FIN48, or practices may adversely affect our reported results of operations or how we conduct our business.
     A change in accounting pronouncements, taxation rules 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. Pursuant to SEC rules, we are required to implement the Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” or SFAS 123R, starting in the first quarter of 2006. SFAS 123R requires us to measure compensation costs for all share-based compensation at fair value and take compensation charges equal to that value. The requirement to measure compensation costs for all share-based compensation under SFAS 123R could negatively affect our profitability and the trading price of our ADSs. SFAS 123R and the impact of expensing on our reported results 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 taxation rules, such as FIN48, and varying interpretations of accounting pronouncements have occurred and may occur in the future. This change to existing rules, future changes, if any, or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.
We have limited business insurance coverage in China.
     The insurance industry in China is still at an early stage of development. In particular, PRC insurance companies do not offer extensive business insurance products. As a result, we do not have any business liability or disruption insurance coverage for our operations in China. Any business disruption, litigation or natural disaster might result in our incurring substantial costs and the diversion of resources.
You should not place undue reliance on our financial guidance, nor should you rely on our quarterly operating results as an indication of our future performance because our results of operations are subject to significant fluctuations.
     We may experience significant fluctuations in our quarterly operating results due to a variety of factors, many of which are outside of our control. Significant fluctuations in our quarterly operating results could be caused by any of the factors identified in this section, including but not limited to our ability to retain existing users, attract new users at a steady rate and maintain user satisfaction; the announcement or introduction of new games or update to existing games by us or our competitors; technical difficulties, system downtime or Internet failures; seasonality of the online game market; the amount and timing of operating costs and capital expenditures relating to expansion of our business, operations and infrastructure; governmental regulation; seasonal trends in Internet use; a shortfall in our revenues relative to our forecasts and a decline in our operating results due to our inability to adjust our spending quickly; and general economic conditions and economic conditions specific to the online game and China market. As a result of these and other factors, you should not place undue reliance on our financial guidance, nor should you rely on quarter-to-quarter comparisons of our operating results as indicators of likely future performance. Our quarterly revenue and earnings per share guidance is our best estimate at the time guidance is provided. Our operating results may be below our expectations or the expectations of public market analysts and investors in one or more future quarters. If that occurs, the price of our ADSs could decline and you could lose part or all of your investment.

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Risks Relating to Regulation of the Internet and to Our Structure
If the PRC government finds that the agreements that establish the structure for operating our China business do not comply with PRC government restrictions on foreign investment in the online game industry, we could be subject to severe penalties.
     On December 11, 2001, the PRC State Counsel promulgated the Foreign-Invested Telecommunications Enterprises Regulation, or the FITE Regulation, which became effective on January 1, 2002. Under the FITE Regulation, foreign ownership of companies that provide value-added telecommunication services, which includes online game operation, is limited to 50%. In addition, foreign and foreign-invested enterprises are currently not able to apply for the licenses required to operate online games in China or to provide Internet information content, such as online advertising. We are a Cayman Islands exempted company and we conduct our operations in China primarily through Shengqu, our indirectly wholly owned subsidiary. We and Shengqu are foreign or foreign-invested enterprises under PRC law and accordingly are ineligible to apply for a license to operate online games or to sell online advertising. In order to comply with foreign ownership restrictions, we operate our online game business in China through Shanda Networking, which is wholly owned by Tianqiao Chen, our chairman and chief executive officer, and Danian Chen, our executive senior vice president, both of whom are PRC citizens, and through Nanjing Shanda and Hangzhou Bianfeng, which are subsidiaries of Shanda Networking. Shanda Networking, Nanjing Shanda, Hangzhou Bianfeng, or our PRC operating companies, and other subsidiaries of Shanda Networking hold the licenses and approvals that are required to operate our online game business and to sell online advertising on our web pages and Shengqu owns the substantial majority of physical assets. Shengqu has entered into a series of contractual arrangements with Shanda Networking and its shareholders. As a result of these contractual arrangements, we are considered the primary beneficiary of Shanda Networking and accordingly we consolidate the results of operations of Shanda Networking and its subsidiaries in our financial statements. For a description of these contractual arrangements, see “Organizational Structure” in Item 4, “Information on the Company” and Item 7 “Major Shareholders and Related Party Transactions”.
     On July 13, 2006, the MII issued The Circular of the Ministry of Information Industry on Intensifying the Administration of Foreign Investment in Value-added Telecommunication Services, or the “MII Circular 2006.” Under the MII Circular 2006, since the FITE Regulation went into effect, some foreign investors have been engaged in value-added telecom services illegally by conspiring with domestic value-added telecom enterprises to circumvent the requirements of the FITE Regulations by delegating domain names and licensing trademarks.
     In order to further intensify the administration of FITEs, the MII Circular 2006 provides that any domain name or trademark used by a value-added telecom carrier shall be legally owned by such carrier or its shareholders. The MII Circular 2006 also provides that the operation site and facilities of a value-added telecom carrier shall be installed within the scope as prescribed by operating licenses obtained by the carrier and shall correspond to the value-added telecom services that the carrier has been approved to provide. In addition, value-added telecom carriers are required to establish or improve the measures of ensuring safety of network information. As to the companies which have obtained the operating licenses for value-added telecom services, they are required to conduct self-examination and self-correction according to the said requirements and report the result of such self-examination and self-correction to the provincial branches of the MII.
     Accordingly, Shengqu and Shanda Networking have certain corrective measures in order to achieve compliance with MII Circular 2006. Shengqu has transferred to Shanda Networking 22 domain names primarily used by the PRC operating companies. In addition, Shengqu will execute the transfer to Shanda Networking of 26 trademarks at the Trademark Office of State Administration of Industry and Commerce, or SAIC.
     We believe that (1) the ownership structures of our company, Shengqu, and our PRC operating companies are in compliance with existing PRC laws and regulations; (2) our contractual arrangements with Shanda Networking and its shareholders are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect; and (3) the business operations of our company, Shengqu, and our PRC operating companies, as described in this annual report, are in compliance with existing PRC laws and regulations in all material aspects. There are, however, substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. Accordingly, we cannot assure you that the PRC regulatory authorities will not ultimately take a view that is contrary to our view. If we, Shengqu, or any of our PRC operating companies are found to be in violation of any

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existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violations, including:
    revoking Shengqu’s or any of our PRC operating companies’ business and operating licenses;
 
    discontinuing or restricting our, Shengqu’s or our PRC operating companies’ operations;
 
    imposing conditions or requirements with which we, Shengqu or our PRC operating companies may not be able to comply;
 
    requiring us, Shengqu or our PRC operating companies to restructure the relevant ownership structure or operations; or
 
    taking other regulatory or enforcement actions, including levying fines, that could be harmful to our business.
     Any of these actions could cause our business, financial condition and results of operations to suffer and the price of our ADSs to decline.
The contractual arrangements related to critical aspects of our operations with Shanda Networking and its shareholders, Tianqiao Chen and Danian Chen, may not be as effective in providing operational control as direct ownership.
     We rely on contractual arrangements with Shanda Networking and its shareholders, Tianqiao Chen and Danian Chen, to operate our business. These contractual arrangements may not be as effective as direct ownership in providing us control over PRC operating companies. Direct ownership would allow us, for example, to directly exercise our rights as a shareholder to effect changes in the board of Shanda Networking, which, in turn, could effect changes, subject to any applicable fiduciary obligations, at the management level. However, under the current contractual arrangements, as a legal matter, if Shanda Networking or Tianqiao Chen or Danian Chen fails to perform its, his or her respective obligations under these contractual arrangements, we may have to incur substantial costs and expend significant resources to enforce those arrangements and rely on legal remedies under PRC law. These remedies may include seeking specific performance or injunctive relief, and claiming damages, any of which may not be effective.
     All of these contractual arrangements are governed by PRC laws and provide for the resolution of disputes through either arbitration or litigation in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In the event we are unable to enforce these contractual arrangements, we may be unable to exert effective control over our PRC operating companies, and our ability to conduct our business may be negatively affected.
The entire share capital of Shanda Networking is held by our controlling shareholders, who may cause the agreements between our company and Shanda Networking to be amended in a manner that is adverse to us.
     We conduct substantially all of our operations, and generate substantially all of our revenues, through our PRC operating companies. Our control over these entities is based upon contractual arrangements with Shanda Networking and its shareholders that provide us with the substantial ability to control Shanda Networking. The two shareholders of Shanda Networking, Tianqiao Chen and Danian Chen, are also our controlling shareholders. As a result, Tianqiao Chen and Danian Chen may be able to cause these agreements to be amended in a manner that will be adverse to our company, or may be able to prevent these agreements from being renewed, even if their renewal would be beneficial for us. Although we have entered into an agreement that prevents the amendment of these agreements without the approval of our audit committee, which is comprised of independent directors, we can provide no assurances that these agreements will not be amended in the future to contain terms that may be adverse to our interests.

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Our arrangements with our PRC operating companies may be subject to scrutiny by the PRC tax authorities for transfer pricing adjustments.
     We also could face material and adverse tax consequences if the PRC tax authorities determine that our contracts with our PRC operating companies were not entered into based on arm’s length negotiations. Although we based our contractual arrangements on those of similar businesses, if the PRC tax authorities determine that these contracts were not entered into on an arm’s length basis, they may adjust our income and expenses for PRC tax purposes in the form of a transfer pricing adjustment. A transfer pricing adjustment could result in a reduction, for PRC tax purposes, of deductions recorded by our PRC operating companies, which could adversely affect us by:
    increasing our PRC operating companies’ tax liability without reducing Shengqu’s tax liability, which could further result in late payment fees and other penalties to our PRC operating companies for under-paid taxes; or
 
    limiting Shengqu’s ability to maintain preferential tax treatments and government financial incentives, if the transfer pricing adjustment is significant.
     As a result, any transfer pricing adjustment could have a material and adverse impact upon our financial condition.
Our corporate structure may restrict our ability to receive dividends from, and transfer funds to, our PRC subsidiary and our PRC operating companies, which could restrict our ability to act in response to changing market conditions and reallocate funds from one Chinese affiliated entity to another in a timely manner.
     We are a Cayman Islands holding company and substantially all of our operations are conducted through our subsidiary, Shengqu, and our PRC operating companies. We rely principally on dividends and other distributions on equity paid by Shengqu for our cash requirements, including the funds necessary to allow us to pay dividends on the shares underlying our ADSs and the funds necessary to service any debt we may incur, or financing we may need for operations other than through Shengqu. If Shengqu incurs debt on its own behalf in the future, the instruments governing the debt may restrict Shengqu’s ability to pay dividends or make other distributions to the intermediate holding company and thus to us. We generate substantially all of our revenues through contractual arrangements with our PRC operating companies. However, PRC governmental authorities may require us to amend these contractual arrangements in a manner that would materially and adversely affect Shengqu’s ability to pay dividends and other distributions to us. Furthermore, PRC legal restrictions permit payments of dividends by Shengqu only out of its retained earnings, if any, determined in accordance with PRC accounting standards and regulations. Under PRC law, Shengqu is also required to set aside a portion of its net income each year to fund certain reserve funds. These reserves are not distributable as cash dividends. As a result of these and other restrictions under PRC laws and regulations, our PRC subsidiary and our affiliated PRC entities are restricted in their ability to transfer a portion of their net assets to us in the form of dividends, loans or advances, which restricted portion amounted to approximately RMB1,588.6 million (US$203.4 million), or 65.7%, of our total consolidated net assets as of December 31, 2006. Any limitation on the ability of our PRC subsidiary and our affiliated PRC entities to transfer funds to us in the form of dividends, loans or advances could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay debt or dividends, and otherwise fund and conduct our business.
     In addition, any transfer of funds from us to our PRC subsidiary, either as a shareholder loan or as an increase in registered capital, is subject to registration or approval of Chinese governmental authorities, including the relevant administration of foreign exchange and/or the relevant examining and approval authority. It is not permitted under PRC law for our PRC subsidiary and our PRC operating companies to directly lend money to each other. Therefore, it is difficult to change our capital expenditure plans once the relevant funds have been remitted from our company to our PRC subsidiary and PRC operating companies. These limitations on the free flow of funds between us and our PRC entities could restrict our ability to act in response to changing market conditions and reallocate funds from one Chinese entity to another in a timely manner.
Recent PRC regulations relating to offshore investment activities by PRC residents may increase the administrative burden we face and create regulatory uncertainties that could restrict our overseas and cross border investment

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activity, and a failure by our shareholders who are PRC residents to make any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits and could expose us and our PRC resident shareholders to liability under PRC law.
     In 2005, regulations were promulgated by the State Administration of Foreign Exchange, or SAFE, that require registration with local SAFE offices in connection with direct or indirect offshore investment by PRC residents, including PRC individual residents and PRC corporate entities. These regulations apply to our shareholders who are PRC residents and also apply to our prior and future offshore acquisitions. In particular, the SAFE regulations require PRC Residents to file with competent SAFE offices information about offshore companies in which they have directly or indirectly invested and to make follow-up filings in connection with certain material transactions involving such offshore companies, such as increases or decreases in investment amount, transfers or exchanges of shares, mergers or divisions, long-term equity or debt investments, or external guarantees, or other material events that do not involve return investment.
     The SAFE regulations retroactively require registration by March 31, 2006 of direct or indirect investments previously made by PRC residents in offshore companies. If a PRC resident with a direct or indirect stake in an offshore parent company fails to make the required SAFE registration, the PRC subsidiaries of such offshore parent company may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries. Further, failure to comply with various SAFE registration requirements described above could result in liability under PRC law for foreign exchange evasion.
     Our major shareholders who are PRC residents, or whose shares are beneficially owned by PRC residents, have completed foreign exchange registration with the local Shanghai Foreign Exchange Bureau according to these SAFE regulations. As a result of the newness of the regulations and uncertainty concerning the reconciliation of the new regulations with other approval requirements, it remains unclear how the regulations, and any future legislation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. We are committed to complying and to ensuring that our shareholders who are subject to the regulations comply with the relevant rules. However, we cannot assure you that all of our shareholders who are PRC residents will comply with our request to make or obtain any applicable registrations or approvals required by the regulations or other related legislation. The failure or inability of our PRC resident shareholders to receive any required approvals or make any required registrations may subject us to fines and legal sanctions, restrict our overseas or cross border investment activities, limit our PRC subsidiary, Shengqu, to make distributions or pay dividends or affect our ownership structure, as a result of which our acquisition strategy and business operations and our ability to distribute dividend to you could be materially and adversely affected.
The laws and regulations governing the online game industry and related businesses in China are developing and subject to future changes. If we or any of our PRC operating companies fail to obtain or maintain all applicable permits and approvals, our business and operations would be materially and adversely affected.
     The Internet industry, including the operation of online games, in China is highly regulated by the PRC government. Various regulatory authorities of the central PRC government, such as the State Council, the Ministry of Information Industry, the State Administration of Industry and Commerce, the Ministry of Culture, the State Press and Publication Administration, the State Administration of Radio, Film and Television, and the Ministry of Public Security, are empowered to issue and implement regulations governing various aspects of the Internet and online game industries.
     Our PRC operating companies are required to obtain applicable permits or approvals from different regulatory authorities in order to provide their services. For example, an Internet content provider, or ICP, must obtain an ICP license from the Ministry of Information Industry in order to engage in any commercial ICP operations within China. An online game operator must also obtain a license from the Ministry of Culture and a license from the State Press and Publication Administration in order to distribute games through the Internet. In addition, in connection with our launch of certain EZ series products, which offer video and audio content, such as music and movies, our PRC operating companies may need to obtain a license from the State Administration of Radio, Film and Television. We understand, however, that companies that are not state-owned may not be able to obtain such license. If any of our PRC operating companies fails to obtain or maintain any of the required permits or approvals, they may be subject to

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various penalties, including fines and the discontinuation or restriction of their operations. Any such disruption in business operations would materially and adversely affect our financial condition and results of operations.
     We currently operate a large number of websites, the domain names of which are registered under the names of Shanda Networking and Shengqu. In order to streamline and optimize our Internet publication businesses, we have started to put all of our Internet publication businesses, including our editing, content supervision, publication, and other related businesses, under Shanda Networking. We have reported to the Ministry of Information Industry of the change and Shanda Networking has applied to the State Press and Publications Administration for expanding its Internet publication license from the publication of online games to encompass books, newspapers, periodicals, music and video products, works in the fields of literature, art, natural science, social science, engineering, and other electronic publications. We believe that Shanda Networking has satisfied all qualifications required to obtain the permission for license expansion and we do not believe that, while its application is pending, the regulatory authorities will take any action against it. However, we cannot assure you that it will obtain this approval or that the regulatory authority will not take any action against it.
     As the online game industry is at an early stage of development in China, new laws and regulations may be adopted in the future to address new issues that arise from time to time, such as online advertising. Also, different regulatory authorities may have different opinions with regard to the licensing requirements imposed on online game operators. As a result, substantial uncertainties exist regarding the interpretation and implementation of current and any future PRC laws and regulations applicable to the online game industry and related businesses. While we believe that we are in compliance in all material respects with all applicable PRC laws and regulations currently in effect, we cannot assure you that we will not be found in violation of any current or future PRC laws and regulations.
The PRC government may prevent us from distributing, and we may be subject to liability for, content that it believes is inappropriate.
     China has enacted laws and regulations governing Internet access and the distribution of news, information or other content, as well as products and services, through the Internet. In the past, the PRC government has stopped the distribution of information through the Internet that it believes violates PRC law. The Ministry of Information Industry, the State Press and Publication Administration and the Ministry of Culture have promulgated regulations that prohibit games from being distributed through the Internet if the games contain content that is found to, among other things, propagate obscenity, gambling or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC, or compromise State security or secrets. In addition, certain PRC social organizations have recently discussed the possibility of implementing a rating system for online games. The effect that such a system could have on our business is unclear.
     If any games we offer were deemed to violate any such content restrictions, we would not be able to continue such offerings and could be subject to penalties, including confiscation of income, fines, suspension of business and revocation of our license for operating online games, which would materially and adversely affect our business, financial condition and results of operations.
     We may also be subject to potential liability for unlawful actions of our users or for content we distribute that is deemed inappropriate. Furthermore, we may be required to delete content that violates the laws of the PRC and report content that we suspect may violate PRC law. It may be difficult to determine the type of content that may result in liability for us, and if we are wrong, we may be prevented from operating our games or other services in China.
     In February 2007, the Ministry of Public Security, the Ministry of Culture, the Ministry of Information Industry and the State Administration of Press and Publication jointly issued a circular regarding online gambling. In an effort to clamp down on online games that involve gambling and online betting as well as address concerns that “virtual money” might be used for money laundering or illicit trade, the circular (1) requires that the online game operators shall not charge commissions that employ “virtual money” or other means in relation to winning or losing of games; (2) requires online game operators to set up quantity limits in guessing and betting games by using game points; (3) bans the exchange of “virtual money” into real currencies or properties; and (4) bans the provision of services for game points transfer among game users. We believe our online operations are in compliance with the provisions of this circular in all material aspects. There are, however, substantial uncertainties regarding the interpretation and application of this circular, and we cannot assure you that the PRC regulatory authorities will not

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ultimately take a view that is contrary to our view. If the PRC regulatory authorities deem our online operations to be in violation of this circular, our business will be materially and adversely affected.
The PRC government has announced its intention, and has begun, to intensify its regulation of Internet cafes, which are currently the primary venue for our users to play online games. Intensified government regulation of Internet cafes could restrict our ability to maintain or increase our revenues and expand our customer base.
     In April 2001, the PRC government began tightening its regulation and supervision of Internet cafes. In particular, a large number of unlicensed Internet cafes have been closed. The PRC government has also imposed higher capital and facility requirements for the establishment of Internet cafes. Furthermore, the PRC government’s policy, which encourages the development of a limited number of national and regional Internet cafe chains and discourages the establishment of independent Internet cafes, may slow down the growth of Internet cafes. Moreover, the State Administration of Industry and Commerce, one of the government agencies in charge of Internet cafe licensing, and other government agencies jointly issued a notice in February 2004 suspending the issuance of new Internet cafe licenses for a period of six months. On February 15, 2007, 14 PRC government departments jointly issued a circular in connection with the strengthening of Internet café and online game administration. According to the circular, local authorities are barred from issuing new Internet café licenses for the remainder of 2007. It is unclear when this suspension will be lifted, if at all. Since a substantial portion of our users play our games in Internet cafes, any reduction in the number, or slowdown in the growth, of Internet cafes in China, or any new regulatory restrictions on their operations, could limit our ability to maintain or increase our revenues and expand our customer base, thereby reducing our profitability and growth prospects.
Currently there are no laws or regulations in the PRC specifically governing virtual asset property rights and therefore, it is not clear what liabilities, if any, online game operators may have for virtual assets.
     In the course of playing online games, some virtual assets, such as special equipment, player experience grades and other features of our users’ game characters, are acquired and accumulated. Such virtual assets can be important to online game players and in some cases are exchanged between players for monetary value. In practice, virtual assets can be lost for various reasons, often through unauthorized use of the game account of one user by other users and occasionally through data loss caused by a delay of network service or by a network crash. Currently there are no PRC laws and regulations specifically governing virtual asset property rights. As a result, it is unclear who is the legal owner of virtual assets and whether and how the ownership of virtual assets is protected by law. In case of a loss of virtual assets, we may be sued by online game players and may be held liable for damages, which may negatively affect our business, financial condition and results of operations.
Risks Relating to the People’s Republic of China
     Substantially all of our assets are located in China and substantially all of our revenues are derived from our operations in China. Accordingly, our business, financial condition, results of operations and prospects are subject, to a significant extent, to economic, political and legal developments in China.
The PRC’s economic, political and social conditions, as well as government policies, could affect our business.
     The PRC economy differs from the economies of most developed countries in many respects, including in the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth since the late 1970’s, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented numerous measures to encourage economic growth and to guide the allocation of resources. Some of these measures may benefit the overall PRC economy, but 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 PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although the PRC government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound

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corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s 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. These actions, as well as future actions and policies of the PRC government, could materially affect general economic conditions in China and could have a material adverse effect on our business and results of operations.
The PRC legal system embodies uncertainties which could limit the legal protections available to you and us.
     The PRC legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing general economic and business matters. The overall effect of legislation since 1979 has been a significant enhancement of the protections afforded to various forms of foreign-invested enterprises in mainland China. Our PRC operating subsidiary, Shengqu, is a wholly foreign owned enterprise, or WFOE, which is an enterprise incorporated in mainland China and wholly-owned by foreign investors. Shengqu is subject to laws and regulations applicable to foreign investment in mainland China in general and laws and regulations applicable to WFOEs in particular. However, these laws, regulations and legal requirements are constantly changing, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to us and other foreign investors, including you. In addition, we cannot predict the effect of future developments in the PRC legal system, particularly with regard to the Internet, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws.
Restrictions on currency exchange may limit our ability to utilize our revenues effectively.
     Substantially all of our revenues and operating expenses are denominated in Renminbi. The Renminbi is currently freely convertible under the “current account”, which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account”, which includes foreign direct investment and loans.
     Currently, Shengqu may purchase foreign exchange for settlement of “current account transactions”, including payment of dividends to us and payment of license fees to foreign game licensors, and our PRC operating companies may purchase foreign exchange for payment of license fees to foreign game licensors without the approval of the State Administration for Foreign Exchange. Shengqu may also retain foreign exchange in its current account, subject to a ceiling approved by the State Administration for Foreign Exchange, to satisfy foreign exchange liabilities or to pay dividends. However, we cannot assure you that the relevant PRC governmental authorities will not limit or eliminate our ability to purchase and retain foreign currencies in the future.
     Since a significant amount of our future revenues will be denominated in Renminbi, the existing and any future restrictions on currency exchange may limit our ability to utilize revenues generated in Renminbi to fund our business activities outside China, if any, or expenditures denominated in foreign currencies.
     Foreign exchange transactions under the capital account are subject to limitations and require registration with or approval by the relevant PRC governmental authorities. In particular, if we finance Shengqu by means of foreign currency loans, those loans cannot exceed certain statutory limits and must be registered with the State Administration for Foreign Exchange, and if we finance Shengqu by means of capital contributions, those capital contributions must be approved by the Ministry of Commerce. Our ability to use the U.S. dollar proceeds of the sale of our equity or debt to finance our business activities conducted through Shengqu will depend on our ability to obtain these governmental registrations or approvals. In addition, because of the regulatory issues related to foreign currency loans to, and foreign investment in, domestic PRC enterprises, we may not be able to finance Shanda Networking or its subsidiaries’ operations by loans or capital contributions. We cannot assure you that we can obtain these governmental registrations or approvals on a timely basis, if at all.

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Fluctuations in exchange rates could result in foreign currency exchange losses.
     Substantially all of our revenues are denominated in Renminbi, while a portion of our expenditures are denominated in foreign currencies, primarily the U.S. dollar. Fluctuations in exchange rates, particularly those involving the U.S. dollar, may affect our costs and operating margins. In addition, these fluctuations could result in exchange losses and increased costs in Renminbi terms. Where our operations conducted in Renminbi are reported in dollars, such fluctuations could result in changes in reported results which do not reflect changes in the underlying operations. Since January 1, 1994, the PRC government has used a unitary managed floating rate system. Under that system, the People’s Bank of China, or PBOC, publishes a daily base exchange rate with reference primarily to the supply and demand of Renminbi against U.S. dollar and other foreign currencies in the market during the previous day. Authorized banks and financial institutions are allowed to quote buy and sell rates for Renminbi within a specified bank around the central bank’s daily exchange rate. On July 21, 2005, PBOC announced an adjustment of the exchange rate of the U.S. dollar to Renminbi from 1:8.27 to 1:8.11 and modified the system by which the exchange rates are determined. As a result of this policy change, the Renminbi has appreciated approximately 2.5% and 3.4% against the U.S. Dollar in 2005 and 2006, respectively. In May 2007, the PRC government widened the daily trading band of the Renminbi against a basket of certain foreign currencies from 0.3% to 0.5%. As a result, the exchange rate of Renminbi against U.S. dollar appreciated to 1:7.617 as of June 19, 2007. It is possible that the PRC government could adopt a more flexible currency policy, which could result in further and more significant revaluation of the Renminbi against the U.S. dollar or any other foreign currency, including possible devaluations. As substantially all of our revenues are denominated in Renminbi, such a potential future devaluation of Renminbi against the U.S. dollars could negatively impact our results of operations. Moreover, we have material monetary assets and liabilities denominated in U.S. dollars, which mainly consists of our bank deposits, investments in marketable securities and affiliated companies and the convertible notes payable. The fluctuation of foreign exchange rate affects the value of these monetary assets and liabilities denominated in U.S. dollars. Generally, appreciation of Renminbi against U.S. dollars results in a foreign exchange loss for monetary assets denominated in U.S. dollars, and a foreign exchange gain for monetary liabilities denominated in U.S. dollars. On the contrary, devaluation of Renminbi against U.S. dollars results in a foreign exchange gain for monetary assets denominated in U.S. dollars, and a foreign exchange loss for monetary liabilities denominated in U.S. dollars.
     Effective from January 1, 2007, Shanda Interactive Entertainment Limited, our listed company incorporated in Cayman Islands, changed its functional currency from Renminbi to US dollars due to changes in its economic facts and circumstances, including an active plan to explore overseas market. Going forward, the exchange gain or losses from revaluation of the monetary assets and liabilities denominated in US dollars of Shanda Interactive Entertainment Limited will not be recorded in the statement of operations, but instead will be treated as a cumulative translation adjustment under shareholders’ equity in the balance sheet.
     Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure at all.
     In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into U.S. dollars. Conversely, an increase in the value of the Renminbi could increase our reported earnings in U.S. dollar terms without a fundamental change in our business or operating performance.
     Since our revenues are primarily denominated in Renminbi, our valuation could be materially and adversely affected by the devaluation of the Renminbi if U.S. investors analyze our value based on the U.S. dollar equivalent of our financial condition and results of operations. In addition, certain of our acquisitions may expose us to additional currency fluctuations that would affect our reported valuation of those holdings. Actoz, which we account for under the equity method, is a South Korean company; changes in its valuation as a consequence of fluctuations in the Korean Won would be reflected in our valuation.
Inflation in China could negatively affect our profitability and growth.
     While the PRC economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the

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money supply and rising inflation. If prices for our products and services rise at a rate that is insufficient to compensate for the rise in our costs, our business may be materially and adversely affected. In order to control inflation in the past, the PRC government has imposed controls on bank credits, limits on loans for fixed assets, and restrictions on state bank lending. Such austerity measures can lead to a slowing of economic growth. A slow down in the PRC economy could also materially and adversely affect our business and prospects.
You may experience difficulties in effecting service of process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us, our management or the experts named in the prospectus.
     We conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, most of our directors and executive officers reside within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon some of our directors and senior executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, the PRC does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts.
We face risks related to health epidemics and other outbreaks of contagious diseases, including avian influenza, or avian flu, and SARS.
     Our business could be adversely affected by the effects of avian flu, SARS or another epidemic or outbreak. There have been recent reports of outbreaks of a highly pathogenic avian flu, caused by the H5N1 virus, in certain regions of Asia and Europe. In 2005 and 2006, there have been reports on the occurrences of avian flu in various parts of China, including a few confirmed human cases. An outbreak of avian flu in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, particularly in Asia. Additionally, any recurrence of SARS, a highly contagious form of atypical pneumonia, similar to the occurrence in 2003 which affected China, Hong Kong, Taiwan, Singapore, Vietnam and certain other countries, would also have similar adverse effects. These outbreaks of contagious diseases, and other adverse public health developments in China, would have a material adverse effect on our business operations. These could include our ability to travel or ship our products outside of China, as well as temporary closure of our manufacturing facilities. Such closures or travel or shipment restrictions would severely disrupt our business operations and adversely affect our financial condition and results of operations. We have not adopted any written preventive measures or contingency plans to combat any future outbreak of avian flu, SARS or any other epidemic.
Risks Relating to our ADSs
One shareholder has significant control over the outcome of our shareholder votes.
     As of March 31, 2007, Skyline Media beneficially owned approximately 56.4% of our outstanding equity interests. Accordingly, Skyline Media has and is expected to maintain significant control over the outcome of any corporate transaction or other matter submitted to our shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets.
If our controlling shareholder, Skyline Media, which holds approximately 56.4% of our ordinary shares, chose to dispose of a material portion of the ordinary shares that it holds, the prevailing market price for our securities may decline.
     As of March 31, 2007, Skyline Media beneficially owned 81,070,090 of our ordinary shares, representing approximately 56.4% of our outstanding ordinary shares. The beneficial owners of Skyline Media are Tianqiao Chen, our chairman and chief executive officer, Danian Chen, our executive senior vice president and the brother of Tianqiao Chen, and Qianqian Luo, our director and the wife of Tianqiao Chen. Tianqiao Chen and Qianqian Luo beneficially own an additional 2,188,388 of our ordinary shares through DBS Trustees Ltd as trustee for the Jade Trust and 266,200 ordinary shares that maybe issued upon exercise of stock options that are held by DBS Trustees Limited acting as trustees of the Jade Trust and Danian Chen beneficially owns an additional ,1,023,170 of our ordinary shares

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through DBS Trustees Ltd as trustee for the Chi Feng Trust and 133,100 ordinary shares that may be issued upon exercise of stock options that are held by DBS Trustees Limited acting as trustees of the Chi Feng Trust.
     In June 2005, Jade Trust adopted pre-arranged stock trading plans in accordance with Rule10b5-1 under the U.S. Securities Exchange Act of 1934, as amended, and the Company’s trading policy with respect to sales of the Company’s securities by insiders. As of the 10b5-1 plan’s expiration on August 15, 2006, 322,000 ordinary shares had been sold pursuant to the plan. If Skyline Media chooses to sell a material portion of the ordinary shares that it holds, or indicate its intention to do so, the prevailing market price for our securities may decline.
The price of our ADSs has been volatile historically and may continue to be volatile, which may make it difficult for holders to resell the ADSs when desired or at attractive prices.
     The trading price of our ADSs has been and may continue to be subject to wide fluctuations. Since we completed our initial public offering in May 2004, the sale prices of our ADSs on the Nasdaq National Market ranged from US$10.58 to US$45.40 per ADS and the last reported sale price on June 22, 2007 was US$28.58. Our ADS price may fluctuate in response to a number of events and factors. In addition, the financial markets in general, and the market prices for Internet-related companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our ADSs, regardless of our operating performance. In addition, the existence of our Zero Coupon Senior Convertible Notes due 2014 that we issued in October 2004, or the convertible notes, may encourage short selling in our ADSs by market participants because the conversion of the convertible notes could depress the price of our ADSs.
You may face difficulties in protecting your interests, and our ability to protect our rights through the U.S. federal courts may be limited, because we are incorporated under Cayman Islands law.
     Our corporate affairs are governed by our memorandum and articles of association and by the Companies Law (2004 Revision) and common law of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of company law as compared to the U.S., and provides significantly less protection to investors. Therefore, our shareholders may have more difficulties in protecting their interests in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States. In addition, Cayman Islands companies may not have standing to sue before the federal courts of the United States. As a result, our ability to protect our interests if we are harmed in a manner that would otherwise enable us to sue in a United States federal court may be limited.
Anti-takeover provisions in our organizational documents may discourage our acquisition by a third party, which could limit your opportunity to sell your shares at a premium.
     Our amended and restated memorandum and articles of association include provisions that could limit the ability of others to acquire control of us, modify our structure or cause us to engage in change of control transactions, including, among other things, the following:
    provisions that restrict the ability of our shareholders to call meetings and to propose special matters for consideration at shareholder meetings; and
 
    provisions that authorize our board of directors, without action by our shareholders, to issue preferred shares and to issue additional ordinary shares, including ordinary shares represented by ADSs.
     These provisions could have the effect of depriving you of an opportunity to sell your ADSs at a premium over prevailing market prices by discouraging third parties from seeking to acquire control of us in a tender offer or similar transactions.
The voting rights of holders of ADSs are limited by the terms of the deposit agreement.

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     A holder of our ADSs may only exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Upon receipt of voting instructions of a holder of ADSs in the manner set forth in the deposit agreement, the depositary will endeavor to vote the underlying ordinary shares in accordance with these instructions. Under our amended and restated memorandum and articles of association and Cayman Islands law, the minimum notice period required for convening a general meeting is ten days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your ordinary shares to allow you to cast your vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast, or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ordinary shares are not voted as you requested.
You may be subject to limitations on transfer of your ADSs
     Your ADSs represented by American Depositary Receipts are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer, or register transfers of our ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
Your right as a holder of ADSs to participate in any future rights offerings may be limited, which may cause dilution to your holdings.
     We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to our ADS holders in the United States unless we register the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. In addition, the deposit agreement provides that the depositary bank will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, ADS holders may be unable to participate in our rights offerings and may experience dilution in their holdings. In addition, if the depositary is unable to sell rights that are not exercised or not distributed or if the sale is not lawful or reasonably practicable, it will allow the rights to lapse, in which case you will receive no value for these rights.
Item 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
     Our business was founded in December 1999 when Tianqiao Chen and Danian Chen established Shanda Networking, initially focusing on investments relating to the development and operation of a Chinese language online virtual community. In November 2004, we incorporated Shanda Interactive Entertainment Limited in the Cayman Islands.

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     Our principal executive offices are located at No. 1 Office Building, No. 690 Bibo Road, Pudong New Area, Shanghai 201203, China. Our telephone number is (86-21) 5050 4740. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011.
     In November 2001, we commercially launched Mir II, our first massively multiplayer online role-playing game, or MMORPG. In March 2003, we commercially launched Fortress II, our first casual game, and in October 2003, we launched Woool, our first in-house developed online game. As of December 31, 2006, Shanda commercially operates fourteen online games, including eight MMORPGs, six casual games, one network PC game platform and two online chess and board game platforms. In 2006, total peak concurrent users for all Shanda games in commercial service reached 2.45 million.
     In addition to our comprehensive online game portfolio, in 2005 Shanda introduced the EZ Center platform, a unified software solution on top of our service platform that integrates entertainment and informational content from the Internet and provides users with access to such content through a user-friendly interface. For more information on the EZ initiative, see also “Business Overview” in Item 4 “Information on the Company, Item 5 “Operating and Financial Review and Prospects,” and Item 3 “Risk Factors”.
     In the fourth quarter of 2005, we adopted a “Come-Stay-Pay”, or CSP, revenue model for three of our MMORPGs: Mir II, Magical Land and Woool. In 2006, we began operating several other games under this revenue model, including ArchLord, and plan to adopt this new revenue model for our other existing or new MMORPGs going forward, depending on the game type and lifecycle. For more information on the new revenue model, see also “Business Overview” in Item 4 “Information on the Company”, Item 5 “Operating and Financial Review and Prospects,” and Item 3 “Risk Factors”.
     As part of our efforts to further broaden our content offerings and expedite our growth, we have developed our business through a number of strategic acquisitions and investments, including the following:
    In July 2004, we acquired Hangzhou Bianfeng Software Co. Ltd., or Bianfeng, a developer and operator of online chess and board games in China;
 
    In October 2004, we completed the second step of a two-step acquisition of Beijing Digital Red Software Application Technology Co., Ltd., or Digital Red, a developer of mobile phone games;
 
    In September 2004, we acquired Shanghai Xuanting Entertainment Information Technology Co., Ltd., which operates Qidian, an online literature forum;
 
    In February 2005, we also completed the purchase of a 29% stake in Actoz, the co-owner of MIR II, increasing our total stake to approximately 38.1%. Actoz is a Korean developer, operator and publisher of online games. During the period from January 2007 to June 22, 2007, we purchased an additional 802,364 ordinary shares of Actoz through the open market and increased our stake in Actoz to 49.48% as of June 22, 2007;
 
    In February 2005, we also completed our purchase of an approximately 19.5% stake in SINA Corporation, or SINA, an online media company and value-added service provider in China. Subsequently, we decided to sell our entire stake in SINA through the following open-market transactions: 3,703,487 shares of SINA for US$99.1 million (RMB779.9 million) on November 6, 2006; 4,000,000 shares of SINA for US$129.6 million (RMB1.0 billion) on February 8, 2007; 1,066,344 shares of SINA for US$38.1 million (RMB297.5 million) on May 11, 2007; and 1,051,934 shares of SINA for US$38.4 million (RMB299.9 million) on May 15, 2007.
 
    In May 2005, we completed the second step of a two-step acquisition of Shanghai Haofang Online Information Technology Co. Ltd., or Haofang, the operator of the largest network PC game platform in China; and

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    In November 2005, we acquired Wenzhou Chuangjia Technology Co., Ltd., or Gametea, which develops chess and board games and operates Gametea, a casual game platform in China.
     We have also made the following issuances of securities:
    In October 2004, we placed US$200 million in aggregate principal amount of zero coupon senior convertible notes in a private placement transaction pursuant to Rule 144A under the Securities Act of 1933, as amended. On October 26, 2004, the underwriters of this zero coupon senior convertible notes offering exercised their option to purchase an additional US$75 million in aggregate principal amount of notes.
 
    In May 2004, we and certain of our shareholders completed an initial public offering and sale of 13.8 million ADSs, priced at US$11 per ADS.
B. BUSINESS OVERVIEW
     Shanda Interactive Entertainment Limited is a leading interactive entertainment media company and the largest operator of online games in China. Shanda offers a portfolio of diversified entertainment content including some of the most popular massively multi-player online role playing games, or MMORPGs, and casual online games in China, along with online chess and board games, a network PC game platform and a variety of cartoons, literary works and music.
     Our core online game business includes the operation of online games that are either licensed from third-parties or developed in-house. In 2006, our commercially launched games had approximately 2.45 million peak concurrent users. In 2006, we commercially launched a MMORPG Archlord and a casual game Crazy Kart, and began open-beta testing for a 3D MMORPG titled Dungeons & Dragons Online. We also started to test several in-house developed online video games for our EZ Platform in late 2006.
     In late November 2005, we introduced a “Come-Stay-Pay”, or CSP, revenue model for three of our leading MMORPGs, Mir II, Woool, and Magical Land. Under the new revenue model, users are able to play the basic functions of an MMORPG for free and may choose to purchase in-game value-added services, including certain in-game items and premium features, which enhance the game experience. In 2006, our CSP revenue model was expanded to most of our MMORPGs, which we believe has helped us to reverse declining revenue trends and achieve consecutive revenue growth over the last three quarters of 2006. The CSP model allows us to make frequent adjustments to meet the changing demands of users in order to enhance game interaction and create a better game community. In addition, the CSP model offers flexible ways to generate revenues, including attracting more users, increasing the number of active paying accounts and growing average monthly revenue per active paying account, or ARPU.
     In 2005, we introduced our EZ Center platform as a unified software solution on top of our service platform, designed to integrate entertainment and informational content from the Internet and provide users with access to such content through a user-friendly interface. The EZ Pod, which is the first product launched off our EZ Center platform, enables PC users to navigate and access the aggregated Internet content over our EZ Center platform using a remote control. In 2006, we modified our EZ Center platform strategy to focus on providing PC users with console-like game experiences.
     Our operating platform includes our technology infrastructure, distribution and payment system, customer service center, game content management and marketing platform. As of December 31, 2006, our technology infrastructure consists of a nation-wide server network with the capacity to accommodate approximately 8.8 million concurrent online users. Our nation-wide distribution and payment network includes approximately 316,000 distribution points for our pre-paid cards. Our customer service system includes a 24-hour call center and a walk-in customer service center. In addition, for each of our online games we have a separate game content management team which manages the operation of the game and the online community for the game.

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Our Content
     Our content offerings primarily consist of online games, including MMORPGs and casual games, as well as online chess and board games, a network PC game platform and wireless games. In addition, through our EZ Center platform we plan to provide PC users with console-like game experiences. As of December 31, 2006, we have started open beta testing of this new online video game platform.
MMORPGs
     Our MMORPGs are action-adventure based, and draw upon martial arts and combat themes. Each MMORPG creates a virtual world within which players interact with one another inside the game. Typical features of our MMORPGs include the following:
    players may assume the ongoing role, or alter-ego, of a particular game character, each with different strengths and weaknesses;
 
    each game character may gain experience and collect certain game features and items, such as weapons and points, which increases the status and power of the game character and, in the process, builds a strong game identity; the variety of features that are available means that a player is unlikely to “meet” anyone in the virtual world exactly like his or her game character;
 
    although each game character may be unique, groups of players may, and often must, form teams or alliances to fulfill certain game objectives, such as quests and missions;
 
    game features and items may be “traded” or “sold” within the game, and game characters may take on life-like social experiences such as getting married and forming master/disciple relationships with other players. In addition, players may communicate with each other through our instant messaging service or our chat room during the game on our operation platform which supports all of our online games;
 
    special events are held from time to time to stimulate group interest, such as “fortress raids” where players are encouraged to form groups and attack a particular fortress at a specified time; and
 
    the game is ultimately never won or lost, but instead continues through a game story that is interactively written by the game developer and players and does not have a natural ending.
     Most of our MMORPGs are now operated under our CSP revenue model, which by the end of 2006 has largely replaced our traditional subscription-based pay-to-play revenue model, where users purchase pre-paid cards to play for a fixed number of hours or for an unlimited amount of time within a specified number of days. Under the CSP model, users are able to play the basic functions of a MMORPG for free and may choose to purchase in-game value-added services, as well as certain in-game items and premium features, which enhance the game experience. Same as our traditional subscription-based pay-to-play revenue model, payment is collected upon the sale of our pre-paid cards under the CSP model. However, game points are consumed as users purchase value-added services and in-game items, instead of as users play the games, which allows us to create additional sources of revenue by offering increased in-game items and premium features through new expansion packs.
     In preparation for the commercial launch of a new game, we conduct closed beta testing of the game in an effort to eliminate technical problems. This closed beta testing is followed by open beta testing in which we allow our registered users to play without charge in open market conditions to ensure performance consistency and stability of operation systems.
     As of December 31, 2006, the following table summarizes the MMORPGs or other massively multiplayer online games that we offer.

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Game   Description   Game Source   Date of Commercial Launch
Mir II
  Martial arts adventure   Licensed   November 2001
Woool
  Martial arts adventure   In-house developed   October 2003
The Sign
  3D martial arts adventure   In-house developed   May 2004
The Age
  Society simulation   In-house developed   June 2004
Magical Land
  Fantasy role-playing   In-house developed   July 2005
D.O.
  3D martial arts adventure   Licensed   August 2005
R.O.
  Fantasy role-playing   Licensed   September 2005
Archlord
  3D martial arts adventure   Licensed   July 2006
     In 2006, total peak concurrent users for all Shanda MMORPGs in commercial service reached 947,000. Shanda launched Archlord in July and began open beta testing of Dungeons & Dragons Online in August, which is a 3D fantasy role playing game. In the fourth quarter of 2006, we also released expansion packs for Mir II and Woool titled Treasury Box and Evil Inside I.
     In February 2007, we entered into a license agreement with our affiliate, Actoz, a Korean online game developer, for the operation of Latale, a side-scrolling role playing game, in China. Latale was commercialized in April 2007.
     In February 2007, Shanda also entered into a license agreement with a leading Korean online game developer to operate Changchun Online, a highly anticipated 3D MMORPG, in China. Changchun Online is based on the popular Chinese novel “The Romance of Three Kingdoms”.
Our Casual Games
     Casual games are easier to play than MMORPGs. Casual games are typically session based, meaning that a game can be played to a conclusion within a short period of time. Generally, fewer than ten players may interact with each other in an online casual game. Casual games are an important component of our overall home strategy because casual games attract a broader range of users than MMORPGs, as well as more home users. We believe that casual games provide us with certain benefits and opportunities not typically available through MMORPGs, including:
    casual games, due to their lower level of complexity and typically shorter duration, provide less-experienced online game players with a means to become familiar with both online game playing and the online game culture without making substantial commitments of time and resources; and
 
    casual games are well-suited to use at home, due to their shorter duration and reduced demand for a player’s full attention for prolonged periods, as compared to MMORPGs; as a result, we believe that casual games may contribute to the expansion of the online game culture beyond the Internet cafes and into the homes of users.
     We generally use the CSP revenue model to charge users of our casual games. As a result, users are able to play the basic functions of our casual games for free and may choose to purchase in-game items and premium features, which enhance the game experience.
     As of December 31, 2006, the following table summarizes the casual games that we offer.
             
Game   Description   Game Source   Launch
BNB
  Battle   Licensed   August 2003
GetAmped
  3D fighting game   Licensed   May 2004
Maple Story
  Side-scrolling combat game   Licensed   August 2004
Three Kingdoms
  Strategy combat   In-house developed   September 2005
Shanda Richman
  3D Strategy Operation   In-house developed   December 2005
Crazy Kart
  3D racing game   In-house developed   March 2006
     In addition to the casual games listed above, we have entered into a license agreement to operate Kong-Fu Masters, a domestic 3D martial arts fighting game in September 2006. The game features a cast of well-known

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characters from Chinese folklore and history including the Monkey King and Mulan. In March 2007, we entered into a license agreement with Korean online game company Nowcom to operate TalesRunner, a 3D online sports-themed running game, in mainland China. The game is expected to enter commercialization in China during the third quarter of 2007. In June 2007, we entered into a license agreement with Korean online game developer Actoz for the exclusive license to operate X-Up, a 3D online table tennis game, in mainland China.
     In 2006, our commercially launched casual games, including the casual games operated by or played on the platforms provided by Bianfeng, Haofang and Gametea, had approximately 1,558,000 peak concurrent users.
Our Online Chess and Board Games
     Our casual games also include online chess and board games offered through Bianfeng, which we acquired in 2004, and Gametea, which we acquired in 2005. Through Bianfeng and Gametea, we offer a variety of casual games, including card games, board games, mahjong and simple arcade games.
Network PC Games Platform
     Through Haofang, which we completed the two-step acquisition of in May 2005, we provide a personal computer game network to our end users. Through this platform, users of PC games are able to find and connect through the Internet with other players of the same PC games. This enables users to form a large network through which to interact with others virtually, using software that has network capability. Without such an Internet based network, users of PC games would generally be limited to playing with other users that are either at the same PC or connected through a local area network. Unlike with our MMORPGs and casual games, we do not own or license the content that PC game players use over the Haofang network. Nonetheless, we believe that the Haofang PC game network enhances our overall online game platform.
Wireless Games
     Through Digital Red, which we completed the two-step acquisition of in October 2004, we develop and offer wireless games to end users of mobile phones. Digital Red offers nearly 500 individual mobile games and several online mobile games, for example, the mobile versions of Woool and Magical Land, to end users through arrangements with various mobile phone manufacturers. Going forward, Digital Red plans to focus on developing and distributing online mobile games.
Content on EZ Platform
     We provided online video games, music, movie and other entertainment content through our EZ Platform which we introduced in 2005. Based on the feedback from our end users, we found the most popular application to be our console-like online video games played on the EZ Platform system. Consequently, we will mainly focus on developing console-like online video games for our EZ Platform in the future. We already have Crazy Kart and other various chess and board games available on the EZ Platform. Going forward, we will continue to provide more console-like video games on the EZ Platform.
Sources of Content
Game Licensing
     We license games from developers in various countries where online game use is relatively established. We monitor each of the South Korean, Japanese, United States and European markets to identify and source new online games. Prior to negotiating a license agreement with an overseas game developer, we evaluate games in our game testing center.
     The cost of licensing games from developers generally consists of an upfront licensing fee, which we normally pay in several installments, and ongoing licensing fees, which are equal to a percentage of revenues generated from operation of the game. The ongoing licensing fee payments for games which have been commercially launched range from 20% to 30% of revenues for MMORPGs, and 20% to 40% of revenues for casual games. Each of

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our licenses provides us with the exclusive right to operate the game in China. Most developers agree to timely provide us, without any additional charge, with updates, enhancements and improvements developed for the games licensed to us. The majority of our game licenses require the licensors to provide us with technical support. As of December 31, 2006, seven of the fourteen online games that we commercially operate are licensed from overseas developers.
     We have also obtained rights or control to certain licenses through the acquisition of, or investment in, other businesses. Please see the section “Recent Acquisitions” in Item 5 “Operating and Financial Review and Prospects”.
Game Development
     We both develop online games at our in-house game development studios and fund the development of games at independent game development studios. Our initial in-house game development efforts focused upon MMORPGs. Currently, besides the development of new MMORPGs and casual games, we are also developing expansion packs for our existing MMORPG games. We will also continue to develop console-like games for our EZ Platform. In addition to the development of traditional online games, through Bianfeng and Gametea we develop online chess and board games, and through Digital Red we develop wireless games for mobile phone users. As of December 31, 2006, approximately 500 employees were engaged in our in-house game development efforts. In addition, as of December 31, 2006, seven of the fourteen online games that we commercially operate were in-house developed, including three casual games.
Other Content
     We also provide additional other content on EZ Platform and Qidian, a Chinese language original literature portal we acquired in 2004. The additional content on EZ Platform is generally provided in partnership with third party service and content providers. Through Qidian, we published works of independent writers, including magic fantasy works, science fiction works and other works.
Our Operating Platform
     We believe that our operating platform contributes to the experience of our users and enhances user loyalty. Our operating platform encompasses a variety of elements, including our product management system, distribution and payment network, unified billing platform, marketing, customer service and technological infrastructure.
Game Product Management
     We have a separate product management team for each of our MMORPGs and casual games. Each product team acts as a product specialist in interaction with our functional departments, such as research and development, marketing, sales and distribution, technology support and customer services. Our product teams:
    conduct the cost/return analysis and form operational plans before the launch of each game;
 
    coordinate internal resources and interact with the other departments to secure the smooth operation of the game on a day-to-day basis;
 
    control the timing of the release of new game versions and enhancements; and
 
    manage the online game’s virtual community on an hour-by-hour basis including, for example, by organizing in-game events.
Pricing, Distribution and Payment
     In order to play our games or in order to purchase in-game value-added services, users must purchase pre-paid cards, which are sold in both virtual and physical form. Each pre-paid card contains a unique access code and password that enables users to add value to their account for one of our online games. Currently, each pre-paid card may only be used to play one of our online games, although a user may choose which game account, among all

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accounts held by the user, to apply the pre-paid card’s value to. Charges based on the number of hours of playtime, unlimited playtime for a specified number of days or the value and amount of in-game value-added services purchased are deducted against the value provided in the pre-paid cards.
     We generally develop a pricing curve to set the retail prices for the games we offer. Pricing curves are developed primarily based on the game cost, user game playing and payment patterns and the pricing of competing games in the market. Since the launch of our first online game in 2001, we have tracked and accumulated user data generated from our user base, which provides us with an extensive database to analyze user patterns and establish pricing curves for particular types of games. Once a game’s pricing is set, it is difficult to increase prices during the game’s commercial lifecycle. We have generally maintained stable pricing curves for our games.
     We distribute our pre-paid cards through three principal channels:
    our e-sales system for virtual pre-paid cards;
 
    our offline distribution system for physical pre-paid cards; and
 
    direct online sales.
     Other than direct online sales, we generally operate by selling pre-paid cards to a group of regional distributors from whom we generally collect payment on a prepaid basis. These distributors resell the cards to sub-distributors who, in turn, distribute the cards directly to Internet cafes and other retail points of sale. We estimate, based on a survey we conducted among our regional distributors in December 2006 and sales records in our e-sales system, that our e-sales and offline distribution networks include approximately 145,000 and 171,000 points of sale in China, respectively. Our data center and servers maintain user information, including user registration information and data relating to usage patterns, and we do not rely on distributors for such information.
     The following table sets forth the percentage of pre-paid card sales from each of these distribution channels in 2005 and 2006:
                 
Distribution Channel   Prepaid Card Sales in
    2005   2006
E-sales
    48.6 %     56.5 %
Offline Distribution
    36.9 %     22.4 %
Direct Online Sales
    13.8 %     20.5 %
Other
    0.7 %     0.6 %
 
               
Total
    100 %     100 %
 
               
     In 2006, we offered average sales discounts of approximately 19.3% and 16.6%, compared to 23.8% and 16.7% in 2005 to our e-sales distributors and offline distributors, respectively. The decrease of the discount rate for e-sales distributors is mainly attributable to our new discount policy that we adopted in April 2006. The sales discount represents the difference between the price at which we sell pre-paid cards to distributors and the face value of the pre-paid cards. We generally offer a larger discount to our e-sales distributors than our offline physical card distributors because we intend to facilitate the expansion of our e-sales system, which provides us with control over the distribution process. In addition, the cost of distributing virtual pre-paid cards through our e-sales system is lower than the costs involved in offline distribution of physical pre-paid cards. In addition, we are actively promoting direct online sales of our pre-paid cards through debit card payments. In 2006, we offered an average sales discount of approximately 8.6% for our prepaid cards sold directly to users via the direct online sales system. For more information on our sales discount policy, please also see subsection “A. Operating Results—Net Revenue” in Item 5 “Operating and Financial Review and Prospects.”
Our Unified User Platform
     Through our unified user and billing verification system, users can access our various online games and other interactive entertainment content through a single Shanda account. We believe that our unified user platform helps us

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to leverage the value of our user base within any given application, to build user loyalty and to have an efficient means to manage our billing and user data as well as to organize promotional events for new products and services.
Marketing
     Due to the group interaction appeal of online games, word-of-mouth is a major medium for promoting our games. Our marketing strategy includes utilizing our large user base and nationwide distribution network to retain our existing users and attract new users. We employ a variety of traditional and online marketing programs and promotional activities, including in-game events, in-game marketing, open beta testing and offline efforts.
     We frequently organize in-game events for our users, which we believe encourages the development of virtual communities among our users and increases user interest in our games. Examples of in-game events include special challenges or features, such as fortress raids, introduced to the game environments for a scheduled period. In addition, we use in-game events to introduce users to new features of our games. Moreover, we frequently post announcements in the game environment of our MMORPGs to promote new features, other improvements to the games, and in-game events. We generally use these announcements to promote the game in which they are displayed.
     After our transition to the CSP model, we worked on more in-game events to promote our new games and existing games during holidays, which have been proven very effective and cost-efficient. Examples of these in-game events include giving Lucky Money to users during Chinese New Year and organizing in-game parties during special holidays such as Christmas and Valentine’s Day.
     Our open beta testing system both tests the operation of new games under open market conditions and introduces new games to users. During open beta testing, we do not charge users to play the new game. Open beta testing provides an initial user base and creates initial excitement and word-of-mouth publicity to support the commercial launch of the game.
     We also market new games through offline efforts. We promote new games by placing game posters in Internet cafes. In addition, we place advertisements in traditional print media as well as on billboards and city buses. We also cooperated with other businesses in co-marketing projects. In addition, we organize promotional events at Internet cafes, distribution points, school campuses and other locations frequented by game players. We also sponsor select media events to promote our brand name and our games.
Customer Service
     We regard customer service as one of our key marketing tools and we are committed to providing superior customer service to our users. We provide service to our customers through three principal channels:
    our call center, which serves our customers 24 hours per day, seven days per week;
 
    our walk-in customer service center, located in Shanghai, Chengdu and Nanjing; and
 
    e-mail and facsimile letters.
     In addition, we offer bulletin board services that allow users to post questions to, and receive responses from, other users.
Technology Infrastructure
     We have developed an extensive technology infrastructure to support the operation of our games, including a nation-wide server network. Due to the real-time interaction among thousands of users, the stable operation of our MMORPGs requires a large number of servers and a significant amount of connectivity bandwidth. Due to China’s large geographical area and limitations on bandwidth, we have located game servers for our MMORPGs in a number of regions throughout China. As a result, our MMORPG users can play our games using servers located in their region

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and without exchanging data across the national network, thereby increasing the speed at which our games operate and enhancing the user experience.
     As of December 31, 2006, our server network for our game operations consisted of approximately 15,000 servers and 1,800 server annex equipment units with the capacity to accommodate up to 8.8 million concurrent online users. As of December 31, 2006, we owned approximately 63% of the servers in our network, and we leased the remainder from telecommunications operators. All of the servers in our server network are located on the premises of our hosting telecommunications operators.
Our EZ Initiative
     In 2005, we introduced our EZ Center interactive entertainment platform and our hardware product EZ Pod, as the first step of our home strategy initiatives. In 2006 we made considerable progress in building business partnerships and developing the distribution models for our EZ Pod product. We formed strategic partnerships with leading PC manufacturers in China, including China HP, Changhong Zarva, Hedy Computer, Hisense Digital Products, TCL Computer Technology and Tsinghua Tongfang, to bundle our EZ Pod with their PC products and digital home products for sale. We also signed partnerships with China Netcom and one China Telecom’s subsidiary. By the end of 2006, we have sold a total of approximately 230,000 sets of EZ Pod and registered users of our EZ Center platform have surpassed 100,000. Going forward, we will continue to work with PC manufacturers to increase EZ Pod shipments through bundling with sales of new PCs.
     Based on the initial feedback we collected from early adopters of our EZ Pod, the most popular application appears to be our console-like online video games offered through our EZ Platform. Going forward, console-like online video games will be a key application on our EZ Platform and will be the primary focus of the current stage of our home strategy. In addition to our current console-like online games offered on the EZ Platform such as Crazy Kart and various chess and board games, we will continue to provide a wide variety of video games which are more open and interactive compared to traditional video games.
Competition
     We compete primarily with other online game operators based in China. We believe that domestic operators, including us, are likely to have a competitive advantage over international service providers who enter the China market, as these international service providers are likely to lack operational infrastructure in China and content localization experience for the China market. We cannot assure you, however, that this competitive advantage will continue to exist, particularly if international operators establish joint ventures or form alliances with, or acquire, domestic operators. In addition, we compete for users against various offline games, such as console games, arcade games and handheld games, as well as various other forms of traditional or other online entertainment.
Intellectual Property and Proprietary Rights
     We rely on copyright, trademark, patent, trade secret and other intellectual property law, as well as non-competition, confidentiality and license agreements with our employees, suppliers, business partners and others to protect our intellectual property rights. Our employees are generally required to sign agreements acknowledging that all inventions, trade secrets, works of authorship, developments and other processes generated by them on our behalf are our property, and assigning to us any ownership rights that they may claim in those works. Despite our precautions, it may be possible for third parties to obtain and use intellectual property that we own or license without our consent. Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.
     As of December 31, 2006, we own 49 software copyrights, each of which we have registered with the State Copyright Bureau of the PRC.
     As of December 31, 2006, we own 32 trademarks, each in various classes, each of which we have registered with the China Trademark Office, and had 94 trademark applications, each in various classes, pending with the China

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Trademark Office. We have also filed applications to register certain trademarks in a number of other jurisdictions, including Taiwan, Hong Kong, South Korea, the United States, India, Japan, Canada, Singapore and New Zealand.
     As of December 31, 2006, we hold 14 patents granted by the State Intellectual Property Office of the PRC and we have 32 patent applications pending with the State Intellectual Property Office. In addition, we hold five patents that have been granted by select jurisdictions outside of China, including the European Union, South Korea and Singapore.
Regulatory Matters
     The online game industry in China operates under a legal regime that consists of the State Council, which is the highest authority of the executive branch of the PRC central government, and the various ministries and agencies under its leadership. These ministries and agencies mainly include:
    the Ministry of Information Industry;
 
    the Ministry of Culture;
 
    the State Press and Publications Administration;
 
    the State Copyright Bureau;
 
    the State Administration for Industry and Commerce;
 
    the Ministry of Public Security; and
 
    the Bureau of State Secrecy.
     The State Council and these ministries and agencies have issued a series of rules that regulate a number of different substantive areas of our business, which are discussed below.
Foreign Ownership Restrictions
     PRC regulations currently limit foreign ownership of companies that provide Internet content services, which includes operating online games, to 50%. In addition, foreign and foreign-invested enterprises are currently not able to apply for the required licenses for operating online games in China. In order to comply with foreign ownership restrictions, we operate our online game business in China through Shanda Networking, which is wholly owned by Tianqiao Chen, our chairman and chief executive officer, and Danian Chen, our executive senior vice president, both of whom are PRC citizens, and through Nanjing Shanda and Hangzhou Bianfeng, which are subsidiaries of Shanda Networking. Under PRC law, we cannot hold the licenses and approvals necessary to operate our online games because those licenses and approvals can only be held by domestic PRC persons and we are not considered to be a domestic PRC person for this purpose. We believe that (1) the ownership structures of our company, Shengqu and our PRC operating companies are in compliance with existing PRC laws and regulations, (2) our contractual arrangements with Shanda Networking and its shareholders are valid and binding, and will not result in any violation of PRC laws or regulations currently in effect; and (3) the business operations of our company, Shengqu and our PRC operating companies, as described in this annual report, are in compliance with existing PRC laws and regulations in all material aspects. There are, however, substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. Accordingly, we cannot assure you that the PRC regulatory authorities will not ultimately take a view that is contrary to our view. If the PRC government finds that the agreements that establish the structure for operating our China business do not comply with PRC government restrictions on foreign investment in the online game industry, we could be subject to severe penalties.

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Licenses
     There are a number of aspects of our business which require us to obtain licenses from a variety of PRC regulatory authorities.
     As ICP service providers, our PRC operating companies are required to either hold value-added telecommunications business operation licenses, or ICP licenses, issued by the Ministry of Information Industry or its local offices or be sublicensed by qualified ICP license holders. Moreover, ICP operators providing ICP services in multiple provinces, autonomous regions and centrally administered municipalities may be required to obtain an Inter-regional ICP license. Shanda Networking and Shanghai Shulong Technology Development Co., Ltd. have already obtained inter-regional ICP licenses, which both cover SMS service. Shanda Networking’s license also covers online bulletin board service. Nanjing Shanda and Hangzhou Bianfeng currently conduct ICP businesses by having sublicensing arrangements with Shanda Networking.
     Each ICP license holder that engages in the supply and servicing of Internet cultural products, which include online games, must obtain an additional Internet culture business operations license from the Ministry of Culture. Shanda Networking holds an Internet culture business operations license issued by the Ministry of Culture. In connection with our launch of certain EZ series products, which offer video and audio content, such as music and movies, we may need to obtain a license from the State Administration of Radio, Film and Television. We understand that non-State-owned companies may not be able to obtain such a license and, accordingly, if it is determined that such a license is required our EZ initiative may be materially and adversely affected.
     The State Press and Publications Administration and the Ministry of Information Industry jointly impose a license requirement for any company that intends to engage in online publishing, defined as any act by an Internet information service provider to select, edit and process content or programs and to make such content or programs publicly available on the Internet. Shanda Networking holds an online publishing license for online games issued by the State Press and Publications Administration. In addition, the Ministry of Culture requires us to submit for its content review and approval any online games we would like to import. If we import games without that approval, the Ministry of Culture may impose penalties on us, including revoking our Internet culture business operations license required for the operation of online games in China.
     The Ministry of Public Security imposes a license requirement for any company that intends to engage in the development and sales of computer and information system safety guard products. Shanda Networking holds a computer and information system safety guard products sales license issued by the Ministry of Public Security.
ICP License Sublicensing
     According to rules promulgated by the Ministry of Information Industry, an ICP service provider that has obtained an inter-regional ICP license shall conduct its business operations in provinces, autonomous regions and centrally administered municipalities as covered by its license within one year after acquiring the license. An inter-regional ICP service provider may authorize its subsidiaries or its branches to conduct an ICP business in licensed regions. If it authorizes its subsidiaries, the ICP service provider’s shareholding in such subsidiaries must be greater than 51%. Moreover, an ICP service provider shall not authorize two or more subsidiaries or branches to conduct the same ICP business in the same region. Shanda Networking has authorized Nanjing Shanda and Hangzhou Bianfeng to conduct ICP business in several regions. Nanjing Shanda is responsible for the east and central-south of China. Hangzhou Bianfeng is responsible for north-east China. Shanda Networking will continue to conduct online game business in residual regions, with its Xian branch, Beijing branch and its subsidiary Chengdu Jisheng Technology Co., Ltd. being respectively responsible for north-west China, north China and south-west China. Shanghai Shulong Technology Development Co., Ltd has set up five branches and authorized them to conduct ICP business in five regions of north China, north-east China, central-south China, south-west China and north-west China. Shanghai Shulong Technology Development Co., Ltd. is responsible for east China.

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Regulation of Internet Content
     The PRC government has promulgated measures relating to Internet content through a number of ministries and agencies, including the Ministry of Information Industry, the Ministry of Culture and the State Press and Publications Administration. These measures specifically prohibit Internet activities, which includes the operation of online games that result in the publication of any content which is found to, among other things, propagate obscenity, gambling or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC, or compromise State security or secrets. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its websites.
     In addition, the PRC government has recently promulgated regulations that require online game operators to implement anti-addiction measures for users under eighteen years of age. The anti-addiction system must be formally implemented beginning on July 16, 2007. See Item 3.D. “Risk Factors—Risks Relating to our Business—Negative publicity in China regarding online games could lead to additional government regulations that may have a material and adverse impact on our business, financial condition and results of operations.”
Regulation of Information Security
     Internet content in China is also regulated and restricted from a State security standpoint. The Standing Committee of the National People’s Congress, China’s national legislative body, issued a decision in December 2000, according to which following conducts in China may be subject to criminal punishment in China any effort to: (1) gain improper entry into a computer or system of strategic importance; (2) disseminate politically disruptive information; (3) leak state secrets; (4) spread false commercial information; or (5) infringe intellectual property rights.
     The Ministry of Public Security has promulgated measures that prohibit use of the Internet in ways which, among other things, result in a leakage of state secrets or a spread of socially destabilizing content. The Ministry of Public Security has supervision and inspection rights in this regard, and we may be subject to the jurisdiction of the local security bureaus. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its websites.
Import Regulation
     Our ability to license online games from abroad and import them into China is regulated in several ways. We are required to register with the Ministry of Commerce any license agreement with a foreign licensor that involves an import of technologies, including online game software into China. Without that registration, we cannot remit licensing fees out of China to any foreign game licensor. Furthermore, the State Copyright Bureau requires us to register copyright license agreements relating to imported software. Without the State Copyright Bureau registration, we are not allowed to publish or reproduce the imported game software in China. In addition, imported online game software is also required to pass a content examination by the Ministry of Culture. Any imported online game software, which has not been examined and approved by the Ministry of Culture is not allowed to be put into operation in China.
Publishing Regulation
     Our publishing activities include both online publishing and offline publishing. In order to engage in the online publishing business, we have obtained licenses for online game publishing from both the State Press and Publications Administration and the Ministry of Culture. We do not hold the required license to engage in online or offline literature publishing. In order to operate our online literature publishing business, Shanda Networking has applied at the State Press and Publications Administration to expand its Internet publication license, which was originally granted for the publication of online games, to encompass, among other things, books literary works and other electronic publications. We believe that Shanda Networking has satisfied all qualifications required to obtain the permission to expand its license and we do not believe that, while its application is pending, the regulatory authorities will take any action against it. However, we cannot assure you that it will obtain this approval or that the regulatory authority will not take any action against it. In order to operate the offline publishing business, we cooperate with companies that are licensed to conduct such business.

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Advertising Regulation
     According to PRC laws and regulations, in order to conduct advertising and related business, a company must have an approved business scope that covers such businesses. Currently, we conduct our advertising and related businesses primarily through our subsidiary, Shanghai Shengyue Advertisement Co., Ltd., which is licensed to conduct these businesses.
Intellectual Property Rights
     The State Council and the State Copyright Bureau have promulgated various regulations and rules relating to protection of software in China. Under these regulations and rules, software owners, licensees and transferees may register their rights in software with the State Copyright Bureau or its local branches and obtain software copyright registration certificates. Although such registration is not mandatory under PRC law, software owners, licensees and transferees are encouraged to go through the registration process and registered software rights may be entitled to better protections. We have registered all of our commercially launched in-house developed online games with the State Copyright Bureau.
Internet Cafe Regulation
     Internet cafes are required to obtain a license from the Ministry of Culture and the State Administration of Industry and Commerce, and are subject to requirements and regulations with respect to location, size, number of computers, age limit of customers and business hours. Although we do not own or operate any Internet cafes, many Internet cafes distribute our virtual pre-paid cards. The PRC government has announced its intention, and has begun, to intensify its regulation of Internet cafes, which are currently the primary venue for our users to play online games. In February 2004, the State Administration of Industry and Commerce and other related government agencies issued a notice to suspend issuance of new Internet cafe licenses for a six month period. In January 2007, 14 PRC government departments jointly issued a circular in connection with the strengthening of Internet café and online game administration. According to the circular, local authorities are barred from issuing new Internet café licenses for the remainder of 2007. Intensified government regulation of Internet cafes could restrict our ability to maintain or increase our revenues and expand our customer base.
Privacy Protection
     PRC law does not prohibit Internet content providers from collecting and analyzing personal information from their users. We require our users to accept a user agreement whereby they agree to provide certain personal information to us. PRC law prohibits Internet content providers from disclosing to any third parties any information transmitted by users through their networks unless otherwise permitted by law. If an Internet content provider violates these regulations, the Ministry of Information Industry or its local bureaus may impose penalties and the Internet content provider may be liable for damages caused to its users.
C. ORGANIZATIONAL STRUCTURE
     We are a Cayman Islands exempted company and we conduct our operations in China primarily through Shengqu, our indirectly wholly owned subsidiary. We and Shengqu are foreign or foreign-invested enterprises under PRC law and accordingly are ineligible to apply for a license to operate online games.
     In order to comply with foreign ownership restrictions, we operate our online game business in China through Shanda Networking, which is wholly owned by Tianqiao Chen, our chairman and chief executive officer, and Danian Chen, our executive senior vice president, both of whom are PRC citizens, and through Nanjing Shanda and Hangzhou Bianfeng, which are subsidiaries of Shanda Networking. Shanda Networking, Nanjing Shanda, Hangzhou Bianfeng, collectively referred to as our PRC operating companies, and other subsidiaries of Shanda Networking hold the licenses and approvals that are required to operate our online game business and to sell online advertising on our web pages, and Shengqu owns the substantial majority of physical assets.

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     Shengqu has entered into a series of contractual arrangements with Shanda Networking and its shareholders. As a result of these contractual arrangements, we are considered the primary beneficiary of Shanda Networking and its subsidiaries (including the other PRC operating companies) and accordingly we consolidate the results of operations of Shanda Networking and its subsidiaries in our financial statements. However, neither we nor Shengqu owns the equity of the PRC operating companies, and, although we consolidate the results of the PRC operating companies in our consolidated financial statements and we can utilize their cash and cash equivalents in our operations through our contractual arrangements with Shanda Networking, we do not have direct access to the cash and cash equivalents or future earnings of the PRC operating companies.
     As of December 31, 2006, we had approximately RMB1,291.9 million (US$165.4 million) in cash and cash equivalents, of which RMB486.4 million (US$62.3 million) was held by Shanda Networking and its subsidiaries.
     Pursuant to our contractual arrangements with Shanda Networking and the other PRC operating companies, we provide services, software licenses and equipment to the PRC operating companies in exchange for fees. The principal service, software license and equipment lease agreements that we have entered into are:
    equipment leasing agreements, pursuant to which Shanda Networking, Nanjing Shanda and Hangzhou Bianfeng lease a substantial majority of their operating assets from Shengqu;
 
    a technical support agreement, pursuant to which Shengqu provides technical support for Shanda Networking’s operations;
 
    technology licensing agreements, pursuant to which Shengqu licenses certain billing technology to Shanda Networking, Nanjing Shanda and Hangzhou Bianfeng;
 
    software license agreements, pursuant to which Shengqu licenses certain software to Shanda Networking, Nanjing Shanda and Hangzhou Bianfeng;
 
    a strategic consulting agreement, pursuant to which Shengqu provides strategic consulting services to Shanda Networking; and
 
    online game distribution and service agreements, pursuant to which Shanda Networking, Nanjing Shanda and Hangzhou Bianfeng distributes and services certain online games that are licensed or owned by Shengqu.
     In addition, we have entered into agreements with Shanda Networking and its shareholders that provide us with the substantial ability to control Shanda Networking. Pursuant to these contractual arrangements:
    the shareholders of Shanda Networking have granted an irrevocable proxy to individuals designated by Shengqu to exercise the right to appoint directors, the general manager and other senior management of Shanda Networking;
 
    Shanda Networking will not enter into any transaction that may materially affect its assets, liabilities, equity or operations without our prior written consent;
 
    Shanda Networking will not distribute any dividend;
 
    Shengqu may purchase the entire equity interest in, or all the assets of, Shanda Networking for a purchase price of the lower of RMB10 million or the lowest price permitted under PRC law when and if such purchase is permitted by PRC law or when the current shareholders of Shanda Networking cease to be directors or employees of Shanda Networking;
 
    the shareholders of Shanda Networking have pledged their equity interest in Shanda Networking to Shengqu to secure the payment obligations of Shanda Networking under all of the agreements between Shanda Networking and Shengqu; and

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    the shareholders of Shanda Networking will not transfer, sell, pledge, dispose of or create any encumbrance on their equity interest in Shanda Networking without the prior written consent of Shengqu.
     Each of Shengqu’s contractual arrangements with Shanda Networking and its shareholders may only be amended with the approval of our audit committee or another independent body of our board of directors.
     The following diagram illustrates our corporate and share ownership structure as of March 31, 2007.
(FLOW CHART)
 
(1)   Skyline Media Limited is 100% owned by Skyline Capital International Limited, which is in turn 40% owned by Tianqiao Chen through Shanda Media Limited, a company wholly owned by him, 30% owned by Danian Chen through Shanda Investment International Limited, a company wholly owned by him, and 30% owned by Qianqian Luo through Fortune Capital Holdings Enterprise Limited, a company wholly owned by her.
 
(2)   Shanda Interactive Entertainment Limited holds a beneficial ownership interest in a number of subsidiaries and investee companies, a list of which is set forth below.
 
(3)   Shanda Networking holds a beneficial ownership interests in a number of subsidiary and investee companies established in the PRC. Although we consolidate our results of operations with those of Shanda Networking and its majority beneficially owned subsidiaries,

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    we do not own these entities. Shanda Networking’s beneficial ownership interests in its subsidiaries and investee companies are listed in the table set forth below.
Subsidiaries and Investee Companies
     The following table sets forth the direct and indirect subsidiaries and investee companies of Shanda Interactive Entertainment Limited as of March 31, 2007.
                 
    Shanda Interactive        
    Entertainment’s        
    Beneficial Ownership   Jurisdiction of    
    Percentage(1)   Incorporation   Business
Shengqu Information Technology (Shanghai) Co., Ltd.
    100 %   PRC   Provider of information technology-related services and developer of software
Shanda Computer (Shanghai) Co., Ltd.
    100 %   PRC   Developer of software, hardware and composite systems for end-users
Grandpro Technology Ltd.
    100 %   BVI   Network PC game platform operator
Shanda Zona LLC
    100 %   Delaware   Developer and provider of server infrastructure
Shanda Zona Limited
    100 %   BVI   Developer and provider of server infrastructure
Actoz Soft Co., Ltd.
    45.64 %   Korea   Developer, operator and publisher of online games
SINA Corporation
  3.9%(2)   Cayman Islands   Online media company and value-added information service provider for China and Chinese communities worldwide
Grandpro Technology (Shanghai) Co., Ltd.
    100 %   PRC   Network PC game platform operator
 
(1)   For purposes of reporting beneficial ownership, we include interests held by controlled subsidiaries and nominee shareholders. Due to certain restrictions under PRC Company Law and before it was amended, most PRC limited liability companies, including Shanda Networking, were required to have two or more shareholders. A common practice in cases where a subsidiary would otherwise be wholly-owned is to realize ownership and control via connected companies or organize a second, nominee shareholder through whom control and beneficial ownership are maintained by contractual arrangements. PRC Company Law was amended on October 27, 2005, which came into effect on January 1, 2006. According to the amended Company Law, limited liability companies are no longer required to have two or more shareholders. We may change our current shareholding structure accordingly.
 
(2)   As of March 31, 2007, we held 2,118,278 ordinary shares of SINA Corporation, or SINA. The figure 3.9% is based on the 54,538,680 ordinary shares outstanding as of February 23, 2007, as reported by SINA Corporation on its annual report on Form 10-K, filed with the Securities and Exchange Commission on March 1, 2007. Subsequently, we sold the remaining 2,118,278 ordinary shares of our stake in SINA through open market transactions in May 2007.
     The following table sets forth the direct and indirect subsidiaries and investee companies of Shanda Networking. Although we consolidate our results of operations with those of Shanda Networking and its majority beneficially owned subsidiaries, we do not own any legal interest in Shanda Networking or such subsidiaries.
                 
    Shanda Networking’s        
    Beneficial Ownership   Jurisdiction of    
    Percentage(1)   Incorporation   Business
Nanjing Shanda Networking Co., Ltd.
    100 %   PRC   Operation of online games
Hangzhou Bianfeng Networking Co., Ltd.
    100 %   PRC   Operation of online games
Shanghai Shengjin Software Development Co., Ltd.
    69 %   PRC   Development of online games
Shanghai Shengpin Network Technology Development Co., Ltd.
    62.5 %   PRC   Development of online games
Shanghai Shanda Xinhua Network Development Co., Ltd.
    56.0 %   PRC   Development and distribution of game publications and Products
Shanghai Orient Youth Culture Development Co., Ltd.
  16.8%(2)   PRC   Expo services, consulting services related to international cultural activities, and advertising business
Chengdu Jisheng Technology Co., Ltd.
    100.0 %   PRC   Development and distribution of management software for Internet cafes
Shanghai Shulong Technology Development Co., Ltd.
    100.0 %   PRC   Short messaging services
Shanghai Haofang Online Information Technology Co., Ltd.
    100 %   PRC   Operation of network PC game platform
Hangzhou Bianfeng Software Co., Ltd.
    100 %   PRC   Development and operation of online chess and board games

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    Shanda Networking’s        
    Beneficial Ownership   Jurisdiction of    
    Percentage(1)   Incorporation   Business
Beijing Manyou Tiandi Networking Service Co., Ltd.
    51.02 %   PRC   Development of virtual community website
Shanghai Xuanting Entertainment Information Technology Co., Ltd.
    100 %   PRC   Publication of original literature online

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    Shanda Networking’s        
    Beneficial Ownership   Jurisdiction of    
    Percentage(1)   Incorporation   Business
Beijing Digital Red Software Technology Co., Ltd.
    100 %   PRC   Development of mobile phone-based wireless games
Shanghai Shengyue Advertisement Co., Ltd.
    100 %   PRC   Provider of online advertising services
Beijing Shengkai Interactive Entertainment Technology Co., Ltd.
    75 %   PRC   Development of video games.
Shanghai Shanda Family Culture Communication Co., Ltd.
    49 %   PRC   Distributor of magazines
Shanghai Shengci Network Technology Co., Ltd.
    75 %   PRC   Developer of instant message software
Wenzhou Chuangjia Technology Co., Ltd.
    100 %   PRC   Development and operation of online chess and board games.
 
(1)   For purposes of reporting beneficial ownership, we include interests held by controlled subsidiaries and nominee shareholders. Due to certain restrictions under PRC Company Law and before it was amended, most PRC limited liability companies, including Shanda Networking, were required to have two or more shareholders. A common practice in cases where a subsidiary would otherwise be wholly-owned is to realize ownership and control via connected companies or organize a second, nominee shareholder through whom control and beneficial ownership are maintained by contractual arrangements. PRC Company Law was amended on October 27, 2005, which came into effect on January 1, 2006. According to the amended Company Law, limited liability companies are no longer required to have two or more shareholders. We may change our current shareholding structure accordingly.
 
(2)   The figure 16.8% is derived from the fact that Shanda Networking owns 56% of Shanghai Xinhua Networking Development Co., Ltd., which in turn owns 30% of Shanghai Orient Youth Culture Development Co., Ltd.
D. PROPERTY, PLANTS AND EQUIPMENT
     Our principal executive offices are located at No. 1 Office Building, No. 690 Bibo Road, Pudong New Area, Shanghai, P.R.C. We acquired this office building with approximately 14,500 square meters of office space on December 21, 2006. In the fourth quarter of 2005, we acquired a property located at No. 356 Guoshoujing Road, Pudong New Area, Shanghai, P.R.C. with approximately 10,197.70 square meters of office space. In addition, in the third quarter of 2006, we acquired the land use rights for a parcel of land with approximately 50,723.80 square meters. We plan to use the newly acquired land for office space.
     As of March 31, 2007, we currently occupy approximately 2,000 square meters of leased office space and warehouse space in a number of locations in Shanghai and approximately 6,500 square meters of additional leased office space in Beijing, Shenzhen, Chengdu, Hangzhou, Guangzhou and Wuhan, China; Tokyo, Japan; and Santa Clara, California. We believe that our existing facilities are adequate for our current requirements.
Item 4A. UNRESOLVED STAFF COMMENTS
     None.
Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
     You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item 3. Key Information—D. Risk Factors” or in other parts of this annual report on Form 20-F.
Overview
     We are a leading interactive entertainment company and one of the largest operators of online games in China. We offer a portfolio of diversified entertainment content including some of the most popular massively multi-player online role playing games, or MMORPGs, and casual online games in China, along with online chess and

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board games, a network PC game platform and a variety of cartoons, literary works and music. In 2006, our commercially launched games had approximately 2.45 million peak concurrent users, which refers to the highest number of users playing our games at the same time during that period.
     Prior to November 2005, we operated all MMORPGs under a pay-to-play model, or “Come-Pay-Stay” (CPS) model. Under this model, users are charged based on the duration of time spent playing games. Beginning in November 2005, we introduced a “Come-Stay-Pay”, or CSP, revenue model for three of our leading MMORPGs, Mir II, Woool, and Magical Land. Under the new CSP revenue model, users are able to play the basic functions of an MMORPG for free and may choose to purchase in-game value-added services, including certain in-game items and premium features, which enhance the game experience. In 2006, our CSP revenue model was expanded to most of our MMORPGsThe CSP model allows us to make frequent adjustments to meet the changing demands of users, which effectively prolongs the lives of our MMORPG titles. Under CSP model, online games were transformed from merely game products to an entertainment platform. We are able to attract more users and increase the average monthly revenue per paying user, or ARPU, by creating demand and satisfy the needs of our users in the virtual community. After the adoption of the CSP model, our revenue from online game operation reported a sequential growth in the second, third and fourth quarter of 2006.
     In November 2005, we introduced our EZ Center platform as a unified software solution on top of our service platform to integrate entertainment and informational content from the Internet and provide users with access through a user-friendly interface. The EZ Pod, which is the first product launched off our EZ Center platform, enables PC users to navigate and access the aggregated Internet content over our EZ Center platform using a remote control. In 2006, we modified our EZ Center platform strategy to focus on providing PC users with console-like game experiences.
Factors Affecting Results of Operations
     Significant factors affecting our financial condition and results of operations include:
    the commercial lifespan of the online games and other content that we offer, and our ability to replace such content with new popular online games during that lifespan;
 
    the willingness of users to purchase in-game value-added services following the introduction of our new CSP revenue model for our leading MMORPGs;
 
    our ability to offer various virtual items or value-added services users prefer under CSP model;
 
    the arrival of additional competition into our markets and its erosion of any first-mover advantage that we might have benefited from by having been one of the first entrants into the online game market in China, and any effect on market prices and the costs of our services and operations;
 
    our ability to successfully grow through the identification and acquisition of complementary businesses and our ability to successfully integrate acquired companies and realize synergies envisioned at the time of acquisition;
 
    our ability to successfully develop the EZ initiative and transition from a pure online game company to an interactive entertainment media platform, content and service provider;
 
    the cost of researching, developing and marketing new products, including the EZ initiative;
 
    the costs of licensing and in-house development of new games;
 
    the future availability of preferential tax treatments and government financial incentives in China;
 
    the discounts offered for sales of our prepaid vouchers;
 
    the effect of PRC regulations on the conduct of our operations; and

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    the growth of Internet and personal computer use and the popularity of these media as a source of entertainment.
Related Party Arrangements
     In order to comply with current foreign ownership restrictions, we operate our online game business in China through Shanda Networking, a company wholly owned by Tianqiao Chen, our chairman and chief executive officer, and Danian Chen, our executive senior vice president, both of whom are PRC citizens, and through Nanjing Shanda and Hangzhou Bianfeng, which are subsidiaries of Shanda Networking. Tianqiao Chen and Danian Chen, together with Qianqian Luo, also own all of the shares of Skyline Media Limited, our controlling shareholder. We have entered into a series of contractual arrangements with Shanda Networking, Nanjing Shanda, Hangzhou Bianfeng and the shareholders of Shanda Networking.
     Pursuant to these contractual arrangements, we provide services, software licenses and equipment to the PRC operating companies in exchange for fees, and we have undertaken to provide financial support to the PRC operating companies to the extent necessary for their operations. As a result of these contractual arrangements, we are considered the primary beneficiary of the PRC operating companies and accordingly we consolidate the results of operations of the PRC operating companies in our financial statements. For a description of our contractual arrangements with Shanda Networking and its shareholders and with Nanjing Shanda and Hangzhou Bianfeng, see “Organizational Structure” in Item 4 and “Major Shareholders and Related Party Transactions” in Item 7.
A. OPERATING RESULTS
Net Revenues
     In 2006, we had net revenues of RMB1,654.5 million (US$211.9 million), of which net revenues from our online games were RMB1,542.9 million (US$197.6 million), accounting for approximately 93.3% of total net revenues, and net revenues from other sources were RMB111.6 million (US$14.3 million), accounting for approximately 6.7% of total net revenues. Our online game revenues are net of a sales discount, which in 2006 averaged approximately 19.3%, 16.6% and 8.6% of the face value of our pre-paid cards that we sell to our e-sales distributors, offline distributors and end-users via direct online payment, respectively. The sales discounts represent the difference between the price at which we sell pre-paid cards to distributors and the face value of the pre-paid cards. In April 2006, we adopted a new discount policy that reduces the traditional sales discount rates, but gives distributors rebates and incentives based on how much they sell and what kinds of pre-paid game cards they sell. Under the new policy, we are able to encourage our distributors to promote specific games, and this allows us to have more control over our distributors.
     Our net revenues reflect a deduction from our revenues for business taxes and related surcharges incurred in connection with our China operations. Since Shanda Networking and its subsidiaries operate in China, their revenues are subject to a business tax, at an effective rate of 4.4% for 2006, on revenues earned from services provided in the PRC. We deduct these amounts from our revenues to arrive at our net revenues. Due to the preferential treatments for qualified high technology companies in China and the incentive from local government to encourage regional business development, a portion of our revenues for which we previously paid business taxes in connection with our operations in China are currently refunded to us in the form of government financial incentives, but the amount of the financial incentives and the timing to grant them are subject to determination of the government authorities. Upon receipt, these government financial incentives are recognized as other income in our statements of operations and comprehensive income. Please see “Taxation” in Item 10 “Additional Information” and note 7 to our consolidated financial statements.
Sources of Revenues
     Online game revenues. We derive our online game revenues, which constitute substantially all of our revenues, from online game usage fees and purchases of in-game items paid by users of our MMORPGs and casual games. Mir II and Woool are our two most popular MMORPGs and accounted for 46.6% and 23.7% of our net revenues in 2006. However, we believe that Mir II and Woool, which we commercially launched in the fourth quarter

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of 2001 and the third quarter of 2003, respectively, have already entered into a mature stage of their lifecycles. To maximize the lifespan of Mir II and Woool, we have taken various measures to upgrade in-game features and offer a variety of customized in-game virtual items and value-added services to players under CSP model. Going forward, we expect Mir II and Woool to continue to be significant contributors to our revenues during the remainder of their respective lifecycles. Revenues from casual games are primarily derived from BNB and Maple Story. In 2006, the revenue contribution from casual games decreased to 18.3% of total net revenue from 21.2% of total net revenue in 2005. The revenue contributed from BNB did decline during 2006 and we expect this downward trend to continue in 2007. Previously under the CPS model, online games had a relatively short commercial lifecycle of typically four to five years for successful games. Our new CSP model has prolonged the lifecycle of our online games by creating an online community instead of merely offering a stand-alone game product. Accordingly, we believe that developing new versions of our existing games is just as important as developing and launching new games. As part of our efforts to introduce new content to our users, we commercially launched one MMORPG, Archlord, and two casual games, Shanda Richman and Crazy Kart, as well the expansion packs for most of our MMORPG and casual games in 2006. In February 2007, we entered into a license agreement with our affiliate, Actoz, a Korean online game developer, for the operation of Latale, a side-scrolling role playing game, in China. Latale was commercialized in April 2007. In February 2007, we also entered into a license agreement with Wemade, a Korean online game developer, to operate Changchun Online, a highly anticipated 3D MMORPG, in China. In March 2007, we entered into a license agreement with Nowcom, a Korean online game developer, to operate TalesRunner, a 3D online sports-themed running game, in China. With the combination of our new games and the expansion packs for our existing games, we expect to witness sequential growth of our online game revenues in 2007.
     Other net revenues. Our other net revenues primarily consist of net revenues from sales of EZ series products subscription fees from our online literature portal, net revenues from online advertisement, fees from technical services and cooperation, service fees from rendering management software to internet cafe, mobile valued-added services revenue, sale of E-Key and other online game related auxiliary products. In 2006, the contribution from other revenues decreased to 6.7% of total net revenue from 12.6% of total net revenue in 2005. In the last quarter of 2005, we commenced the sale of EZ Pod products, which is a software-based upgrade that allows users to access our interactive entertainment content. For the year ended December 31, 2006, the revenue from sale of EZ series products amounted to RMB28.9 million (US$3.7 million).
Significant Factors
     Pay-to-play revenue model. Prior to late November 2005, our MMORPG online game revenues were primarily derived from the purchase and utilization of playing time by our users. Accordingly, the two significant factors that affect our MMORPG online game revenues have been:
    the number of hours that users play our games, or total user-hours; and
 
    our average revenue per user-hour.
     We calculate our total user-hours based on our average concurrent users, which is a commonly used industry statistic. In a given period, the number of total user-hours equals the average concurrent users for that period multiplied by the number of hours in that period. In measuring average concurrent users, we determine the number of users logged on to each of our commercially launched games at one minute intervals, then average that data over the course of a day to derive daily averages. Average daily information is further averaged over a particular period to determine average concurrent users for that period. For a discussion of factors that might affect total user-hours, see “Risk Factors” in Item 3 “Key Information”.
     Our effective revenue per user-hour is derived by taking the revenues from our online games for a period and dividing this number by total user-hours in that period. This provides us with a measure of the average revenue per user-hour that we receive from users that play our games.
     Come-Stay-Play (CSP) revenue model. In late November 2005, we adopted a CSP revenue model for three of our MMORPGs: Mir II, Magical Land and Woool. The CSP revenue model is also used for our casual games and by the end of 2006 has been adopted for most of our MMORPGs.. Under this model, users acquire in-game items by

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converting game points from pre-paid cards. Because playing the basic features of the game is free and the purchase of in-game items is optional, average concurrent users is not a significant revenue factor under this model. The most significant factors that affect MMORPG and casual game revenue under the CSP revenue model are:
    the number of active paying accounts; and
 
    our average revenue per active paying account.
     The number of active paying accounts for any given period is equal to the number of accounts from which game points are utilized during such period. Our average revenue per paying account is equal to our revenue for the given period divided by our active paying accounts in that period. For a discussion of factors that might affect the number of active paying casual game account and the average revenue per active paying account, see “Risk Factors” in Item 3 “Key Information”
Revenue Collection
     Our online game revenues are collected through the sale of pre-paid cards, which we sell in both virtual and physical form, to third party distributors and retailers, including Internet cafes, as well as through our direct online payment systems. In most cases, we receive cash payments from these parties in exchange for delivery of the pre-paid cards. We do not provide refunds to these distributors or retailers with respect to unsold inventories of pre-paid cards. We also collect online game revenues through certain telecommunications service operators that bundle broadband access services for home users with our online games. In April 2006, we adopted a new discount policy that cuts the sales discount rates, but gives distributors more in rebates and incentives based on how much they sell and what kinds of pre-paid game cards they sell. Under the new policy, we are able to encourage our distributors to promote specific games, and this allows us to have more control over our distributors.
     Our other revenues are collected form sales of EZ series products, sales of our E-key, subscription fees from our online literature portal, fees from online advertisement, fees from other online game related auxiliary products and payments from mobile telecommunications service operators in connection with our recharge by SMS service.
     In 2006, we recorded doubtful debts in the amount of RMB26.4 million (US$3.4 million), which was mainly due to overdue receivables from online advertising and sales of EZ series products. As of December 31, 2006, we had net accounts receivable of RMB31.7 million (US$4.1 million), which were also mainly due from purchasers of online advertising, SMS services and sales of EZ series products.
Revenue Recognition and Deferred Revenue
     In the case of pay-to-play games, we recognize revenues based on the time units actually consumed by our users, and, in the case of the games operated under CSP model, we recognize revenues over the life of the in-game premium features users purchase or as the premium features are consumed. We also recognize revenues when our users who had previously purchased playing time and/or points are no longer entitled to access the online games in accordance with our published expiration policy. We account for the amounts received upon the sale of pre-paid cards, but prior to usage or expiration of the value sold, as deferred revenue in our consolidated balance sheets. Deferred revenue is reduced as revenues are recognized. As of December 31, 2006, we had deferred revenue of RMB201.6 million (US$25.8 million), an increase from RMB172.5 million as of December 31, 2005.
Sales Tax
     Our PRC affiliates are subject to PRC business tax. We primarily pay business tax on gross revenues generated from online game operations, rentals, service fees and license fees. Shanda Networking, Nanjing Shanda and Hangzhou Bianfeng pay business tax on their gross revenues derived from online game operations at a rate ranging from 3% to 5%, and this business tax is deducted from total revenues. In addition, Shengqu pays a 5% business tax on the gross revenues derived from its contractual arrangements with Shanda Networking, Nanjing Shanda and Hangzhou Bianfeng, and these taxes are primarily recorded in operating expenses in accordance with our accounting policy.

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Cost of Revenue
     Our cost of revenue primarily consists of ongoing licensing fees for online games, amortization of upfront licensing fees and other intangible assets related to game operations, server leasing and maintenance fees, salary and benefits, depreciation of property, equipment and software.
     Upfront and ongoing licensing fees. The cost of licensing games from developers consists of upfront licensing fees, which are generally paid in several installments, and ongoing licensing fees, which are equal to a percentage of our revenues from the relevant licensed game. The ongoing licensing fee payments range from 20% to 30% of revenues for our commercially launched MMORPGs, and from 20% to 40% of our revenues for our commercially launched casual games. The cost of licensing fees for our ongoing games was equal to 15.8% of our net revenues in 2005 and 17.7% of our net revenues in 2006, and constituted the largest component of our cost of revenue in each such period. Seven of the fourteen online games we offer commercially are licensed from third parties. The increase of upfront and ongoing licensing cost as a percentage of our net revenues is primarily due to a decrease in our non-game revenue and an increase in the revenue sharing percentage of BNB from 30% to 40% when its license agreement was renewed in November 2005. In 2007, we expect that upfront and ongoing licensing fees will increase as a result of intense market competition and continued growth of the revenue from licensed games, but will remain stable as a percentage of net revenue.
     Amortization of upfront licensing fees and other intangible assets related to game operations. Amortization of upfront licensing fees and other intangible assets related to game operations was equal to 2.0% of our net revenues in 2005 and 3.4% of our net revenues in 2006. Upfront licensing fees are paid to developers of the licensed games in several installments and are amortized over the licensed period upon commercial launch of the games. Other intangible assets related to game operations included the software technology of game servers, EZ Platform, and game engines. As a result of licensing new games and purchasing software related to game operations, we expect the amortization of upfront licensing fees and other intangible assets related to game operations to increase in 2007.
     Server leasing and maintenance fees. Server leasing and maintenance fees was equal to 4.7% of our net revenues in 2005 and 5.9% of our net revenues in 2006. As of December 31, 2006, we leased approximately 37% of our servers, primarily from telecommunications companies. These companies host our server network, and receive maintenance fees from us in addition to the lease payments. The majority of our server leases have variable payment obligations based on the number of our users logging on to each relevant server. We expect our costs for servers to decline in the future, which will be the net effect of the purchase of additional servers in connection with our introduction of new games, and elimination or combination of server groups for existing games as part of our cost saving procedures.
     Depreciation of property, equipment and software. Depreciation of property, equipment and software, which consisted primarily of servers and other computer equipment, was equal to 2.3% of our net revenues in 2005 and 3.2% of our net revenues in 2006. We include depreciation expenses within our cost of revenue when the relevant assets are directly related to the operations of our online game network and provision of online game services. Depreciation expenses are characterized as operating expenses in all other cases. In 2006, the increase in our depreciation expense was primarily due to the acquisition of additional servers and office premises. As we expect to continue to purchase additional servers in connection with the introduction of new games, we believe that our depreciate costs will continue to increase in 2007.
     Salary and benefits. Salary and benefits expense was equal to 2.2% of our net revenues in 2005 and 3.2% of our net revenues in 2006. Salary and benefits expense includes employee wages and welfare benefits, such as medical insurance, housing subsidies, unemployment insurance and pension benefits. Salary and benefits expense included in our cost of revenue primarily relates to employees involved in the operation of our online games, including network maintenance, billing systems and our call center. In 2005 and 2006, approximately 18.6% and 21.3%, respectively, of our salary and benefits expense was included in our cost of revenue, with the remainder constituting operating expenses. As a result of the commercial launch of new games in 2007, we expect an increase in the number of employees involved in the operation of our games. Beginning from the second quarter of 2006, we adopted a new compensation structure for employees that operate our games, pursuant to which an employee’s bonus is tied to the financial performance of the game that his group operates. Moreover, we typically perform a merit-based increase in salaries throughout the company in the third quarter of every year. Based on the increased number of employees

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involved in game operations, the results of the new compensation structure and the anticipated increase in salaries in the third quarter, we expect the salary and benefit expenses to increase in cost of revenues, but decline as a percentage of net revenue in 2007.
     Gross profit/margin. Gross profit represented 67.6% of our net revenues in 2005 and 58.3% of our net revenues in 2006.
Operating Expenses
     Our operating expenses consist of product development expenses, sales and marketing expenses, general and administrative expenses.
     Product development expenses. Product development expenses were equal to 8.7% of our net revenues in 2005 and 10.1% of our net revenues in 2006. Our product development expenses primarily consist of salary and benefits expenses of personnel engaged in the research and development of our products, amortization of software used by our research and development center, rental and management fees for office space used by our research and development center, share-based compensation, and depreciation of equipment used in research and development activities. We expect our product development expenses to decline in 2007, as we continue to control our expenses for research and development projects related to our in-house casual games and our EZ initiative.
     Sales and marketing expenses. Sales and marketing expenses were equal to 12.4% of our net revenues in 2005 and 10.9% of our net revenues in 2006. Our sales and marketing expenses primarily consist of promotion, advertising and sponsorship of media events, share-based compensation, and salary and benefits of our sales and marketing department. In 2006, we took various measures to improve the budget control procedure. Our sales and marketing budget is set based on a certain percentage of forecasted revenues on a quarterly basis, and then we allocate budgets to each of our teams responsible for existing and new games, as well as our other business lines. In 2006, each marketing and promotional activity was done within the pre-determined quotas, In addition, we also changed our employee compensation scheme to incorporate bonuses based on the actual performance result under our new budgeting plan for each team. Going forward, we will focus on the effective usage of the budget, with emphasis on promoting new games launched. We expect that sales and marketing expenses to remain stable in 2007.
     General and administrative expenses. General and administrative expenses were equal to 13.7% of our net revenues in 2005 and 14.4% of our net revenues in 2006. General and administrative expenses primarily consist of salary and benefits for general management, finance and administrative personnel, professional service fees, business tax expense, share-based compensation, and provision for doubtful debts. Our business tax expense primarily relates to services and licensing fees paid by our PRC operating companies to Shengqu. Provisions of RMB 26.4 million (US$ 3.4 million) for doubtful debts were made in 2006 for the overdue receivables from online advertising, and sales of EZ series products. Going forward, we expect the general and administrative expenses to increase in 2007 due to the increased business tax to be paid by our PRC operating companies, as a result of the expected growth of game revenues. See the sections entitled “Our Corporate Structure” and “Related Party Transactions” in Item 7 “Major Shareholders and Related Party Transactions” for additional description of the relationship between Shengqu and our PRC operating companies.
     Income from operations/margin. In 2005, our income from operations accounted for 32.8% of our net revenues. In 2006, our income from operations accounted for 22.8% of our net revenues.
Other Income
     Our other income consists primarily of government financial incentives that certain of our PRC incorporated affiliates receive from municipal governments and that are calculated with reference to taxable income and revenues, as the case may be. In 2005 and 2006, we received aggregate government financial incentives of RMB137.3 million and RMB83.9 million (US$10.7 million), respectively, from municipal governments. Going forward, eligibility for the government financial incentives we are to receive requires that we continue to meet a number of government financial and non-financial criteria to continue to qualify for these government financial incentives. Generally, which include:

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    at least a minimum level of revenues must be generated from high-tech related sales or services, determined as a percentage of total revenues;
 
    at least a minimum number of employees must be engaged in research and development; and
 
    at least a minimum amount must be expended on research and development, determined as a percentage of total revenues.
     The continued qualification is further subject to the discretion of the municipal government. Moreover, the central government or municipal government could determine at any time to immediately eliminate or reduce these financial incentives. Upon expiration of these government financial incentives, we will consider available options, in accordance with applicable law, that would enable us to qualify for further government financial incentives to the extent they are then available to us.
     In 2007, we expect to continue receiving government financial incentives related to our 2006 taxable income and revenues in 2006 until those 2006 financial incentives are completed, but the amount of the government financial incentives is expected to decline due to expiration of the financial incentives in certain PRC operating companies.
     In 2006, other income also includes a foreign exchange gain of RMB59.8 million (US$7.7 million) mainly arising from a revaluation of convertible bond denominated in US Dollar following the appreciation of the RMB against the U.S. dollar in 2006. We cannot predict a foreign exchange gain or loss in 2007 because that fully depends upon the amount of monetary assets and liabilities we have in US Dollars as well as the trend of the foreign exchange rates. Effective from January 1, 2007, Shanda Interactive Entertainment Limited, our listed company incorporated in Cayman Islands, changed its functional currency from Renminbi to US dollars due to changes in its economic facts and circumstances, which includes an active plan to explore overseas market. Going forward, the foreign exchange gains or losses from revaluation of the monetary assets and liabilities denominated in US dollars of Shanda Interactive Entertainment Limited will not be recorded in the statement of operations, but instead will be treated as a cumulative translation adjustment under shareholders’ equity in the balance sheet.
Income Tax Expense
     Under the current laws of the Cayman Islands and the British Virgin Islands, neither Shanda Interactive Entertainment Limited nor Shanda Holdings Limited, our wholly owned subsidiary incorporated in the British Virgin Islands, is subject to tax on its income or capital gains. In addition, payment of dividends by either company is not subject to withholding tax in those jurisdictions.
     PRC enterprise income tax. Our PRC incorporated affiliates, including Shengqu, Shanda Networking, Nanjing Shanda, Hangzhou Bianfeng and Shanda Computer, are subject to PRC enterprise income tax on the taxable income as reported in their respective statutory financial statements, adjusted in accordance with the Enterprise Income Tax Law and the Income Tax Law of the People’s Republic of China concerning Foreign Investment Enterprise and Foreign Enterprises (collectively the “PRC Income Tax Laws”), respectively. Pursuant to the PRC Income Tax Laws, our PRC incorporated affiliates are generally subject to PRC enterprise income tax at a statutory rate of 33%. However, Shengqu, Shanda Networking and Shanda Computer, because of their incorporation in the Pudong New District of Shanghai, are subject to a 15% preferential income tax rate pursuant to the local tax preferential treatment. Shengqu, as a software development enterprise, has been granted a two year income tax exemption to be followed by a three year 50% income tax reduction on its taxable income, commencing the year ended December 31, 2003 (“tax holiday”). Nanjing Shanda, as a result of receiving government’s recognition as a technologically advanced enterprise in the third quarter of 2005, has been entitled to a full income tax exemption for two years effective from January 1, 2005 and will be subject to a preferential tax rate of 15% after January 1, 2007 due to its residence in a national high-tech development zone. As a result of this recognition, Nanjing Shanda received the refund for the income tax it previously paid in 2005. Hangzhou Bianfeng was in the process of applying for recognition as a technologically advanced enterprise in 2005 and was then subject to income tax at the statutory rate of 33%. In the second quarter of 2006, Hangzhou Bianfeng received an approval from local tax authorities in respect of the preferential treatment as a technologically advanced enterprise and is thus entitled to a reduced income tax rate of 15% effective from January 1, 2006. Moreover, the income tax previously paid by Hangzhou Bianfeng for the years

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ended December 31, 2004 and 2005 was refunded in 2006. The qualifications of Shengqu, Shanda Networking, Nanjing Shanda and Hangzhou Bianfeng as a software development enterprise or a technologically advanced enterprise are required to be reassessed on an annual basis. Shanda Computer was still in a loss-making position as of December 31, 2006, and thus no PRC enterprise income tax was due for the year then ended.
     We reported an effective income tax rate of 6.2% in 2006. However, after taking into account the effects of the net gain of RMB 66.9 million (US$8.6 million) from the sale of SINA’s ordinary shares, which is tax free as we are incorporated in Cayman Islands, and the income tax expenses of RMB10.3 million (US$1.3 million) reversed by Hangzhou Bianfeng as a result of being recognized as a technologically advanced enterprise, our effective tax rate in 2006 would be adjusted to 8.9%. Given the fact that the tax holiday of Nanjing Shanda expired in 2006, we expect that the effective tax rate in 2007 will increase to approximately 10%,
Critical Accounting Policies
     We prepare our financial statements in conformity with US GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and expenses during the financial reporting period. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our financial statements as their application places the most significant demands in our management’s judgment.
Revenue Recognition
     Substantially all of our revenues are collected through the sales of pre-paid cards, which we sell in both virtual and physical form, to third party distributors and retailers. Prior to late November 2005, we operated all MMORPGs under a pay-to-play model. Under this model, the subscription fees from distributors or retailers are deferred when received and revenue is recognized based upon the actual usage of time units by the end users. In late November 2005, we changed the revenue model of certain MMORPGs from the pay-to-play to a CSP revenue model. Under the new model, players can access the game free of charge but must pay for in-game premium features, which is the same model under which our casual games were operated. Under the CSP revenue model, subscription fees are deferred when received and revenue is recognized over the life of the premium features users purchase or as the premium features are consumed.
     Deferred revenues included the value of the prepaid cards which were sold but not yet activated by users within our published expiration policy, and the value of the prepaid cards which were sold and transferred to game accounts but not yet consumed within our published expiration policy. Both are collectively referred to as deferred revenues from expired cards. In accordance with our published expiration policy and our belief that the likelihood of our being required to render online game services in connection with these expired card to be remote, starting from January 2005, we recognized revenues for pre-paid cards which are sold but not yet activated six and twelve months after the pre-paid cards are sold, for virtual pre-paid cards and physical pre-paid cards, respectively. For the deferred revenues which were deposited in game account but not yet consumed, we recognize them as revenues after the game accounts remain inactive for certain period of time, specifically, seven months for MMORPGs, and six months for casual games. As a result of the above policies, we recognized net revenues from expired cards of RMB86.1 million in 2005 and additional net revenues of RMB39.8million (US$5.1 million) in 2006.
Consolidation of Variable Interest Entities
     PRC regulations currently limit foreign ownership of companies that provide Internet content services, which includes the operation of online games, to 50%. In addition, foreign and foreign-invested enterprises are currently not able to apply for the licenses required to operate online games in China or to provide Internet information content (such as online advertising). We are a Cayman Islands exempted company and we conduct our operations in China primarily through Shengqu, our indirect wholly owned subsidiary. We and Shengqu are foreign or foreign-invested enterprises under PRC law and accordingly are ineligible to apply for a license to operate online games or to sell online

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advertising. In order to comply with foreign ownership restrictions, we operate our online games business in China through Shanda Networking, which is wholly owned by Tianqiao Chen, our chairman and chief executive officer, and Danian Chen, our executive senior vice president, both of whom are PRC citizens, and through Nanjing Shanda and Hangzhou Bianfeng, which are subsidiaries of Shanda Networking. Shanda Networking, Nanjing Shanda and Hangzhou Bianfeng hold the licenses and approvals that are required to operate our online game business and to sell online advertising on our web pages and Shengqu owns the substantial majority of physical assets. Shengqu has entered into a series of contractual arrangements with Shanda Networking, Nanjing Shanda, Hangzhou Bianfeng, and the shareholders of Shanda Networking. As a result of these contractual arrangements, we are considered the primary beneficiary of the PRC operating companies and accordingly we consolidate their results of operations in our financial statements.
Property and Equipment, Intangible Assets, Long-term Prepayments and Other Long-lived Assets
     Our accounting for long-lived assets, including property and equipment, intangible assets, long-term prepayments and other long-lived assets is described in notes 2(10), 2(11), 2(13) and 2(14) to our consolidated financial statements. The recorded values of long-lived assets, including property and equipment, intangible assets, long-term prepayments and other long-lived assets are affected by a number of management estimates, including the estimated useful lives, residual values and impairment charges. We assess the impairment for long-lived assets whenever events or changes in circumstances indicate that the applicable carrying amount may not be recoverable. During the years ended December 31, 2004, 2005 and 2006, we did not record any material impairment charges for long-lived assets.
Impairment of Investment in Affiliated Companies
     We continually review our investments in affiliated companies to determine whether a decline in fair value below the cost basis is other than temporary. The primary factors we consider in its determination are the length of time that the fair value of the investment is below its carrying value; and the financial condition, operating performance and near term prospects of the investee. In addition, we consider the reasons for the decline in fair value, be it general market conditions, industry specific or investee specific; analysts’ ratings and estimates of 12 month share price targets for the investee; changes in stock market price or valuation subsequent to the balance sheet date; and our intent and ability to hold the investment for a period of time sufficient to allow for a recovery in fair value. In determination of whether a decline in value is other than temporary requires significant judgment. If the decline in fair value is deemed to be other than temporary, the cost basis of the security is written down to fair value. Write-downs for equity method investments are included in equity in earning (loss) of affiliated companies. In the fourth quarter of 2005, we recorded a non-cash impairment charge of RMB521.5 million (US$64.6 million) to reflect the fair value of our 38.1% stake in Actoz, the co-owner of Mir II. We completed the purchase of our controlling stake in February 2005 for a total consideration of RMB878.0 million (US$106.1 million). We recognized the impairment charge primarily as a result of the continued decline in royalties payable to Actoz from our operation of Mir II in China. The decision to recognize impairment was also influenced by the decline in market price for share of Actoz, which in the fourth quarter of 2005 was determined to be other than temporary mainly due to the continued decline in Mir II royalties. In 2006, the revenue from Mir II rebounded after changing to the CSP business model, and the share price of Actoz appreciated during the year to a level that was close to our investment cost. Therefore, we believe that the circumstances that triggered impairment of the investment in Actoz has substantially changed and therefore no further impairment was necessary.
     In addition, as of December 31, 2006, the goodwill and intangibles relating to Haofang amounted to approximately RMB400 million (US$51.28 million). In accordance with SFAS No. 142, goodwill and intangible assets are tested for impairment at the reporting unit level annually or when there are indicators of impairment. Haofang experienced substantial year over year decline in profit and revenue in 2006. Additionally, the founders and key management of Haofang left the company during the first half of 2006. Our management obtained an independent valuation to ascertain the fair value of Haofang as of October 31, 2006. Based on the valuation report and their own assessment, our management concluded that there was no impairment in the carrying value of Haofang for 2006. However, we will continuously monitor the operation of Haofang for any impairment indicators. If the actual cashflow of 2007 does not reflect our management’s current estimates, then an impairment in this investment may be necessary for 2007.

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Allowances for Doubtful Accounts
     We determines the allowance for doubtful accounts when facts and circumstances indicate that the receivable is unlikely to be collected. If the financial condition of our customers deteriorates, resulting in an impairment of their ability to make payments, we consider making additional allowances. During the years ended December 31, 2004, 2005 and 2006, we made provisions of nil, RMB55.7 million and RMB26.4 (US$ 3.4 million) for doubtful accounts, respectively.
Share-Based Compensation
     We have equity compensation plans, which allow for the granting of stock options to certain senior executives, management, employees and directors. Prior to January 1, 2006, we accounted for any grants made pursuant to the plans in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, or APB No. 25, the intrinsic value approach, with the required disclosures under the related accounting guidance described in note 2(22) to our consolidated financial statements.
     Under APB No. 25, intrinsic value, if any, is determined as the difference between estimated fair value of our ordinary shares on the grant date of an option and the exercise price for the option. On March 31, 2003, we granted options to purchase 7,320,436 of our ordinary shares to some of our directors and officers at an exercise price of US$1.516 per share, which approximated the estimated fair value of our ordinary shares on the grant date. When estimating the fair value of our ordinary shares, we review both internal and external sources of information. The sources utilized to determine the fair market value of the underlying shares at the date of measurement were, prior to our initial public offering in May 2004, subjective in nature. For our March 2003 option grants, the estimated fair value of our ordinary shares was based on, among other factors, our (1) financial condition as of the date of grant, (2) operating history and (3) financial and operating prospects at that time with reference to our issuance of convertible preferred shares in March 2003. On December 18, 2003, we granted options to purchase an additional 1,537,367 of our ordinary shares to some of our officers and managers at the same exercise price. Compensation expense was recognized based on the intrinsic value of our ordinary shares measured on that date. Estimated fair value of the Company’s ordinary shares on December 18, 2003 was determined with reference to the initial public offering price of our ordinary shares. In 2004 and 2005, we granted options to purchase an additional 4,826,234 ordinary shares to some of our officers, directors and other employees, which have an exercise price equal to the market value of our ordinary shares at the time of grant. Accordingly, no share-based compensation expenses have been incurred in connection with our 2004 and 2005 option grants prior to January 1, 2006. For purposes of 2004 grants made prior to our initial public offering in May of 2004, the fair value of our shares was equal to the initial public offering price of our ordinary shares. For purposes of 2004 grants made after the initial public offering, the fair value of our ordinary shares equaled the market value of such shares (in the form of ADS equivalents) on the Nasdaq at the time of grant.
     We recognized compensation expense of RMB28.8 million in 2004 and RMB13.7 million (US$1.7 million) in 2005 with respect to the options granted in December 2003. These options had the same exercise price as the options granted to our directors and officers in March 2003. See note 2(22) to our consolidated financial statements.
     Since January 1, 2006, we have accounted for grants made pursuant to the plans in accordance with, Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”, or SFAS 123R. We elected the modified-prospective method, under which prior periods are not revised for comparative purposes. Under the fair value recognition provision of SFAS 123R, share-based compensation expense is measured at the grant date based on the fair value of the stock options and is recognized as an expense on a straight-line basis, net of estimated forfeitures, over the requisite service period, which is generally the vesting period. We use the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock options on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables, including our expected stock price volatility over the vesting period, risk-free interest rate, expected dividend yield, and actual and projected employee stock option exercise behaviors. Furthermore, we are required to estimate forfeitures at the time of grant and recognize stock-based compensation expense only for those awards that are expected to vest. If actual forfeitures differ from those estimates, we may need to revise those estimates used in subsequent periods.

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     Had we determined the share-based compensation expenses for the options granted based upon the fair value at their grant date in accordance with SFAS 123R, the net income attributable to ordinary shareholders for the years ended December 31, 2004 and 2005 would have been reduced by RMB35.6 million and RMB36.5 million, respectively.
     On June 28, 2006, we granted options to purchase an additional 3,000,000 of ordinary shares to some of our directors, officers and other employees. For the year ended December 31, 2006, the share-based compensation expense amounted to RMB 40.0 million (US$5.1 million).
     On April 24, 2007, we granted options under the 2005 plan to purchase 655,000 of ordinary shares to some of our officers and other employees.
     Based on unvested options as of the date of this annual report, and excluding any new options that may be granted, we estimate the share-based compensation expenses to be approximately RMB13.0 million (US$1.7 million) in each of the following quarters in 2007. See note 2(24) to our consolidated financial statements for a discussion of these changes in accounting standards. For a description of our equity compensation plans, see Item 6 “Directors, Senior Manage and Employees – B. Compensation – Equity Compensation Plans.”
Income Taxes
     We account for income taxes under the provisions of SFAS No. 109, “Accounting for Income Taxes”, with the required disclosures as described in note 7 to our consolidated financial statements. Accordingly, we record valuation allowances to reduce our deferred tax assets when we believe it is more likely than not that we will not be able to utilize the deferred tax asset amounts based on our estimates of future taxable income and prudent and feasible tax planning strategies. As of December 31, 2005 and 2006, valuation allowances recognized were RMB7.0 million and RMB14.2million (US$1.8 million), respectively. Valuation allowances were provided for because it was more likely than not that we would not be able to utilize certain tax loss carryforwards generated by certain indirectly held subsidiaries. As of December 31, 2005 and 2006, we have recorded deferred tax assets, net of valuation allowances, of RMB17.1 million and RMB17.4 million (US$2.2 million) respectively. We do not believe any further valuation allowances to reduce our net deferred tax assets are necessary as we currently anticipate future taxable profits which will allow us to fully utilize our net deferred tax assets in the foreseeable future. If, however, events were to occur in the future which are not currently contemplated, that would not allow us to realize all or part of our net deferred tax assets in the future, an adjustment would result by way of a charge to income tax expense in the period in which such determination was made.
Contingencies
     We account for loss contingencies under the provisions of SFAS No. 5, “Accounting for Contingencies”, with the required disclosures as described in note 25 to our consolidated financial statements. We record loss contingencies when, based on information available, it is likely that a loss has been incurred and the amount of the loss can be reasonably estimated. Based on our current knowledge, which includes consultation with outside counsel handling our defense in these matters, we believe that we have made adequate provisions for current or unasserted claims. It is possible, however, that our future results of operations could be materially affected by changes in our estimates or in the effectiveness of our strategies relating to these proceedings. As of December 31, 2006, we did not have any accruals for loss contingencies. We are, however, currently involved in various legal proceedings. See “Legal Proceedings” in Item 8, “Financial Information”.
Results of Operations
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
     Net revenues. Our net revenues decreased from RMB1,896.6 million in 2005 to RMB1,654.5 million (US$211.9 million) in 2006.

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     Our online game net revenues decreased from RMB1,658.3 million in 2005 to RMB1,542.9 million (US$197.6 million) in 2006. Net revenues from MMORPGs decreased by 1.2% from RMB1,255.3 million in 2005 to RMB1,240.1 million (US$158.8 million) in 2006. Net revenues from casual games decreased from RMB403.0 million in 2005 to RMB302.8 million (US$38.8 million) in 2006.
     The decrease in our net revenues from MMORPGs was primarily due to a decrease in revenues from Woool, partially offset by an increase in revenue of Mir II, Magic Land and Archlord. Starting from late November 2005, we have operated our leading MMORPGs using CSP model. Under the CSP model, which is also used for our casual games, playing the basic features of the game is free and users are able to purchase in-game items and value-added services. The most significant factors effecting revenue under the CSP model are the number of active paying accounts and the average revenue per paying account, which we reported on a quarterly basis. In each of the four quarters of 2006, the number of active paying accounts for MMORPGs was 2.47 million, 2.23 million, 2.14 million and 2.29 million, respectively, and the average revenue per paying account per quarter was RMB91.2, RMB136.6, RMB155.3 and RMB165.1, respectively.
     The decrease in our net revenues from our casual games was primarily due to a decrease in revenues from BNB, partially offset by an increase in sales of GetAmped and board and chess games. For our casual games, we also reported the number of active paying accounts and average revenue per paying account on a quarterly basis. In each of the four quarters of 2006, the number of active paying accounts for casual games was 2.50 million , 2.26 million, 2.09 million and 1.96 million, respectively, and the average revenue per paying account per quarter was RMB33.8, RMB29.4, RMB36.8 and RMB36.8.
     Our other net revenue also decreased from RMB238.3 million in 2005 to RMB111.6 million (US$14.3 million) in 2006. This decrease in other net revenue was primarily due to decreases in sales of online advertising and user password protection products, as well as a decrease in revenue from mobile value-added services. The decrease in other net revenue was partially offset by an increase in revenue from sales of EZ series products, subscription fees from our online literature website and the revenue from licensing of management software to internet cafés.
     Cost of revenue. Our cost of revenue increased 12.3% from RMB614.4 million in 2005 to RMB689.8 million (US$88.3 million) in 2006. This increase was primarily due to increases in our amortization of upfront licensing fees and other intangible assets related to game operations. server leasing and maintenance fees, depreciation of property and equipment, salary and benefits of employees directly engaged in provision of our online games services, and manufacturing costs for our EZ series products. The increase in cost of revenue was partially offset by decreases in the cost of our user password protection products and ongoing licensing fees for online games:
    Ongoing licensing fees for online games decreased 1.9% from RMB299.2 million in 2005 to RMB293.4 million (US$37.6 million) in 2006. The decrease in ongoing licensing fees for online games is primarily the result of the decrease in sales of BNB, a licensed casual game. Ongoing licensing fees for online games totaled approximately 15.8% of our net revenues in 2005 compared to approximately 17.7% of our net revenues in 2006.
 
    Amortization of upfront online game licensing fees and other intangible assets related to game operations increased 51.4% from RMB37.3 million in 2005 to RMB56.4 million (US$7.2 million) in 2006. This increase was principally due to the acquisition of Haofang in May 2005, the operator of a network PC game platform. We commenced amortization of the acquired intangible assets in Haofang immediately after the acquisition. 2006 was the first full year that the acquired intangible assets in Haofang were amortized and thus amortization expense was in excess of that in 2005. Amortization of upfront online game licensing fees and other intangible assets related to game operations totaled approximately 2.0% and 3.4% of our net revenues in 2005 and 2006, respectively.
 
    Aggregate server leasing fees and server maintenance fees increased 9.4% from RMB88.9 million in 2005 to RMB97.2 million (US$12.5 million) in 2006. This increase was primarily due to acquiring of additional servers and increased maintenance fees. Aggregate server leasing and maintenance fees totaled approximately 4.7% and 5.9% of our net revenues in 2005 and 2006, respectively.

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    Depreciation of property and equipment increased 20.7% from RMB44.0 million in 2005 to RMB53.1 million (US$6.8 million) in 2006. This increase was primarily due to our acquiring of additional servers and our new office premise. Depreciation of property and equipment totaled approximately 2.3% and 3.2% of our net revenues in each of 2005 and 2006.
 
    Salary and benefits increased 29.8% from RMB40.9 million in 2005 to RMB53.1 million (US$6.8 million) in 2006. This increase was primarily due to a merit-based salary raise throughout the company in the middle of 2006 and the additional bonus granted to the employees directly engaged in provision of our online games services as a result of implementing a performance-based employee incentive program starting from the second quarter of 2006. Salary and benefits attributable to costs of revenue totaled approximately 2.2% and 3.2% of our net revenues in 2005 and 2006, respectively.
 
    Other cost of revenue, which includes manufacturing costs for our EZ series products, user password protection product and pre-paid cards, rental of leased software, commission paid or payable to the writers of online literature which were published on our online literature website, technical service charges (including commissions paid or payable to telecommunications providers), cost of customer royalty program, inventory provisions, among other things, increased 31.2% from RMB104.1 million in 2005 to RMB136.6 million (US$17.5 million) in 2006. This increase was primarily due to an increase in manufacturing costs for our EZ series products, and an increase in the charges paid or payable to business partners for operation of the certain games in particular regions. The increase was also caused by a cost arising from a new customer loyalty program, which was implemented beginning in June 2006. The increase in cost of revenue was partially offset by a decrease in manufacturing costs of user password protection products due to slowdown in sales. Other cost of revenue totaled approximately 5.5% and 8.3% of our net revenues in 2005 and 2006, respectively.
     Gross profit. As a result of the foregoing, our gross profit decreased 24.8% from RMB1,282.2 million in 2005 to RMB964.7 million (US$123.5 million) in 2006. Our gross profit margin, which is equal to our gross profit divided by our net revenues, decreased from 67.6% in 2005 to 58.3% in 2006.
     Operating expenses. Our operating expenses decreased from RMB660.3 million in 2005 to RM587.0 million (US$75.2 million) in 2006. This increase was due to decreases in our product development, sales and marketing and general and administrative expenses.
    Our product development expenses increased from RMB164.8 million in 2005 to RMB167.8 million (US$21.5 million) in 2006. This increase was primarily due to an increase in depreciation of property and equipment from RMB12.6 million in 2005 to RMB18.5 million (US$2.4 million) in 2006 as a result of acquiring our new office premise and information technology equipment. The increase was also attributable to the increased outsourcing service charges from RMB7.5 million in 2005 to RMB11.7 million (US$1.5 million) in 2006 for development of new online games. The number of our employees engaged in the development of online games, our EZ initiative and technology supporting our operations decreased from approximately 810 as of December 31, 2005 to approximately 720 as of December 31, 2006, but salary and benefits expenses incurred for project development staff in 2006 did not decline as a result of a merit-based increase in salary throughout the company in the middle of 2006. Product development expenses totaled approximately 8.7% and 10.1% of our net revenues in 2005 and 2006, respectively.
 
    Our sales and marketing expenses decreased from RMB235.4 million in 2005 to RMB181.1 million (US$23.2 million) in 2006. This decrease was mainly due to a significant cut in marketing promotion expenses from RMB168.6 million in 2005 to RMB105.3 million (US$13.5 million) as a result of enhanced budgeting controls. The number of sales and marketing personnel slightly decreased from approximately 350 as of December 31, 2005 to approximately 270 as of December 31, 2006. The decrease in our sales and marketing expenses was partially offset by an increase in salary and benefit of our sales and marketing personnel from RMB34.6 million in 2005 to RMB43.0 million (US$5.5 million) in 2006, due to a merit-based salary raise throughout the company in the middle of 2006, as well as

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      implementing a performance-based employee incentive program. Sales and marketing expenses totaled approximately 12.4% and 10.9% of our net revenues in 2005 and 2006, respectively.
 
    Our general and administrative expenses decreased by 8.4% from RMB260.1 million in 2005 to RMB238.1 million (US$30.5 million) in 2006. This decrease was primarily due to the following factors:
    The decrease in provisions for doubtful debts from RMB55.7 million in 2005 to RMB26.4 million (US$3.4 million) in 2006, as a result of tightening credit controls over receivables from online advertising and sales of EZ series products.
 
    The 23.5% increase in salary and benefits expenses from RMB42.4 million in 2005 to RMB52.4 million (US$6.7 million) in 2006, which was primarily attributable to the increase in the number of employees engaged in general and administrative work from approximately 200 as of December 31, 2005 to approximately 250 as of December 31, 2006, as well as a merit-based salary raise throughout the company in the middle of 2006.
 
    The 15.8% decrease in business taxes from RMB57.8 million in 2005 to RMB48.7 million (US$6.2 million) in 2006, which primarily relate to business taxes incurred by Shengqu from revenues collected from our operating companies, namely Shanda Networking, Nanjing Shanda and Hangzhou Bianfeng;
 
    The 372.6% increase in share-based compensation cost from RMB8.1 million in 2005 to RMB38.4 million (US$4.9 million) in 2006, which is due to the options granted to our directors and officers and other administration staff under the 2005 Equity Plan in June 2006.
 
    The decrease in other general and administrative expenses from RMB96.1 million in 2005 to RMB72.2 million (US$9.2 million) in 2006, which relate primarily to consulting, legal and audit fees, rental and management fees and amortization of intangible assets-reevaluation.
     General and administrative expenses accounted for approximately 13.7% and 14.4% of our net revenues in 2005 and 2006, respectively.
     Income from operations. As a result of the foregoing, our operating income decreased from RMB621.9 million in 2005 to RMB377.6 million (US$48.4 million) in 2006. Our operating margin, which is equal to our operating profit divided by our net revenues, decreased from 32.8% in 2005 to 22.8% in 2006.
     Income before minority interests and income tax expenses. Our income before minority interests and income tax expenses decreased 26.2% from RMB801.4 million in 2005 to RMB591.2 million (US$75.7 million) in 2006. This decrease was primarily the result of the decrease in income from operations, as well as the following:
    Interest income. Our interest income decreased from RMB29.0 million in 2005 to RMB24.7 million (US$3.2 million) in 2006. This decrease was primarily due to the decrease in our average cash and cash equivalents balances in 2006 relative to those in 2005.
 
    Amortization of convertible debt insurance cost. Amortization of convertible debt issuance costs decreased from RMB18.5 million in 2005 to RMB17.5 million (US$2.2 million) in 2006.
 
    Investment income (loss). We had an investment loss of RMB5.9 million in 2005 and an investment income of RMB72.4 million (US$9.3 million) in 2006. The loss in 2005 primarily related to loss on disposition of investment in Bothtec Inc. and Shenzhen Fenglin Huoshan Computer Technology Co., Ltd., while the investment gain in 2006 primarily related to gains from disposal of marketable securities.
 
    Other income. Our other income decreased from RMB174.9 million in 2005 to RMB133.9 million (US$17.1 million) in 2006. Our other income in 2006 was primarily comprised of government financial incentives of RMB83.9 million (US$10.7 million), compared to RMB137.3 million in 2005, from local

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      government authorities in China relating to business and income taxes we previously paid in the PRC. The decrease in our government financial incentives in 2006 is primarily due to expiry of the financial incentive treatments in certain subsidiary companies. Looking forward, we expect that the government financial incentives will further decline as compared to that in 2006. Other income in 2006 also included a foreign exchange gain of RMB59.8 million (US$7.7 million), compared to RMB46.3 million in 2005, as a result of the continued appreciation of the RMB against the U.S. dollar.
     Income tax expenses. Our income tax expenses decreased from RMB96.7 million in 2005 to RMB36.5 million (US$4.7 million) in 2006, primarily due to the decrease in taxable income and reversal of income tax expense previously recorded in Hangzhou Bianfeng for the year ended December 31, 2005 amounting to RMB10.3 million as a result of the preferential tax treatment obtained in 2006.
     Equity in loss of affiliates. Our equity in loss of an affiliate decreased from RMB544.3 million in 2005 to RMB26.2 million (US$3.4 million) in 2006. The significant loss in 2005 was primarily due to the recognition of a non-cash impairment charge of RMB521.5 million (US$64.6 million) in the fourth quarter of 2005 to reflect the fair value of our 38.1% stake in Actoz. We completed the purchase of our 38.1% controlling stake in February 2005 for a total consideration of RMB878.0 million (US$106.1 million), which represented a premium over the then quoted market price. We recognized an impairment charge on our investment in Actoz primarily as a result of the continued decline in royalties payable to Actoz from our operation of Mir II in China. The decision to recognize impairment was also influenced by the decline in the market price for shares of Actoz.
     Net income. As a result of the foregoing, our net income increased by 220.2% from RMB165.3 million in 2005 to RMB529.2 million (US$67.8 million) in 2006.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
     Net revenues. Our net revenues increased from RMB1,298.7 million in 2004 to RMB1,896.6 million in 2005.
     Our online game net revenues increased from RMB1,209.2 million in 2004 to RMB1,658.3 million in 2005. Net revenues from MMORPGs increased by 26.2% from RMB994.7 million in 2004 to RMB1,255.3 million in 2005. Net revenues from casual games increased from RMB214.5 million in 2004 to RMB403.0 million in 2005.
     The increase in our net revenues from MMORPGs was primarily due to an increase in revenues from Woool as well as Mir II. Average concurrent users for our MMORPGs decreased from 736,000 in 2004 to 672,000 in 2005. Average revenue per user-hour increased from RMB 0.16 in 2004 to RMB 0.21 in 2005. Peak concurrent users for our MMORPGs increased from 1,006,000 in 2004 to 1,028, 000 in 2005. In late November 2005, we adopted the free-to-play and pay-for in-game value-added services revenue model for our leading MMORPGs. Under the free-to-play and pay-for in-game value-added services revenue model, which is also used for our casual games, playing the basic features of the game is free and users are able to purchase in-game items and value-added services that enhance the game experience. Under the free-to-play and pay-for in-game value-added services revenue model, the most significant factors effecting revenue are the number of active paying accounts and the average revenue per paying account.
     Increase in our net revenues from our casual games was primarily due to an increase in revenues from Maple Story and BNB. Peak concurrent users for our casual games increased from 878,000 in 2004 to 1,661,000 in 2005.
     Our other net revenue also increased from RMB89.5 million in 2004 to RMB238.3 million in 2005. This increase in other net revenue was primarily due to increases in online advertising sales, which we commenced in 2004, and user password protection products sales as well as revenue generated by EZ Pod sales and by Haofang’s PC game network platform. The increase in other net revenue was partially offset by a decrease in revenue from the sale of game related merchandise products and our SMS services.
     Cost of revenue. Our cost of revenue increased 30.4% from RMB471.2 million in 2004 to RMB614.4 million in 2005. This increase was primarily due to increases in our ongoing licensing fees for online games, amortization of upfront licensing fees, server leasing and maintenance fees, depreciation of property, equipment and software, salary

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and benefits of employees directly engaged in provision of our online games services, and manufacturing costs for our user password protection products and EZ Pod.
    Ongoing licensing fees for online games increased 20.0% from RMB249.3 million in 2004 to RMB299.2 million in 2005. This increase was principally a result of the continued increase in our revenues attributable to licensed games, particularly MapleStory, which we launched commercially in the third quarter of 2004, and Mir II. Ongoing licensing fees for online games totaled approximately 19.2% of our net revenues in 2004 compared to approximately 15.8% of our net revenues in 2005. This decrease was primarily due to the increase in revenue generated by Woool, an in-house developed game, and the increase in our non-game revenue.
 
    Amortization of upfront online game licensing fees increased 36.9% from RMB27.2 million in 2004 to RMB37.3 million in 2005. This increase was principally due to the amortization of upfront fees that we paid for the license of R.O. and D.O. to Gravity Co,, Ltd. and Cr-Space Co., Ltd., respectively, and of an upfront fee that we paid to Nexon Corporation in connection with our extension of our BNB license. Amortization of upfront online game licensing fees totaled approximately 2.1% and 2.0% of our net revenues in 2004 and 2005, respectively.
 
    Aggregate server leasing fees and server maintenance fees increased 11.2% from RMB79.9 million in 2004 to RMB88.9 million in 2005. This increase was primarily due to the increase of average concurrent user, acquiring of additional servers and increased maintenance fees. The number of servers we leased as of December 31, 2005 was approximately 5665. Aggregate server leasing and maintenance fees totaled approximately 6.2% and 4.7% of our net revenues in 2004 and 2005, respectively.
 
    Depreciation of property, equipment and software increased 55.0% from RMB28.4 million in 2004 to RMB44.0 million in 2005. This increase was primarily due to our acquiring of additional servers to meet the needs of our increased user base. Depreciation of property, equipment and software totaled approximately 2.2% and 2.3% of our net revenues in each of 2004 and 2005.
 
    Salary and benefits increased 71.8% from RMB23.8 million in 2004 to RMB40.9 million in 2005. This increase was primarily due to the increase in the number of employees directly engaged in provision of our online games services from approximately 500 as of December 31, 2004 to approximately 720 as of December 31, 2005, as well as a merit-based salary raise throughout the company during the third quarter of 2005. Salary and benefits attributable to costs of revenue totaled approximately 1.8% and 2.2% of our net revenues in 2004 and 2005, respectively.
 
    Other cost of revenue, which includes manufacturing costs for our user password protection product, derivative products, pre-paid cards and EZ Pods, rental and management fees, technical service fees (including commissions paid to telecommunications providers) and inventory provisions, increased from RMB62.6 million in 2004 to RMB104.1 million in 2005. This increase was primarily due to an increase in manufacturing costs of our user protection product as a result of increased production costs due to increased sales, and costs of manufacturing EZ Pod, which was commercially launched in the fourth quarter of 2005. The increase was partially offset by a decrease in manufacturing costs for derivative products as a result of a decrease in production due to the slowdown of derivative product sales. Other expenses totaled approximately 4.8% and 5.5% of our net revenues in 2004 and 2005, respectively.
     Gross profit. As a result of the foregoing, our gross profit increased 54.9% from RMB827.5 million in 2004 to RMB1,282.2 million in 2005. Our gross profit margin, which is equal to our gross profit divided by our net revenues, increased from 63.7% in 2004 to 67.6% in 2005.

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     Operating expenses. Our operating expenses increased from RMB316.6 million in 2004 to RM660.3 million in 2005. This increase was due to increases in our product development, sales and marketing and general and administrative expenses.
    Our product development expenses increased from RMB71.8 million in 2004 to RMB164.8 million in 2005. This increase was primarily due to an increase in salary and benefits expenses of personnel engaged in the research and development of our products, as well as depreciation and rental and management fees attributable to our research and development efforts. The number of our employees engaged in the development of online games, our EZ initiative and technology supporting our operations increased from approximately 550 as of December 31, 2004 to approximately 810 as of December 31, 2005. These increases were principally a result of our focus on the EZ initiative in 2005. Product development expenses totaled approximately 5.5% and 8.7% of our net revenues in 2004 and 2005, respectively.
 
    Our sales and marketing expenses increased from RMB91.2 million in 2004 to RMB235.4 million in 2005. This increase was mainly due to the following factors:
    The significant increase in advertisement fees and marketing promotion expenses from RMB57.7 million in 2004 to RMB168.6 million in 2005, which is primarily attributable to the expansion of our game offerings, introduction of the EZ Pod and advertising efforts to build awareness of our brand;
 
    The growth of our sales and marketing personnel from approximately 215 as of December 31, 2004 to approximately 340 as of December 31, 2005, along with a merit-based salary raise throughout the company during the third quarter of 2005, resulted in an increase in our salary and benefit expense increasing from RMB19.0 million in 2004 to RMB34.6 million in 2005; and
     Sales and marketing expenses accounted for approximately 7.0% and 12.4% of our net revenues in 2004 and 2005, respectively.
    Our general and administrative expenses increased by 69.4% from RMB153.6 million in 2004 to RMB260.1 million in 2005. This increase was primarily due to the following factors:
    The increase in provisions for doubtful debts from RMB0.8 million in 2004 to RMB55.7 million in 2005. The provisions for doubtful debt in 2005 are due to RMB48.0 million recorded in the fourth quarter of 2005, which was mainly due to overdue receivables from online advertising and sales of our user password protection product.
 
    The 56.7% increase in salary and benefits expenses from RMB27.1 million in 2004 to RMB42.4 million in 2005, which was primarily attributable to the increase in the number of employees engaged in general and administrative work from approximately 180 as of December 31, 2004 to approximately 201 as of December 31, 2005, as well as a merit-based salary raise throughout the company during the third quarter of 2005.
 
    The 50.1% increase in business taxes from RMB38.5 million in 2004 to RMB57.8 million in 2005, which primarily relate to business taxes incurred by Shengqu from revenues collected from our operating companies: Shanda Networking, Nanjing Shanda and Hangzhou Bianfeng; and
 
    The increase in other general and administrative expenses from RMB87.2 million in 2004 to RMB104.2 million in 2005, which relate primarily to consulting, legal and audit fees, rental and management fees and amortization of intangible assets-reevaluation.

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     General and administrative expenses accounted for approximately 11.8% and 13.7% of our net revenues in 2004 and 2005, respectively.
     Income from operations. As a result of the foregoing, our operating income increased from RMB511.0 million in 2004 to RMB621.9 million in 2005. Our operating margin, which is equal to our operating profit divided by our net revenues, decreased from 39.3% in 2004 to 32.8% in 2005.
     Income before minority interests and income tax expenses. Our income before minority interests and income tax expenses increased 22.5% from RMB654.3 million in 2004 to RMB801.4 million in 2005. This increase was primarily the result of the increase in income from operations, as well as the following:
    Interest income. Our interest income increased from RMB19.7 million in 2004 to RMB29.0 million in 2005. This increase was primarily due to the increase in our average cash and cash equivalents balances in 2005 relative to those in 2004.
 
    Amortization of convertible debt insurance cost. Amortization of convertible debt issuance costs increased from RMB3.5 million in 2004 to RMB18.5 million in 2005 due to the full year effect from the amortization of costs incurred in connection with the issuance of our convertible notes in October 2004.
 
    Investment income (loss). We had investment income of RMB43.5 million in 2004 and an investment loss of RMB5.9 million in 2005. The investment gain in 2004 primarily related to gains on trading marketable securities, while the loss in 2005 primarily related to loss on disposition of investment in Bothtec Inc. and Shenzhen Fenglin Huoshan Computer Technology Co., Ltd.
 
    Other income. Our other income increased from RMB83.7 million in 2004 to RMB174.9 million in 2005. Our other income during 2005 was primarily attributable to government financial incentives of RM137.3 million we received in 2005 from a local government authority in China relating to business taxes we paid in the PRC. The increase in our government financial incentives in 2005 is due to an increase in the amount of business taxes we have paid as a result of our increased revenues. See the sections of this Item 5 entitled “A. Operating Results-Other Income”. In 2005, we also recorded a foreign exchange gain of RMB48.9 million due to the appreciation of the RMB against the U.S. dollar during 2005.
     Income tax expenses. Our income tax expenses increased from RMB38.9 million in 2004 to RMB96.7 million in 2005.
     Equity in loss of affiliates. Our equity in loss of an affiliate increased from RMB4.2 million in 2004 to RMB544.3 million in 2005. This increase was primarily due to the recognition of a non-cash impairment charge of RMB521.5 million in the fourth quarter of 2005 to reflect the fair value of our 38.1% stake in Actoz. We completed the purchase of our 38.1% controlling stake in February 2005 for a total consideration of RMB878.0 million, which represents a premium over the then quoted market price. We recognized an impairment charge on our investment in Actoz primarily as a result of the continued decline in royalties payable to Actoz from our operation of Mir II in China. The decision to recognize impairment was also influenced by the decline in the market price for shares of Actoz.
     Net income. As a result of the foregoing, our net income decreased by 72.9% from RMB609.5 million in 2004 to RMB165.3 million in 2005.
B. LIQUIDITY AND CAPITAL RESOURCES
Cash Flows and Working Capital
     To date, we have financed our operations through internally generated cash, the sale of our preferred shares to an investor in March 2003, our initial public offering of ADSs in May 2004 and the offering of the convertible notes in October 2004. As of December 31, 2006, we had approximately RMB1,291.9 million (US$165.4 million) in cash and

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cash equivalents, of which RMB486.4 million (US$62.3 million) was held by Shanda Networking and its subsidiaries. As of the same date, we had outstanding debt of RMB2,147.4 million (US$275.0 million) pursuant to the convertible notes. Our cash and cash equivalents primarily consist of cash on hand, demand deposits, and liquid investments with original maturities of three months or less that are placed with banks and other financial institutions. Although we consolidate the results of Shanda Networking and its subsidiaries in our consolidated financial statements and we can utilize the cash and cash equivalents of Shanda Networking and its subsidiaries in our operations, we do not have direct access to the cash and cash equivalents or future earnings of Shanda Networking or any of its subsidiaries. However, these cash balances can be utilized by us for our normal operations pursuant to our agreements with Shanda Networking and its subsidiaries that provide us with the substantial ability to control these companies and their operations. See “Organizational Structure” in Item 4 and “Exchange Controls” in Item 10.
     The following table shows our cash flows with respect to operating activities, investing activities and financing activities in the years ended December 31, 2004, 2005 and 2006:
                                 
    For the years ended December 31,
    2004   2005   2006
    RMB   RMB   RMB   US$
    (in thousands)
Net cash provided by operating activities
    807,330.8       649,787.9       780,066.6       99,897.1  
Net cash used in investing activities
    (615,675.0 )     (2,831,460.3 )     (449,223.4 )     (57,528.6 )
Net cash provided by financing activities
    2,333,392.9       17,900.5       23,864.8       3,056.2  
Effect of exchange rate change on cash
          (10,577.6 )     (12,428.4 )     (1,591.6 )
Net increase (decrease) in cash and cash equivalents
    2,525,048.7       (2,174,349.5 )     342,279.6       43,833.1  
Cash beginning of period
    598,922.4       3,123,971.1       949,621.6       121,610.7  
 
                               
Cash, end of period
    3,123,971.1       949,621.6       1,291,901.2       165,443.8  
 
                               
     We had net cash provided by operating activities of RMB780.1 million (US$99.9 million) in 2006 compared to RMB649.8 million in 2005. The cash provided by operating activities was primarily derived from our online games operations, advertising, sales of EZ series products, subscription fees from our online literature website and sales of our internet café management software. The increase of net cash provided by operating activities in 2006 was primarily a result of a decrease in account receivables from online advertisement and a decrease in accounts receivables and inventories attributable to manufacturing and sales of the EZ series products product and user password protection product. The increase in net cash provided by operating activity in 2006 was also due to an increase in deferred revenue, taxes payables and licensing fees payable to a related party. The increase was partially offset by the lower cash operating profit as a result of declining operating margin. We had net cash provided by operating activities of RMB649.8 million in 2005 compared to RMB807.3 million in 2004. This decrease in net cash provided by operating activities in 2005 was primarily due to a decline in operating margin of online game operations, and an increase of accounts receivable and inventories attributable to manufacturing and sales of user password projection product and EZ series products.
     In 2006, we had net cash used in investing activities of RMB449.2 million (US$57.5 million), compared to RMB2,831.5 million in 2005. In 2006, our cash used in investing activities was principally due to the purchase of a US Dollar high yield fund of RMB464.3 million (US$59.5 million), an increase in bank deposits with maturity date over three months of RMB281.0 million (US$36.0 million), the payment of RMB220.0 million (US$28.2 million) for purchase of property, equipment, software, intangible assets and land use rights, new investments totaling RMB25.1 million (US$3.2 million) in our affiliate companies, Actoz and Shanda Family, and the consideration of RMB249.3 (US$31.9 million) and RMB7.4 million (US$948,000) paid for the acquisitions of Haofang and Gametea, respectively. In 2006, our cash provided by investing activities was primarily from the proceeds of a RMB 779.9 million (US$99.1 million) sale of 3,703,487 ordinary shares of SINA Corporation under Rule 144 of the Securities Act of 1933, as amended. In 2005, we had net cash used in investing activities of RMB2,831.5 million. Our net cash used in investing activities in 2005 was principally attributed to the payment of RMB1,559.5 million for purchase of the stake in SINA, the payment of RMB759.1 million for purchase of the issued and outstanding shares of Actoz, the payment of RMB218.9 for purchase of property, equipment, software, intangible assets and land use rights, the net increase in time deposits of RMB 126.4 million, the payment of RMB165.5 million for the acquisition of a 100% equity interest in Haofang and the payment of RMB29.2 million for the acquisition of a 100% equity interest in Gametea. In 2004, we had net cash used in investing activities of RMB615.7 million. This was primarily due to our purchase of marketable securities, our purchase of property, equipment, software and intangible assets, and our investments in associated companies. This amount was partially offset by the repayment of an outstanding loan to an unrelated party and the proceeds from the disposition of short-term investments.

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     In 2006, we had net cash provided by financing activities of RMB23.9 million (US$3.1 million), compared to RMB17.9 million in 2005. Our cash provided by financing activities was primarily attributed the proceeds of RMB23.6 million (US$3.0 million) in connection with the stock options exercised by our officers, directors and employees. In 2005, we had net cash provided by financing activities of RMB17.9 million, which was comprised of RMB72.5 million in connection with stock option exercises by our officers, directors and employees, and partially offset by RMB54.9 million used for share repurchases. In 2004, we had net cash provided by financing activities of RMB2,333.4 million. This was primarily attributable to the net proceeds from our initial public offering in May 2004 of RMB875.5 million and the net proceeds of our offering of convertible notes in October 2004 of approximately RMB2,225.4 million. This amount was partially offset by a special dividend of RMB192.1 million paid to our shareholders in March 2004 and the repurchase of 5,326,250 of our ordinary shares from SB Asia Infrastructure Fund for US$75.0 million, or $14.08 per ordinary share.
     As of December 31, 2006, we had cash and cash equivalents of RMB1,291.9 million (US$165.4 million).
     Certain transactions out of the ordinary course of business have occurred since December 31, 2006 and have affected our liquidity and capital resources. We sold 4,000,000 and 2,118,278 shares of SINA in February and May 2007, respectively, and received net proceeds of US$206.1 million (RMB1,609.4 million) in aggregate. On March 9, 2007, the board of directors approved a US$50 million share repurchase program, and as of March 31, 2007, we have repurchased 1,476,550 ordinary shares (which was equal to 738,275 ADSs) from the open market at a cost of US$ 16.0 million (RMB 124.9 million). In the first quarter of 2007, we continued to acquire shares of Actoz in the open market at a cost of US$4.7 million (RMB36.7 million). As of June 22, 2007, our shareholding in Actoz increased to 49.48%. As of March 31, 2007, we had cash and cash equivalents, short-term investments and marketable securities totaling RMB3,577.2 million(US$458.1 million).
     We believe that our existing cash and cash equivalents, cash flows from operations, short-term investments and marketable securities will be sufficient to meet the anticipated cash needs for our operating activities, capital expenditures and other obligations for at least the next twelve months. In particular, the holders of our US$275 million Zero Coupon Senior Convertible Notes, or the convertible notes, have the right to require us to repurchase all or a portion of their notes on October 15, 2007 at a repurchase price equal to 100% of the principal amount of notes to be repurchased, plus accrued and unpaid interest and liquidated damages, if any. We may, however, require additional cash resources due to changed business conditions or other future developments. We may sell additional equities or obtain credit facilities to enhance our liquidity position or to or increase our cash reserves for future operations. The sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. ” Please see “Exchange Controls” in Item 10 for a discussion of impediments to capital flows in and out of China.
     From time to time, we evaluate possible investments, acquisitions or divestments and may, if a suitable opportunity arises, make an investment or acquisition or conduct a divestment, which may have a material effect upon our liquidity and capital resources. Please see “Recent Acquisitions” in this Item 5 for a description of our significant investments, acquisitions and divestments.
Capital Expenditures
     We made capital expenditures of RMB97.4 million, RMB218.9 million and RMB220.0 million (US$28.2 million) in 2004, 2005 and 2006. To date, the capital expenditures have primarily consisted of purchases of online game network infrastructure, software, copyrights as well as office premises. Since we will continue to purchase severs and IT equipment for new game operations, complete improvement of our new office premises and perform extensive network upgrades in 2007, we expect the capital expenditures in 2007 to increase.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
     We focus our research and development activities principally on the in-house development of casual games and on the EZ initiative.

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     Our research and development efforts and plans consist of:
    development of casual online games, including chess and board games, for use on our Internet game portal and our EZ Center platform;
 
    design and development of the EZ Center software platform and the EZ Series products;
 
    localization of games licensed from abroad for commercialization in China;
 
    design and development of the EZ Center software platform and the EZ Series products;
 
    development of wireless games for mobile phones;
 
    improving our unified user platform, including our unified billing and user authentication system; and
 
    improving our server management and control systems.
     Our research and development expenditures were RMB71.8 million, and RMB164.8 million and RMB167.8 million (US$21.5 million) in 2004, 2005 and 2006, respectively.
D. TREND INFORMATION
     Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2004 to December 31, 2006 that are reasonably likely to have a material effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
E. OFF-BALANCE SHEET ARRANGEMENTS
     Other than our operating lease arrangements, we have not entered into any off-balance sheet arrangements other than our operating lease arrangements:
    We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any unconsolidated entity;
 
    We have not entered into any obligations under any derivative contracts that are indexed to our own shares and classified as shareholder’s equity, or that are not reflected in our consolidated financial statements;
 
    We do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity; and
F. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
     The following table sets forth our contractual obligations as of December 31, 2006:

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    Payments Due by Period  
            January 1,     January 1,     January 1,     January 1,        
            2007 to     2008 to     2009 to     2010 to        
            December     December     December     December        
    Total     31, 2007     31, 2008     31, 2009     31, 2010     Thereafter  
                    (RMB in millions)                  
Operating lease obligations:
                                               
Office premises
    7.8       6.9       0.7       0.2              
Computer equipment and others.
    48.3       32.0       16.3                    
Obligations relating to upfront licensing fees for licensed games
    9.7       9.7                          
Total contractual obligations.
    65.8       48.6       17.0       0.2              
     As of December 31, 2006, substantially all of our operating lease arrangements for servers and related services provide for the calculation of lease payments based on formulas that reference the actual number of users of the relevant servers. Our rental expenses under these operating leases were RMB55.7 million, RMB43.9 million and RMB40.9 million (US$5.2 million) in 2004, 2005 and 2006, respectively. As future lease payments for these arrangements are based on the actual number of users and thus cannot be reasonably estimated, they are not included in the minimum lease payments shown above.
     As of December 31, 2006, we did not have any material capital lease obligations.
     Apart from the foregoing, as of December 31, 2006, we did not have any other long-term debt obligations, operating lease obligations or purchase obligations. However, pursuant to the contractual arrangements between Shengqu, Shanda Networking and the shareholders of Shanda Networking, Shengqu has an option, exercisable at such time, if any, as it is legally permissible, to acquire 100% of the equity interest in Shanda Networking for RMB10.0 million or such lower amount as permitted by applicable law. In addition, Shengqu has agreed to indemnify the shareholders of Shanda Networking to the extent that they are subject to any legal or economic liabilities as a result of performing their obligations pursuant to their agreements with Shengqu. Furthermore, Shengqu has undertaken to provide financial support to Shanda Networking and its subsidiaries to the extent necessary for its operations. See Item 7 “Major Shareholders and Related Party Transactions” and “Organizational Structure” in Item 4.
     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.
G. SAFE HARBOR
     This form contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about us and our industry. All statements other than statements of historical fact in this form are forward-looking statements. These forward-looking statements can be identified by words or phrases such as “may”, “will”, “expect”, “anticipate”, “estimate”, “plan”, “believe”, “is/are likely to” or other similar expressions. The forward-looking statements included in this form relate to, among others:
    our goals and strategies;
 
    our future business development, financial condition and results of operations;
 
    our projected revenues, earnings, profits and other estimated financial information;
 
    expected changes in our margins and certain costs or expenditures;
 
    expected continued acceptance of our new revenue model;
 
    our plans to expand and diversify the sources of our revenues;
 
    expected changes in the respective shares of our revenues from particular sources;

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    our plans for staffing, research and development and regional focus;
 
    the projected economic lifespan of our current games, and our plans to launch games and to develop new games in-house or license additional games from third parties, including the timing of any such launches, development or licenses;
 
    our plans to launch new products, including the new EZ series products, EZ content and services, movies and music content;
 
    our plans for strategic partnerships with other businesses;
 
    our acquisition strategy, and our ability to successfully integrate past or future acquisitions with our existing operations;
 
    the development of other delivery platforms for online games and other interactive entertainment content and services, including the new EZ series products;
 
    competition in the PRC online game industry;
 
    the outcome of ongoing, or any future, litigation or arbitration;
 
    the outcome of our annual PFIC evaluations;
 
    the expected growth in the number of Internet and broadband users in China, growth of personal computer penetration and developments in the ways most people in China access the Internet;
 
    changes in PRC governmental preferential tax treatment and financial incentives we currently qualify for and expect to qualify for; and
 
    PRC governmental policies relating to media and the Internet and Internet content providers and to the provision of advertising over the Internet.
     These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, we cannot assure you that our expectations will turn out to be correct. Our actual results could be materially different from and worse than our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in the “Risk Factors” section of Item 3 and elsewhere in this form.
The forward-looking statements made in this form relate only to events or information as of the date on which the statements are made in this form. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
     The following table sets forth certain information relating to our directors and executive officers as of the date of this annual report. The business address of each of our directors and executive officers is No. 1 Office Building, No. 690 Bibo Road, Pudong New Area, Shanghai 201203, China.

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Name   Age   Position
Tianqiao Chen(1)
    33     Chairman of the Board and Chief Executive Officer
Jun Tang
    44     Director and President
Danian Chen
    28     Director and Executive Senior Vice President
Qianqian Luo(1)
    30     Director
Jingsheng Huang(2)
    49     Director
Chengyu Xiong(2)
    52     Director
Bruno Wu(2)
    40     Director
Qunzhao Tan
    30     Director, Executive Senior Vice President and Chief Technology Officer
Daniel Zhang
    34     Director, Vice President and Chief Financial Officer
Haibin Qu
    32     Executive Senior Vice President
Yanmei Zhang
    42     Senior Vice President
Jingying Wang
    36     Senior Vice President
Hai Ling
    36     Senior Vice President
Xiangdong Zhang
    31     Senior Vice President
Jianwu Liang
    25     Vice President
Jisheng Zhu
    34     Vice President
Diana Li
    36     Vice President
 
(1)   Member of the compensation committee.
 
(2)   Member of the audit committee.
     Tianqiao Chen, one of our co-founders, has served as the chairman of our board of directors and our chief executive officer since our inception in December 1999. Mr. Chen established Shanda Networking with Danian Chen in December 1999. Prior to establishing Shanda Networking, Mr. Tianqiao Chen served as the vice director of the office of the president of Kinghing Trust & Investment Co., Ltd. from 1998 to 1999. From 1994 to 1998, Mr. Chen served in various management positions with Shanghai Lujiazui Group. Mr. Tianqiao Chen holds a bachelor’s degree in economics from Fudan University. Mr. Tianqiao Chen is the brother of Danian Chen, our co-founder, and is married to Qianqian Luo, one of our directors.
     Jun Tang has served as our president since February 2004 and as our director since April 2004. Prior to joining us, Mr. Tang served as the president of Microsoft China Co., Ltd. from March 2002 to January 2004 and the general manager of Microsoft Asia product support and service and Microsoft Global Technical Engineering Center from January 1998 to March 2002. In 2002, he founded Intertex Company, a software and entertainment company, in California. Mr. Tang received his doctorate degree, master’s degree and bachelor’s degree in the U.S., Japan and China, respectively.
     Danian Chen, one of our co-founders, established Shanda Networking with Tianqiao Chen in December 1999. Mr. Danian Chen has served as our executive senior vice president since August 2005. Mr. Danian Chen served as a senior vice president from July 2003 to August 2005, after serving as our director of products until July 2003, Mr. Danian Chen has served on our board of directors since our inception. Prior to co-founding Shanda Networking, Mr. Danian Chen worked as an employee in Xinghui International Transport Company, Haijie Shipping Agency Company and Jinyi Network from September 1996 to November 1999. Mr. Danian Chen is Tianqiao Chen’s brother.
     Qianqian Luo has served as our director since our inception in December 1999. Ms. Luo previously served as our director of administration from November 1999 to July 2003 and vice president from July 2003 to February 2004. Ms. Luo served as a project manager at the investment banking department of Kinghing Trust & Investment Co., Ltd. from 1998 to 1999. Ms. Luo holds a bachelor’s degree in economics from Financial & Banking Institute of China. Ms. Luo is married to Tianqiao Chen.
     Jingsheng Huang has served as our director since October 2005. Since October 2005, Mr. Huang has served as Managing Director at Bain Capital. From January 2002 to September 2005, he was Managing Director China at SOFTBANK Asia Infrastructure Fund, or SAIF, and served as a director on the board of twelve SAIF portfolio companies in the technology, telecommunications and media sectors. Prior to joining SAIF, Mr. Huang was a partner at SUNeVision Ventures. Mr. Huang has also served as Senior Manager of Strategic Investments at Intel Capital,

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Director of Asia Pacific Research Operations at Gartner Group and Vice President of Marketing of Mtone Wireless. Mr. Huang holds an MBA degree from Harvard Business School, a master’s degree in sociology from Stanford University and a bachelor’s degree in English from Beijing Foreign Studies University.
     Chengyu Xiong has served as our director since October 2005. Dr. Xiong is a professor and deputy dean of the School of Journalism and Communication at Tsinghua University. In addition, Dr. Xiong serves as the director of both the New Media Studies Center and the Cultural Industries Center at the School of Journalism. Dr. Xiong received his doctorate degree from Brigham Young University. Dr Xiong has written, edited and translated numerous books and articles.
     Bruno Wu has served as our director since October 2006. Mr. Wu is the Co-Founder and Chairman of The Sun Media Investment Holding Group of Companies, one of China’s largest privately held media groups with investment interests in 20 media-related companies and a portfolio of over 60 media brands and products. Mr. Wu served as Co-Chairman of SINA Corporation from 2001 to 2002 and as the Chief Operating Officer of ATV, one of the two free-to-air networks in Hong Kong, from June 1998 until February 1999. Mr. Wu received his Diploma of Studies in French civilization from the University of Savoie, France, in 1987. He graduated with a Bachelor of Science in Business Administration-Finance from Culver-Stockton College in Missouri in December 1990. He received his Master of Arts in International Affairs degree from Washington University, Missouri in 1993 and a Ph.D. in the International Politics Department of College of Law, Fudan University, Shanghai, China, in 2001.
     Qunzhao Tan has served as our executive senior vice president since June 2006 and senior vice president from August 2005 to June 2006 and chief technology officer since July 2003. Mr. Tan became a member of our board of directors in October 2006. Mr. Tan previously served as our vice president from July 2003 to August 2005 and director of research and development from November 1999 to July 2003. Prior to joining us, Mr. Tan worked as an assistant in the Institute of Clean Coal Technology of East China University of Science and Technology from July 1996 to November 1999. Mr. Tan holds a bachelor’s degree in chemical engineering from East China University of Science and Technology.
     Daniel Zhang has served as our vice president and chief financial officer since July 2006. Mr. Zhang previously served as our financial controller from September 2005 to June 2006. Prior to joining Shanda, Mr. Zhang served as senior manager of PricewaterhouseCoopers’ Audit and Business Advisory Division in Shanghai, China from 2002 to 2005. Prior to PricewaterhouseCoopers’ he served for seven years with Arthur Andersen, departing as an audit manager of the firm’s Shanghai office. Mr. Zhang holds a bachelor’s degree in finance from Shanghai University of Finance and Economics.
     Haibin Qu has served as our executive senior vice president since August 2005. Prior to serving as our senior vice president from July 2003 to August 2005, Mr. Qu served as our vice president from September 2002 to June 2003 and as our director of business development from February 2000 to August 2002. Previously, Mr. Qu served as a vice president of Shanghai Fuwei Technology Development Co., Ltd. from September 1996 to December 1999. Mr. Qu holds a bachelor’s degree in mechanics from Fudan University.
     Yanmei Zhang has served as our senior vice president since August 2005 and as our vice president from January 2005 to August 2005. Prior to joining us, Ms. Zhang served as vice president at Sony China Corp. from January 1994 until December 2004. Ms. Zhang joined Sony America in New York in 1991 as international Human Resources specialist and served in that position until 1993. Ms. Zhang holds a master’s degree in Business Administration from University of South Carolina and a bachelor’s degree in English from Shanxi University.
     Jingying Wang has served as our senior vice president since August 2005. Ms. Wang previously served as our vice president from January 2005 to August 2005 and as our director of customer services from May 2002 to July 2003. Prior to joining us, Ms. Wang served as the customer services manager of Shanghai Waterman Drinks Co., Ltd. from December 2000 to May 2002, and the customer services supervisor of Hangzhou Marykay Cosmetics Co., Ltd. from 1998 to December 2000. Ms. Wang holds a bachelor’s degree in radio technology from Shanghai University.
     Hai Ling has served as our senior vice president since August 2005. Mr. Ling previously served as our vice president from August 2003 to August 2005 and as our director of sales. Prior to joining us, Mr. Ling served as general

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manager of Powerise Technology Co. from 1997 to 2003. Mr. Ling holds a bachelor’s degree in computer science and technology from the National University of Defense Technology.
     Xiangdong Zhang was promoted to senior vice president in June 2006. Prior to serving as our vice president from July 2005 to June 2006, Mr. Zhang served as director of our product management center from 2001 to July 2005. Prior to joining us, Mr. Zhang served as the editor-in-chief of the game channel at China.com from 1999 to 2001. Mr. Zhang holds a bachelor’s degree in engineering from Dalian Institute of Light Industry.
     Jianwu Liang has served as our vice president since March 2007. Mr. Liang previously served as the vice president of our SDO (Shanda Operation) Division from July 2006 to March 2007, and as the director of our billing platform center from July 2005 to July 2006. Mr. Liang joined Shanda in February 2002 and worked in our Billing Platform Center. Before joining Shanda, Jianwu Liang worked in a Shanghai software company from May 2000 to January 2002, and was responsible for research and development as well as project management. Mr. Liang holds a bachelor’s degree in applied mathematics from Shanghai Jiao Tong University.
     Jisheng Zhu has served as our vice president since March 2007. Mr. Zhu previously served as the vice president of our SDO (Shanda Operation) Division from July 2006 to March 2007, as the director of our Technical Support Center from January 2005 to June 2006, and as a manager of our Network Security Department from May 2003 to December 2004. Before joining Shanda, Mr. Zhu served as the engineering service director of Kingnet Security Inc. from 2001 to 2003 and as the director of research and development in Eachnet.com from 2000 to 2001. Mr. Zhu holds a master’s degree in automatic control from East China University of Science and Technology.
     Diana Li has served as our vice president since March 2007. Ms. Li was previously appointed vice president of our SDG (Shanda Game) Division in May 2006 and as a director of both our Project Management Center and Game Design Center since February 2005. Before joining Shanda, Ms. Li was a project director at Expedia Inc., responsible for project management and operations for Expedia in the Asia Pacific including Australia. From 1999 to 2004, Ms. Li held management positions in various product groups of Microsoft including the Office, Windows Server and Xbox product groups. Prior to joining Microsoft, Ms. Li was a manager at Fidelity Investments in Boston from 1998 to 1999, and she was a team manager at Unifi Telecommunication Inc. from 1995 to 1998. Ms. Li holds a bachelor’s of science degree in psychology from Beijing University and a master’s of science degree in applied statistics and operations research from Bowling Green State University in Ohio.
Duties of Directors
     Under Cayman Islands law, our directors have a duty of loyalty to act honestly in good faith with a view to our best interests. Our directors also have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our amended and restated memorandum and articles of association. A shareholder has the right in certain circumstances in a derivative action in the name of the company to seek damages if a duty owed by our directors is breached.
     The functions and powers of our board of directors include, among others:
    convening shareholders’ meetings and reporting its work to shareholders at such meetings;
 
    implementing shareholders’ resolutions;
 
    determining our business plans and investment proposals;
 
    formulating our profit distribution plans and loss recovery plans;
 
    determining our debt and finance policies and proposals for the increase or decrease in our registered capital and the issuance of debentures;

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    formulating our major acquisition and disposition plans, and plans for merger, division or dissolution;
 
    proposing amendments to our amended and restated memorandum and articles of association; and
 
    exercising any other powers conferred by the shareholders’ meetings or under our amended and restated memorandum and articles of association.
Terms of Directors and Executive Officers
     Each of our directors holds office until a successor has been duly elected and qualified unless the director was appointed by the board of directors, in which case such director holds office until the next following annual meeting of shareholders at which time such director is eligible for reelection. All of our executive officers are appointed by and serve at the discretion of our board of directors.
B. COMPENSATION
     In 2006, the aggregate cash compensation paid to our directors and executive officers as a group RMB was 14.06 million (US$1.80 million). In addition, options to acquire an aggregate of 1,280,000 ordinary shares were granted to our directors and executive officers in 2006. We have no service contracts with any of our directors or executive officers that provide benefits to them upon termination.
Equity Compensation Plans
     In order to promote our success and to increase shareholder value by providing an additional means to attract, motivate, retain and reward selected directors, employees and other eligible persons, we have adopted our 2003 Incentive Plan, or the 2003 Plan and our 2005 Equity Compensation Plan, or the 2005 Plan. In March 2003, our board of directors adopted the 2003 Plan. An aggregate of 13,309,880 ordinary shares, which is equal to approximately 9.4% of our issued and outstanding ordinary shares as of March 31, 2007, were reserved for issuance under the 2003 Plan. In October 2005, shareholders approved the 2005 plan at our annual general meeting of shareholders. An aggregate of 7,449,235 ordinary shares, which is equal to approximately 5.2% of our issued and outstanding ordinary shares as of March 31, 2007, were reserved for issuance under the 2005 Plan.
     The table set forth below summarizes stock option activity under the plans for the years ended December 31, 2004, 2005 and 2006:
                                                 
    2004   2005   2006
            Weighted           Weighted           Weighted
            Average           Average           Average
    Options   Exercise Price   Options   Exercise Price   Options   Exercise Price
    Outstanding   (US$)   Outstanding   (US$)   Outstanding   (US$)
Outstanding at beginning of year
    8,857,803       1.516       8,883,402       3.42       6,220,775       4.71  
Granted
    4,258,503       5.57       567,731       15.63       3,000,000       6.8505  
Exercised
    (4,116,074 )     1.55       (2,762,438 )     2.70       (1,226,082 )     3.57  
Forfeited
    (116,830 )     3.51       (467,920 )     5.33       (406,671 )     7.88  
Expired
                                    (20,785 )     13.87  
Outstanding at end of year
    8,883,402       3.42       6,220,775       4.71       7,567,237       5.55  
 
                                               
 
                                               
Vested and exercisable at end of year
    397,091       2.53       1,164,853       3.97       2,907,096       3.18  
 
                                               

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     As of December 31, 2006, approximately 5,087,284 options were available for granted under the plans. The table set forth below summarizes outstanding and exercisable stock options under the plans as of December 31, 2006.
                                         
    Options Outstanding at   Options Exercisable at
    December 31, 2006   December 31, 2006
            Weighted Average                
            Remaining   Weighted Average           Weighted Average
    Number   Contractual Life   Exercise Price   Number   Exercise Price
Exercise Prices US$   Outstanding   (years)   (US$)   Outstanding   (US$)
1.516
    1,967,966       6.25       1.516       1,967,966       1.516  
5.5
    2,158,452       7.14       5.5       802,037       5.5  
8.00
    35,850       7.58       8.00       35,850       8.00  
15.33
    163,078       8.07       15.33       40,770       15.33  
15.55
    171,940       8.08       15.55       42,985       15.55  
14.89
    40,295       8.13       14.89       10,074       14.89  
16.86
    29,656       8.42       16.86       7,414       16.86  
6.8505
    3,000,000       9.50       6.8505       0       6.8505  
 
    7,567,237                       2,907,096          
     On April 24, 2007, we granted options under the 2005 plan to purchase 655,000 of our ordinary shares to three of our officers, Jianwu Liang, Jisheng Zhu and Diana Li, and other employees at an exercise price of US$11.6406, which is equal to the average of the closing prices for the 90 trading days prior to the grant date.
     Both the 2003 Plan and the 2005 Plan are administered by our compensation committee, which has wide discretion to award equity compensation grants. Subject to the provisions of the 2003 Plan and the 2005 Plan, including the limits upon the number of ordinary shares reserved for issuance under these plans, our compensation committee determines who will receive equity compensation awards, the type and timing of awards to be granted, vesting schedules, exercise prices and other terms and conditions of the awards.
     For a description of our past stock option compensation expense and recent accounting changes, see Item 5 “Operating and Financial Review and Prospects – A. Operating Results – Operating Expenses – Share-based Compensation.”
     The table below sets forth the option grants made to our directors and executive officers pursuant to the plans as of March 31, 2007:
                                 
    Number of Shares   Per Share            
    Underlying   Exercise Price (in           Date of
Name   Options Granted   US$)   Date of Grant   Expiration
Tianqiao Chen
    266,198       1.516     March 31, 2003   March 31, 2013
Danian Chen
    266,198       1.516     March 31, 2003   March 31, 2013
Jun Tang
    2,661,976       5.5     February 12, 2004   February 12, 2014
Qianqian Luo
    266,198       1.516     March 31, 2003   March 31, 2013
Jingsheng Huang
    *       1.516     March 31, 2003   March 31, 2013
Qunzhao Tan
    2,129,581       1.516     March 31, 2003   March 31, 2013
Qunzhao Tan
    150,000       6.8505     June 28, 2006   June 28, 2016
Daniel Zhang
    *       6.8505     June 28, 2006   June 28, 2016
Haibin Qu
    1,863,383       1.516     March 31, 2003   March 31, 2013
Jingying Wang
    *       1.516     March 31, 2003   March 31, 2013
Jingying Wang
    *       6.8505     June 28, 2006   June 28, 2016
Yanmei Zhang
    *       15.33     January 25, 2005   January 25, 2015
Yanmei Zhang
    *       6.8505     June 28, 2006   June 28, 2016
Hai Ling
    *       1.516     March 31, 2003   March 31, 2013
Hai Ling
    *       5.5     April 1, 2004   April 1, 2014
Hai Ling
    *       6.8505     June 28, 2006   June 28, 2016
Xiangdong Zhang
    *       1.516     March 31, 2003   March 31, 2013
Xiangdong Zhang
    *       5.5     April 1, 2004   April 1, 2014
Xiangdong Zhang
    *       6.8505     June 28, 2006   June 28, 2016

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    Number of Shares   Per Share            
    Underlying   Exercise Price (in           Date of
Name   Options Granted   US$)   Date of Grant   Expiration
Jianwu Liang
    *       1.516     March 31, 2003   March 31, 2013
Jianwu Liang
    *       6.8505     June 28, 2006   June 28, 2016
Jisheng Zhu
    *       5.5     April 1, 2004   April 1, 2014
Jisheng Zhu
    *       6.8505     June 28, 2006   June 28, 2016
Diana Li
    *       14.89     February 16, 2005   February 16, 2016
Diana Li
    *       6.8505     June 28, 2006   June 28, 2016
 
*   Upon exercise of all options granted, would beneficially own less than 1% of our outstanding ordinary shares.
C. BOARD PRACTICES
Term and Severance Provisions of Directors and Executive Officers
     Each of our directors holds office until a successor has been duly elected and qualified unless the director was appointed by the board of directors, in which case such director holds office until the next following annual meeting of shareholders at which time such director is eligible for reelection. All of our executive officers are appointed by and serve at the discretion of our board of directors. We have no service contracts with any of our directors or executive officers that provide benefits to them upon termination.
Board Committees
     Our board of directors has established an audit committee and a compensation committee.
     Audit Committee
     Our audit committee currently consists of Jingsheng Huang, Chengyu Xiong and Bruno Wu. Our board of directors has determined that all of our audit committee members are independent directors within the meaning of Nasdaq Marketplace Rule 4200(a)(15) and meet the criteria for independence set forth in Section 10A(m)(3)(B)(i) of the Exchange Act.
     Our audit committee is responsible for, among other things:
    selecting the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors;
 
    annually reviewing an independent auditors’ report describing the auditing firm’s internal quality-control procedures, any material issues raised by the most recent internal quality-control review, or peer review, of the independent auditors and all relationships between the independent auditors and our company;
 
    setting clear hiring policies for employees or former employees of the independent auditors;
 
    reviewing with the independent auditors any audit problems or difficulties and management’s response;
 
    reviewing and approving all proposed related-party transactions, as defined in Item 404 of Regulation S-K;
 
    discussing the annual audited financial statements with management and the independent auditors;
 
    discussing with management and the independent auditors major issues regarding accounting principles and financial statement presentations;

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    reviewing reports prepared by management or the independent auditors relating to significant financial reporting issues and judgments;
 
    discussing earnings press releases, as well as financial information and earnings guidance provided to analysts and rating agencies;
 
    reviewing with management and the independent auditors the effect of regulatory and accounting initiatives, as well as off-balance sheet structures on our financial statements;
 
    discussing policies with respect to risk assessment and risk management;
 
    reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material control deficiencies;
 
    timely reviewing reports from the independent auditors regarding all critical accounting policies and practices to be used by our company, all alternative treatments of financial information within GAAP that have been discussed with management and all other material written communications between the independent auditors and management;
 
    establishing procedures for the receipt, retention and treatment of complaints received from our employees regarding accounting, internal controls or auditing matters and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters;
 
    annually reviewing and reassessing the adequacy of our audit committee charter;
 
    such other matters that are specifically delegated to our audit committee by our board of directors from time to time;
 
    meeting separately, periodically, with management, the internal auditors and the independent auditors; and
 
    reporting regularly to the full board of directors.
Compensation Committee
     Our current compensation committee consists of Tianqiao Chen and Qianqian Luo.
     Our compensation committee is responsible for:
    reviewing and making recommendations to our board of directors regarding our compensation policies and forms of compensation provided to our directors and officers;
 
    reviewing and determining bonuses for our officers and other employees;
 
    reviewing and determining stock-based compensation for our directors, officers, employees and consultants;
 
    administering our equity incentive plans in accordance with the terms thereof; and
 
    such other matters that are specifically delegated to the compensation committee by our board of directors from time to time.

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Controlled Company
     We are a controlled company as defined under Nasdaq Marketplace Rule 4350(c)(5). As a result, for so long as we remain a controlled company as defined in that rule, we are exempt from some of the requirements of Nasdaq Marketplace Rule 4350(c), including the requirements that:
    a majority of our board of directors must be independent directors;
 
    the compensation of our chief executive officer must be determined or recommended by a majority of the independent directors or a compensation committee comprised solely of independent directors; and
 
    the director nominees must be selected or recommended by a majority of the independent directors or a nomination committee comprised solely of independent directors.
Corporate Governance
     Our board of directors has adopted a code of ethics, which is applicable to our senior executive and financial officers. In addition, our board of directors has adopted a code of conduct, which is applicable to all of our directors, officers and employees. We have made our code of ethics and our code of conduct publicly available on our website. See also Item 16B “Code of Ethics”.
     In addition, our board of directors has adopted a set of corporate governance guidelines. The guidelines reflect certain guiding principles with respect to our board’s structure, procedure and committees. The guidelines are not intended to change or interpret any law or our amended and restated memorandum and articles of association.
     We also have established a disclosure committee, which is comprised of certain members of senior management. Pursuant to the disclosure committee’s charter, which was ratified by our board of directors, the disclosure committee is responsible for adopting, evaluating and overseeing our disclosure controls and procedures and internal financial controls.
D. EMPLOYEES
     As of December 31, 2004, 2005 and 2006, we had 1,429, 2,392 and 1,906 full-time employees, respectively. The following table sets forth the number of our employees by department as of December 31, 2005 and 2006:
                                 
    As of December 31, 2005   As of December 31, 2006
    Number   Percent   Number   Percent
Senior Management
    32       1.3       27       1.4  
Customer Service
    419       17.5       398       20.9  
Technology Support
    301       12.6       245       12.9  
Game Development
    818       34.2       504       26.4  
Product Management
    254       10.6       324       17.0  
Sales, Marketing and Public Relations
    345       14.4       229       12.0  
Finance and Administration / Investment and Overseas Business
    223       9.4       179       9.4  
 
                               
New Business
                               
 
                               
Total
    2,392       100       1,906       100  
 
                               
     As required by PRC regulations, we participate in various employee benefit plans that are organized by municipal and provincial governments, including housing, pension, medical and unemployment benefit plans. We are required under PRC law to make contributions to the employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time. Members of the retirement plan are entitled to a pension equal to a fixed proportion of the salary prevailing at the member’s retirement date. In addition to the benefits that we are required to provide to our employees

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pursuant to PRC regulations, we also provide life insurance and supplemental medical and housing insurance. The total amount of contributions we made to employee benefit plans in 2004, 2005 and 2006 was RMB13.7 million, RMB 24.2 million and RMB33.5 million (US$4.3 million) respectively.
     Our employees who are PRC citizens are members of a labor union that represents employees with respect to labor disputes and other employee matters. The labor union does not, however, represent employees for the purpose of collective bargaining. We believe that we maintain a good working relationship with our employees and we have not experienced any significant labor disputes or any difficulty in recruiting staff for our operations.
     We enter into a standard annual employment contract with most of our officers, managers and employees. These contracts include a covenant that prohibits the officer, manager or employee from engaging in any activities that compete with our business during, and for one to two years after the period of their employment with us.
E. SHARE OWNERSHIP
Please see Item 7.A.
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
     The following table sets forth information with respect to the beneficial ownership, within the meaning of Rule 13d-3 of the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act, of our ordinary shares, as of March 31, 2007:
    each person known to us to own beneficially more than 5% of our ordinary shares; and
 
    each of our directors and executive officers who beneficially own ordinary shares within the meaning of Rule 13d-3 of the Exchange Act;
     Beneficial ownership includes voting or investment power with respect to the securities. Except as indicated below, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all ordinary shares shown as beneficially owned by them. Percentage of beneficial ownership is based on 143,678,698 ordinary shares outstanding as of March 31, 2007.
                 
    Shares Beneficially Owned
            Percentage of
Name   Number   Total
Tianqiao Chen(1)
    83,524,628       58.1 %
Danian Chen(2)
    82,226,360       57.2 %
Qianqian Luo(3)
    83,524,628       58.1 %
Skyline Media Limited(4)
    81,070,090       56.4 %
Cisco Systems, Inc(5)
    10,382,316       7.3 %
AXA Group(5)
    7,596,058       5.4 %
Jun Tang
    887,581       0.6 %
Jingsheng Huang
    *       *  
Qunzhao Tan(6)
    1,415,781       1.0 %
Daniel Zhang
    *       *  
Haibin Qu(7)
    1,216,661       0.9 %
Yanmei Zhang
    *       *  
Jingying Wang(8)
    *       *  
Hai Ling
    *       *  
Xiangdong Zhang(9)
    *       *  
Jianwu Liang
    *       *  
Jisheng Zhu
    *       *  
Diana Li
    *       *  

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*   Upon exercise of all options currently exercisable or vesting within 60 days of the date of this table, would beneficially own less than 1% of our ordinary shares.
 
(1)   Represents 81,070,090 ordinary shares owned by Skyline Media Limited, 2,188,338 ordinary shares held by DBS Trustees Limited acting as trustees of the Jade Trust and 266,200 ordinary shares that may be issued upon exercise of stock options that are held by DBS Trustees Limited acting as trustees of the Jade Trust. Tianqiao Chen is the sole shareholder of Shanda Media Limited, which is a director and owns 40% of Skyline Capital International Limited, the sole shareholder of Skyline Media Limited. Tianqiao Chen is also a director of Skyline Media Limited. Tianqiao Chen disclaims beneficial ownership of all of our ordinary shares owned by Skyline Media Limited. Ordinary shares and stock options held by DBS Trustees Limited acting as trustees of the Jade Trust are held for the benefit of Tianqiao Chen and his family members.
 
(2)   Represents 81,070,090 ordinary shares owned by Skyline Media Limited, 1,023,170 ordinary shares owned by DBS Trustees Limited acting as trustees of the Chi Feng Trust and 133,100 ordinary shares that may be issued upon exercise of stock options that are held by DBS Trustees Limited acting as trustees of the Chi Feng Trust. Danian Chen is the sole shareholder of Shanda Investment International Limited, which is a director and owns 30% of Skyline Capital International Limited, the sole shareholder of Skyline Media Limited. Danian Chen is also a director of Skyline Media Limited. Danian Chen disclaims beneficial ownership of all of our ordinary shares owned by Skyline Media Limited. Ordinary shares and stock options held by DBS Trustees Limited acting as trustees of the Chi Feng Trust are held for the benefit of Danian Chen and his family members.
 
(3)   Represents 81,070,090 ordinary shares owned by Skyline Media Limited, 2,188,338 ordinary shares owned by DBS Trustees Limited acting as trustees of the Jade Trust and 266,200 ordinary shares that may be issued upon exercise of stock options held by DBS Trustees Limited acting as trustees of the Jade Trust. Qianqian Luo is the sole shareholder of Fortune Capital Holdings Enterprises Limited, which is a director and owns 30% of Skyline Capital International Limited, the sole shareholder of Skyline Media Limited. Ms. Luo is also a director of Skyline Media Limited. Ms. Luo disclaims beneficial ownership of all of our ordinary shares owned by Skyline Media Limited. Ordinary shares and stock options held by DBS Trustees Limited acting as trustees of the Jade Trust are held for the benefit of Ms. Luo and her family members.
 
(4)   Tianqiao Chen, Danian Chen and Qianqian Luo indirectly own 40%, 30% and 30%, respectively, of Skyline Media and may be deemed to beneficially own all of our shares held by Skyline Media Limited.
 
(5)   The number of shares was taken from Schedule 13G filed with the SEC by AXA Group and Cisco Systems, Inc. on February 13, 2007 and February 14, 2007 respectively, both the file number is 005-80297. The percentage of beneficial ownership was calculated based on the amount of our ordinary shares outstanding as of March 31, 2007
 
(6)   These ordinary shares, or stock options to purchase ordinary shares, are held by DBS Trustees Limited acting as Trustees of the Three Gorges Trust for the benefit of Qunzhao Tan and his family members.
 
(7)   These ordinary shares, or stock options to purchase ordinary shares, are held by DBS Trustees Limited acting as Trustees of the Hub Trust for the benefit of Haibin Qu and his family members.
 
(8)   These ordinary shares, or stock options to purchase ordinary shares, are held by DBS Trustee Limited acting as Trustees of the Fly Trust for the benefit of Jingying Wang and his family members
 
(9)   These ordinary shares, or stock options to purchase ordinary shares, are held by DBS Trustee Limited acting as Trustee of the Shabak Trust for the benefit of Xiangdong Zhang and his family members.
     None of our existing shareholders have voting rights that differ from the voting rights of other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company. As of March 31, 2007 of the 143,678,698 issued and outstanding ordinary shares, approximately 23.7% of those ordinary shares were held in the US by 86 institutional holders of record.
B. RELATED PARTY TRANSACTIONS
Shengqu/Shanda Networking Arrangements
     In order to comply with PRC regulations, through the date of this annual report, we have operated our online game business in China through Shanda Networking, a company wholly owned by Tianqiao Chen and Danian Chen, our founders and controlling shareholders, who are also PRC citizens. We have entered into a series of contractual arrangements with Shanda Networking and its shareholders, including contracts relating to the transfer of assets, the provision of services, software licenses and equipment, and certain shareholder rights and corporate governance matters.
     Each of Shengqu’s contractual arrangements with Shanda Networking and its shareholders may only be amended with the approval of our audit committee or another independent body of our board of directors.

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     In December 2004, with an effective date of January 2005, we reorganized our online game operations in China, splitting such operations between three different companies, Shanda Networking, Nanjing Shanda and Hangzhou Bianfeng. Nanjing Shanda and Hangzhou Bianfeng are subsidiaries of Shanda Networking. Following this reorganization, each of these companies operates our online games in distinct provinces and regions across China. In connection with this reorganization, we entered into a series of contractual arrangements with Shanda Networking, Nanjing Shanda and Hangzhou Bianfeng and modified certain existing contractual arrangements with Shanda Networking.
     The following is a summary of the material provisions of these agreements. For more complete information you should read these agreements in their entirety. Directions of how to obtain copies of those agreements are provided in this annual report under “Documents on Display” included in Item 10 “Additional Information”.
                     
No   Agreement   Date   Parties   Purpose   Payment
1
  Research and Development Agreement   October 31, 2005   Shengqu and Shengjin   Shengjin to develop Shanda Richman, an online casual game   Shengqu to pay: (i) recoupable installment payments of totaling 2 million over 24 months; and (ii) monthly royalty payments equal to 16%
 
                   
2
  Research and Development Agreement   July 14, 2004   Shengqu and Shengjin   Shengjin to develop The Sign, a MMORPG   Shengqu to pay: (i) recoupable installment payments of totaling 2 million over 24 months; and (ii) monthly royalty payments between 5% and 10%.
 
                   
3
  Purchase Agreement   December 21, 2004   Shengqu and Shengpin   Shengqu to purchase from Shengpin copyright for The Age, a MMORPG   RMB2.7 million
 
                   
4
  The Woool License
Agreement Extension
  January 1, 2007   Shengqu and PRC operating companies   Shengqu extends term Woool operating license to the PRC operating companies   26% royalty
 
                   
5
  The Age License
Agreement Extension
  January 1, 2007   Shengqu and PRC operating companies   Shengqu extends term The Age operating license to the PRC operating companies   26% royalty
 
                   
6
  3G Hero License
Agreement
  September 1, 2006   Shengqu and PRC operating companies   Shengqu licenses right to operate 3G Hero to the PRC operating companies   35% royalty
 
                   
7
  Shanda Richman
License Agreement
  December 8, 2006   Shengqu and PRC operating companies   Shengqu licenses right to operate Shanda Richman to the PRC operating companies   35% royalty
 
                   
8
  GetAmped License
Agreement
  February 18, 2006   Shengqu and PRC operating companies   Shengqu licenses right to operate GetAmped to the PRC operating companies   25% royalty
 
                   
9
  LaTale License
Agreement
  April 2, 2007   Shengqu and PRC operating companies   Shengqu licenses right to operate LaTale to the PRC operating companies   RMB7,740,900 and 32% royalty

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No   Agreement   Date   Parties   Purpose   Payment
10
  Arena Software III
License Agreement
  May 1, 2006   Grandpro and Haofang Online   Grandpro licenses right to use Arena Software III to Haofang Online   35% royalty
 
                   
11
  Mir II License
Agreement Extension
  September 28, 2005   Shengqu and PRC operating companies   Shengqu extends term Mir II operating license to the PRC operating companies   RMB23,799,400 and 26% royalty
 
                   
12
  BNB License
Agreement Extension
  October 1, 2005   Shengqu and PRC operating companies   Shengqu extends term BNB operating license to the PRC operating companies   RMB12,138,000 and 45% royalty
 
                   
13
  The Woool License
Agreement Extension
  January 1, 2006   Shengqu and PRC operating companies   Shengqu extends term Woool operating license to the PRC operating companies   RMB15,000,000 and 26% royalty
 
                   
14
  The Age License
Agreement Extension
  January 1, 2006   Shengqu and PRC operating companies   Shengqu extends term The Age operating license to the PRC operating companies   RMB1,080,000 and 26% royalty
 
                   
15
  The Sign License
Agreement Extension
  January 1, 2006   Shengqu and PRC operating companies   Shengqu extends term The Sign operating license to the PRC operating companies   RMB1,080,000 and 26% royalty
 
                   
16
  R.O. License Agreement   September 1, 2005   Shengqu and PRC operating companies   Shengqu licenses right to operate R.O. to the PRC operating companies   RMB5,669,860 and 35% royalty
 
                   
17
  3G Hero License
Agreement
  September 1, 2005   Shengqu and PRC Operating Companies   Shengqu licenses right to operate 3G Hero to the PRC operating companies   RMB2,000,000 and 35% royalty
 
                   
18
  Shanda Richman
License Agreement
  December 8, 2005   Shengqu and PRC operating companies   Shengqu licenses right to operate Shanda Richman to the PRC operating companies   RMB1,500,000 and 35% royalty
 
                   
19
  Crazy Kart License
Agreement
  March 18, 2006   Shengqu and PRC operating companies   Shengqu licenses right to operate Crazy Kart to the PRC operating companies   RMB1,200,000 and 35% royalty
 
                   
20
  Doudizhu License
Agreement
  May 1, 2006   Grandpro and Haofang Online   Grandpro licenses right to operate Doudizhu to Haofang Online   35% royalty
 
                   
21
  The Woool License
Agreement
  December 28, 2004   Shengqu and PRC operating companies   Shengqu licenses right to operate Woool to the PRC operating companies   RMB30,000,000 and 26% royalty
 
                   
22
  The Age License
Agreement
  December 28, 2004   Shengqu and PRC operating companies   Shengqu licenses right to operate the Age to the PRC operating companies   RMB3,300,000 and 26% royalty

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No   Agreement   Date   Parties   Purpose   Payment
23
  The Sign License
Agreement
  December 28, 2004   Shengqu and PRC operating companies   Shengqu licenses right to operate The Sign to the PRC operating companies   RMB2,900,000 and 26% royalty
 
                   
24
  Maple Story License
Agreement
  December 28, 2004   Shengqu and PRC operating companies   Shengqu licenses right to operate Maple Story to the PRC operating companies   RMB3,972,960 and 35% royalty
 
                   
25
  Mir II License
Agreement
  December 28, 2004   Shengqu and PRC operating companies   Shengqu licenses right to operate Mir II to the PRC operating companies   RMB11,035,733 and 26% royalty
 
                   
26
  BNB License
Agreement
  December 28, 2004   Shengqu and PRC operating companies   Shengqu licenses right to operate BNB to the PRC operating companies   RMB1,308,701 and 35% royalty
 
                   
27
  GetAmped License
Agreement
  December 28, 2004   Shengqu and PRC operating companies   Shengqu licenses right to operate GetAmped to the PRC operating companies   RMB958,222 and 25% royalty
 
                   
28
  Arena Software I
License Agreement
  May 1, 2006   Grandpro and Haofang Online   Grandpro licenses right to use Arena Software I to Haofang Online   35% royalty
 
                   
29
  Arena Software II
License Agreement
  May 1, 2006   Grandpro and Haofang Online   Grandpro licenses right to use Arena Software II to Haofang Online   35% royalty
 
                   
30
  Unified Platform
Verification System
License Agreement
  January 1, 2007   Shanda Computer and Shanda Networking   Shanda Computer licenses right to use Unified Platform Verification System to Shanda Networking   monthly royalty fee equal to log-in number multiplied by unit price as set forth in Exhibit A.
 
                   
31
  Unified Platform
Verification System
License Agreement
  January 1, 2007   Shanda Computer and Nanjing Shanda   Shanda Computer licenses right to use Unified Platform Verification System to Nanjing Shanda   monthly royalty fee equal to log-in number multiplied by unit price as set forth in Exhibit A.
 
                   
32
  Unified Platform
Verification System
License Agreement
  January 1, 2007   Shanda Computer and Hangzhou Bianfeng   Shanda Computer licenses right to use Unified Platform Verification System to Hangzhou Bianfeng   monthly royalty fee equal to log-in number multiplied by unit price as set forth in Exhibit A.
 
                   
33
  Jingling System
Software License
Agreement
  January 1, 2007   Shanda Computer and Shanda Networking   Shanda Computer licenses right to use Jingling System to Shanda Networking   monthly royalty fee equal to Q&A number multiplied by unit price as set forth in Exhibit A
 
                   
34
  Jingling System
Software License
Agreement
  January 1, 2007   Shanda Computer and Nanjing Shanda   Shanda Computer licenses right to use Jingling System to Nanjing Shanda   monthly royalty fee equal to Q&A number multiplied by unit price as set forth in Exhibit A

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No   Agreement   Date   Parties   Purpose   Payment
35
  Jingling System
Software License
Agreement
  January 1, 2007   Shanda Computer and Hangzhou Bianfeng   Shanda Computer licenses right to use Jingling System to Hangzhou Bianfeng   monthly royalty fee equal to Q&A number multiplied by unit price as set forth in Exhibit A
 
                   
36
  Physical Card   January 1, 2007   Shanda Computer and   Shanda Computer   Shanda Networking to pay:
 
  Online-sales System
Software License
Agreement
      Shanda Networking   licenses right to use Physical Card Online-sales System to Shanda Networking   (i) installment payments of RMB1,200,000 over 12 months; and (ii) monthly royalty equal to 15%
 
                   
37
  Physical Card   January 1, 2007   Shanda Computer and   Shanda Computer   Nanjing Shanda to pay:
 
  Online-sales System
Software License
Agreement
      Nanjing Shanda   licenses right to use Physical Card Online-sales System to Nanjing Shanda   (i) installment payments of RMB1,200,000 over 12 months; and (ii) monthly royalty equal to 15%
 
                   
38
  Physical Card   January 1, 2007   Shanda Computer and   Hangzhou Bianfeng   Hangzhou Bianfeng to pay:
 
  Online-sales System
Software License
Agreement
      Hangzhou Bianfeng   licenses right to use Physical Card Online-sales System to Hangzhou Bianfeng   (i) installment payments of RMB120,000 over 12 months; and (ii) monthly royalty equal to 15%
 
                   
39
  Virtual Card   January 1, 2007   Shanda Computer and   Shanda Computer   Shanda Networking to pay:
 
  Online-sales System
Software License
Agreement
      Shanda Networking   licenses right to use Virtual Card Online-sales System to Shanda Networking   (i) installment payments of RMB1,200,000 over 12 months; and (ii) monthly royalty equal to 15%
 
                   
40
  Virtual Card   January 1, 2007   Shanda Computer and   Shanda Computer   Nanjing Shanda to pay:
 
  Online-sales System
Software License
Agreement
      Nanjing Shanda   licenses right to use Virtual Card Online-sales System to Nanjing Shanda   (i) installment payments of RMB1,200,000 over 12 months; and (ii) monthly royalty equal to 15%
 
                   
41
  Virtual Card   January 1, 2007   Shanda Computer and   Shanda Computer   Hangzhou Bianfeng to pay:
 
  Online-sales System
Software License
Agreement
      Hangzhou Bianfeng   licenses right to use Virtual Card Online-sales System to Hangzhou Bianfeng   (i) installment payments of RMB120,000 over 12 months; and (ii) monthly royalty equal to 15%
 
                   
42
  Debit Card and   January 1, 2007   Shanda Computer and   Shanda Computer   Shanda Networking to pay:
 
  Credit Card
Online-sales System
Software License
Agreement
      Shanda Networking   licenses right to use Debit Card and Credit Card Online-sales System to Shanda Networking   (i) installment payments of RMB1,200,000 over 12 months; and (ii) monthly royalty equal to 15%
 
                   
43
  Debit Card and   January 1, 2007   Shanda Computer and   Shanda Computer   Nanjing Shanda to pay:
 
  Credit Card
Online-sales System
Software License
Agreement
      Nanjing Shanda   licenses right to use Debit Card and Credit Card Online-sales System to Nanjing Shanda   (i) installment payments of RMB1,200,000 over 12 months; and (ii) monthly royalty equal to 15%
 
                   
44
  Debit Card and   January 1, 2007   Shanda Computer and   Shanda Computer   Hangzhou Bianfeng to pay:
 
  Credit Card
Online-sales System
Software License
Agreement
      Hangzhou Bianfeng   licenses right to use Debit Card and Credit Card Online-sales System to Hangzhou Bianfeng   (i) installment payments of RMB120,000 over 12 months; and (ii) monthly royalty equal to 15%

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No   Agreement   Date   Parties   Purpose   Payment
45
  Equipment   January 1, 2007   Shengqu and Shanda   Shengqu licenses   Shanda Networking to pay:
 
  Management Platform
Software License
Agreement
      Networking   right to use Equipment Management Platform Software to Shanda Networking   (i) initial license fee of RMB1,680,000 over 12 months; (ii) monthly service fees equal to RMB70,000; and (iii) monthly supporting fees equal to request number multiplied by RMB50,000
 
                   
46
  Equipment   January 1, 2007   Shengqu and Nanjing   Shengqu licenses   Nanjing Shanda to pay:
 
  Management Platform
Software License
Agreement
      Shanda   right to use Equipment Management Platform Software to Nanjing Shanda   (i) initial license fee of RMB1,680,000 over 12 months; (ii) monthly service fees equal to RMB70,000; and (iii) monthly supporting fees equal to request number multiplied by RMB50,000
 
                   
47
  Equipment   January 1, 2007   Shengqu and   Shengqu licenses   Hangzhou Bianfeng to pay:
 
  Management Platform
Software License
Agreement
      Hangzhou Bianfeng   right to use Equipment Management Platform Software to Hangzhou Bianfeng   (i) initial license fee of RMB240,000 over 12 months; (ii) monthly service fees equal to RMB10,000; and (iii) monthly supporting fees equal to request number multiplied by RMB50,000
 
                   
48
  Octopod System
Software License
Agreement
  January 1, 2007   Shengqu and Shanda Networking   Shengqu licenses right to use Octopod System Software to Shanda Networking   Shanda Networking to pay monthly supporting fees equal to number of servers multiplied by RMB100
 
                   
49
  Octopod System
Software License
Agreement
  January 1, 2007   Shengqu and Nanjing Shanda   Shengqu licenses right to use Octopod System Software to Nanjing Shanda   Nanjing Shanda to pay monthly supporting fees equal to number of servers multiplied by RMB100
 
                   
50
  Octopod System
Software License
Agreement
  January 1, 2007   Shengqu and Hangzhou Bianfeng   Shengqu licenses right to use Octopod System Software to Hangzhou Bianfeng   Hangzhou Bianfeng to pay monthly supporting fees equal to number of servers multiplied by RMB100
 
                   
51
  User Platform
Software License
Agreement
  January 1, 2007   Shengqu and Shanda Networking   Shengqu licenses right to use User Platform Software to Shanda Networking   Shanda Networking to pay monthly supporting fees equal to total number of subsidiary systems multiplied by RMB5,000
 
                   
52
  User Platform
Software License
Agreement
  January 1, 2007   Shengqu and Nanjing Shanda   Shengqu licenses right to use User Platform Software to Nanjing Shanda   Nanjing Shanda to pay monthly supporting fees equal to total number of subsidiary systems multiplied by RMB5,000
 
                   
53
  User Platform
Software License
Agreement
  January 1, 2007   Shengqu and Hangzhou Bianfeng   Shengqu licenses right to use User Platform Software to Hangzhou Bianfeng   Hangzhou Bianfeng to pay monthly supporting fees equal to total number of subsidiary systems multiplied by RMB5,000

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No   Agreement   Date   Parties   Purpose   Payment
54
  Remote Desktop   January 1, 2007   Shengqu and Shanda   Shengqu licenses   Shanda Networking to pay:
 
  System Software
License Agreement
      Networking   right to use Remote Desktop System Software to Shanda Networking   (i) initial license fee of RMB2,040,000 over 12 months; (ii) monthly service fees equal to RMB40,000
 
                   
55
  Remote Desktop   January 1, 2007   Shengqu and Nanjing   Shengqu licenses   Nanjing Shanda to pay:
 
  System Software
License Agreement
      Shanda   right to use Remote Desktop System Software to Nanjing Shanda   (i) initial license fee of RMB2,040,000 over 12 months; (ii) monthly service fees equal to RMB40,000
 
                   
56
  Remote Desktop   January 1, 2007   Shengqu and   Shengqu licenses   Hangzhou Bianfeng to pay:
 
  System Software
License Agreement
      Hangzhou Bianfeng   right to use Remote Desktop System Software to Hangzhou Bianfeng   (i) initial license fee of RMB240,000 over 12 months; (ii) monthly service fees equal to RMB10,000
 
                   
57
  Graph Supervision
System Software
License Agreement
  January 1, 2007   Shengqu and Shanda Networking   Shengqu licenses right to use Graph Supervision System Software to Shanda Networking   Shanda Networking to pay monthly supporting fees equal to revenue multiplied by 1%
 
                   
58
  Graph Supervision
System Software
License Agreement
  January 1, 2007   Shengqu and Nanjing Shanda   Shengqu licenses right to use Graph Supervision System Software to Nanjing Shanda   Nanjing Shanda to pay monthly supporting fees equal to revenue multiplied by 1%
 
                   
59
  Graph Supervision
System Software
License Agreement
  January 1, 2007   Shengqu and Hangzhou Bianfeng   Shengqu licenses right to use Graph Supervision System Software to Hangzhou Bianfeng   Hangzhou Bianfeng to pay monthly supporting fees equal to revenue multiplied by 1%
 
                   
60
  Server Local   January 1, 2007   Shengqu and Shanda   Shengqu licenses   Shanda Networking to pay:
 
  Verification
Software License
Agreement
      Networking   right to use Server Local Verification Software to Shanda Networking   (i) initial license fee of RMB840,000 over 12 months; and (ii) monthly supporting fees equal to total number servers multiplied by RMB50
 
                   
61
  Server Local   January 1, 2007   Shengqu and Nanjing   Shengqu licenses   Nanjing Shanda to pay:
 
  Verification
Software License
Agreement
      Shanda   right to use Server Local Verification Software to Nanjing Shanda   (i) initial license fee of RMB840,000 over 12 months; and (ii) monthly supporting fees equal to total number servers multiplied by RMB50
 
                   
62
  Server Local   January 1, 2007   Shengqu and   Shengqu licenses   Hangzhou Bianfeng to pay:
 
  Verification
Software License
Agreement
      Hangzhou Bianfeng   right to use Server Local Verification Software to Hangzhou Bianfeng   (i) initial license fee of RMB120,000 over 12 months; and (ii) monthly supporting fees equal to total number servers multiplied by RMB50
 
                   
63
  External
Application
Supervision System
Software License
Agreement
  January 1, 2007   Shengqu and Shanda Networking   Shengqu licenses right to use External Application Supervision System Software to Shanda Networking   Shanda Networking to pay monthly supporting fees equal to Supervised Object number multiplied by RMB2,000

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No   Agreement   Date   Parties   Purpose   Payment
64
  External
Application
Supervision System
Software License
Agreement
  January 1, 2007   Shengqu and Nanjing Shanda   Shengqu licenses right to use External Application Supervision System Software to Nanjing Shanda   Nanjing Shanda to pay monthly supporting fees equal to Supervised Object number multiplied by RMB2,000
 
                   
65
  External
Application
Supervision System
Software License
Agreement
  January 1, 2007   Shengqu and Hangzhou Bianfeng   Shengqu licenses right to use External Application Supervision System Software to Hangzhou Bianfeng   Hangzhou Bianfeng to pay monthly supporting fees equal to supervised object number multiplied by RMB2,000
 
                   
66
  HIDS System
Software License
Agreement
  January 1, 2007   Shengqu and Shanda Networking   Shengqu licenses right to use HIDS System Software to Shanda Networking   Shanda Networking to pay monthly supporting fees equal to alarm number multiplied by RMB500
 
                   
67
  HIDS System
Software License
Agreement
  January 1, 2007   Shengqu and Nanjing Shanda   Shengqu licenses right to use HIDS System Software to Nanjing Shanda   Nanjing Shanda to pay monthly supporting fees equal to alarm number multiplied by RMB500
 
                   
68
  HIDS System
Software License
Agreement
  January 1, 2007   Shengqu and Hangzhou Bianfeng   Shengqu licenses right to use HIDS System Software to Hangzhou Bianfeng   Hangzhou Bianfeng to pay monthly supporting fees equal to alarm number multiplied by RMB500
 
                   
69
  GameMaster System
Software License
Agreement
  January 1, 2007   Shengqu and Shanda Networking   Shengqu licenses right to use GameMaster System Software to Shanda Networking   Shanda Networking to pay monthly supporting fees equal to revenue multiplied by 0.5%
 
                   
70
  GameMaster System
Software License
Agreement
  January 1, 2007   Shengqu and Nanjing Shanda   Shengqu licenses right to use GameMaster System Software to Nanjing Shanda   Nanjing Shanda to pay monthly supporting fees equal to revenue multiplied by 0.5%
 
                   
71
  GameMaster System
Software License
Agreement
  January 1, 2007   Shengqu and Hangzhou Bianfeng   Shengqu licenses right to use GameMaster System Software to Hangzhou Bianfeng   Hangzhou Bianfeng to pay monthly supporting fees equal to revenue multiplied by 0.5%
 
                   
72
  Kangaroo System   January 1, 2007   Shengqu and Shanda   Shengqu licenses   Shanda Networking to pay:
 
  Software License
Agreement
      Networking   right to use Kangaroo System Software to Shanda Networking   (i) initial license fee of RMB 840,000 over 12 months; and (ii) monthly supporting fees equal to request number multiplied by RMB100,000
 
                   
73
  Kangaroo System   January 1, 2007   Shengqu and Nanjing   Shengqu licenses   Nanjing Shanda to pay:
 
  Software License
Agreement
      Shanda   right to use Kangaroo System Software to Nanjing Shanda   (i) initial license fee of RMB 840,000 over 12 months; and (ii) monthly supporting fees equal to request number multiplied by RMB100,000

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No   Agreement   Date   Parties   Purpose   Payment
74
  Kangaroo System
Software License
Agreement
  January 1, 2007   Shengqu and Hangzhou Bianfeng   Shengqu licenses right to use Kangaroo System Software to Hangzhou Bianfeng   Hangzhou Bianfeng to pay(i) initial license fee of RMB 120,000 over 12 months; and (ii) monthly supporting fees equal to request number multiplied by RMB100,000
 
                   
75
  Cobweb System   January 1, 2007   Shengqu and Shanda   Shengqu licenses   Shanda Networking to pay:
 
  Software License
Agreement
      Networking   right to use Cobweb System Software to Shanda Networking   (i) initial license fee of RMB 840,000 over 12 months; and (ii) monthly supporting fees equal to checking point number multiplied by RMB10,000
 
                   
76
  Cobweb System   January 1, 2007   Shengqu and Nanjing   Shengqu licenses   Nanjing Shanda to pay:
 
  Software License
Agreement
      Shanda   right to use Cobweb System Software to Nanjing Shanda   (i) initial license fee of RMB 840,000 over 12 months; and (ii) monthly supporting fees equal to checking point number multiplied by RMB10,000
 
                   
77
  Cobweb System   January 1, 2007   Shengqu and   Shengqu licenses   Hangzhou Bianfeng to pay:
 
  Software License
Agreement
      Hangzhou Bianfeng   right to use Cobweb System Software to Hangzhou Bianfeng   (i) initial license fee of RMB 120,000 over 12 months; and (ii) monthly supporting fees equal to checking point number multiplied by RMB10,000
 
                   
78
  Netview System
Software License
Agreement
  January 1, 2007   Shengqu and Shanda Networking   Shengqu licenses right to use Netview System Software to Shanda Networking   Shanda Networking to pay monthly supporting fees equal to equipment number multiplied by RMB50
 
                   
79
  Netview System
Software License
Agreement
  January 1, 2007   Shengqu and Nanjing Shanda   Shengqu licenses right to use Netview System Software to Nanjing Shanda   Nanjing Shanda to pay monthly supporting fees equal to equipment number multiplied by RMB50
 
                   
80
  Netview System
Software License
Agreement
  January 1, 2007   Shengqu and Hangzhou Bianfeng   Shengqu licenses right to use Netview System Software to Hangzhou Bianfeng   Hangzhou Bianfeng to pay monthly supporting fees equal to equipment number multiplied by RMB50
 
                   
81
  Event Platform
Software License
Agreement
  January 1, 2007   Shengqu and Shanda Networking   Shengqu licenses right to use Event Platform Software to Shanda Networking   Shanda Networking to pay monthly supporting fees equal to event number multiplied by RMB300
 
                   
82
  Event Platform
Software License
Agreement
  January 1, 2007   Shengqu and Nanjing Shanda   Shengqu licenses right to use Event Platform Software to Nanjing Shanda   Nanjing Shanda to pay monthly supporting fees equal to event number multiplied by RMB300
 
                   
83
  Event Platform
Software License
Agreement
  January 1, 2007   Shengqu and Hangzhou Bianfeng   Shengqu licenses right to use Event Platform Software to Hangzhou Bianfeng   Hangzhou Bianfeng to pay monthly supporting fees equal to event number multiplied by RMB300

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No   Agreement   Date   Parties   Purpose   Payment
84
  Network Log   January 1, 2007   Shengqu and Shanda   Shengqu licenses   Shanda Networking to pay:
 
  Supervision System
Software License
Agreement
      Networking   right to use Network Log Supervision System Software to Shanda Networking   (i) initial license fee of RMB1,008,000 over 12 months; and (ii) monthly supporting fees equal to alarm number multiplied by RMB150
 
                   
85
  Network Log   January 1, 2007   Shengqu and Nanjing   Shengqu licenses   Nanjing Shanda to pay:
 
  Supervision System
Software License
Agreement
      Shanda   right to use Network Log Supervision System Software to Nanjing Shanda   (i) initial license fee of RMB1,008,000 over 12 months; and (ii) monthly supporting fees equal to alarm number multiplied by RMB150
 
                   
86
  Network Log   January 1, 2007   Shengqu and   Shengqu licenses   Hangzhou Bianfeng to pay:
 
  Supervision System
Software License
Agreement
      Hangzhou Bianfeng   right to use Network Log Supervision System Software to Hangzhou Bianfeng   (i) initial license fee of RMB144,000 over 12 months; and (ii) monthly supporting fees equal to alarm number multiplied by RMB150
 
                   
87
  New E-sales System
License Agreement
  December 9, 2005   Shengqu and PRC operating companies   Shengqu licenses right to use E-Sales System software to the PRC operating companies   The PRC operating companies to pay: (i) installment payments of RMB3,250,000 over 12 months; and (ii) monthly royalty payments equal to 15%
 
                   
88
  New Xintianyou
License Agreement
  January 1, 2006   Shengqu and PRC operating companies   Shengqu licenses right to use Xintianyou to the PRC operating companies   The PRC operating companies to pay: (i) one installment payment of RMB3,600,000 over 12 months, and (ii) monthly royalty equal to 5%
 
                   
89
  E-sales System
License Agreement
  December 28, 2004   Shengqu and PRC operating companies   Shengqu licenses right to use E-Sales System software to the PRC operating companies   The PRC operating companies to pay: (i) one installment payments of RMB6,000,000 over 12 months, and (ii) monthly royalty equal to 15%
 
                   
90
  Xintianyou License
Agreement
  December 28, 2004   Shengqu and PRC operating companies   Shengqu licenses right to use Xintianyou to the PRC operating companies   The PRC operating companies to pay: (i) one installment payment of RMB3,600,000 over 12 months, and (ii) monthly royalty equal to 5%
 
                   
91
  New Business
Support System
License Agreement
  January 1, 2007   Shanda Computer and Shanda Networking   Shanda Computer licenses right to use Business Support System in South-west China, North-west China and North China to Shanda Networking   Shanda Networking to pay monthly royalty payments equal to the number of online game players per month multiplied by unit price as set forth in Appendix 2
 
                   
92
  New Business
Support System
License Agreement
  January 1, 2007   Shanda Computer and Nanjing Shanda   Shanda Computer licenses right to use Business Support System in East China and South-central China to Nanjing Shanda   Nanjing Shanda to pay monthly royalty payments equal to the number of online game players per month multiplied by unit price as set forth in Appendix 2

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No   Agreement   Date   Parties   Purpose   Payment
93
  New Business
Support System
License Agreement
  January 1, 2007   Shanda Computer and Hangzhou Bianfeng   Shanda Computer licenses right to use Business Support System in North-east China to Hangzhou Bianfeng   Hangzhou Bianfeng to pay monthly royalty payments equal to the number of online game players per month multiplied by unit price as set forth in Appendix 2
 
                   
94
  Termination Agreement to New Billing Technology License Agreement   December 1, 2006   Shengqu and Shanda Networking   Shengqu terminates the right to use billing technology in South-west China, North-west China and North China to Shanda Networking    
 
                   
95
  Termination Agreement to New Billing Technology License Agreement   December 1, 2006   Shengqu and Nanjing Shanda   Shengqu terminates the right to use billing technology in East China and South-central China to Nanjing Shanda    
 
                   
96
  Termination Agreement to New Billing Technology License Agreement   December 1, 2006   Shengqu and Hangzhou Bianfeng   Shengqu terminates the right to use billing technology in North-east China to Hangzhou Bianfeng    
 
                   
97
  New Billing
Technology License
Agreement
  January 1, 2006   Shengqu and Shanda Networking   Shengqu licenses right to use billing technology in South-west China, North-west China and North China to Shanda Networking   Shanda Networking to pay monthly royalty payments equal to the number of monthly average concurrent users multiplied by RMB10 for 2006
 
                   
98
  New Billing
Technology License
Agreement
  January 1, 2006   Shengqu and Nanjing Shanda   Shengqu licenses right to use billing technology in East China and South-central China to Nanjing Shanda   Nanjing Shanda to pay monthly royalty payments equal to the number of monthly average concurrent users multiplied by RMB10 for 2006
 
                   
99
  New Billing
Technology License
Agreement
  January 1, 2006   Shengqu and Hangzhou Bianfeng   Shengqu licenses right to use billing technology in North-east China to Hangzhou Bianfeng   Hangzhou Bianfeng to pay monthly royalty payments equal to the number of monthly average concurrent users multiplied by RMB10 for 2006
 
                   
100
  Amendment to the Amended and Restated Billing Technology License Agreement   December 28, 2004   Shengqu and Shanda Networking   Shengqu licenses right to use billing technology in South-west China, North-west China and North China to Shanda Networking   Shanda Networking to pay monthly royalty payments equal to the number of monthly average concurrent users multiplied by RMB13.46 for 2005
 
                   
101
  Billing Technology
License Agreement
  December 28, 2004   Shengqu and Nanjing Shanda   Shengqu licenses right to use billing technology in East China and South-central China to Nanjing Shanda   Nanjing Shanda to pay monthly royalty payments equal to the number of monthly average concurrent users multiplied by RMB13.46 for 2005

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No   Agreement   Date   Parties   Purpose   Payment
102
  Billing Technology
License Agreement
  December 28, 2004   Shengqu and Hangzhou Bianfeng   Shengqu licenses right to use billing technology in North-east China to Hangzhou Bianfeng   Nanjing Shanda to pay monthly royalty payments equal to the number of monthly average concurrent users multiplied by RMB13.46 for 2005
 
                   
103
  The Amended and Restated Billing Technology License Agreement   December 9, 2003   Shengqu and Shanda Networking   Shengqu licenses right to use billing technology in China to Shanda Networking   Shanda Networking to pay monthly royalty payments equal to the number of monthly average concurrent users multiplied by RMB13.46 for 2004 and RMB 15.3 for 2003
 
                   
104
  Equipment Lease
Agreement
  December 28, 2004   Shengqu and Nanjing Shanda   Shengqu leases certain equipment to Nanjing Shanda   Nanjing Shanda to pay monthly rent equal to 4.2% of the original value of the leased equipment.
 
                   
105
  Equipment Lease
Agreement
  December 28, 2004   Shengqu and Hangzhou Bianfeng   Shengqu leases certain equipment to Hangzhou Bianfeng   Hangzhou Bianfeng to pay monthly rent equal to 4.2% of the original value of the leased equipment.
 
                   
106
  New Strategic
Consulting Service
Agreement
  January 1, 2007   Shengqu and Shanda Networking   Shengqu provides strategic consulting service to Shanda Networking   Shanda Networking to pay monthly consulting fee equal to the result of the following formula:
 
                  (player number of paying account x ARPU as described in the Exhibit 1 — fees paid to cooperative parties - other reasonable costs) x 60%
 
                   
107
  New Strategic
Consulting Service
Agreement
  January 1, 2007   Shengqu and Nanjing Shanda   Shengqu provides strategic consulting service to Nanjing Shanda   Nanjing Shanda to pay monthly consulting fee equal to the result of the following formula:
 
                  (player number of paying account x ARPU as described in the Exhibit 1 — fees paid to cooperative parties - other reasonable costs) x 60%
 
                   
108
  New Strategic
Consulting Service
Agreement
  January 1, 2007   Shengqu and Hangzhou Bianfeng   Shengqu provides strategic consulting service to Hangzhou Bianfeng   Hangzhou Bianfeng to pay monthly consulting fee equal to the result of the following formula:
 
                (player number of paying account x ARPU as described in the Exhibit 1 — fees paid to cooperative parties - other reasonable costs) x 60%
 
                   
109
  New Technical
Support Agreement
  January 1, 2007   Shanda Computer and Shanda Networking   Shanda Computer provides technical support to Shanda Networking   Shanda Networking to make monthly service fee equal to the result of the following formula:
 
                  service fee of different employee /per day described in the Schedule A x number of business days) x 88% + other reasonable out of pocket costs

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No   Agreement   Date   Parties   Purpose   Payment
110
  New Technical
Support Agreement
  January 1, 2007   Shanda Computer and Nanjing Shanda   Shanda Computer provides technical support to Nanjing Shanda   Nanjing Shanda to make monthly service fee equal to the result of the following formula:
 
                  service fee of different employee /per day described in the Schedule A x number of business days) x 88% + other reasonable out of pocket costs
 
                   
111
  New Technical
Support Agreement
  January 1, 2007   Shanda Computer and Hangzhou Bianfeng   Shanda Computer provides technical support to Hangzhou Bianfeng   Hangzhou Bianfeng to make monthly service fee equal to the result of the following formula:
 
                  service fee of different employee /per day described in the Schedule A x number of business days) x 88% + other reasonable out of pocket costs
 
                   
112
  Amended Strategic   December 28,   Shengqu and Shanda   Shengqu provides   Shanda Networking to pay:
 
  Consulting Service
Agreement II
  2004    Networking   strategic consulting service to Shanda Networking   (i) standard monthly fee of RMB150.00 per user; and (ii) RMB1,900,000 for 2005
 
                   
113
  Amended Strategic   December 28,   Shengqu and Shanda   Shengqu provides   Shanda Networking to pay:
 
  Consulting Service
Agreement III
  2005    Networking   strategic consulting service to Shanda Networking   (i) standard monthly fee of RMB92.00 per user; and (ii) RMB1,600,000 for 2006
 
                   
114
  Amended Strategic   December 28,   Shengqu and Shanda   Shengqu provides   Shanda Networking to pay:
 
  Consulting Service
Agreement
  2004    Networking   strategic consulting service to Shanda Networking   (i) standard monthly fee of RMB86.00 per user; and (ii) RMB1,900,000 for 2004
 
                   
115
  Entrusted Loan
Agreement
  March 19, 2006   Nanjing Shanda and China Merchants Bank Dongfang Branch   Nanjing Shanda
provides Shanda
Computer with a
loan through
services provided
by China Merchants
Bank
  Nanjing Shanda to provide Shanda Computer a loan of RMB38,000,000
 
                   
116
  Loan Agreement   March 19, 2006   China Merchants Bank Dongfang Branch and Shanda Computer   Nanjing Shanda
provides Shanda
Computer with a
loan through
services provided
by China Merchants
Bank
  Nanjing Shanda to provide Shanda Computer a loan of RMB38,000,000
 
                   
117
  Entrusted Loan
Agreement
  March 19, 2006   Hangzhou Bianfeng and China Merchants Bank Dongfang Branch   Hangzhou Bianfeng
provides Shanda
Computer with a
loan through
services provided
by China Merchants
Bank
  Hangzhou Bianfeng to provide Shanda Computer a loan of RMB27,000,000
 
                   
118
  Loan Agreement   March 19, 2006   China Merchants Bank Dongfang Branch and Shanda Computer   Hangzhou Bianfeng
provides Shanda
Computer with a
loan through
services provided
by China Merchants
Bank
  Hangzhou Bianfeng to provide Shanda Computer a loan of RMB27,000,000

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No   Agreement   Date   Parties   Purpose   Payment
119
  Entrusted Loan
Agreement
  March 24, 2006   Shanda Networking and China Industrial & Commercial Bank Pudong Branch   Shanda Networking
provides Shanda
Computer with a
loan through
services provided
by China Industrial
& Commercial Bank
  Shanda Networking to provide Shanda Computer a loan of RMB35,000,000
 
                   
120
  Loan Agreement   March 24, 2006   Shanda Networking, Shanda Computer and China Industrial & Commercial Bank Pudong Branch   Shanda Networking
provides Shanda
Computer with a
loan through
services provided
by China Industrial
& Commercial Bank
  Shanda Networking to provide Shanda Computer a loan of RMB35,000,000
 
                   
121
  Loan Agreement   January 4, 2006   Shanda Networking, Shanghai Bank Xujiahui Branch and Shegnqu   Shanda Networking
provides Shengqu
with a loan through
services provided
by Shanghai Bank
  Shanda Networking to provide Shengqu a loan of RMB100,000,000
 
                   
122
  Entrusted Loan
Agreement
  January 4, 2006   Shanda Networking and China Merchants Bank Dongfang Branch   Shanda Networking
provides Shengqu
with a loan through
services provided
by China Merchants
Bank
  Shanda Networking to provide Shengqu a loan of RMB100,000,000
 
                   
123
  Loan Agreement   January 4, 2006   China Merchants Bank Dongfang Branch and Shengqu   Shanda Networking
provides Shengqu
with a loan through
services provided
by China Merchants
Bank
  Shanda Networking to provide Shengqu a loan of RMB100,000,000
 
                   
124
  Entrusted Loan
Agreement
  January 4, 2006   Nanjing Shanda and China Merchants Bank Dongfang Branch   Nanjing Shanda
provides Shengqu
with a loan through
services provided
by China Merchants
Bank
  Nanjing Shanda to provide Shengqu a loan of RMB100,000,000
 
                   
125
  Loan Agreement   January 4, 2006   China Merchants Bank Dongfang Branch and Shengqu   Nanjing Shanda
provides Shengqu
with a loan through
services provided
by China Merchants
Bank
  Nanjing Shanda to provide Shengqu a loan of RMB100,000,000
 
                   
126
  Cooperation
Agreement
  January 1, 2005   Shengqu and Shengyue   Shengqu to plan, design and create media content and prepare such materials for Shengyue   Shengyue to pay a service fee equal to 80% of the revenue realized through the distribution of media content
 
                   
127
  Website Development
Agreement
  January 1, 2007   Shengqu and Shanda Networking   Shengqu to design and cdevelop Rainbow Service website for Shanda Networking   Shanda Networking to make monthly supporting fees equal to request number multiplied by RMB100,000
Shareholder Rights and Corporate Governance
     Transfer of Ownership when Permitted by Law. Pursuant to a purchase option and cooperation agreement, or the purchase option agreement, entered into among Shengqu, Tianqiao Chen, Danian Chen and Shanda Networking on December 30, 2003, Tianqiao Chen and Danian Chen jointly granted Shengqu an exclusive option to purchase all of

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their equity interest in Shanda Networking, and Shanda Networking granted Shengqu an exclusive option to purchase all of its assets if and when (1) such purchase is permitted under applicable PRC law or (2) to the extent permitted by law, with respect to his individual interest, either Tianqiao Chen and Danian Chen ceases to be a director or employee of Shanda Networking or desires to transfer his equity interest in Shanda Networking to a third party. Shengqu may purchase such interest or assets by itself or designate another party to purchase such interest or assets. The exercise price of the option will be equal to the lower of RMB10 million or the lowest price permitted by PRC law, or a pro rata portion thereof for a purchase of a portion of the equity interest in, or assets of, Shanda Networking. Shengqu will bear the tax consequences of Tianqiao Chen and Danian Chen caused by any exercise by Shengqu of the option to purchase the equity interest in Shanda Networking. Following any exercise of the option, the parties will enter into a definitive share or asset purchase agreement and other related transfer documents within 30 days after written notice of exercise is delivered. Pursuant to the purchase option agreement, at all times before Shengqu acquires 100% of Shanda Networking’s shares or assets, Shanda Networking may not (1) sell, transfer, assign, dispose of in any manner or create any encumbrance in any form on any of its assets unless such sale, transfer, assignment, disposal or encumbrance is relating to the daily operation of Shanda Networking or has been disclosed to and consented to in writing by Shengqu; (2) enter into any transaction which may have a material effect on Shanda Networking assets, liabilities, operations, equity or other legal interests unless such transaction relates to the daily operation of Shanda Networking or has been disclosed to and consented to in writing by Shengqu; and (3) distribute any dividends to its shareholders in any manner, and Tianqiao Chen and Danian Chen may not cause Shanda Networking to amend its articles of association to the extent such amendment may have a material effect on Shanda Networking’s assets, liabilities, operations, equity or other legal interests except for pro rata increases of registered capital required by law.
     Voting Arrangement. Pursuant to two proxies executed and delivered by Tianqiao Chen and Danian Chen to Haibin Qu and Qunzhao Tan, respectively, on December 30, 2003, Tianqiao Chen and Danian Chen have granted Haibin Qu and Qunzhao Tan, who are employees of Shengqu, the power to exercise their rights as the shareholders of Shanda Networking to appoint directors, the general manager and other senior managers of Shanda Networking. Under the purchase option agreement, Tianqiao Chen and Danian Chen have agreed that (1) they will only revoke the proxies granted to Haibin Qu or Qunzhao Tan when either of the two individuals ceases to be an employee of Shengqu or Shengqu delivers a written notice to Tianqiao Chen and Danian Chen requesting such revocation, and (2) they, or either of them, as the case may be, will execute and deliver another proxy in the same format as the one dated December 30, 2003 to any other individual as instructed by Shengqu. Tianqiao Chen and Danian Chen have agreed that they will cause their successors to continue to fulfill such undertaking if and when either ceases to be a shareholder or director of Shanda Networking.
     Share Pledge Agreement. Pursuant to a share pledge agreement, dated December 30, 2003, Tianqiao Chen and Danian Chen have pledged all of their equity interest in Shanda Networking to Shengqu to secure the payment obligations of Shanda Networking under all of the agreements between Shanda Networking and Shengqu. Under this agreement, Tianqiao Chen and Danian Chen have agreed not to transfer, assign, pledge or in other manner dispose of their interests in Shanda Networking or create any other encumbrance on their interests in Shanda Networking which may have a material effect on Shengqu’s interests without the written consent of Shengqu.
     Financing Support. Pursuant to the purchase option agreement, Shengqu has agreed to provide or designate one of its affiliates to provide financing to Shanda Networking to the extent Shanda Networking needs such financing. To the extent that Shanda Networking is unable to repay the financing due to its losses, Shengqu agrees to waive or cause other relevant parties to waive all recourse against Shanda Networking with respect to the financing.
     Indemnifications. Shengqu has agreed to provide necessary support to and to indemnify Tianqiao Chen and Danian Chen to the extent that they are subject to any legal or economic liabilities as a result of performing their obligations pursuant to their agreements with Shengqu.
Other Related Party Transactions
     Authorization of Skyline Media Limited, Skyline Capital International Limited and Shanda Media Limited to purchase shares of SINA on behalf of the Company. On February 14, 2005, we entered into an agreement to purchase 688,015 shares of SINA Corp, an online media company, value-added service provider and Internet portal in China, at an aggregate purchase price of US$10.7 million from Skyline Media Limited, Skyline Capital International Limited and Shanda Media Limited, in connection with our strategic investment in SINA. This aggregate purchase price is

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equivalent to a US$15.59 per share purchase price, which represents the actual cost incurred by the sellers in purchasing the SINA shares less certain past profits realize by the sellers on behalf of us in connection with trading SINA shares.
Item 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
Consolidated Financial Statements
     Please see Item 18 “Financial Statements” for our audited consolidated financial statements filed as a part of this annual report.
Legal Proceedings
     From time to time we may initiate legal proceedings in order to protect our contractual and property rights and becoming involved in legal proceedings in which others allege that we have breached their contractual or property rights.
     Actoz / Wemade
     On July 3, 2003, we initiated an arbitration in Singapore, under the auspices of the International Chamber of Commerce, or the ICC, against Actoz and Wemade, which are two online game developers based in South Korea, in order to resolve, among other things, certain disputes relating to the software license agreement between Shanda Networking and Actoz for Mir II. In August 2003, we settled the disputes regarding the Mir II license agreement with Actoz and requested discontinuance of the arbitration. Wemade, however, objected to the discontinuation request and filed claims against Shanda and Actoz, alleging, among other things, that Wemade validly terminated the Mir II license in November 2002. In October 2005, the arbitrator appointed by the ICC to decide the dispute issued its award. The tribunal found that Actoz was fully authorized to enter into the settlement with Shanda on behalf of Wemade and that Wemade had no legitimate interest to object to the withdrawal of the arbitration. Accordingly, the claims made by Wemade against Shanda and Actoz were dismissed. In addition, Wemade shall bear and pay the costs incurred by Shanda and Actoz from August 29, 2003 in defending against such claims.
     On October 8, 2003, Wemade filed a claim with the Beijing First Intermediate People’s Court, or the Beijing Court, against us and Beijing Lian Jin Century Scientific and Commercial Centre, a Beijing based distributor of our games, which alleged that we have infringed upon Wemade’s copyright and violated the PRC Anti-Unfair Competition Law with respect to Mir II in connection with our development and operation of Woool. In particular, Wemade has alleged that the Chinese name for Woool, which includes two characters from the Chinese name for Mir II, misleads users and that we previously encouraged users to switch from Mir II to Woool by permitting the transfer of game characters developed in Mir II to Woool. The claim was served to us on December 29, 2003. Wemade has alleged, among other things, that we have copied Mir II and elements of the Legend of Mir III, another game developed by Wemade, in developing Woool and that customers have been misled into thinking that Woool is a new version of Mir II. Wemade has requested the court to order us to stop operating Woool, destroy all data relating to Woool, stop distributing and marketing products related to Woool, take down the Woool website, stop selling pre-paid cards and related products with respect to Woool, and pay Wemade’s legal fees and related costs incurred by Wemade in connection with this litigation. On May 24, 2004, the Beijing court informed us that Actoz joined Wemade as a co-plaintiff in these proceedings. In October 2005, the Beijing Court completed a series of hearings in connection with the allegations. On February 2, 2007, we entered into an agreement with Wemade and Actoz to fully settle the copyright infringement and unfair competition case before the Beijing court. All parties agreed to settle at no additional cost to any party and each party would bear its own costs incurred to date in relation to the litigation. Under the terms of the settlement, Wemade and Actoz agreed to recognize our copyright for Woool, and we agreed to recognize Wemade and Actoz’s jointly-owned copyright of Mir II.
     In late March 2004, we received notice from Actoz on a separate cause of action relating to an audit on Mir II royalty fees prepared on behalf of Actoz pursuant to the settlement agreement. The audit alleged certain potential

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underpayments of royalty fees in respect of the period from July 1, 2002 to September 30, 2003 amounting to approximately RMB35 million. In addition, we received notice from Actoz relating to an audit of Mir II royalty fees prepared on behalf of Actoz for royalties accrued during the fourth quarter of 2003. The audit alleged certain potential underpayments of royalty fees for such period in an amount of approximately RMB2 million. In September 2005, in connection with the extension of the software license agreement for Mir II, we settled the alleged underpayment of royalty fees with Actoz and agreed to pay RMB20.6 million of RMB37 million alleged underpayment.
     China Cyberport
     On April 25, 2006, China Cyberport Co. Ltd., or China Cyberport, filed a claim with the Shanghai First Intermediate People’s Court against our affiliate company Haofang. The claim alleges that Haofang, which operates a PC game network platform that allows users to play PC games against each other through the Internet, infringed upon China Cyberport’s exclusive distribution rights for certain PC games. China Cyberport has requested that the Shanghai Court order Haofang to cease operation of its PC game network, to pay damages in the amount of RMB120 million and to reimburse China Cyberport for costs incurred in connection with the dispute. On February 2, 2007, the Shanghai court completed the first hearing in connection with the allegations. On June 6, 2007, the Shanghai First Intermediate People’s Court dismissed China Cyberport’s complaint based on the finding that China Cyberport is not a qualified plaintiff. On June 14, 2007, China Cyberport filed an appeal with the Shanghai High Court to appeal the dismissal of the claim against Haofang by the First Intermediate People’s Court of Shanghai.
Dividend Policy
     We declared a special cash dividend in the first quarter of 2004, that was paid on April 29, 2004, pro-rata out of available cash to our existing shareholders. We do not, however, expect to pay dividends on our ordinary shares in the foreseeable future. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business, and do not anticipate paying any cash dividends on our ordinary shares, or indirectly on our ADSs, for the foreseeable future.
     Future cash dividends, if any, will be declared at the discretion of our board of directors and will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors as our board of directors may deem relevant.
     Holders of ADSs will be entitled to receive dividends, subject to the terms of the deposit agreement, to the same extent as the holders of our ordinary shares, less the fees and expenses payable under the deposit agreement. Cash dividends will be paid by the depositary to holders of ADSs in U.S. dollars, subject to the terms of the deposit agreement. Other distributions, if any, will be paid by the depositary to holders of ADSs in any means it deems legal, fair and practical.
B. SIGNIFICANT CHANGES
     Since the date of the audited financial statements included as a part of this annual report, the following significant changes have occurred:
     Effective from January 1, 2007, Shanda Interactive Entertainment Limited changed its functional currency from Renminbi into US dollars, given changes in its economic facts and circumstances, including an active plan to explore overseas market.
     During the period from January 1, 2007 to June 22, 2007, we purchased additional Actoz shares on the open market and increased our total stake to approximately 49.48% as of June 22, 2007.
     On February 2, 2007, Wemade repurchased a 40% equity interest in Wemade from Actoz under a share purchase agreement.
     On February 2, 2007, we entered into an agreement with Wemade and Actoz to fully settle the copyright infringement and unfair competition case before the Beijing court. Under the terms of the settlement, Wemade and

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Actoz agreeed to recognize our copyright for Woool. In addition, we agreeed to recognize Wemade and Actoz’s jointly-owned copyright of Mir II.
     On February 2, 2007 we entered into an exclusive agreement with Wemade Entertainment, Co., Ltd., or Wemade, for the license to operate the 3D MMORPG Changchun Online in China. The up-front licence fee payable to Wemade in respect of the initial five year term of the agreement was US$20 million. Additional amounts may be payable if certain performance targets are met.
     On February 8, 2007, we sold 4,000,000 ordinary shares of SINA Corporation, or SINA, pursuant to Rule 144 of the Securities Act of 1933, as amended, for approximately US$ 129.6 million (RMB1.0 billion).
     On March 9, 2007, our Board of Directors approved a share repurchase program, effective March, 2007. Under the program, we are authorized to repurchase up to US$50 million of our outstanding American Depositary Shares over the following 12 months depending on market conditions, share price and other factors, as well as subject to the relevant rules under the United States securities regulations. The share repurchases may be made on the open market, in block trades or otherwise and may include derivative transactions. The program may be suspended or discontinued at any time. As of March 31, 2007, we have repurchased 1,476,550 ordinary shares (which was equal to 738,275 ADSs) from the open market at a cost of US$16.0 million (RMB 124.9 million).
     On April 24, 2007, we granted options under the 2005 plan to purchase 655,000 of ordinary shares to some of our officers and other employees.
     On May 11, 2007 and May 15, 2007, we sold the remaining 1,066,344 and 1,051,934 shares of SINA in open-market transactions for US$38.1 million (RMB297.5 million) and US$38.4 million (RMB299.9 million), respectively.
     On June 6, 2007, the Shanghai First Intermediate People’s Court dismissed the complaint filed by China Cyberport Co., Ltd., or China Cyberport, against Haofang, ruling that China Cyberport is not a qualified plaintiff. On June 14, 2007, China Cyberport filed an appeal with the Shanghai High Court to appeal the dismissal of the claim against Haofang by the First Intermediate People’s Court of Shanghai.
Item 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
Price Range of American Depositary Shares
     Our ADSs, each representing two of our ordinary shares, have been listed on The Nasdaq National Market since May 13, 2004. Our ADSs trade under the symbol “SNDA.” The following table provides the high and low sale prices for our ADSs on The Nasdaq National Market for (1) the year of 2004 and the year of 2005, (2) each of the quarters since the second quarter of 2004, and (3) each of the most recent six months. On June 22, 2007, the last reported sale price for our ADSs was US$28.58 per ADS.
                 
    Sale Price (US$)
    High   Low
Yearly highs and lows
               
Year 2004 (from May 13, 2004)
    45.40       10.58  
Year 2005
    43.55       14.80  
Year 2006
    22.49       12.23  
Quarterly highs and lows:
               
First quarter 2005
    43.55       27.80  
Second quarter 2005
    42.24       28.98  
Third quarter 2005
    41.18       26.67  
Fourth quarter 2005
    28.30       14.80  
First quarter 2006
    18.40       12.58  
Second quarter 2006
    15.30       12.23  

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    Sale Price (US$)
    High   Low
Third quarter 2006
    17.84       12.65  
Fourth quarter 2006
    22.49       13.63  
Monthly highs and lows:
               
August 2006
    17.84       14.38  
September 2006
    16.78       14.76  
October 2006
    15.84       13.63  
November 2006
    19.68       14.68  
December 2006
    22.49       18.65  
January 2007
    23.56       20.25  
February 2007
    25.68       21.42  
March 2007
    27.23       21.13  
April 2007
    27.59       25.00  
May 2007
    30.63       24.10  
 
               
June 2007 (through June 22)
    28.80       26.75  
 
               
B. PLAN OF DISTRIBUTION
     Not applicable
C. MARKETS
     Our ADSs, each representing two of our ordinary shares, have been listed on The Nasdaq Global Market since May 13, 2004 under the symbol “SNDA.”
D. SELLING SHAREHOLDER
Not applicable
E. DILUTION
Not applicable
F. EXPENSES OF THE ISSUE
Not applicable
Item 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
     We incorporate by reference into this annual report the description of our amended and restated memorandum and articles of association contained in our registration statement on Form F-1 (File No. 333-114177) filed with the Securities and Exchange Commission on May 7, 2004.
C. MATERIAL CONTRACTS
     We have not entered into any material contracts other than in the ordinary course of business or other than those described in Item 4 “Information on the Company” and elsewhere in this annual report.

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D. EXCHANGE CONTROLS
     Substantially all of our revenues are denominated in Renminbi, while a portion of our expenditures are denominated in foreign currencies, primarily the U.S. dollar. Fluctuations in exchange rates, particularly those involving the U.S. dollar and the Japanese yen, may affect our costs and operating margins. In addition, these fluctuations could result in exchange losses and increased costs in Renminbi terms. Where our operations conducted in Renminbi are reported in dollars, such fluctuations could result in changes in reported results which do not reflect changes in the underlying operations. Since January 1, 1994, the PRC government has used a unitary managed floating rate system. Under that system, the People’s Bank of China, or PBOC, publishes a daily base exchange rate with reference primarily to the supply and demand of Renminbi against U.S. dollar and other foreign currencies in the market during the previous day. Authorized banks and financial institutions are allowed to quote buy and sell rats for Renminbi within a specified bank around the central bank’s daily exchange rate. On July 21, 2005, PBOC announced an adjustment of the exchange rate of the U.S. dollar to Renminbi from 1:8.27 to 1:8.11 and modified the system by which the exchange rates are determined. While the international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further reevaluation and a significant fluctuation of the exchange rate of Renminbi against the U.S. dollar, including possible devaluations. As substantially all of our revenues are denominated in Renminbi, such a potential future devaluation of Renminbi against the U.S. dollars could negatively impact our results of operations.
     In October 2005, the State Administration of Foreign Exchange, or SAFE, promulgated regulations that require registration with local SAFE in connection with direct or indirect offshore investment by PRC residents, including PRC individual residents and PRC corporate entities. These regulations apply to our shareholders who are PRC residents and also apply to our prior and future offshore acquisitions.
     The SAFE regulations retroactively require registration by March 31, 2006 of direct or indirect investments previously made by PRC residents in offshore companies. If a PRC resident with a direct or indirect stake in an offshore parent company fails to make the required SAFE registration, the PRC subsidiaries of such offshore parent company may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries. Further, failure to comply with various SAFE registration requirements described above could result in liability under PRC law for foreign exchange evasion.
     For more information about foreign exchange control and other foreign exchange regulations in China, see “Risk Factors” in Item 3 “Key Information.”
E. TAXATION
     The following is a general summary of certain Cayman Islands and U.S. federal income tax considerations. The discussion is not intended to be, nor should it be construed as, legal or tax advice to any particular prospective holder of our ADSs. The discussion is based on laws and relevant interpretations thereof in effect as of the date hereof, all of which are subject to change or different interpretations, possibly with retroactive effect. The discussion does not address United States state or local tax laws, or tax laws of jurisdictions other than the Cayman Islands and the United States.
Cayman Islands Taxation
     The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty or withholding tax applicable to us or to any holder of our securities. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands. No stamp duty is payable in the Cayman Islands on transfers of shares of Cayman Islands companies except those which hold interests in land in the Cayman Islands. The Cayman Islands is not party to any double tax treaties. There are no exchange control regulations or currency restrictions in the Cayman Islands.

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     Pursuant to Section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, the Company has obtained an undertaking from the Governor-in-Council:
  (1)   that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciation shall apply to the Company or its operations; and
 
  (2)   that the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable on the shares, debentures or other obligations of the Company.
     The undertaking for the Company is for a period of twenty years from November 25, 2003.
United States Federal Income Taxation
     The following summary describes certain United States federal income tax consequences of the ownership of our ADSs as of the date hereof. The discussion is applicable to United States Holders (as defined below) who hold our ADSs as capital assets. As used herein, the term “United States Holder’’ means a holder of an ADS that is for United States federal income tax purposes:
    an individual citizen or resident of the United States;
 
    a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;
 
    an estate the income of which is subject to United States federal income taxation regardless of its source; or
 
    a trust if it (1) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person.
     This summary does not represent a detailed description of the United States federal income tax consequences applicable to you if you are subject to special treatment under the United States federal income tax laws, including if you are:
    a dealer in securities or currencies;
 
    a financial institution;
 
    a regulated investment company;
 
    a real estate investment trust;
 
    an insurance company;
 
    a tax-exempt organization;
 
    a person holding our ADSs as part of a hedging, integrated or conversion transaction, a constructive sale or a straddle;
 
    a trader in securities that has elected the mark-to-market method of accounting for your securities;

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    a person liable for alternative minimum tax;
 
    a person who owns 10% or more of our voting stock;
 
    a partnership or other pass-through entity for United States federal income tax purposes; or
 
    a person whose “functional currency” is not the United States dollar.
     The discussion below is based upon the provisions of the Internal Revenue Code of 1986, as amended (the “Code’’), and regulations, rulings and judicial decisions thereunder as of the date hereof, and such authorities may be replaced, revoked or modified so as to result in United States federal income tax consequences different from those discussed below. In addition, this summary is based, in part, upon representations made by the depositary to us and assumes that the deposit agreement, and all other related agreements, will be performed in accordance with their terms.
     If a partnership holds ADSs, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our ADSs, you should consult your tax advisors.
     This summary does not contain a detailed description of all the United States federal income tax consequences to you in light of your particular circumstances. If you are considering the purchase, ownership or disposition of our ADSs, you should consult your own tax advisors concerning the United States federal income tax consequences to you in light of your particular situation as well as any consequences arising under the laws of any other taxing jurisdiction.
     The U.S. Treasury has expressed concerns that intermediaries in the chain of ownership between the holder of an ADS and the issuer of the security underlying the ADS may be taking actions that are inconsistent with the claiming of foreign tax credits for United States holders of ADSs. Such actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate holders. Accordingly, the analysis of the availability of the reduced tax rate for dividends received by certain non-corporate holders below could be affected by actions taken by intermediaries in the chain of ownership between the holder of an ADS and our company.
ADSs
     If you hold ADSs, for United States federal income tax purposes, you generally will be treated as the owner of the underlying Shares that are represented by such ADSs. Accordingly, deposits or withdrawals of Shares for ADSs will not be subject to United States federal income tax.
Taxation of Dividends
     We do not anticipate paying dividends on our ordinary shares or indirectly on our ADSs, in the foreseeable future. See “Dividend Policy” in Item 8.
     Subject to the “Passive Foreign Investment Company” discussion below, the gross amount of distributions on the ADSs will be taxable as dividends, to the extent paid out of our current or accumulated earnings and profits, as determined under United States federal income tax principles. Such income will be includable in your gross income as ordinary income on the day actually or constructively received by the depositary. Such dividends will not be eligible for the dividends received deduction allowed to corporations under the Code.
     With respect to non-corporate United States investors, certain dividends received before January 1, 2011 from a qualified foreign corporation may be subject to reduced rates of taxation. A foreign corporation is treated as a qualified foreign corporation with respect to dividends received from that corporation on shares (or ADSs backed by such shares) that are readily tradable on an established securities market in the United States. United States Treasury Department guidance indicates that our ADSs, which are listed on the Nasdaq National Market, are readily tradable

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on an established securities market in the United States. There can be no assurance that our ADSs will be considered readily tradable on an established securities market in later years. Non-corporate holders that do not meet a minimum holding period requirement during which they are not protected from the risk of loss or that elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation regardless of our status as a qualified foreign corporation. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. You should consult your own tax advisors regarding the application of these rules given your particular circumstances.
     To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year, as determined under United States federal income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of the ADSs, and the balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or exchange. However, we do not expect to keep earnings and profits in accordance with United States federal income tax principles. Therefore, you should expect that a distribution will generally be treated as a dividend (as discussed above).
Passive Foreign Investment Company
     Based on the projected composition of our income and valuation of our assets, including goodwill, we do not believe we were a passive foreign investment company (a “PFIC”) for 2006, and we do not expect to become one in the future, although there can be no assurance in this regard.
     In general, we will be a PFIC for any taxable year in which:
at least 75% of our gross income is passive income, or
at least 50% of the value (determined on a quarterly basis) of our assets is attributable to assets that produce or are held for the production of passive income.
For this purpose, passive income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not derived from a related person). If we own at least 25% (by value) of the stock of another corporation, we will be treated, for purposes of the PFIC tests, as owning our proportionate share of the other corporation’s assets and receiving our proportionate share of the other corporation’s income.
     The determination of whether we are a PFIC is made annually. Accordingly, it is possible that we may become a PFIC in the current or any future taxable year due to changes in our asset or income composition. Because we have valued our goodwill based on the market value of our equity, a decrease in the price of our ADSs may also result in our becoming a PFIC. If we are a PFIC for any taxable year during which you hold our ADSs, you will be subject to special tax rules discussed below.
     If we are a PFIC for any taxable year during which you hold our ADSs, you will be subject to special tax rules with respect to any “excess distribution” received and any gain realized from a sale or other disposition, including a pledge, of ADSs. Distributions received in a taxable year that are greater than 125% of the average annual distributions received during the shorter of the three preceding taxable years or your holding period for the ADSs will be treated as excess distributions. Under these special tax rules:
    the excess distribution or gain will be allocated ratably over your holding period for the ADSs,
 
    the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and
 
    the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

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     In addition, non-corporate United States Holders will not be eligible for reduced rates of taxation on any dividends received from us prior to January 1, 2011, if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year. You will be required to file Internal Revenue Service Form 8621 if you hold our ADSs in any year in which we are classified as a PFIC.
     If we are a PFIC for any taxable year and any of our foreign subsidiaries is also a PFIC, a United States Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these rules. You are urged to consult your tax advisors about the application of the PFIC rules to any of our subsidiaries.
     In certain circumstances, in lieu of being subject to the excess distribution rules discussed above, you may make an election to include gain on the stock of a PFIC as ordinary income under a mark-to-market method, provided that such stock is regularly traded on a qualified exchange. Under current law, the mark-to-market election may be available to holders of ADSs because the ADSs will be listed on the Nasdaq National Market which constitutes a qualified exchange, although there can be no assurance that the ADSs will be “regularly traded” for purposes of the mark-to-market election.
     If you make an effective mark-to-market election, you will include in each year as ordinary income the excess of the fair market value of your ADSs at the end of the year over your adjusted tax basis in the ADSs. You will be entitled to deduct as an ordinary loss each year the excess of your adjusted tax basis in the ADSs over their fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election.
     Your adjusted tax basis in the ADSs will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. If you make a mark-to-market election it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the ADSs are no longer regularly traded on a qualified exchange or the Internal Revenue Service consents to the revocation of the election. You are urged to consult your tax advisor about the availability of the mark-to-market election, and whether making the election would be advisable in your particular circumstances.
     Alternatively, you can sometimes avoid the rules described above by electing to treat us as a “qualified electing fund” under Section 1295 of the Code. This option is not available to you because we do not intend to comply with the requirements necessary to permit you to make this election.
     You are urged to consult your tax advisors concerning the United States federal income tax consequences of holding ADSs if we are considered a PFIC in any taxable year.
Taxation of Capital Gains
     For United States federal income tax purposes and subject to the discussion under “Passive Foreign Investment Company” above, you will recognize taxable gain or loss on any sale or exchange of ADSs in an amount equal to the difference between the amount realized for the ADSs and your tax basis in the ADSs. Such gain or loss will generally be capital gain or loss. Capital gains of individuals derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. Any gain or loss recognized by you will generally be treated as United States source gain or loss.
Information reporting and backup withholding
     In general, information reporting will apply to dividends in respect of our ADSs and the proceeds from the sale, exchange or redemption of our ADSs that are paid to you within the United States (and in certain cases, outside the United States), unless you are an exempt recipient such as a corporation. A backup withholding tax may apply to such payments if you fail to provide a taxpayer identification number or certification of other exempt status or fail to report in full dividend and interest income.

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     Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your United States federal income tax liability provided the required information is furnished to the Internal Revenue Service.
F. DIVIDENDS AND PAYING AGENTS
Not applicable
G. STATEMENTS BY EXPERTS
Not applicable
H. DOCUMENTS ON DISPLAY
     We have filed with the SEC a registration statement on Form F-1, a registration statement on Form F-6, a registration statement on Form F-3, and a registration statement on Form 8-A, including relevant exhibits and schedules under the Securities Act, covering the ordinary shares represented by the ADSs, as well as the ADSs. You should refer to our registration statements and their exhibits and schedules if you would like to find out more about us and about the ADSs and the ordinary shares represented by the ADSs. This annual report summarizes material provisions of contracts and other documents to which we refer you. Since the annual report may not contain all the information that you may find important, you should review a full text of these documents.
     The SEC also maintains a website that contains reports, proxy statements and other information about issuers, such as us, who file electronically with the SEC. The address of that site is http://www.sec.gov. The information on that website is not a part of this annual report.
     We will furnish to The Bank of New York, as depositary of our ADSs, our annual reports. When the depositary receives these reports, it will upon our request promptly provide them to all holders of record of ADSs. We will also furnish the depositary with all notices of shareholders’ meetings and other reports and communications in English that we make available to our shareholders. The depositary will make these notices, reports and communications available to holders of ADSs and will upon our request mail to all holders of record of ADSs the information contained in any notice of a shareholders’ meeting it receives.
     We are subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Accordingly, we will be required to file reports, including annual reports on Form 20-F, and other information with the SEC. As a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing the furnishing and content of proxy statements to shareholders. The registration statements, reports and other information so filed can be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these documents upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms.
I. SUBSIDIARY INFORMATION
Not applicable
Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
     Our exposure to interest rate risk primarily relates to the interest income generated by excess cash invested in demand deposits, investments in fixed deposits with maturity over three months, PRC government and PRC corporate bonds, and interest expenses to be incurred, if we seek to obtain a credit facility to satisfy our cash requirement for repurchase of our convertible notes. We have not used derivative financial instruments in our investment portfolio in

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order to reduce interest rate risk. Interest earning instruments carry a degree of interest rate risk. However, our future interest income may change, subject to market interest rate movement.
Foreign Currency Risk
     Our business is operated in the PRC, and its value is effectively denominated in Renminbi, while our ADSs will be traded in U.S. dollars. The fluctuation of foreign exchange rate between U.S. dollars and Renminbi affects the value of your investment in our ADSs. All our revenues and most of expenses are substantially denominated in Renminbi, their exposure to foreign exchange risks should generally be limited. However, as at the release date of our annual report, we do have material monetary assets and liabilities denominated in U.S. dollars, which mainly consist of the investments in marketable securities and affiliated companies and the convertible notes payable. The fluctuation of foreign exchange rate affects the value of these monetary assets and liabilities denominated in U.S. dollars. Generally, appreciation of Renminbi against U.S. dollars will devaluate the assets and liabilities denominated in U.S. dollar, while devaluation of Renminbi again U.S. dollars will appreciate the assets and liabilities denominated in U.S. dollar. In 2006, a foreign exchange gain of RMB59.8 million (US$7.7 million) incurred as a result of revaluation of monetary assets and liabilities denominated in US dollar following the appreciation of Renminbi against the U.S. dollar. Effective from January 1, 2007, Shanda Interactive Entertainment Limited, our listed company incorporated in Cayman Islands, changed its functional currency from Renminbi to US dollars due to changes in its economic facts and circumstances, including an active plan to explore overseas market. Going forward, the exchange gain or losses from revaluation of the monetary assets and liabilities denominated in US dollars of Shanda Interactive Entertainment Limited will not be recorded in the statement of operations, but instead will be treated as a cumulative translation adjustment under shareholders’ equity in the balance sheet.
     In China, very limited hedging transactions are available to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure at all. See “Exchange Controls” in Item 10, “Additional Information”.
Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable
Part II
Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable
Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
A. — D. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
Not applicable
E. USE OF PROCEEDS
Not applicable
Item 15T. CONTROLS AND PROCEDURES
     Evaluation of Disclosure Controls and Procedures

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     As of the end of the period covered by this report, our principal executive officer and principal financial officer have performed an evaluation of the effectiveness of our disclosure controls and procedures within the meaning of Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, they have concluded that our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports that we file and furnish under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in by the Securities and Exchange Commission’s rules and regulations.
     Management’s Report on Internal Control over Financial Reporting
     Management of Shanda Interactive Entertainment Limited (together with its consolidated subsidiaries, the “Group”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Group’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with applicable generally accepted accounting principles. The Group’s internal control over financial reporting includes those policies and procedures that:
    pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets and liabilities of the Group;
 
    provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with the applicable generally accepted accounting principles, and that receipts and expenditures of the Group are being made only in accordance with authorizations of management and directors of the Group; and
 
    provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Group’s assets that could have a material effect on the financial statements.
     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
     Management assessed the effectiveness of the Group’s internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework. Based on this assessment, management determined that the Group’s internal control over financial reporting was effective as of December 31, 2006.
     This Form 20-F annual report does not include an attestation report of the Group’s registered public accounting firm, PricewaterhouseCoopers Zhong Tian CPAs Limited Company, regarding internal control over financial reporting. Management’s report was not subject to attestation by the Group’s registered public accounting firm pursuant to the temporary rules of the Securities and Exchange Commission (the “SEC”) that permit the Group to provide only management’s report in this Form 20-F.
     Changes in Internal Control over Financial Reporting
     In its 2005 Form 20-F, the Group reported the following material weaknesses in its internal control over financial reporting including: (1) lack of an enterprise risk management system, including internal audit or similar functions to address enterprise risk and lack of formalization of internal policies over company level controls; (2) lack of sufficient personnel with appropriate knowledge, experience and training in the application of accounting principles generally accepted in the United States of America (“US GAAP”), commensurate with the financial reporting requirements; and (3) lack of policies to select and evaluate the design and implementation with regards to US GAAP accounting policies and critical accounting estimates.

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     In response to the above outlined material weaknesses identified in our 2005 filing, in cooperation with our Board and under the supervision of our Audit Committee, we have taken a number of actions to remediate the material weaknesses including:
    standardized internal policies over the design and implementation of company level controls including the formalization of internal audit roles and responsibilities;
 
    introduction of an anonymous hotline for the purpose of establishing additional means for whistleblower activities;
 
    arranged training for financial and accounting personnel on a periodic basis to furnish them with adequate knowledge of US GAAP and SEC rules and disclosure requirements;
 
    acquired additional resources in the financial accounting function with appropriate knowledge and experience in the application of US GAAP including the appointment of a new financial controller so as to enhance monitoring controls over the implementation of significant US GAAP accounting policies and estimates;
 
    standardized periodic review procedures in connection with the selection and evaluation of significant US GAAP accounting policies, critical accounting judgments and estimates by the Audit Committee; and
 
    implemented additional monitoring controls that are designed to improve upon the accuracy and timely preparation of our financial statements and related SEC filings.
     As of December 31, 2006, management of the Group determined that the applicable controls were effectively designed and operating so as to enable management to conclude that the above described material weaknesses have been remediated.
Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT
     Our board of directors has determined that Mr. Jingsheng Huang qualifies as an Audit Committee Financial Expert as defined by the applicable rules of the SEC.
     Our board of directors has determined that Mr. Jingsheng Huang is independent as such term is defined by Rule 4200 of the NASD Marketplace Rules.
Item 16B. CODE OF ETHICS
     Our board of directors has adopted a code of ethics, which is applicable to our senior executive and financial officers. In addition, our board of directors has adopted a code of conduct, which is applicable to all of our directors, officers and employees. We have made our code of ethics and our code of conduct publicly available on our website at www.snda.com.
Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
     Note: As above.
     The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by our principal external auditors for the periods indicated. We did not pay any other fees to our principal external auditors during the periods indicated below.

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    For the year ended December 31,
    2004   2005   2006
    RMB   RMB   RMB   US$
            (in thousands)        
Audit fees(1)
    9,327.6       5,084.2       7,418.3       950.0  
Audit-related fees(2)
    1,858.1       2,679.3       2,417.0       309.5  
 
                               
Other fees(3)
    703.5       2,001.4       2,320.7       297.2  
 
                               
 
(1)   Audit fees means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors for the audit of our annual financial statements or services that are normally provided by the auditors in connection with statutory and regulatory filings or engagements.
 
(2)   Audit-related fees means the aggregate fees billed in each of the fiscal years listed for assurance and related services by our principal auditors that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit fees”. Services comprising the fees disclosed under the category of “Audit-related fees” involve principally limited reviews performed on our consolidated financial statements and the audits of the annual financial statements of our subsidiaries and affiliated companies. .
 
(3)   Other fees means the aggregate fees billed for (i) the issuance of agreed-upon procedures reports by our principal auditors as part of the due diligence work relating to our merger and acquisition projects and (ii) compliance, advisory and other tax related service.
Item 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
     We have not been granted an exemption from the applicable listing standards for the audit committee of our board of directors.
Item 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
                                 
                            (d) Maximum  
                    (c) Total     Approximate  
                    Number of ADS     US Dollar  
            (b) Average     Purchased as     Value of ADS  
    (a) Total     Price Paid     Part of Publicly     that May Yet  
    Number of ADS     per ADS in     Announced     Be Purchased  
                     Period   Purchased     US$     Plan(1)     Under the Plan  
November 1 – November 30, 2005
    260,000     $ 19.14       260,000     $ 45,023,600  
December 1 – December 31, 2005
    110,000     $ 16.57       110,000     $ 43,200,900  
 
                       
March 1 – March 31, 2007
    738,275     $ 21.73       738,275     $ 16,041,710  
 
                       
 
(1)   On October 24, 2005, we announced a share repurchase plan, which expired on October 23, 2006. Under the plan, we were approved to repurchase up to US$50 million worth of our outstanding ADS from time to time over the 12 month period following the plan’s approval date. On March 9, 2007, we announced a share repurchase plan, under the plan, we are approved to repurchase up to US$50 million worth of our outstanding ADS from time to time over the next 12 months.
Item 17. FINANCIAL STATEMENTS
Not applicable
Item 18. FINANCIAL STATEMENTS
     The consolidated financial statements for the Company and its subsidiaries are included at the end of this annual report.
     As of June 22, 2007, we owned approximately 49.48% of Actoz Soft Co., Ltd., and pursuant to Rule 3-09 of SEC Regulation S-X, we have included the financial statements of Actoz Soft Co., Ltd. at the end of this annual report.

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Item 19. EXHIBITS
     
Exhibit    
Number   Description
1.1
  Amended and Restated Memorandum and Articles of Association of Shanda Interactive Entertainment Limited (incorporated by reference to Exhibit 3.1 to our Registration Statement on Form F-1 (file no. 333-114177) filed with the Securities and Exchange Commission on May 7, 2004).
 
   
2.1
  Specimen Ordinary Share Certificate (incorporated by reference to Exhibit 4.1 to our Registration Statement on Form F-1 (file no. 333-114177) filed with the Securities and Exchange Commission on May 7, 2004).
 
   
2.2
  Specimen of American Depositary Receipts (incorporated by reference to Exhibit A to Exhibit 1 to our Registration Statement on Form F-6 POS (file no. 333-114759) filed with the Securities and Exchange Commission on June 9, 2004).
 
   
2.3
  Form of Deposit Agreement (incorporated by reference to Exhibit 1 to our Post-Effective Amendment No. 1 to the Form F-6 (file no. 333-114759) filed with the Securities and Exchange Commission on June 9, 2004).
 
   
2.4
  Registration Rights Agreement, dated October 20, 2004, between Shanda Interactive Entertainment Limited and the parties named herein (incorporated by reference to Exhibit 4.7 to our Registration Statement on Form F-1 (file no. 333-122029) filed with the Securities and Exchange Commission on January 13, 2005).
 
   
2.5
  Indenture, dated October 20, 2004, between Shanda Interactive Entertainment Limited, and The Bank of New York, as Trustee, relating to the Company’s Zero Coupon Senior Convertible Notes due 2014 (incorporated by reference to Exhibit 4.6 to our Registration Statement on Form F-1 (file no. 333-122029) filed with the Securities and Exchange Commission on January 13, 2005).
 
   
2.6
  Shareholders Agreement of Shanda Interactive Entertainment Limited among Shanda Interactive Entertainment Limited, Shanghai Shanda Internet Development Co., Ltd., Shanda Media Limited, Shanda Investment International Limited, Tianqiao Chen, Danian Chen and SB Asia Infrastructure Fund L.P., dated December 19, 2003, (incorporated by reference to Exhibit 4.2 to our Registration Statement on Form F-1 (file no. 333-114177) filed with the Securities and Exchange Commission on April 2, 2004).
 
   
2.7
  Sale and Purchase Agreement, among Shanda Interactive Entertainment Limited, Jong Hyun Lee, Il Wang Park, Byung Chan Park, Jin Ho Lee, Sang Jun Roh, Sung Gon Bae and Yong Sung Cho, dated November 29, 2004 in connection with the sale of shares of Actoz Soft Co., Ltd. to Shanda Interactive Entertainment Limited (incorporated by reference to Exhibit 2.7 to our 2004 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on May 31, 2005).
 
   
4.1
  Employee Stock Option Plan and form of share option agreement (incorporated by reference to Exhibit 10.1 to our Registration Statement on Form F-1 (file no. 333-114177) filed with the Securities and Exchange Commission on April 2, 2004).
 
   
4.2
  Employee Equity Compensation Plan (incorporated by reference to Exhibit 99.2 to our press release on Form 6-K (file no.000-50705) filed with the Securities and Exchange Commission on September 22, 2005)
 
   
4.3
  Share Purchase Agreement among Shanda Media Limited, Shanda Investment International Limited, SB Asia Infrastructure Fund L.P., Shanda Interactive Entertainment Limited and Shanda Holdings Limited, dated December 19, 2003, (incorporated by reference to Exhibit 4.3 to our Registration Statement on Form F-1 (file no. 333-114177) filed with the Securities and Exchange Commission on April 2, 2004).

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Exhibit    
Number   Description
4.4
  Purchase Option and Cooperation Agreement among Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd., Tianqiao Chen and Danian Chen, dated December 30, 2003, (incorporated by reference to Exhibit 10.2 to our Registration Statement on Form F-1 (file no. 333-114177) filed with the Securities and Exchange Commission on April 2, 2004).
 
   
4.5
  Share Pledge Agreement among Tianqiao Chen, Danian Chen and Shengqu Information Technology (Shanghai) Co., Ltd., dated December 30, 2003, (incorporated by reference to Exhibit 10.3 to our Registration Statement on Form F-1 (file no. 333-114177) filed with the Securities and Exchange Commission on April 2, 2004).
 
   
4.6
  Amended and Restated Equipment Leasing Agreement between Shanghai Shanda Networking Co., Ltd. and Shengqu Information Technology (Shanghai) Co., Ltd., dated December 9, 2003, (incorporated by reference to Exhibit 10.8 to our Registration Statement on Form F-1 (file no. 333-114177) filed with the Securities and Exchange Commission on April 2, 2004).
 
   
4.7
  Amended and Restated Technical Support Agreement between Shanghai Shanda Networking Co., Ltd. and Shengqu Information Technology (Shanghai) Co., Ltd., dated December 9, 2003, (incorporated by reference to Exhibit 10.9 to our Registration Statement on Form F-1 (file no. 333-114177) filed with the Securities and Exchange Commission on April 2, 2004).
 
   
4.8
  Arena Software I License Agreement between Grandpro Information Technology (Shanghai) Co., Ltd. and Shanghai Haofang Online Information Technology Co., Ltd. with respect to Arena Software I, dated May 1, 2006 (incorporated by reference to Exhibit 4.8 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.9
  Arena Software II License Agreement between Grandpro Information Technology (Shanghai) Co., Ltd. and Shanghai Haofang Online Information Technology Co., Ltd. with respect to Arena Software II, dated May 1, 2006 (incorporated by reference to Exhibit 4.9 to our 2005 annual report on Form 20-F (file no. 000-50705).
 
   
4.10
  Software Licensing Agreement among Shanghai Shanda Networking Co., Ltd., Shengqu Information Technology (Shanghai) Co., Ltd., Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. with respect to Shanda Xintianyou 1.0 software system, dated January 1, 2006 (Incorporated by reference to Exhibit 4.10 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.11
  Software Licensing Agreement among Shanghai Shanda Networking Co., Ltd., Shengqu Information Technology (Shanghai) Co., Ltd., Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. with respect to E-sales System 2.0 Software, dated December 9, 2005 (Incorporated by reference to Exhibit 4.11 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.12
  Software Licensing Agreement among Shanghai Shanda Networking Co., Ltd., Shengqu Information Technology (Shanghai) Co., Ltd., Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. with respect to Shanda Xintianyou 1.0 software system, dated December 28, 2004, (incorporated by reference to Exhibit 4.11 to our 2004 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on May 31, 2005).
 
   
4.13
  Software Licensing Agreement among Shanghai Shanda Networking Co., Ltd., Shengqu Information Technology (Shanghai) Co., Ltd., Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. with respect to E-sales System 2.0 Software, dated December 28, 2004, (incorporated by reference to Exhibit 4.12 to our 2004 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on May 31, 2005).

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Exhibit    
Number   Description
4.14
  Sample of Provincial General Distribution and City-level Distribution Agreement (incorporated by reference to Exhibit 10.16 to our Registration Statement on Form F-1 (file no. 333-114177) filed with the Securities and Exchange Commission on April 2, 2004).
 
   
4.15
  Software Licensing Agreement among Shanghai Shanda Internet Development Co., Ltd., Shanghai Pudong New Area Imp. & Exp. Corp. and Actoz Soft Co., Ltd., dated June 29, 2001, (incorporated by reference to Exhibit 10.17 to our Registration Statement on Form F-1 (file no. 333-114177) filed with the Securities and Exchange Commission on April 20, 2004).
 
   
4.16
  Supplemental Agreement among Shanghai Shanda Networking Development Co., Ltd., Actoz Soft Co., Ltd. and Wemade Entertainment Co., Ltd., dated July 14, 2002, (incorporated by reference to Exhibit 10.18 to our Registration Statement on Form F-1 (file no. 333-114177) filed with the Securities and Exchange Commission on April 2, 2004).
 
   
4.17
  Pre-lease Contract between Shengqu Information Technology (Shanghai) Co., Ltd. and Shanghai Zhangjiang Micro-electronics Harbor Co., Ltd., dated August 29, 2003, for offices located at No. 1 (temporary) Building, No. 690 Bibo Road, Zhangjiang High-Tech Area, Shanghai, PRC (incorporated by reference to Exhibit 10.20 to our Registration Statement on Form F-1 (file no. 333-114177) filed with the Securities and Exchange Commission on April 2, 2004).
 
   
4.18
  Articles of Association of Shengqu Information Technology (Shanghai) Co., Ltd. (incorporated by reference to Exhibit 10.21 to our Registration Statement on Form F-1 (file no. 333-114177) filed with the Securities and Exchange Commission on April 2, 2004).
 
   
4.19
  Settlement Agreement between Shanghai Shanda Internet Development Co., Ltd. and Actoz Soft Co., Ltd., dated August 19, 2003, (incorporated by reference to Exhibit 10.22 to our Registration Statement on Form F-1 (file no. 33-114177) filed with the Securities and Exchange Commission on April 20, 2004).
 
   
4.20
  Amendment Agreement among Shanghai Shanda Internet Development Co., Ltd., Actoz Soft Co., Ltd, Shanghai Pudong Import & Export Co., Ltd. and Shengqu Information Technology (Shanghai) Co., Ltd., dated August 19, 2003, (incorporated by reference to Exhibit 10.23 to our Registration Statement on Form F-1 (file no. 333-114177) filed with the Securities and Exchange Commission on April 20, 2004).
 
   
4.21
  Extension Agreement among Actoz Soft Co., Ltd, Shanghai Shanda Internet Development Co., Ltd. and Shanghai Pudong Imp.& Exp. Co., Ltd., dated September 22, 2005 (Incorporated by reference to Exhibit 4.21 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.22
  Form of Indemnification Agreement for Directors and Officers (incorporated by reference to Exhibit 10.24 to our Registration Statement on Form F-1 (file no. 333-114177) filed with the Securities and Exchange Commission on April 2, 2004).
 
   
4.23
  Form of Employment Contract of Shengqu Information Technology (Shanghai) Co., Ltd. (incorporated by reference to Exhibit 10.25 to our Registration Statement on Form F-1 (file no. 333-114177) filed with the Securities and Exchange Commission on April 2, 2004).
 
   
4.24
  Research and Development Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Shanghai Shengjin Software Development Co., Ltd. with respect to Shanda Richman, dated October 31, 2005 (Incorporated by reference to Exhibit 4.24 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).

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Exhibit    
Number   Description
4.25
  Online Game Distribution and License Agreement among Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd., Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. with respect to Legend of Mir II, dated September 28, 2005 (Incorporated by reference to Exhibit 4.25 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.26
  Online Game Distribution and License Agreement among Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd., Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. with respect to BNB, dated October 1, 2005 (Incorporated by reference to Exhibit 4.26 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.27
  Online Game Distribution and License Agreement among Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd., Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. with respect to Woool, dated January 1, 2006.
 
   
4.28
  Online Game Distribution and License Agreement among Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd., Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. with respect to The Age, dated January 1, 2006 (Incorporated by reference to Exhibit 4.28 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.29
  Online Game Distribution and License Agreement among Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd., Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. with respect to The Sign, dated January 1, 2006 (Incorporated by reference to Exhibit 4.29 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.30
  Online Game Distribution and License Agreement among Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd., Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. with respect to R.O., dated September 1, 2005 (Incorporated by reference to Exhibit 4.30 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.31
  Online Game Distribution and License Agreement among Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd., Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. with respect to 3G Hero, dated September 1, 2005 (Incorporated by reference to Exhibit 4.31 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.32
  Online Game Distribution and License Agreement among Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd., Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. with respect to Shanda Richman, dated December 8, 2005 (Incorporated by reference to Exhibit 4.32 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.33
  Online Game Distribution and License Agreement among Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd., Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. with respect to Crazy Kart, dated March 18, 2006 (Incorporated by reference to Exhibit 4.33 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).

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Exhibit    
Number   Description
4.34
  Online Game Distribution and License Agreement between Grandpro and Haofang Online with respect to Doudizhu, dated May 1, 2006 (Incorporated by reference to Exhibit 4.34 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.35
  Online Game Distribution and Service Agreement among Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd., Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. with respect to The Age, dated December 28, 2004, (incorporated by reference Exhibit 4.22 to our 2004 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on May 31, 2005).
 
   
4.36
  Online Game Distribution and Service Agreement among Shengqu Information Technology (Shanghai) Co., Ltd. Shanghai Shanda Networking Co., Ltd., Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co. Ltd. with respect to The Sign, dated December 28, 2004, (incorporated by reference to Exhibit 4.23 to our 2004 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on May 31, 2005).
 
   
4.37
  Online Game Software Distribution and License Agreement among Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd. Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. with respect to Woool, dated December 28, 2004, (incorporated by reference to Exhibit 4.24 to our 2004 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on May 31, 2005).
 
   
4.38
  Online Game Software Distribution and License Agreement among Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd. Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. with respect to D.O., dated December 28, 2004, (incorporated by reference to Exhibit 4.25 to our 2004 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on May 31, 2005).
 
   
4.39
  Online Game Software Distribution and License Agreement among Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd. Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. with respect to Maple Story, dated December 28, 2004, (incorporated by reference to Exhibit 4.26 to our 2004 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on May 31, 2005).
 
   
4.40
  Online Game Software Distribution and License Agreement among Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd. Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. with respect to Legend of Mir II, dated December 28, 2004, (incorporated by reference to Exhibit 4.27 to our 2004 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on May 31, 2005).
 
   
4.41
  Online Game Software Distribution and License Agreement among Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd. Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd., Shanda Networking with respect to BNB dated December 28, 2004 (incorporated by reference to Exhibit 4.28 to our 2004 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on May 31, 2005) .
 
   
4.42
  Online Game Software Distribution and License Agreement among Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd., Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. with respect to GetAmped dated December 28, 2004 (incorporated by reference to Exhibit 4.29 to our 2004 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on May 31, 2005).

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Exhibit    
Number   Description
4.43
  Online Game Software Distribution and License Agreement among Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd., Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. with respect to Buzzer Beater dated December 28, 2004 (incorporated by reference to Exhibit 4.32 to our 2004 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on May 31, 2005).
 
   
4.44
  Billing Technology License Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., Ltd. dated January 1, 2006 (Incorporated by reference to Exhibit 4.44 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.45
  Billing Technology License Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., Ltd. dated January 1, 2006 (Incorporated by reference to Exhibit 4.45 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.46
  Billing Technology License Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated January 1, 2006 (Incorporated by reference to Exhibit 4.46 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.47
  Amendment to Billing Technology License Agreement between Shanghai Shanda Networking Co., Ltd. and Shengqu Information Technology Co., Ltd., dated December 28, 2004 (incorporated by reference to Exhibit 4.33 to our 2004 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on May 31, 2005)         .
 
   
4.48
  Billing Technology License Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., Ltd. dated December 28, 2004 (incorporated by reference to Exhibit 4.34 to our 2004 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on May 31, 2005)         .
 
   
4.49
  Billing Technology License Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated December 28, 2004 (incorporated by reference to Exhibit 4.35 to our 2004 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on May 31, 2005).
 
   
4.50
  Equipment Lease Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., Ltd. dated December 28, 2004 (incorporated by reference to Exhibit 4.36 to our 2004 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on May 31, 2005).
 
   
4.51
  Equipment Lease Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated December 28, 2004 (incorporated by reference to Exhibit 4.37 to our 2004 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on May 31, 2005).
 
   
4.52
  Amendment to Strategic Consulting Service Agreement between Shanghai Shanda Networking Co., Ltd. and Shengqu Information Technology Co., Ltd. dated December 28, 2004 (incorporated by reference to Exhibit 4.38 to our 2004 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on May 31, 2005).

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Exhibit    
Number   Description
4.53
  Amendment II to Strategic Consulting Service Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., Ltd. dated December 28, 2004 (Incorporated by reference to Exhibit 4.53 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.54
  Amendment III to Strategic Consulting Service Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., Ltd. dated December 28, 2005 (Incorporated by reference to Exhibit 4.54 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.55
  Technology Transfer Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Shanghai Shengpin Networking, dated November 30, 2004 (incorporated by reference to Exhibit 10.30 to our Registration Statement on Form F-1 (file no. 333-122029) filed with the Securities and Exchange Commission on January 13, 2005).
 
   
4.56
  Entrusted Loan Agreement between Nanjing Shanda Networking Co., Ltd. and China Merchants Bank Dongfang Branch with respect to a loan of RMB38,000,000 dated March 19, 2006 (Incorporated by reference to Exhibit 4.56 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.57
  Loan Agreement between China Merchants Bank Dongfang Branch and Shanda Computer (Shanghai) Co., Ltd. with respect to a loan of RMB38,000,000 dated March 19, 2006 (Incorporated by reference to Exhibit 4.57 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.58
  Entrusted Loan Agreement between Hangzhou Bianfeng Networking Co., Ltd. and China Merchants Bank Dongfang Branch with respect to a loan of RMB27,000,000 dated March 19, 2006 (Incorporated by reference to Exhibit 4.58 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.59
  Loan Agreement between China Merchants Bank Dongfang Branch and Shanda Computer (Shanghai) Co., Ltd. with respect to a loan of RMB27,000,000 dated March 19, 2006 (Incorporated by reference to Exhibit 4.59 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.60
  Entrusted Loan Agreement between Shanghai Shanda Networking Co., Ltd. and China Industrial and Commercial Bank Pudong Branch with respect to a loan of RMB35,000,000 dated March 24, 2006 (Incorporated by reference to Exhibit 4.60 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.61
  Loan Agreement among Shanghai Shanda Networking Co., Ltd., China Industrial and Commercial Bank Pudong Branch and Shanda Computer (Shanghai) Co., Ltd. with respect to a loan of RMB35,000,000 dated March 24, 2006 (Incorporated by reference to Exhibit 4.61 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.62
  Loan Agreement among Shanghai Shanda Networking Co., Ltd., Shanghai Bank Xujiahui Branch and Shengqu Information Technology (Shanghai) Co., Ltd. with respect to a loan of RMB100,000,000 dated January 4, 2006 (Incorporated by reference to Exhibit 4.62 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).

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Exhibit    
Number   Description
4.63
  Entrusted Loan Agreement between Shanghai Shanda Networking Co., Ltd. and China Merchants Bank Dongfang Branch with respect to a loan of RMB100,000,000 dated January 4, 2006 (Incorporated by reference to Exhibit 4.63 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.64
  Loan Agreement between China Merchants Bank Dongfang Branch and Shengqu Information Technology (Shanghai) Co., Ltd. with respect to a loan of RMB100,000,000 dated January 4, 2006 (Incorporated by reference to Exhibit 4.64 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.65
  Entrusted Loan Agreement between Nanjing Shanda Networking Co., Ltd. and China Merchants Bank Dongfang Branch with respect to a loan of RMB100,000,000 dated January 4, 2006 (Incorporated by reference to Exhibit 4.65 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.66
  Loan Agreement between China Merchants Bank Dongfang Branch and Shengqu Information Technology (Shanghai) Co., Ltd. with respect to a loan of RMB100,000,000 dated January 4, 2006 (Incorporated by reference to Exhibit 4.66 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.67
  Cooperation Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Shanghai Shengyue Advertisement Co., Ltd. dated January 1, 2005 (Incorporated by reference to Exhibit 4.67 to our 2005 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on June 29, 2006).
 
   
4.68
  Stock Purchase Agreement between Shanda Interactive Entertainment Limited and SB Asia Infrastructure Fund L.P. dated October 15, 2004 (incorporated by reference to Exhibit 10.31 to our Registration Statement on Form F-1 (file no. 333-122029) filed with the Securities and Exchange Commission on January 13, 2005).
 
   
4.69*
  Online Game Software Sublicense Agreement on game Woool between Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd., Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated January 1, 2007.
 
   
4.70*
  Online Game Software Sublicense Agreement on game “the Age” between Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd., Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated January 1, 2007.
 
   
4.71*
  Online Game Software Sublicense Agreement on game “3G Hero” between Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd., Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated September 1, 2007.
 
   
4.72*
  Online Game Software Sublicense Agreement on game “Shanda Richman” between Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd., Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated December 8, 2006.
 
   
4.73*
  Online Game Software Sublicense Agreement on game “Getamped” between Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd., Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated February 18, 2006
 
   
4.74*
  Online Game Software Sublicense Agreement on game “LaTale” between Shengqu Information Technology (Shanghai) Co., Ltd., Shanghai Shanda Networking Co., Ltd., Nanjing Shanda Networking Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated April 2, 2007.

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Exhibit    
Number   Description
4.75*
  Arena Software III Licensing Agreement between Grandpro Information Technology (Shanghai) Co., Ltd. and Shanghai Haofang Online Information Technology Co., Ltd. dated May 1, 2006.
 
   
4.76*
  Unified Platform Verification System Software Licensing Agreement between Shanda Computer (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.77*
  Unified Platform Verification System Software Licensing Agreement between Shanda Computer (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.78*
  Unified Platform Certification System Software Licensing Agreement between Shanda Computer (Shanghai) Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated January 1, 2007.
 
   
4.79*
  Jingling System Software Licensing Agreement between Shanda Computer (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.80*
  Jingling System Software Licensing Agreement between Shanda Computer (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.81*
  Jingling System Software Licensing Agreement between Shanda Computer (Shanghai) Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated January 1, 2007.
 
   
4.82*
  Physical Card Online-Sales System Software Licensing Agreement between Shanda Computer (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., ltd. dated January 1, 2007
 
   
4.83*
  Physical Card Online-Sales System Software Licensing Agreement between Shanda Computer (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., ltd. dated January 1, 2007
 
   
4.84*
  Physical Card Online-Sales System Software Licensing Agreement between Shanda Computer (Shanghai) Co., Ltd. and Hangzhou Bianfeng Networking Co., ltd. dated January 1, 2007
 
   
4.85*
  Virtual Card Online-Sales System Software Licensing Agreement between Shanda Computer (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.86*
  Virtual Card Online-Sales System Software Licensing Agreement between Shanda Computer (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., Ltd. dated January 2007.
 
   
4.87*
  Virtual Card Online-Sales System Software Licensing Agreement between Shanda Computer (Shanghai) Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated January 1, 2007.
 
   
4.88*
  Debit Card and Credit Card Online-Sales System Software Licensing Agreement between Shanda Computer (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.89*
  Debit Card and Credit Card Online-Sales System Software Licensing Agreement between Shanda Computer (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.90*
  Debit Card and Credit Card Online-Sales System Software Licensing Agreement between Shanda Computer (Shanghai) Co., Ltd. and Hangzhou Bianfeng Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.91*
  Equipment Management Platform Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.92*
  Equipment Management Platform Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., Ltd. dated January 1, 2007.

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Exhibit    
Number   Description
4.93*
  Equipment Management Platform Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated January 1, 2007.
 
   
4.94*
  Octopod System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.95*
  Octopod System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.96*
  Octopod System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated January 1, 2007.
 
   
4.97*
  User Platform Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.98*
  User Platform Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.99*
  User Platform Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated January 1, 2007.
 
   
4.100*
  Remote Desktop System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.101*
  Remote Desktop System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.102*
  Remote Desktop System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated January 1, 2007.
 
   
4.103*
  Graph Supervision System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.104*
  Graph Supervision System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.105*
  Graph Supervision System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated January 1, 2007.
 
   
4.106*
  Server Local Verification System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.107*
  Server Local Verification System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.108*
  Server Local Verification System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated January 1, 2007.
 
   
4.109*
  External Application Supervision System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., Ltd. dated January 1, 2007.

113


Table of Contents

     
Exhibit    
Number   Description
4.110*
  External Application Supervision System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.111*
  External Application Supervision System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated January 1, 2007.
 
   
4.112*
  Hids System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.113*
  Hids System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.114*
  Hids System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated January 1, 2007.
 
   
4.115*
  Gamemaster System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.116*
  Gamemaster System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.117*
  Gamemaster System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated January 1, 2007.
 
   
4.118*
  Kangaroo System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.119*
  Kangaroo System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.120*
  Kangaroo System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated January 1, 2007.
 
   
4.121*
  Cobweb System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.122*
  Cobweb System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.123*
  Cobweb System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated January 1, 2007.
 
   
4.124*
  Netview System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.125*
  Netview System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.126*
  Netview System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated January 1, 2007.

114


Table of Contents

     
Exhibit    
Number   Description
4.127*
  Event Platform Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.128*
  Event Platform Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.129*
  Event Platform Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated January 1, 2007.
 
   
4.130*
  Network Log Supervision System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.131*
  Network Log Supervision System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.132*
  Network Log Supervision System Software Licensing Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated January 1, 2007.
 
   
4.133*
  Business Support System License Agreement between Shanda Computer (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.134*
  Business Support System License Agreement between Shanda Computer (Shanghai) Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated January 1, 2007.
 
   
4.135*
  Business Support System License Agreement between Shanda Computer (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., Ltd. dated January 1, 2007.
 
   
4.136*
  Termination Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Shanghai Shanda Networking Co., Ltd. dated December 1, 2006 (to terminate the Billing Technology License Agreement entered into by Shengqu and Shanghai Shanda on January 1, 2006 filed with 2005 Form 20-F as Exhibit 4.44).
 
   
4.137*
  Termination Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Nanjing Shanda Networking Co., Ltd. dated December 1, 2006 (to terminate the Billing Technology License Agreement entered into by Shengqu and Nanjing Shanda on January 1, 2006 filed with 2005 Form 20-F as Exhibit 4.45).
 
   
4.138*
  Termination Agreement between Shengqu Information Technology (Shanghai) Co., Ltd. and Hangzhou Bianfeng Networking Co., Ltd. dated December 1, 2006 (to terminate the Billing Technology License Agreement entered into by Shengqu and Bianfeng Networking on January 1, 2006 filed with 2005 Form 20-F as Exhibit 4.46).
 
   
4.139*
  Strategic Consulting Service Agreement between Shanghai Shanda Networking Co., Ltd. and Shengqu Information Technology (Shanghai) Co., Ltd. dated January 1, 2007.
 
   
4.140*
  Strategic Consulting Service Agreement between Nanjing Shanda Networking Co., Ltd. and Shengqu Information Technology (Shanghai) Co., Ltd. dated January 1, 2007.
 
   
4.141*
  Strategic Consulting Service Agreement between Hangzhou Bianfeng Networking Co., Ltd. and Shengqu Information Technology (Shanghai) Co., Ltd. dated January 1, 2007.
 
   
4.142*
  Technical Support Agreement between Shanghai Shanda Networking Co., Ltd. and Shanda Computer (Shanghai) Co., Ltd. dated January 1, 2007.

115


Table of Contents

     
Exhibit    
Number   Description
4.143*
  Technical Support Agreement between Nanjing Shanda Networking Co., Ltd. and Shanda Computer (Shanghai) Co., Ltd. dated January 1, 2007.
 
   
4.144*
  Technical Support Agreement between Hangzhou Bianfeng Networking Co., Ltd. and Shanda Computer (Shanghai) Co., Ltd. dated January 1, 2007.
 
   
4.145*
  Website Development Agreement between Shanghai Shanda Networking Co., Ltd. and Shengqu Information Technology (Shanghai) Co., Ltd. dated January 1, 2007.
 
   
8.1*
  List of Subsidiaries.
 
   
11.1
  Code of Ethics (incorporated by reference to Exhibit 11.1 to our 2004 annual report on Form 20-F (file no. 000-50705) filed with the Securities and Exchange Commission on May 31, 2005).
 
   
12.1*
  Certification of Chief Executive Officer Required by Rule 13a-14(a).
 
   
12.2*
  Certification of Chief Financial Officer Required by Rule 13a-14(a).
 
   
13.1*
  Certification of Chief Executive Officer Required by Rule 13(a)-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code.
 
   
13.2*
  Certification of Chief Financial Officer Required by Rule 13(a)-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code.
 
*   filed herewith

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Table of Contents

SIGNATURE
     The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
         
 
  SHANDA INTERACTIVE    
 
  ENTERTAINMENT LIMITED    
 
       
 
      /s/ Tianqiao Chen    
 
       
 
  Name: Tianqiao Chen    
 
  Title: Chairman and Chief Executive Officer    
Date: June 26, 2007

 


Table of Contents

SHANDA INTERACTIVE ENTERTAINMENT LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
         
    Page
   
Report of Independent Registered Public Accounting Firm
    F-2  
Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2004, 2005 and 2006
    F-3  
Consolidated Balance Sheets as of December 31, 2005 and 2006
    F-4  
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2004, 2005 and 2006
    F-5  
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2005 and 2006
    F-6  
Notes to Consolidated Financial Statements
    F-7  
ACTOZ SOFT COMPANY LIMITED
INDEX TO FINANCIAL STATEMENTS
         
    Page
   
Balance Sheets as of December 31, 2005 and 2006
    F-53  
Statements of Income for the years ended December 31, 2005 and 2006
    F-55  
Statements of Appropriations of Retained Earnings for the years ended December 31, 2005 and 2006
    F-56  
Statements of Cash Flows for the years ended December 31, 2004, 2005 and 2006
    F-57  
Notes to Financial Statements
    F-59  

F-1


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
SHANDA INTERACTIVE ENTERTAINMENT LIMITED:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income, of changes in shareholders’ equity and of cash flows expressed in Renminbi present fairly, in all material respects, the financial position of Shanda Interactive Entertainment Limited (the “Company”) and its subsidiaries as of December 31, 2005 and 2006, and the results of their operations and their cash flows for each of the three years ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the related Financial Statement Schedule I presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and Financial Statement Schedule I are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and Financial Statement Schedule I based on our audits. We conducted our audits of these statements 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2(24) to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in 2006.
/s/ PricewaterhouseCoopers Zhong Tian CPAs Limited Company
Shanghai, People’s Republic of China
June 25, 2007

F-2


Table of Contents

SHANDA INTERACTIVE ENTERTAINMENT LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME