UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-QSB

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ________________ to ______________

Commission file number: 0-18731

FORLINK SOFTWARE CORPORATION, INC.

(Exact name of small business issuer as specified in it charter)

Nevada	87-0438458
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

9F Fang Yuan Mansion, No. 56, ZhongGuanCun South Road Yi, Haidian District, Beijing, China

(Address of principal executive offices)

011-8610 8802 6368 

(issuer’s telephone number)

(Former name, former address and former fiscal year, if changed since last report)

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

The registrant is a shell company (Check one): Yes o  No x

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of August 11, 2006, the issuer had 76,924,707 shares of common stock, $.001 par value, outstanding.

Transitional Small Business Disclosure Format (Check one): Yes o  No x

INDEX

PART I - FINANCIAL INFORMATION	Page
Item 1. Financial Statements.
Forlink Software Corporation, Inc.
Unaudited Consolidated Condensed Financial Statements
As of and For the Six Months ended June 30, 2006 and 2005
Consolidated Balance Sheets	F-1
Consolidated Statements of Operations	F-2
Consolidated Statements of Cash Flows	F-3
Notes to Consolidated Financial Statements (unaudited)	F-4 - F-22
Item 2. Management’s Discussion and Analysis.	1
Item 3. Controls and Procedures.	14
PART II - OTHER INFORMATION	15
Item 1. Legal Proceedings.	15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	15
Item 3. Defaults upon Senior Securities.	15
Item 4. Submission of Matters to a Vote of Securities Holders.	15
Item 5. Other Information.	15
Item 6. Exhibits	15
SIGNATURES

i

Forlink Software Corporation, Inc.

Consolidated Balance Sheets

(Expressed in US Dollars)

	June 30,		December 31,
	2006		2005
	(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	778,090	$	589,781
Accounts receivable		2,131,569		861,000
Other receivables, deposits and prepayments (Note 3)		436,136		515,787
Other tax recoverable		21,596		32,350
Inventories (Note 4)		42,262		264,839
Total current assets		3,409,653		2,263,757
Property, plant and equipment (Note 6)		810,319		884,108
Long term investments		760,870		760,870
Goodwill (Note 8)		1,684,023		1,684,023
Total assets	$	6,664,865	$	5,592,758

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Short term borrowings	$	-		$	246,609
Accounts payable		1,879,683			762,593
Amounts due to stockholders (Note 5)		769,001			149,622
Customer deposits		1,055,516			580,482
Other payables and accrued expenses (Note 9)		303,837			287,246
Total current liabilities	$	4,008,037		$	2,026,552
Commitments and contingencies
Stockholders’ equity
Common stock, par value $0.001 per share;
100,000,000 shares authorized; 85,224,707 and
85,224,707 shares issued and 76,924,707 and 76,924,707 shares outstanding, respectively	$	85,225		$	85,225
Treasury stock		(215,800	)		(215,800	)
Additional paid-in capital		8,949,810			8,949,810
Accumulated losses		(6,278,128	)		(5,331,634	)
Accumulated other comprehensive income		115,721			78,605
Total stockholders’ equity	$	2,656,828		$	3,566,206
Total liabilities and stockholders’ equity	$	6,664,865		$	5,592,758

See accompanying notes to unaudited consolidated condensed financial statements.

F-1

Forlink Software Corporation, Inc.

Consolidated Statements of Operations

(unaudited)

(Expressed in US Dollars)

		Three Months Ended June 30,						Six Months Ended June 30,
		2006			2005			2006			2005
					(restated)						(restated)
Net sales	$	2,221,140		$	1,569,445		$	3,274,610		$	2,220,583
Cost of sales		(1,508,291	)		(703,462	)		(2,418,577	)		(1,127,659	)
Gross profit		712,849			865,983			856,033			1,092,924
Selling expenses		(223,058	)		(116,468	)		(357,214	)		(321,609	)
Research and development expenses		(423,235	)		(316,841	)		(812,692	)		(596,172	)
General and administrative expenses		(298,311	)		(383,013	)		(698,185	)		(744,079	)
Total operating expenses		(944,604	)		(816,322	)		(1,868,091	)		(1,661,860	)
Operating (loss)/profit		(231,755	)		49,661			(1,012,058	)		(568,936	)
Loss from equity method investee		-			(10,223	)		-			(7,916	)
Interest income		1,745			778			2,324			2,375
Interest expenses		-			-			-			-
Other income, net		3,235			59,686			63,240			61,173
(Loss)/profit before income tax and minority interest		(226,775	)		99,902			(946,494	)		(513,304	)
Income tax (Note 10)		-			(764	)		-			(764	)
Minority interest		-			956			-			945
Net (loss)/profit	$	(226,775	)	$	100,094		$	(946,494	)	$	(513,123	)
Earnings/(loss) per share - basic and diluted	$	(0.00	)	$	0.00		$	(0.01	)	$	(0.01	)
Weighted average common shares outstanding - basic and diluted		76,924,707			76,827,557			76,924,707			76,870,417

See accompanying notes to unaudited consolidated condensed financial statements.

F-2

Forlink Software Corporation, Inc.

Consolidated Statements of Cash Flows

Increase/(Decrease) in Cash and Cash Equivalents

(unaudited)

(Expressed in US Dollars)

	Six Months Ended June 30,
		2006			2005
Cash flows from operating activities
Net loss	$	(946,494	)	$	(513,123	)
Adjustments to reconcile net loss to
net cash used in operating activities
Minority interest		-			(945	)
Depreciation of property, plant and equipment		103,852			89,309
Loss from equity method investee		-			7,916
Change in:
Accounts receivables		(1,246,044	)		(896,298	)
Other receivables, deposits and prepayments		22,177			75,015
Inventories		223,099			1,188
Accounts payable		1,063,914			(181,380	)
Customer deposits		462,019			(9,033	)
Other payables and accrued expenses		(4,478	)		12,407
Income tax payable		-			-
Other taxes payable/recoverable		11,020			(109,589	)
Net cash used in operating activities		(310,935	)		(1,524,533	)
Cash flows from investing activities
Acquisition of property, plant and equipment		(20,071	)		(256,628	)
Net cash used in investing activities		(20,071	)		(256,628	)
Cash flows from financing activities
Repayment to short term borrowings		(246,609	)		-
Advances to/(repayments from) stockholders		650,614			(412,935	)
Proceeds from issuances of common stock under Plan 2002		-			13,650
Net cash generated from/(used in) financing activities		404,005			(399,285	)
Effect of exchange rate changes		115,310			-
Net increase/(decrease) in cash and cash equivalents		188,309			(2,180,446	)
Cash and cash equivalents at beginning of period		589,781			2,298,831
Cash and cash equivalents at end of period	$	778,090		$	118,385
Supplemental disclosure of cash flow information
Income tax paid		-			764

See accompanying notes to unaudited consolidated condensed financial statements.

F-3

Forlink Software Corporation, Inc.

Notes to Unaudited Consolidated Financial Statements

(Expressed in US Dollars)

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

Beijing Slait Science & Technology Development Limited Co. (“Slait”) was established in the People’s Republic of China (the “PRC”) on January 25, 1998 as a limited liability company. Slait commenced operations in May 1998. Slait was beneficially owned by three individual PRC citizens, namely Yi He, Hongkeung Lam and Jing Zeng. Slait was granted a ten year operation period which can be extended with approvals from relevant PRC authorities.

On January 11, 2001, Slait entered into an agreement of Plan of Reorganization (“the Plan”) with Forlink Software Corporation, Inc. (“Forlink”). Forlink had issued to the owners of Slait as individuals 59,430,000 authorized shares of common stock of Forlink in exchange for 100% of the registered and fully paid up capital of Slait. In accordance with the terms of the Plan, Forlink transferred $131,039 (RMB1,085,000) to Slait, the amount was disbursed to the original owners of Slait. The closing date of this exchange transaction was August 28, 2001.

As a result of the acquisition, the former owners of Slait hold a majority interest in the combined entity. Generally accepted accounting principles require in certain circumstances that a company whose stockholders retain the majority voting interest in the combined business to be treated as the acquirer for financial reporting purposes. Accordingly, the acquisition has been accounted for as a “reverse acquisition” whereby Slait is deemed to have purchased Forlink. However, Forlink remains the legal entity and the Registrant for Securities and Exchange Commission reporting purposes. Subsequent to the reverse acquisition, the principal activities of Slait have been gradually shifted to Forlink Technologies Co., Ltd. (“FTCL”). On February 13, 2004, Slait was officially dissolved in accordance with relevant PRC regulations.

On June 18, 2003, Forlink Technologies (Hong Kong) Limited (“FTHK”) was incorporated in Hong Kong as a limited liability company with an authorized share capital of $129,032 (HK$1,000,000) divided into 1,000,000 ordinary shares of $0.129 (HK$1) each. At the time of incorporation, two ordinary shares of HK$1 each were issued to the subscribers. In December 2003, 999,998 ordinary shares were issued to Forlink, since then FTHK becomes a wholly owned subsidiary of Forlink. The principal activities of FTHK is investment holding.

To comply with PRC laws and regulations, Forlink will conduct its internet value-added services in PRC via Beijing Forlink Hua Xin Technology Co. Ltd. (“BFHX”). BFHX was established in PRC on September 19, 2003 as a limited liability company. The registered capital of BFHX is $120,733 (RMB1,000,000) and has been fully paid up by March 31, 2005. In accordance with a directors’ resolution of Forlink passed on September 15, 2003, Mr. Yi He and Mr. Xiaoxia Zhao were entrusted as nominee owners of BFHX to hold 70% and 30%, respectively, of the fully paid up capital of BFHX on behalf of Forlink and Forlink is the primary beneficiary. BFHX is considered a Variable Interest Entity (“VIE”) and because Forlink is the primary beneficiary, Forlink’s consolidated financial statements include BFHX. Upon the request of Forlink, Mr. Yi He and Mr. Xiaoxia Zhao are required to transfer their ownership in BFHX to Forlink or to designees of Forlink at any time for the amount of the fully paid up capital of BFHX.

F-4

Forlink Software Corporation, Inc.

Notes to Unaudited Consolidated Financial Statements

(Expressed in US Dollars)

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS - Continued

In accordance with a registered capital transfer agreement dated and owners’ resolutions of BFHX passed on February 16, 2004, Mr. Xiaoxia Zhao transferred the fully paid up capital of BFHX of $10,870 (RMB90,000) to Mr. Wei Li for $10,870. Mr. Yi He and Mr. Wei Li entered into agreements with Forlink on November 8, 2003 and March 18, 2004 respectively, under which agreements Mr. Yi He and Mr. Wei Li were entrusted as nominee owners of BFHX to hold 70% and 30% of the fully paid up capital of BFHX respectively on behalf of Forlink and Forlink is the primary beneficiary. Upon the request of Forlink, Mr. Yi He and Mr. Wei Li are required to transfer their ownership in BFHX to Forlink or to designees of Forlink at any time for the amount of the fully paid up capital of BFHX.

The capital of BFHX was funded by FTCL and recorded as interest-free loans to Mr. Yi He and Mr. Wei Li. These loans were eliminated with capital of BFHX during consolidation. Mr. Yi He is a director and a major stockholder of Forlink. Mr. Xiaoxia Zhao is a former director and stockholder of Forlink. Mr. Wei Li is the administration manager of FTCL.

On June 14, 2004, Forlink Technologies (Chengdu) Limited (“FTCD”) was established as a limited liability company in Chengdu, PRC. In September 2004, FTHK invested $750,000 in FTCD, since then FTCD becomes a wholly owned subsidiary of FTHK. The registered capital of FTCD is $5,000,000 and the fully paid up capital was $750,000 as of March 31, 2006. FTCD has commenced operations in late 2005.

On March 20, 2005, Beijing Forlink Kuanshi Technologies Limited (“BFKT”) was established as a limited liability company by BFHX and two individuals, Mr. Jianqiu Fang and Mr. Bizhao Zhong, which hold 70%, 10% and 20% of fully paid up capital of BFKT, respectively. The registered capital of BSKT is $120,733 (RMB1,000,000) and was fully paid up on March 16, 2005. After being set up, BFKT acquired 90% and 95% of shares of Qingdao Jiashi Technologies Limited (“QJT”) and Xiamen Kuanshi Technologies Limited (“XKT”), respectively, on March 28, 2005. Both QJT and XKT were originally established by Mr. Yi He and Mr. Wei Li on March 4, 2005 and March 7, 2005 respectively. Pursuant to the agreement reached between BFHX and Mr. Wei Li, Mr. Wei Li was entrusted as nominee owner of QJT and XKT to hold 10% and 5%, respectively, of the fully paid up capital of QCT and XKT on behalf of BFHX and BFHX is the primary beneficiary. QCT and XKT have not commenced operations since the date of establishment.

On October 24, 2005, Forlink entered into a definitive agreement to acquire a 17.5% equity interest from China Liquid Chemical Exchange Company Limited (“CLCE”), a limited liability company in PRC. Under the terms of the agreement, Forlink deployed the “For-online Electronic Trading System”, a proprietary, integrated software solution, to support the Exchange’s operations, including, but not limited to, online trading, online billing and payment, user authentication, customer care., in exchange for the 17.5% equity interest. This investment has been recognized as corporate joint venture and is accounted for under the equity method of accounting, under SOP 78-9. CLCE has not commenced operation since its date of establishment. This investment will increase the Company return in this fast growing market.

Forlink, its subsidiaries, the VIE and corporate joint venture are collectively referred to as “the Company” hereafter.

The principal activities of the Company are the development and sale of network software systems and the provision of enterprise application system integration services in the PRC. The Company is also engaged in the sale of computer hardware.

F-5

Forlink Software Corporation, Inc.

Notes to Unaudited Consolidated Financial Statements

(Expressed in US Dollars)

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting and Principles of Consolidation

The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America and present the financial statements of Forlink and its subsidiaries, namely, FTCL, FTHK, BFHX, FTCD, BFKT, QJT and XKT. All intercompany transactions and balances have been eliminated.

Minority interests at the balance sheet date, being the portion of the net assets of subsidiaries attributable to equity interests that are not owned by Forlink, whether directly or indirectly through subsidiaries, are presented in the consolidated balance sheet separately from liabilities and the shareholders’ equity. Minority interests in the results of the Company for the quarter are also separately presented in the income statement.

The accompanying financial data as of June 30, 2006 and December 31, 2005 and for the three months and six months ended June 30, 2006 and 2005 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The balance sheet data as of December 31, 2005 has been derived from the audited financial statements in the 2005 10-KSB. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s audited annual financial statements for the year ended December 31, 2005.

The preparation of financial statements in conformity with general accepted accounting principles requires management to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from these estimates.

In the opinion of Management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows as of June 30, 2006 and December 31, 2005 and for the three and six months ended June 30, 2006 and 2005, have been made. The results of operations for the three and six months ended June 30, 2006 and 2005 are not necessarily indicative of the operating results for the full year.

Stock Based Compensation

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards 123(R), Share-Based Payment (SFAS 123(R)), using the modified prospective application transition method. Before we adopted SFAS 123(R), we accounted for share-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.

F-6

Forlink Software Corporation, Inc.

Notes to Unaudited Consolidated Financial Statements

(Expressed in US Dollars)

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Stock Based Compensation - Continued

SFAS 123(R) requires the Company to record the cost of stock options and other equity-based compensation in its income statement based upon the estimated fair value of those rewards. The Company elected to use the modified prospective method for adoption, which requires compensation expense to be recorded for all unvested stock options and other equity-based compensation beginning in the first quarter of adoption. Accordingly, prior periods have not been restated to reflect stock based compensation. On January 1, 2006, the Company adopted SFAS 123(R) using the modified prospective method, and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements because most of the Company’s outstanding stock options were vested as of December 31, 2005 and the unvested portion of the stock options was considered immaterial.

SFAS 123(R) also requires the Company to estimate forfeitures in calculating the expense relating to share-based compensation as opposed to recognizing forfeitures as an expense reduction as they incur. The adjustment to apply estimated forfeitures to previously share-based compensation was considered immaterial by the Company and as such was not classified as a cumulative effect of a change in accounting principle. As of January 1, 2006, the Company had no unrecognized compensation cost remaining associated with existing stock option grants. Also, the Company made no modifications to outstanding stock option grants prior to the adoption of Statement No. 123(R), there were no changes in valuation methodologies or assumptions compared to those used by the Company prior to January 1, 2006.

In November 2005, the FASB issued final FSP No. 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.” The FSP provides an alternative method of calculating excess tax benefits (the Additional Paid-in Capital “APIC” pool) from the method defined in FAS 123(R) for share-based payments. A one-time election to adopt the transition method in this FSP is available to those entities adopting FAS 123(R) using either the modified-retrospective or modified-prospective method. Up to one year from the initial adoption of FAS 123(R) or effective date of the FSP is provided to make this one-time election. However, until an entity makes it election, it must follow the guidance in FAS 123(R). The Company is currently evaluating the potential impact of calculating the APIC pool with this alternative method and has not yet determined which method the Company will adopt, or the expected impact on our financial position or results of operations.

In February 2006, the FASB issued FASB Staff Position No. FAS 123(R)-4, “Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event.” This position amended SFAS 123(R) to incorporate that a cash settlement feature that can be exercised only upon the occurrence of a contingent event that is outside the employee’s control does not meet certain conditions in SFAS 123(R) until it becomes probable that the event will occur. The guidance in this FASB Staff Position was required to be applied upon initial adoption of Statement No. 123(R). The Company does not have any option grants that allow for cash settlement.

F-7

Forlink Software Corporation, Inc.

Notes to Unaudited Consolidated Financial Statements

(Expressed in US Dollars)

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Stock Based Compensation - Continued

The Company did not adopt any new share-based compensation plans during the period. No stock plans were exercised for the three and six months ended June 30, 2006.

The Company applied the intrinsic-value method under APB Opinion 25 in accounting for options issued and fully vested prior to December 31, 2005, and has disclosed the effect on net loss and loss per share as the Company had applied the fair value recognition provisions of SFAS 123(R) to the Company’s Plan 2002. The table below illustrates the effects on the Company’s net loss and loss per share had compensation cost for the Company’s Plan 2002 been determined based on the fair value at the grant dates, as prescribed by SFAS 123(R).

		Three Months Ended June 30, 2005			Six Months Ended June 30, 2005
Net profit/(loss), as reported	$	100,094		$	(513,123	)
Deduct: Stock-based compensation expense determined under fair value based method		(78,190	)		(78,190	)
Proforma net profit/(loss)	$	21,904		$	(591,313	)
Loss per share:
Basic - Reported		0.00			(0.01	)
- Pro forma		0.00			(0.01	)
Diluted - Reported		0.00			(0.01	)
- Pro forma		0.00			(0.01	)

Foreign Currency Translation and Transactions

The functional currency of Forlink is US$ and the financial records are maintained and the financial statements prepared in US$. The functional currency of FTHK is HK$ and the financial records are maintained and the financial statements prepared in HK$. The functional currency of Slait, FTCL, BFHX and FTCD is Renminbi (RMB) and the financial records are maintained and the financial statements are prepared in RMB.

Foreign currency transactions during the period are translated into each company’s denominated currency at the exchange rates ruling at the transaction dates. Gain and loss resulting from foreign currency transactions are included in the consolidated statement of operations. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated into each company’s denominated currency at period end exchange rates. All exchange differences are dealt with in the consolidated statements of operations.

F-8

Forlink Software Corporation, Inc.

Notes to Unaudited Consolidated Financial Statements

(Expressed in US Dollars)

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Foreign Currency Translation and Transactions - Continued

The financial statements of the Company’s operations based outside of the United States have been translated into US$ in accordance with SFAS 52. Management has determined that the functional currency for each of the Company’s foreign operations is its applicable local currency. When translating functional currency financial statements into US$, year-end exchange rates are applied to the consolidated balance sheets, while average period rates are applied to consolidated statements of operations. Translation gains and losses are recorded in translation reserve as a component of stockholders’ equity.

The value of the RMB is subject to changes in China’s central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. Since 1994, the conversion of RMB into foreign currencies, including USD, has been based on rates set by the People’s Bank of China, which are set daily based on the previous day’s interbank foreign exchange market rates and current exchange rates on the world financial markets. Since 1994, the official exchange rate generally has been stable. In July 2005, the Chinese government announced that it will no longer peg its currency exclusively to USD but will switch to a managed floating exchange rate based on market supply and demand with reference to a basket of currencies yet to be named by the People’s Bank of China, which will likely increase the volatility of RMB as compared to USD. The exchange rate of RMB to USD changed from RMB8.28 to RMB8.11 in late July 2005.

Exchange rates between US$, HK$ and RMB had minimal fluctuations during the periods presented. The rates ruling as of June 30, 2006, December 31, 2005 and June 30, 2005 are US$1: HK$7.75: RMB8.01, US$1: HK$7.75: RMB8.11, and US$1 : HK$7.75 : RMB8.28 respectively. The weighted average rates ruling for the three months ended June 30, 2006 and 2005 are US$1: HK$7.75:RMB8.02 and US$1:HK$7.75:RMB8.28 respectively.

Revenue Recognition

The Company generally provides services under multiple element arrangements, which include software license fees, hardware and software sales, provision of system integration services including consulting, implementation, and software maintenance. The Company evaluates revenue recognition on a contract-by-contract basis as the terms of each arrangement vary. The evaluation of the contractual arrangements often requires judgments and estimates that affect the timing of revenue recognized in the statements of operations. Specifically, the Company may be required to make judgments about:

-   whether the fees associated with our products and services are fixed or determinable;

-   whether collection of our fees is reasonably assured;

-   whether professional services are essential to the functionality of the related software product;

-   whether we have the ability to make reasonably dependable estimates in the application of the percentage-of-completion method; and

-   whether we have verifiable objective evidence of fair value for our products and services.

F-9

Forlink Software Corporation, Inc.

Notes to Unaudited Consolidated Financial Statements

(Expressed in US Dollars)

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Revenue Recognition - Continued

The Company recognizes revenues in accordance with the provisions of Statements of Position, or SOP, No. 97-2, “Software Revenue Recognition”, as amended by SOP No. 98-9, “Modification of SOP 97-2, Software Revenue Recognition, with respect to Certain Transactions”, Staff Accounting Bulletin, or SAB, 104, “Revenue Recognition”. SOP 97-2 and SAB 104 require among other matters, that there be a signed contract evidencing an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is probable.

Software license revenue is recognized over the accounting periods contained in the terms of the relevant agreements, commencing upon the delivery of the software provided that (1) there is evidence of an arrangement, (2) the fee is fixed or determinable and (3) collection of the fee is considered probable. Under certain arrangements, the Company capitalize related direct costs consisting of third party software costs and direct software implementation costs. These costs are amortized over the term of the arrangement.

In the case of maintenance revenues, vendor-specific objective evidence, or VSOE, of fair value is based on substantive renewal prices, and the revenues are recognized rateably over the maintenance period.

In the case of consulting and implementation services revenues, where VSOE is based on prices from stand-alone sale transactions, and the revenues are recognized as services are performed pursuant to paragraph 65 of SOP 97-2.

For hardware transactions where software is incidental, we do not apply separate accounting guidance to the hardware and software elements. We apply the provisions of EITF 03-05, “Applicability of AICPA Statement of Position 97-2, Software Revenue Recognition, to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software” (EITF 03-05). Per EITF 03-05, if the software is considered not essential to the functionality of the hardware, then the hardware is not considered “software related” and is excluded from the scope of SOP 97-2. Such sale of computer hardware is recognized as revenue on the transfer of risks and rewards of ownership, which generally coincides with the time when the goods are delivered to customers and title has passed, pursuant to SAB 104.

Remote hosting services, where VSOE is based upon consistent pricing charged to customers based on volumes and performance requirements on a stand-alone basis and substantive renewal terms, are recognized rateably over the contract term as the services are performed. The remote hosting arrangements generally require the Company to perform one-time set-up activities and include a one-time set-up fee. This one-time set-up fee is generally paid by the customer at contract execution. The Company determined that these set-up activities do not constitute a separate unit of accounting, and accordingly the related set-up fees are recognized rateably over the term of the contract.

F-10

Forlink Software Corporation, Inc.

Notes to Unaudited Consolidated Financial Statements

(Expressed in US Dollars)

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Revenue Recognition - Continued

The Company consider the applicability of EITF 00-3, “Application of AICPA Statement of SOP 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware”, to the hosting services arrangements on a contract-by-contract basis. If the Company determine that the customer has the contractual right to take possession of the Company’s software at any time during the hosting period without significant penalty, and can feasibly run the software on its own hardware or enter into another arrangement with a third party to hast the software, a software element covered by SOP 97-2 exists. When a software element exists in a hosting services arrangement, the Company recognizes the license, professional services and hosting services revenues pursuant to SOP 97-2, whereby the fair value of the hosting service is recognized as revenue rateably over the term of the hosting contract. If the Company determines that a software element covered by SOP 97-2 is not present a hosting services arrangement, the Company recognize revenue for the hosting services arrangement, rateably over the term of the hosting contract pursuant to SAB 104.

Cash and Cash Equivalents

Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less.

Property, Plant, Equipment and Depreciation

Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method to allocate the cost of depreciable assets over the estimated useful lives of the assets as follows:

	Estimated useful life (in years)
Building	20
Computer equipment	5
Office equipment	5
Motor vehicle	10

Maintenance, repairs and minor renewals are charged directly to the statement of operations as incurred. Additions and betterments to office equipment are capitalized. When assets are disposed of, the related cost and accumulated depreciation thereon are removed from the accounts and any resulting gain or loss is included in the statement of operations.

F-11

Forlink Software Corporation, Inc.

Notes to Unaudited Consolidated Financial Statements

(Expressed in US Dollars)

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Computer Software Development Costs

In accordance with SFAS No. 86 “Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed” software development costs are expensed as incurred until technological feasibility in the form of a working model has been established. Deferred software development costs will be amortized over the estimated economic life of the software once the product is available for general release to customers. For the current software products, the Company determined that technological feasibility was reached at the point in time it was available for general distribution. Therefore, no costs were capitalized.

Long term investments

The Company’s long term investments consist of (1) Equity Investments which are accounted for in accordance with the equity method (the ‘Equity Method’) and (2) Cost Investments which are accounted for under the Cost Method. Under the Equity Method each such investment is reported at cost plus the Company’s proportionate share of the income or loss or other changes in stockholders’ equity of each such investee since its acquisition. The consolidated results of operations include such proportionate share of income or loss. See note 7.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109 “Accounting for Income Taxes”. Under SFAS No. 109, deferred tax liabilities or assets at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered. Valuation allowances are established when it is more likely than not that some or all of the deferred tax assets not be realized.

Foreign Currency Risk

The RMB is not a freely convertible currency. The State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of RMB into foreign currencies. The value of the RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market.

The PRC subsidiaries conduct their business substantially in the PRC, and their financial performance and position are measured in terms of RMB. Any devaluation of the RMB against the USD would consequently have an adverse effect on the financial performance and asset values of the Company when measured in terms of USD. The PRC subsidiaries’ products are primarily procured, sold and delivered in the PRC for RMB. Thus, their revenues and profits are predominantly denominated in RMB. Should the RMB devalue against USD, such devaluation could have a material adverse effect on the Company’s profits and the foreign currency equivalent of such profits repatriated by the PRC entities to the Company.

F-12

Forlink Software Corporation, Inc.

Notes to Unaudited Consolidated Financial Statements

(Expressed in US Dollars)

Recent Accounting Pronouncements

In February 2006, the FASB issued FAS 155, Accounting for Certain Hybrid Financial Instruments (FAS155), an amendment of FAS 140 and FAS 133. FAS155 permits the Company to elect to measure any hybrid financial instrument at fair value (with changes in fair value recognized in earnings) if the hybrid instrument contains an embedded derivative that would otherwise be required to be bifurcated and accounted for separately under FAS 133. The election to measure the hybrid instrument at fair value is made on an instrument-by-instrument basis and is irreversible. The Statement will be effective for all instruments acquired, issued, or subject to a re-measurement event occurring after the beginning of the Company's fiscal year that begins after September 15, 2006, with earlier adoption permitted as of the beginning of the Company's 2006 fiscal year, provided that financial statements for any interim period of that fiscal year have not yet been issued. We do not expect the adoption of FAS155 to have a material impact on our financial position or results of operations.

In March 2006, the FASB issued FAS 156 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FAS 156), an amendment to portions of FAS 133, FAS 140 and FTB 87-3. FAS 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. It also permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. Derivative instruments used to mitigate the risks inherent in servicing assets and servicing liabilities must be accounted for at fair value. Under FAS 156 an election can also be made for subsequent fair value measurement of servicing assets and servicing liabilities by class, thus simplifying the accounting and provide for income statement recognition of potential offsetting changes in the fair value of servicing assets, servicing liabilities and related derivative instruments. The Statement will be effect beginning the first fiscal year that begins after September 15, 2006. We do not expect the adoption of FAS 156 to have a material impact on our financial position or results of operations.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FIN 48).  This Interpretation provides guidance for recognizing and measuring uncertain tax positions, as defined in SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a threshold condition that a tax position must meet for any of the benefit of the uncertain tax position to be recognized in the financial statements. Guidance is also provided regarding derecognition, classification and disclosure of these uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. We do not expect that this Interpretation will have a material impact on our financial position, results of operations or cash flows.

In June 2006, the EITF reached consensus on and ratified EITF Issue 06-03, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (EITF 06-03). The scope of this Issue includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, and some excise taxes. The Task Force concluded that the presentation of taxes within the scope of the Issue on either a gross (included in revenues and costs) or a net (excluded from revenues) basis is an accounting policy decision that should be disclosed pursuant to Opinion 22. In addition, for any such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant. The disclosure of those taxes can be done on an aggregate basis. The consensus in this Issue should be applied to financial reports for interim and annual reporting periods beginning after December 15, 2006. We believe the adoption of EITF 06-03 will not have a material impact on our method for recording and reporting these type taxes in its consolidated financial statements, as the Company’s policy is to exclude all such taxes from revenue.

F-13

Forlink Software Corporation, Inc.

Notes to Unaudited Consolidated Financial Statements

(Expressed in US Dollars)

NOTE 3 - OTHER RECEIVABLES, DEPOSITS AND PREPAYMENTS

		June 30,		December 31,
		2006		2005
Other receivables	$	91,614	$	44,484
Deposits		312,535		424,017
Prepayments		31,987		47,286
	$	436,136	$	515,787

NOTE 4 - INVENTORIES

		June 30,		December 31,
		2006		2005
Computer hardware and software	$	42,262	$	264,839

All the inventories were purchased for identified system integration contracts.

NOTE 5 - RELATED PARTY

The Company has had and expects to have transactions in the ordinary course of business with many of its stockholders, directors, senior officers and other affiliates (and their associates) on substantially the same terms as these prevailing for comparable transactions with others. Listed below is a summary of material relationship or transactions with the Company’s stockholders, directors, senior officers and other affiliates:

Amounts due to stockholders

The Company, from time to time, received from or made repayment to one major stockholder who is also the management of the Company. The amounts due to stockholders do not bear any interest and do not have clearly defined terms of repayment.

As of June 30, 2006 and December 31, 2005, the amounts due to stockholders represented advances from stockholders.

Related Party Transactions

During the three and six months ended June 30, 2006, there were no sale derived from an affiliate (2005: $604,441 and $712,855).

F-14

Forlink Software Corporation, Inc.

Notes to Unaudited Consolidated Financial Statements

(Expressed in US Dollars)

NOTE 6 - PROPERTY, PLANT AND EQUIPMENT, NET

		June 30,			December 31,
		2006			2005
Building	$	182,386		$	180,137
Computer and office equipment		1,048,000			1,015,006
Motor vehicles		196,732			194,306
		1,427,118			1,389,449
Less: Accumulated depreciation		(616,799	)		(505,341	)
	$	810,319			884,108

The building is located in Chengdu, PRC and was purchased on behalf of the Company by Mr. Yi He, one of the stockholders and directors of the Company. By a stockholders’ resolution passed on March 8, 1999, it was ratified that the title to the building belonged to the Company. The building was pledged as collateral for the mortgage loan granted to Mr. Yi He. The related mortgage was in the name of Mr. Yi He, however, the Company agreed to pay Mr. Yi He amounts equal to the required mortgage payments. In 2005, the mortgage loan was fully repaid and the title to the building was transferred to the Company.

NOTE 7 - LONG TERM INVESTMENTS

The Company invested $760,870 in a privately held PRC company, All China Logistics Online Co., Ltd., for a 17.8% equity interest. The Company records the investment at cost because it does not have the ability to exercise significant influence over the investee.

In October 2004, the Company invested $36,232 in a privately held PRC company, Huntington Network Technologies (Beijing) Co., Ltd. (“HNTB”), for a 30% equity interest through BFHX. The investment in HNTB is accounted for under the equity method of accounting due to the Company’s significant influence over the operational and financial policies of HNTB. For the three and six months ended June 30, 2006, there is no share of HNTB’s net results ($10,223 and $7,916 share of loss for three and six months ended June 30, 2005) as the investment was impaired in full in 2005.

On October 24, 2005, the Company set up a corporate joint venture, named China Liquid Chemical Exchange Company Limited, a limited liability company in PRC, and shares the risk and rewards up to the equity interest of 17.5%. The consideration is made in form of the internally developed “For-online Electronic Trading System” without any cash outflow. Therefore, the Company recorded the contribution of software at the lower of its carrying amount or fair value, and accounted for under the equity method under SOP 78-9. Up to June 30, 2006, the share of loss was $17,557, which has not been recorded in the accompanying statements of operations as the carrying amount of investment cost is zero.

F-15

Forlink Software Corporation, Inc.

Notes to Unaudited Consolidated Financial Statements

(Expressed in US Dollars)

NOTE 8 - GOODWILL

The Company accounted for the acquisition in accordance with SFAS No. 141 “Business Combinations”, which resulted in the recognition of goodwill. Goodwill represents the excess of acquisition cost over the estimated fair value of net assets acquired as of August 27, 2001 as a result of acquisition of Slait. The acquisition cost is based upon a value of $0.34 per share, the closing price of Forlink’s common stock on January 11, 2001 (date of the agreement of Plan of Reorganization), plus a value of $0.15 per option determined using a Black Scholes model on January 11, 2001.

The purchase price, purchase-price allocation, and financing of the transaction are summarized as follows:

Consideration paid as:
Common stock of Forlink issued	$	8,659,800
Options of Forlink issued		125,550
		8,785,350
Allocated to historical book value/fair value of Forlink’s assets and liabilities		(134,781	)
Excess purchase price over allocation to identifiable assets and liabilities (goodwill)		8,650,569

As the acquisition was completed after June 30, 2001, no amortization of goodwill was necessary in accordance with SFAS No. 142 “Goodwill and other Intangible Assets”.

During the quarter ended June 30, 2002, the Company completed the first step of the transitional goodwill impairment test (i.e. comparing the carrying amount of the net assets, including goodwill, with the fair value of the Company as of January 1, 2002). Based on the results of the first step of the test, the Company believes that there was no impairment of goodwill as of January 1, 2002.

However, in the quarter ended June 30, 2002, the closing trading price of the Company’s common stock had fallen to $0.05 per share, which indicated that there might be a potential impairment of goodwill since January 1, 2002. Therefore, the Company performed an additional impairment test as of June 30, 2002. As a result of the impairment test performed, which was based on the fair value of the Company as determined by the trading price of the Company’s common stock, an impairment of $5,308,760 was recorded in the quarter ended 30 June 2002. As the closing trading price of the Company’s common stock as of December 31, 2002 had fallen to $0.04 per share, a total impairment of $6,966,546 was recorded for the year ended December 31, 2002.

As of December 31, 2003, 2004 and 2005, the Company completed the annual impairment test. Based on the result of the first step of the test, the Company believes that there was no further impairment of goodwill as of December 31, 2003, 2004 and 2005.

F-16

Forlink Software Corporation, Inc.

Notes to Unaudited Consolidated Financial Statements

(Expressed in US Dollars)

NOTE 9 - OTHER PAYABLES AND ACCRUED EXPENSES

		June 30,		December 31,
		2006		2005
Other payables	$	87,240	$	58,907
Accrued salaries & wages		163,111		171,508
Other accrued expenses		53,486		56,831
	$	303,837	$	287,246

NOTE 10 - INCOME TAX

According to the relevant PRC tax rules and regulations, FTCL and BFHX, being recognized New Technology Enterprises operating within a New and High Technology Development Zone, are entitled to an Enterprise Income Tax (“EIT”) rate of 15%.

Pursuant to approval documents dated September 23, 1999 and August 2, 2000 issued by the Beijing Tax Bureau and State Tax Bureau respectively, FTCL, being a recognized New Technology Enterprise, is eligible to full exemption from EIT for fiscal years 1999, 2000, 2001 and 2002. FTCL is also eligible to 50% EIT reduction at the rate of 7.5% for fiscal years 2003, 2004 and 2005.

Pursuant to an approval document dated January 19, 2004 issued by State Tax Bureau, BFHX, being a recognized New Technology Enterprise, is eligible to full exemption from EIT for fiscal years 2004, 2005 and 2006.

Hong Kong profits tax is calculated at 17.5% on the estimate assessable profits of FTHK for the period. No provision for EIT and Hong Kong profits tax were made for FTCL, BFHX, FTCD and FTHK as they have not gained taxable income for the periods.

The EIT rates for FTCD, BFKT, QJT and XKT range from 15% to 33%. No provision for EIT was made for BFKT, QJT and XKT as they have not commenced operations during the period.

F-17

Forlink Software Corporation, Inc.

Notes to Unaudited Consolidated Financial Statements

(Expressed in US Dollars)

NOTE 11 - OTHER TAXES RECOVERABLE/(PAYABLE)

Other taxes payable comprise mainly Valued-Added Tax (“VAT”) and Business Tax (“BT”). The Company is subject to output VAT levied at the rate of 17% of its operating revenue. The input VAT paid on purchases of materials and other direct inputs can be used to offset the output VAT levied on operating revenue to determine the net VAT payable or recoverable. BT is charged at a rate of 5% on the revenue from other services.

As part of the PRC government’s policy of encouraging software development in the PRC, companies that fulfill certain criteria set by the relevant authorities and which develop their own software products and have the software products registered with the relevant authorities in the PRC are entitled to a refund of VAT equivalent to the excess over 3% of revenue paid in the month when output VAT exceeds input VAT (excluding export sales). The excess portion of the VAT is refundable and is recorded by the Company on an accrual basis. The VAT rebate included in other income was $3,235 and $63,153 for the three and six months ended June 30, 2006, respectively (2005: $59,686 and $60,898).

NOTE 12 - SHORT TERM BORROWINGS

The short term bank loan was a 6-month loan that bears interest at a rate of 0.4875% per month, and the maturity date of the loan was March 29, 2006. It was fully repaid on 16 February, 2006.

NOTE 13 - STOCK PLAN

On June 1, 2000, the Company adopted a plan of stock-based compensation incentives for selected eligible participants who are the staff and consultants of Forlink. This plan is known as the “Forlink Software Corporation, Inc. Stock Plan” (“the Plan”). The total number of shares of common stock reserved for issuance by Forlink either directly as stock awards or underlying options granted under this Plan shall not be more than 1,600,000. Under the terms of this Plan, options can be issued to purchase shares of Forlink’s common stock. The Board of Directors shall determine the terms and conditions of each option granted to eligible participants, which terms shall be set forth in writing. The terms and conditions so set by the Board of Directors may vary from one eligible participant to another.

F-18

Forlink Software Corporation, Inc.

Notes to Unaudited Consolidated Financial Statements

(Expressed in US Dollars)

NOTE 13 - STOCK PLAN - Continued

The following table summarizes the activity on stock options under the Plan:

	Number of options		Weighted average exercise price
Outstanding at December 31, 2002	1,337,000	$	1.00
Granted	1,968,000	$	2.28
Exercised	0		0.00
Forfeited or Cancelled	631,000	$	5.00
Outstanding at December 31, 2003, 2004 and 2005 and June 30, 2006	1,337,000	$	1.00

All outstanding options at June 30, 2006 and December 31, 2005 are exercisable.

In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25. The Interpretation, which has been adopted prospectively as of July 1, 2000, requires that stock options that have been modified to reduce the exercise price be accounted for as variable. Forlink re-priced 337,000 stock options on September 21, 2000, and reduced the exercise price to $1 per share, the then-current market price of the stock. Under the Interpretation, the options are accounted for as variable from September 21, 2000 until the options are exercised, forfeited or expire unexercised. Since September 21, 2000, the market price of the Forlink’s stock decreased to a level lower than the exercise price. Accordingly, there are no effects of adopting the Interpretation for the six months ended June 30, 2006 and 2005.

On August 16, 2002, the Company established a plan of stock-based compensation incentives for selected eligible participants of the Company and its affiliated corporations. This plan is known as the “Forlink Software Corporation, Inc. 2002 Stock Plan” (the “Plan 2002”). The total number of shares of common stock reserved for issuance by Forlink either directly as stock awards or underlying options granted under the Plan 2002 shall not be more than 8,000,000. Under the terms of the Plan 2002, options can be issued to purchase shares of Forlink’s common stock. The Board of Directors shall determine the terms and conditions of each option granted to eligible participants, which terms shall be set forth in writing. The terms and conditions so set by the Board of Directors may vary from one eligible participant to another.

On September 7, 2004, 3,315,000 options were granted to the Company’s employees to purchase the Company’s shares of common stock, $0.001 par value, at an exercise price of $0.10 per share. Of the 3,315,000 options, 800,000 options were granted to an employee with 5 years vesting period, 2,515,000 options were granted to employees with 3 years vesting period. The expiration date for 2,385,000 options is December 30, 2006 (the “December 2006 Options”). The expiration date for 130,000 options is June 30, 2007 (the “June 2007 Options”). The expiration date for 800,000 options is June 30, 2009 (the “June 2009 Options”). On September 7, 2004 and January 1, 2005, 854,500 and 904,500 options were vested to employees respectively. The market price of the stock as of September 7, 2004 and January 1, 2005 was $0.10 per share.

F-19

Forlink Software Corporation, Inc.

Notes to Unaudited Consolidated Financial Statements

(Expressed in US Dollars)

NOTE 13 - STOCK PLAN - Continued

The following table summarizes the activity on stock options under the Plan 2002:

	Number of options			Weighted average exercise price
Granted on September 7, 2004	3,315,000		$	0.10
Exercised	(15,000	)	$	0.10
Forfeited or Cancelled	0		$	0.00
Outstanding at December 31, 2004	3,300,000		$	1.00
Exercised	(136,500	)	$	0.10
Forfeited or Cancelled	(132,500	)	$	0.00
Outstanding at December 31, 2005	3,031,000		$	1.00
Exercised	0		$	0.00
Forfeited or Cancelled	(35,000	)	$	0.10
Outstanding at March 31, 2006	2,996,000		$	1.00
Exercised	0		$	0.00
Forfeited or Cancelled	(17,500	)	$	0.00
Outstanding at June 30, 2006	2,978,500		$	1.00

The weighted average fair value of the December 2006 Options, the June 2007 Options and the June 2009 Options granted on the date of grant, were $0.042, $0.046 and $0.058 per option, respectively.

The Company calculated the fair value of each option award on the date of grant using the Black-Scholes option pricing model. The following assumptions were used for each respective options.

For six months ended June 30, 2006 and 2005

	The value of Options
		December 2006 Options		June 2007 Options		June 2009 Options
Risk-free interest rate		2.17	%	2.28	%	2.66	%
Expected lives (in years)		1.167		1.417		2.417
Dividend yield		0	%	0	%	0	%
Expected volatility		100	%	100	%	100	%

F-20

Forlink Software Corporation, Inc.

Notes to Unaudited Consolidated Financial Statements

(Expressed in US Dollars)

NOTE 14 - CONCENTRATION OF A CUSTOMER

During the three and six months ended June 30, 2006 and 2005, the following customers accounted for more than 10% of total sales:

	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Net sales derived from - Customer A	2,077,684		693,224		2,885,406		1,139,113
- Customer B	*		604,441		*		712,855
% to total net sales - Customer A	94	%	44	%	88	%	51	%
-- Customer B	*		39	%	*		32	%
Account receivable from - Customer A					1,535,303		711,605
- Customer B					347,444		533,993
% to total accounts receivable - Customer A					72	%	46	%
-- Customer B					16	%	35	%

* less than 10%

NOTE 15 - RESTATEMENT OF UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THREE AND SIX MONTHS ENDED JUNE 30, 2005

Subsequent to the issuance of the unaudited consolidated financial statements for the three and six months ended June 30, 2005 (the “2005 Second Quarter”), the Company restated certain items of the consolidated statements of operations for the 2005 Second Quarter for better presentation of the figures of net sales and other income. The Company removed, from its “Net Sales”, the VAT rebate that the Company received in connection with software sales and presented the VAT rebate as part of the “Other Income” in the consolidated statement of operations for the 2005 Second Quarter. Such VAT rebate was previously included as part of the net sales in the consolidated statement of operations for the 2005 Second Quarter. As described in note 11, software sales in PRC are subject to a 17% VAT and the Company is responsible for billing, collecting, and submitting the tax to the Chinese tax authorities (i.e. the PRC Local and Federal Tax Authorities) for amounts attributable to both VAT related receivables and payables. However, to encourage local software development in China, the Chinese tax authorities provide a refund of a certain percentage of the VAT to companies who develop their own software products and have the software products registered with the relevant authorities in China. The Company is qualified to apply for such VAT rebate and thus if the net amount of the VAT payable exceeds 3% of software sales, the excess portion of the value added tax is refundable upon the Company’s application to the tax authority for such VAT rebate.

F-21

Forlink Software Corporation, Inc.

Notes to Unaudited Consolidated Financial Statements

(Expressed in US Dollars)

NOTE 15 - RESTATEMENT OF UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THREE AND SIX MONTHS ENDED JUNE 30, 2005 - Continued

These corrections had no effect on the Company’s consolidated balance sheet and consolidated statements of cash flows contained in the financial statements for the 2005 Second Quarter. Additionally, the restatements did not affect net income as reported in the Company’s consolidated statements of operations for the 2005 Second Quarter. The following is a summary of the effects of these changes on the Company’s consolidated statements of operations for the 2005 Second Quarter:

	Consolidated Statements of Operations
For the three months Ended June 30, 2005		As previously reported		Adjustments			As restated
Net sales	$	1,629,131	$	(59,686	)	$	1,569,445
Gross profit		925,669		(59,686	)		865,983
Operating profit		109,347		(59,686	)		49,661
Other income, net		-		59,686			59,686

	Consolidated Statements of Operations
For the six months Ended June 30, 2005		As previously reported			Adjustments			As restated
Net sales	$	2,281,481		$	(60,898	)	$	2,220,583
Gross profit		1,153,822			(60,898	)		1,092,924
Operating loss		(508,038	)		(60,898	)		(568,936	)
Other income, net		275			60,898			61,173

F-22

Item 2. Management's Discussion and Analysis or Plan of Operation.

GENERAL

Statements contained herein that are not historical facts are forward-looking statements as that term is defined by the Private Securities Litigation Reform Act of 1995. Although we believe that the expectations reflected in such forward looking statements are reasonable, the forward looking statements are subject to risks and uncertainties that could cause actual results to differ from those projected. We caution investors that any forward looking statements made by us are not guarantees of future performance and that actual results may differ materially from those in the forward-looking statements. Such risks and uncertainties include, without limitation: well-established competitors who have substantially greater financial resources and longer operating histories, regulatory delays or denials, ability to compete as a start-up company in a highly competitive market, and access to sources of capital.

The following discussion and analysis should be read in conjunction with our financial statements and notes thereto included elsewhere in this Form 10-QSB. Except for the historical information contained herein, the discussion in this Form 10-QSB contains certain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-QSB should be read as being applicable to all related forward looking statements wherever they appear in this Form 10-QSB. The Company's actual results could differ materially from those discussed here.

OVERVIEW

We are a leading provider of software solutions and information technology services in China (the “PRC” or “China”). We focus on providing Enterprise Application Integration (EAI) solutions for large companies in the telecom, finance, and logistics industries. In May 2004, we launched For-online, which delivers enterprise applications and services over the Internet to Small and Medium-sized Enterprises (SMEs) in China. For-online is quickly becoming an important new channel for delivering and distributing our products and services to more customers.

On August 28, 2001, we completed the acquisition of Beijing Slait Science & Technology Development Limited Co. (“Slait”). Slait was engaged in the development and sale of network software systems and provision of enterprise application system integration services for telecommunication companies and network services providers in China. Slait was also engaged in the sale of computer hardware. Subsequent to the acquisition, the principal activities of Slait were gradually shifted to Forlink Technologies Co., Ltd. (“FTCL”). On February 13, 2004, Slait was officially dissolved in accordance with relevant PRC regulations. FTCL is the major operating company of the Group in Beijing.

We have derived, and believe that we will continue to derive, a significant portion of our revenues from Beijing Mobile Communication Company, a subsidiary of China Mobile. Since 1998, we have been developing and maintaining BOSS (Business Operation Support System) for the carrier. BOSS is an integrated software platform and it is developed in stages to accommodate the carrier’s increasing subscribers and service offerings. We are currently developing and maintaining phase two of BOSS.

Although we are an important strategic IT partner of Beijing Mobile, we do not have long-term contracts with the carrier. All of our agreements with the carrier are for short-term projects or sales of third-party hardware. While we feel that our significant relationships with Beijing Mobile will likely provide additional sales agreements in the future, Beijing Mobile is not contractually bound to purchase any products or services from us. The loss of this customer could hurt our business by reducing our revenues and profitability.

-1-

For the three and six months ended June 30, 2006, sales to Beijing Mobile Communication Company were $2,077,684 and $2,885,406, respectively, accounting for 94% and 88% of our revenue for these periods, respectively.

REVENUES

Our business includes Forlink brand “For-series” software system sales such as ForOSS, ForRMS, For-Mail and their copyright licensing, and “For-series” related system integration, which consists of hardware sales and other related services rendered to customers. The following table shows our revenue breakdown by business line:

	Three Months Ended June 30,					Six Months Ended June 30,
		2006		2005			2006		2005
Sales of For-series software		762,640		691,737			1,147,418		1,256,186
as a percentage of net sales		34	%	44	%		35	%	57	%
For-series related system integration		1,458,500		877,708			2,127,192		964,397
as a percentage of net sales		66	%	56	%		65	%	43	%

As indicated in the foregoing table, sales of For-series software decreased 9% to $1,147,418 in the first half of 2006 from $1,256,186 in the first half of 2005. Software revenue as a percentage of net sales decreased to 35% in the first half of 2006 from 57% in the first half of 2005. For-series related system integration increased 121% to $2,127,192 in the first half of 2006 from $964,397 in the first half of 2005. System integration revenue as a percentage of net sales increased to 65% in the first half of 2006 from 43% in the first half of 2005. The change was mainly attributable to revenue from system integration services we provided pursuant to a large system integration contract with Beijing Mobile in the second quarter of 2006.

Generally, we offer our products and services to our customers on a total-solutions basis. Most of the contracts we undertake for our customers include revenue from hardware and software sales and professional services.

SOURCES OF REVENUE

Hardware Revenue

Revenues from sales of products are mainly derived from sales of hardware. Normally, the hardware that we procure is in connection with total-solutions basis system integration contracts.

Service Revenue

Service revenue consists of revenue for the professional services we provide to our customers for network planning, design and systems integration, software development, modification and installation, and related training services.

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Software License Revenue

We generate revenue in the form of fees received from customers to whom we issue licenses for the use of our software products over an agreed period of time.

COST OF REVENUE

Our costs of revenue include hardware costs, software-related costs and compensation and travel expenses for the professionals involved in the relevant projects. Hardware costs consist primarily of third party hardware costs. We recognize hardware costs in full upon delivery of the hardware to our customers. Software-related costs consist primarily of packaging and written manual expenses for our proprietary software products and software license fees paid to third-party software providers for the right to sublicense their products to our customers as part of our solutions offerings. The costs associated with designing and modifying our proprietary software are classified as research and development expenses as such costs are incurred.

OPERATING EXPENSES

Operating expenses are comprised of selling expenses, research and development expenses and general and administrative expenses.

Selling expenses include compensation expenses for employees in our sales and marketing departments, third party advertising expenses, as well as sales commissions and sales agency fees.

Research and development expenses relate to the development of new software and the modification of existing software. We expense such costs as they are incurred.

TAXES

According to the relevant PRC tax rules and regulations, FTCL and BFHX, which are entities recognized as New Technology Enterprises operating within a New and High Technology Development Zone, are entitled to an Enterprise Income Tax (“EIT”) rate of 15%.

Pursuant to approval documents dated September 23, 1999 and August 2, 2000 that were issued by the Beijing Tax Bureau and the State Tax Bureau, respectively, FTCL, which is recognized as a New Technology Enterprise, was eligible for a full exemption from EIT for the fiscal years 1999, 2000, 2001 and 2002. FTCL also became eligible for a 50% EIT reduction at the rate of 7.5% for the fiscal years 2003, 2004 and 2005.

Pursuant to an approval document dated January 19, 2004 that was issued by the State Tax Bureau, BFHX, which is recognized as a New Technology Enterprise, is eligible for a full exemption from EIT for the fiscal years 2004, 2005 and 2006.

Hong Kong profits tax is calculated at 17.5% on the estimated assessable profits of FTHK for the period.

The EIT rates for FTCD, BFKT, QJT and XKT range from 15% to 33%. No provision for EIT was made for BFKT, QJT and XKT because they have not commenced operations during the period.

Revenue from the sale of hardware procured in China together with the related system integration is subject to a 17% value added tax. Although sales of software in China are subject to a 17% value added tax as well, companies that develop their own software and have the software registered are generally entitled to a value added tax refund. If the net amount of the value added tax payable exceeds 3% of software sales, then the excess portion of the value added tax is refundable to us upon our application to the tax authority. This policy is effective until 2010. Changes in Chinese tax laws may adversely affect our future operations.

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FOREIGN EXCHANGE

Our functional currency is the U.S. Dollar (“US$”) and our financial records are maintained and our financial statements are prepared in US$. The functional currency of FTHK is the Hong Kong Dollar (“HK$”) and the financial records are maintained and the financial statements prepared in HK$. The functional currency of Slait, FTCL, BFHX and FTCD is the Renminbi (“RMB”) and their financial records are maintained and their financial statements are prepared in RMB.

Foreign currency transactions during the year are translated into each company’s denominated currency at the exchange rates ruling at the transaction dates. Gains and losses resulting from foreign currency transactions are included in the consolidated statement of operations. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated into each company’s denominated currency at year-end exchange rates. All exchange differences are dealt with in the consolidated statements of operations.

The financial statements of our operations based outside of the United States have been translated into US$ in accordance with SFAS 52. We have determined that the functional currency for each of the Company’s foreign operations is its applicable local currency. When translating functional currency financial statements into US$, year-end exchange rates are applied to the consolidated balance sheets, while average period rates are applied to consolidated statements of operations. Translation gains and losses are recorded in translation reserve as a component of shareholders’ equity.

The value of the RMB is subject to changes in China’s central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. Since 1994, the conversion of RMB into foreign currencies, including USD, has been based on rates set by the People’s Bank of China, which are set daily based on the previous day’s interbank foreign exchange market rates and current exchange rates on the world financial markets. Since 1994, the official exchange rate generally has been stable. In July 2005, the Chinese government announced that it would no longer peg its currency exclusively to US$ but would switch to a managed floating exchange rate based on market supply and demand with reference to a basket of currencies yet to be named by the People’s Bank of China. This switch will likely increase the volatility of RMB as compared to US$. The exchange rate of RMB to US$ changed from RMB8.28 to RMB8.11 in late July 2005.

Exchange rates between US$, HK$ and RMB had minimal fluctuations during the periods presented. The rates ruling as of June 30, 2006, December 31, 2005 and June 30, 2005 are US$1:HK$7.75:RMB8.01, US$1:HK$7.75:RMB8.11, and US$1:HK$7.75:RMB8.28, respectively. The weighted average rates ruling for the three months ended June 30, 2006 and 2005 are US$1:HK$7.75:RMB8.02 and US$1:HK$7.75:RMB8.28, respectively.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States of America. The preparation of those financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenues and cost of revenues under customer contracts, bad debts, income taxes, investment in affiliate, long-lived assets and goodwill. We base our estimates and judgments on historical experience and on various other factors that we believe are reasonable. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

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Revenue Recognition

We generally provide services under multiple element arrangements, which include software license fees, hardware and software sales, provision of system integration services including consulting, implementation, and software maintenance. We evaluate revenue recognition on a contract-by-contract basis as the terms of each arrangement vary. The evaluation of the contractual arrangements often requires judgments and estimates that affect the timing of revenue recognized in the statements of operations. Specifically, we may be required to make judgments about

- whether the fees associated with our products and services are fixed or determinable;

- whether collection of our fees is reasonably assured;

- whether professional services are essential to the functionality of the related software product;

- whether we have the ability to make reasonably dependable estimates in the application of the percentage-of-completion method; and

- whether we have verifiable objective evidence of fair value for our products and services.

We recognize revenues in accordance with the provisions of Statements of Position, or SOP, No. 97-2, “Software Revenue Recognition”, as amended by SOP No. 98-9, “Modification of SOP 97-2, Software Revenue Recognition, with respect to Certain Transactions”, Staff Accounting Bulletin, or SAB, 104, “Revenue Recognition”. SOP 97-2 and SAB 104 require, among other matters, that there be a signed contract evidencing an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable.

Revenue from provision of system integration services and other related services are recognized when services are rendered in stages as separate identifiable phases of a project are completed and accepted by customers.

Revenue from software sales is recognized when the related products are delivered and installed and collection of sales proceeds is deemed probable and persuasive evidence of an arrangement exists.

Software license revenue is recognized over the accounting periods contained in the terms of the relevant agreements, commencing upon the delivery of the software provided that (1) there is evidence of an arrangement, (2) the fee is fixed or determinable and (3) collection of the fee is considered probable. Under certain arrangements, the Company capitalizes related direct costs consisting of third party software costs and direct software implementation costs. These costs are amortized over the term of the arrangement.

In the case of maintenance revenue, vendor-specific objective evidence, or VSOE, of fair value is based on substantive renewal prices, and such revenue is recognized ratably over the maintenance period.

In the case of consulting and implementation services revenue, VSOE is based on prices from stand-alone sale transactions, and such revenue is recognized as services are performed pursuant to paragraph 65 of SOP 97-2.

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The sale of computer hardware is recognized as revenue on the transfer of risks and rewards of ownership, which generally coincides with the time when the goods are delivered to customers and title has passed, pursuant to SAB 104.

Remote hosting services revenue, where VSOE is based upon consistent pricing charged to customers based on volumes and performance requirements on a stand-alone basis and substantive renewal terms, is recognized ratably over the contract term as the services are performed. The remote hosting arrangements generally require the Company to perform one-time set-up activities and include a one-time set-up fee. This one-time set-up fee is generally paid by the customer at contract execution. The Company determined that these set-up activities do not constitute a separate unit of accounting, and accordingly, the related set-up fees are recognized ratably over the term of the contract.

We consider the applicability of EITF 00-3, “Application of AICPA Statement of SOP 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware”, to the hosting services arrangements on a contract-by-contract basis. If we determine that the customer has the contractual right to take possession of our software at any time during the hosting period without significant penalty, and can feasibly run the software on its own hardware or enter into another arrangement with a third party to hast the software, a software element covered by SOP 97-2 exists. When a software element exists in a hosting services arrangement, we recognize the licensed, professional services and hosting services revenues pursuant to SOP 97-2, whereby the fair value of the hosting service is recognized as revenue ratably over the term of the hosting contract. If we determine that a software element covered by SOP 97-2 is not present in a hosting services arrangement, then we recognize revenue for the hosting services arrangement ratably over the term of the hosting contract pursuant to SAB 104.

Income Taxes

We account for income taxes in accordance with SFAS No. 109 “Accounting for Income Taxes”. Under SFAS No. 109, deferred tax liabilities or assets at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered. Valuation allowances are established when it is more likely than not that some or all of the deferred tax assets will not be realized.

Allowance for Doubtful Accounts

We record an allowance for doubtful accounts based on specifically identified amounts that the Company believes to be uncollectible. We have a limited number of customers with individually large amounts due at any given balance sheet date. Any unanticipated change in one of those customer’s credit worthiness or other matters affecting the collectibility of amounts due from such customers could have a material affect on the results of operations in the period in which such changes or events occur. After all attempts to collect a receivable have failed, the receivable is written off against the allowance.

Goodwill

SFAS 142, Goodwill and Other Intangible Assets, requires that goodwill be tested for impairment on an annual basis (December 31 for us) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of a company. Application of the goodwill impairment test requires judgment, including the determination of the fair value of a company. The fair value of a company is estimated using a discounted cash flow methodology. This requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, the useful life over which cash flows will occur, and the determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for a company.

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Recent Accounting Pronouncements

SFAS No. 123 (Revised 2004) (“SFAS No. 123R”), “Share-Based Payment,” issued in December 2004, is a revision of FASB Statement 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. The Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. On March 29, 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB No. 107”), which provides the Staff’s views regarding interactions between SFAS No. 123R and certain SEC rules and regulations and provides interpretations of the valuation of share-based payments for public companies.

SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:  

(1) A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.  

(2) A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

This statement is effective for the beginning of the first annual reporting period that begins after June 15, 2005, therefore, we have adopted the standard in the quarter ended March 31, 2006 and used the modified prospective method. The adoption of SFAS No. 123(R) did not have a material impact on our consolidated operating results, nor will there be any impact on our future consolidated cash flows.

In May 2005, the FASB issued FAS 154, Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3. This statement is effective for accounting changes and corrections of errors made after January 1, 2006. This statement applies to voluntary changes in accounting principle and requires retrospective application of the new accounting principle to prior period financial statements. The adoption of this standard did not have a material effect on the Company’s financial statements.

In November 2005, FASB issued FSP FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP FAS 115-1”), which provides guidance for determining when investments in certain debt and equity securities are considered impaired, whether an impairment is other-than-temporary, and on measuring such impairment loss. FSP FAS 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP FAS 115-1 is required to be applied to reporting periods beginning after December 15, 2005. The Company adopted FSP FAS 115-1 in the first quarter of 2006. Adoption of FSP FAS 115-1 did not have a material impact on the Company’s consolidated results of operations or financial condition.

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In February 2006, the FASB issued FAS 155, Accounting for Certain Hybrid Financial Instruments (FAS155), an amendment of FAS 140 and FAS 133. FAS155 permits the Company to elect to measure any hybrid financial instrument at fair value (with changes in fair value recognized in earnings) if the hybrid instrument contains an embedded derivative that would otherwise be required to be bifurcated and accounted for separately under FAS 133. The election to measure the hybrid instrument at fair value is made on an instrument-by-instrument basis and is irreversible. The Statement will be effective for all instruments acquired, issued, or subject to a re-measurement event occurring after the beginning of the Company's fiscal year that begins after September 15, 2006, with earlier adoption permitted as of the beginning of the Company's 2006 fiscal year, provided that financial statements for any interim period of that fiscal year have not yet been issued. We do not expect the adoption of FAS155 will have a material impact on our financial position or results of operations.

In March 2006, the FASB issued FAS 156 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FAS 156), an amendment to portions of FAS 133, FAS 140 and FTB 87-3. FAS 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. It also permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. Derivative instruments used to mitigate the risks inherent in servicing assets and servicing liabilities must be accounted for at fair value. Under FAS 156 an election can also be made for subsequent fair value measurement of servicing assets and servicing liabilities by class, thus simplifying the accounting and provide for income statement recognition of potential offsetting changes in the fair value of servicing assets, servicing liabilities and related derivative instruments. The statement will be in effect beginning the first fiscal year that begins after September 15, 2006. We do not expect the adoption of FAS 156 will have a material impact on our financial position or results of operations.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (FIN 48).  This Interpretation provides guidance for recognizing and measuring uncertain tax positions, as defined in SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a threshold condition that a tax position must meet for any of the benefit of the uncertain tax position to be recognized in the financial statements. Guidance is also provided regarding derecognition, classification and disclosure of these uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. We do not expect that this interpretation will have a material impact on our financial position, results of operations or cash flows.

In June 2006, the EITF reached consensus on and ratified EITF Issue 06-03, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (EITF 06-03). The scope of this Issue includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added, and some excise taxes. The Task Force concluded that the presentation of taxes within the scope of the Issue on either a gross (included in revenues and costs) or a net (excluded from revenues) basis is an accounting policy decision that should be disclosed pursuant to Opinion 22. In addition, for any such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant. The disclosure of those taxes can be done on an aggregate basis. The consensus in this Issue should be applied to financial reports for interim and annual reporting periods beginning after December 15, 2006. We believe the adoption of EITF 06-03 will not have a material impact on our method for recording and reporting these type taxes in its consolidated financial statements, as the Company’s policy is to exclude all such taxes from revenue.

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Restatement of Consolidated Statement of Operations for Quarter Ended June 30, 2005

Subsequent to the issuance of the consolidated financial statements for the quarter ended June 30, 2005 (the “Second Quarter”), the Company restated certain items of the consolidated statements of operations for the Second Quarter for better presentation of the figures of net sales and other income. The Company removed, from its “Net Sales”, the VAT rebate that the Company received in connection with software sales and presented the VAT rebate as part of the “Other Income” in the consolidated statement of operations for the Second Quarter in 2005. Such VAT rebate was previously included as part of the net sales in the consolidated statement of operations for the Second Quarter in 2005. Software sales in PRC are subject to a 17% VAT and the Company is responsible for billing, collecting, and submitting the tax to the Chinese tax authorities (i.e. the PRC Local and Federal Tax Authorities) for amounts attributable to both VAT related receivables and payables. However, to encourage local software development in China, the Chinese tax authorities provide a refund of a certain percentage of the VAT to companies who develop their own software products and have the software products registered with the relevant authorities in China. The Company is qualified to apply for such VAT rebate and thus if the net amount of the VAT payable exceeds 3% of software sales, the excess portion of the value added tax is refundable upon the Company’s application to the tax authority for such VAT rebate.

These corrections had no effect on the Company’s consolidated balance sheet and consolidated statements of cash flows contained in the financial statements for the Second Quarter in 2005. Additionally, the restatements did not affect net income as reported in the Company’s consolidated statements of operations for the Second Quarter in 2005. The June 30, 2005 amounts discussed below in this Form 10-QSB regarding “Net Sales”, “Gross Profit”, “Operating Profit (Loss)”, and “Other Income” reflect the restated amounts.

CONSOLIDATED RESULTS OF OPERATIONS

Net sales

In the three-month period ended June 30, 2006, revenue was $2,221,140, representing an increase of 42% against the comparable period in 2005 and an increase of 111% from the previous quarter. In the six-month period ended June 30, 2006, revenue was $3,274,610, representing an increase of 47% against the comparable period in 2005. The increase was mainly caused by increased system integration revenue. In the first half of 2006, sales from system integration increased 121% to $2,127,192 from $964,397 in the first half of 2005, while software sales decreased 9% to $1,147,418 from $1,256,186 in the first half of 2005. These changes were mainly attributable to revenue from system integration services we provided pursuant to a large system integration contract with Beijing Mobile in the second quarter of 2006.

Cost of sales

Our cost of sales were $1,508,291 and $2,418,577, respectively, in the three-and six-month periods ended June 30, 2006, representing an increase of 114% and 114%, respectively, against comparable periods in 2005. The increase was attributable to increased hardware pass-through associated with a large system integration contract with Beijing Mobile in the second quarter of 2006.

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Gross profit

In the three-month period ended June 30, 2006, gross profit was $712,849, representing a decrease of 18% against the comparable period in 2005 and an increase of 398% from the previous quarter. In the six-month period ended June 30, 2006, our gross profit was $856,033, representing a decrease of 22% against comparable periods in 2005. Gross profit margins decreased to 32% and 26%, respectively, in the three-and six-month periods ended June 30, 2006, as compared to 55% and 49%, respectively, in the comparable periods of 2005 and 14% in the first quarter of 2006. The decrease in the gross profit margin was primarily due to increased hardware pass-through, which has a lower profit margin.

Operating expenses

Total operating expenses were $944,604 and $1,868,091, respectively, in the three-and six-month periods ended June 30, 2006, representing an increase of 16% and 12%, respectively, against comparable periods in 2005, and an increase of 2% from the first quarter. The overall increase in operating expenses was attributable to increased selling expenses and R&D expenses.

Selling expenses were $233,058 and $357,214, respectively, in the three-and six-month periods ended June 30, 2006, representing an increase of 92% and 11%, respectively, against comparable periods in 2005. The increase in the first half of 2006 was mainly attributable to our increased sales efforts.

Research and development expenses were $423,235 and $812,692, respectively, in the three-and six-month periods ended June 30, 2006, representing an increase of 34% and 36%, respectively, against comparable periods in 2005. The increases were due to our continued focus on developing new products and solutions, especially on customized industry solutions that are delivered through our For-Online platform.

General and administrative expenses were $298,311 and $698,185, respectively, in the three-and six-month periods ended June 30, 2006, representing a decrease of 22% and 6%, respectively, against comparable periods in 2005. The decrease was primarily due to reduced rent expenses.

Operating loss

We recorded an operating loss of $231,755 in the second quarter of 2006, compared to an operating profit of $49,661 in the same period of 2005. For the six-month period ended June 30, 2006, we recorded an operating loss of $1,012,058, compared to an operating loss of $568,936 in the same period of 2005. The increase in operating loss was mainly due to decreased gross profit and increased operating expenses.

Other income

Our other income were $3,235 and $63,240, respectively, in the three- and six-month period ended June 30, 2006, as compared to $59,686 and $61,173 in the comparable periods in 2005. Our other income is mainly derived from a value added tax refund associated with software sales. Software sales in China are subject to a 17% value added tax. However, companies that develop their own software and have the software registered are generally entitled to a value added tax refund. If the net amount of the value added tax payable exceeds 3% of software sales, then the excess portion of the value added tax is refundable to us upon our application to tax authority. This policy is effective until 2010.

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Net loss

In the three-month period ended June 30, 2006, we recorded a net loss of $226,775, or basic and diluted loss of $0.003 per share, compared to a net profit of $100,094, or basic and diluted profit of $0.001 per share in the same period of 2005. For the six-month period ended June 30, 2006, we recorded a net loss of $946,494, or basic and diluted loss of $0.01 per share, as compared to a net loss of $513,123 in the same period of 2005, or basic and diluted loss of $0.01 per share.

LIQUIDITY AND CAPITAL RESOURCES

Our capital requirements are primarily working capital requirements related to costs of hardware for network solution projects and costs associated with the expansion of our business. In order to minimize our working capital requirements, we generally obtain from our hardware vendors payment terms that are timed to permit us to receive payment from our customers for the hardware before our payments to our hardware vendors are due. However, we sometimes obtain less favorable payment terms from our customers, thereby increasing our working capital requirements. We have historically financed our working capital and other financing requirements through careful management of our billing cycle and, to a limited extent, bank loans.

Our accounts receivable balance at June 30, 2006 was $2,131,569, as compared to $861,000 at the end of 2005. The increase was mainly attributable to account receivables that became due from Beijing Mobile during the six-months ended June 30, 2006.

Our inventory position at the end of the second quarter was $42,262, as compared to $264,839 at the end of 2005. At the end of 2005, we had several inventory items in the process of delivery to Beijing Mobile which caused the 2005 year-end inventory to be larger than usual.

We ended the period with a cash position of $778,090. We had negative operating cash flow of $310,935, which was primarily attributable to the increase in accounts receivable.

Although our revenues and operating results for any period are not necessarily indicative of future periods, we anticipate that our available funds and cash flows generated from operations will be sufficient to meet our anticipated needs for working capital, capital expenditures and business expansion through 2006.We may need to raise additional funds in the future, however, in order to fund acquisitions, develop new or enhanced services or products, respond to competitive pressures to compete successfully for larger projects involving higher levels of hardware purchases, or if our business otherwise grows more rapidly than we currently predict. If we do need to raise additional funds, we expect to raise those funds through new issuances of shares of our equity securities in one or more public offerings or private placements, or through credit facilities extended by lending institutions.

OFF-BALANCE SHEET ARRANGEMENTS

As of June 30, 2006, we have not entered into any off-balance sheet arrangements with any individuals or entities.

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CONTRACTUAL OBLIGATIONS

As of June 30, 2006, we had commitments under non-cancelable operating leases requiring annual minimum rental payments as follows:

July 1, 2006 to June 30, 2007	$385,881
July 1, 2007 to June 31, 2008	$26,200

RELATED PARTY TRANSACTIONS

On January 11, 2001, the Company entered into a Plan of Reorganization with Beijing Slait Science & Technology Development Limited Co. (hereinafter “Slait”), under the terms of which the Company acquired up to 100% of the outstanding equity of Slait. Pursuant to the Plan of Reorganization (the “Plan”), in August 2001, the Company acquired 100% of the registered and fully paid-up capital of Slait in exchange for 59,430,000 shares of restricted common stock of the Company. Under the terms of the Plan, three former beneficial owners of Slait, Yi He, Hongkeung Lam and Jing Zeng were issued 25,800,000, 10,500,000 and 5,760,000, respectively, of the Company's shares. Additionally, at closing, all of the Company's officers and directors resigned with the exception of Xiaoxia Zhao, who remained as an officer and director, Yi He, who was appointed as President and Director, and Hongkeung Lam, who was appointed as a Director of the Company.

The Company, from time to time, received from or made repayments to one major stockholder who is also a member of the management of the Company. The amounts due from/to stockholders do not bear any interest and do not have clearly defined terms of repayment.

As of June 30, 2006 and December 31, 2005, the amounts due to stockholders represented advances from stockholders.

Mr. Yi He, an officer and director of the Company, purchased the building located in Chengdu on behalf of the Company. By a stockholders' resolution passed on March 8, 1999, it was ratified that the title to the building belonged to SLAIT. The building had been pledged as collateral for the mortgage loan granted to Mr. Yi He. Although the related mortgage was in the name of Mr. Yi He, the Company agreed to pay Mr. Yi He amounts equal to the required mortgage payments. As of December 31, 2004, the amount of the mortgage loan was $44,584 ($53,010 as of December 31, 2003) and was included in “Amounts due to stockholders” on the balance sheet. In the last quarter of 2005, the mortgage loan was fully repaid and the title to the building was transferred to the Company.

To comply with PRC laws and regulations, Forlink conducts its Internet value-added services in PRC via Beijing Forlink Hua Xin Technology Co. Ltd. (“BFHX”). BFHX was established in PRC on September 19, 2003 as a limited liability company. The registered capital of BFHX is $120,733 (RMB1,000,000) and the fully paid up capital was $37,313 (RMB300,000) as of March 31, 2006. In accordance with a directors’ resolution of Forlink passed on September 15, 2003, Mr. Yi He and Mr. Xiaoxia Zhao were entrusted as nominee owners of BFHX to hold 70% and 30% of the fully paid up capital of BFHX, respectively, on behalf of Forlink and Forlink is the primary beneficiary. BFHX is considered a variable interest entity (“VIE”) and because Forlink is the primary beneficiary, Forlink’s consolidated financial statements include BFHX. Upon the request of Forlink, Mr. Yi He and Mr. Xiaoxia Zhao are required to transfer their ownership in BFHX to Forlink or to designees of Forlink at any time for the amount of the fully paid up capital of BFHX.

In accordance with a registered capital transfer agreement dated February 16, 2004, and the owners’ resolutions of BFHX passed on February 16, 2004, Mr. Xiaoxia Zhao transferred the fully paid up capital of BFHX of $10,870 (RMB90,000) to Mr. Wei Li for $10,870. Mr. Yi He and Mr. Wei Li entered into agreements with Forlink on November 8, 2003 and March 18, 2004, respectively, under which agreements Mr. Yi He and Mr. Wei Li were entrusted as nominee owners of BFHX to hold 70% and 30%, respectively, of the fully paid up capital of BFHX on behalf of Forlink. Forlink is the primary beneficiary of such agreements. Upon the request of Forlink, Mr. Yi He and Mr. Wei Li are required to transfer their ownership in BFHX to Forlink or to designees of Forlink at any time for the amount of the fully paid up capital of BFHX.

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The capital of BFHX was funded by FTCL and recorded as interest-free loans to Mr. Yi He and Mr. Wei Li. These loans were eliminated with capital of BFHX during consolidation. Mr. Yi He is an officer, director and a major stockholder of Forlink. Mr. Xiaoxia Zhao is a former director and a major stockholder of Forlink. Mr. Wei Li is the administration manager of FTCL.

In the opinion of the directors, except for the arrangements in connection with the purchase of the office in Chengdu, all the above transactions were negotiated at arm's length and entered into and executed under the normal course of business with no difference from those that would be negotiated with a clearly independent party. With respect to the purchase of the office in Chengdu, if Mr. Yi He would not have been able to obtain a mortgage for the property, the Company may not have been able to obtain one on its own and the financial resources may not have been available for the Company to purchase the property outright.

RISK FACTORS AFFECTING OUR OPERATING RESULTS AND COMMON STOCK

In addition to the other information in this report, the following factors should be considered in evaluating our business and our future prospects:

POLITICAL AND ECONOMIC POLICIES OF THE CHINESE GOVERNMENT COULD AFFECT OUR INDUSTRY IN GENERAL AND OUR COMPETITIVE POSITION IN PARTICULAR

Since the establishment of the People's Republic of China in 1949, the Communist Party has been the governing political party in the PRC. The highest bodies of leadership are the Politburo of the Communist Party, the Central Committee and the National People's Congress. The State Council, which is the highest institution of government administration, reports to the National People's Congress and has under its supervision various commissions, agencies and ministries, including The Ministry of Information Industry, the telecommunications regulatory body of the Chinese government. Since the late 1970s, the Chinese government has been reforming the Chinese economic system. Although we believe that economic reform and the macroeconomic measures adopted by the Chinese government have had and will continue to have a positive effect on economic development in China, there can be no assurance that the economic reform strategy will not from time to time be modified or revised. Such modifications or revisions, if any, could have a material adverse effect on the overall economic growth of China and investment in the Internet and the telecommunications industry in China. Such developments could reduce, perhaps significantly, the demand for our products and services. There is no guarantee that the Chinese government will not impose other economic or regulatory controls that would have a material adverse effect on our business. Furthermore, changes in political, economic and social conditions in China, adjustments in policies of the Chinese government or changes in laws and regulations could affect our industry in general and our competitive position in particular.

THE GROWTH OF OUR BUSINESS IS DEPENDENT ON GOVERNMENT TELECOMMUNICATIONS INFRASTRUCTURE AND BUDGETARY POLICY, PARTICULARLY THE ALLOCATION OF FUNDS TO SUSTAIN THE GROWTH OF THE TELECOMMUNICATIONS INDUSTRY IN CHINA

Virtually all of our large customers are directly or indirectly owned or controlled by the government of China. Accordingly, their business strategies, capital expenditure budgets and spending plans are largely decided in accordance with government policies, which, in turn, are determined on a centralized basis at the highest level by the National Development and Reform Commission of China. As a result, the growth of our business is heavily dependent on government policies for telecommunications and Internet infrastructure. Insufficient government allocation of funds to sustain the growth of China's telecommunications industries in the future could reduce the demand for our products and services and have a material adverse effect on our ability to grow our business.

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CURRENCY EXCHANGE RATE RISK DUE TO FLUCTUATIONS IN THE EXCHANGE RATE BETWEEN U.S. DOLLARS AND RENMINBI

The functional currency of our operations is Renminbi and our financial statements are expressed in U.S. dollars. As a result, we are subject to the effects of exchange rate fluctuations between these currencies. On January 1, 1994, a unitary exchange rate system was implemented in China and the official bank exchange rate for translation of Renminbi to U.S. dollars was set to US$1 to RMB8.28. However, in July 2005, the Chinese government announced that it would no longer peg its currency exclusively to US Dollar but instead would switch to a managed floating exchange rate based on market supply and demand with reference to a basket of currencies determined by the People’s Bank of China. The exchange rate of RMB to US$ changed from RMB8.28 to RMB8.11 in late July 2005. Any future devaluation of the Renminbi against the U.S. dollars may have an adverse effect on our reported net income. As our operations are conducted in the PRC, substantially all our revenues, expenses, assets and liabilities are denominated in Renminbi. In general, our exposure to foreign exchange risks should be limited. However, the value in our shares may be affected by the foreign exchange rate between the U.S. dollar and the Renminbi because the value of our business is effectively denominated in Renminbi, while our shares are traded in U.S. dollars. Furthermore, a decline in the value of Renminbi could reduce the U.S. dollar equivalent of the value of the earnings from, and our investment in, our subsidiaries in the PRC; while an increase in the value of the Renminbi may require us to exchange more U.S. dollars into Renminbi to meet the working capital requirements of our subsidiaries in China. Depreciation of the value of the U.S. dollar will also reduce the value of the cash we hold in U.S. dollars, which we may use for purposes of future acquisitions or other business expansion. We actively monitor our exposure to these risks and adjust our cash position in the Renminbi and the U.S. dollar when we believe such adjustments will reduce risks.

GENERAL RISK OF FINANCING

In order for the Company to meet its continuing cash requirements and to successfully implement its growth strategy, the Company will need to rely on increased future revenues and/or will require additional financing. In the event additional financing is required, no assurances can be given that such financing will be available in the amount required or, if available, that it can be on terms satisfactory to the Company.

Item 3.Controls and Procedures

Based on their most recent evaluation, which was completed as of the end of the period covered by this periodic report on Form 10-QSB, the Company's Chief Executive Officer and Chief Financial Officer believe that the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) are effective to ensure that information required to be disclosed by the Company in this report is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. During the fiscal quarter to which this report relates, there were no significant changes in the Company's internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation and there were no corrective actions with regard to significant deficiencies and material weaknesses.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.  None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.  None.

Item 3. Defaults upon Senior Securities.  None.

Item 4. Submission of Matters to a Vote of Securities Holders.  None.

Item 5. Other Information.

(a) None.

(b) There were no changes to the procedures by which security holders may recommend nominees to our board of directors.

Item 6. Exhibits

Exhibit Number and Brief Description.

3.1 Articles of Incorporation, as amended and currently in effect. (Incorporated by reference to Exhibit No. 3.1 of the Form 10-QSB for the quarter ended March 31, 2000, and filed on May 13, 2000.)

3.2 Bylaws dated May 11, 2000. (Incorporated by reference to Exhibit No. 3.2 of the Form 10-QSB for the quarter ended March 31, 2000, and filed on May 13, 2000.)

10.1 Forlink Software Corporation, Inc. Stock Plan dated June 1, 2000. (Incorporated by reference to Exhibit 10.1 of the Company’s Registration Statement on Form S-8 (file no. 333-41700) filed July 19, 2000.)

10.2 Forlink Software Corporation, Inc. 2002 Stock Plan dated August 16, 2002. (Incorporated by reference to Exhibit 10.2 of the Company’s Registration Statement on Form S-8 (file no. 333-100645) filed October 21, 2002.)

31.1 Section 302 Certification by the Corporation’s Chief Executive Officer. (Filed herewith.)

31.2 Section 302 Certification by the Corporation’s Chief Financial Officer. (Filed herewith.)

32.1 Section 906 Certification by the Corporation’s Chief Executive Officer. (Filed herewith.)

32.2 Section 906 Certification by the Corporation’s Chief Financial Officer. (Filed herewith.)

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SIGNATURES

In accordance with the requirements of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	FORLINK SOFTWARE CORPORATION, INC.
Date: August 14, 2006	By:	/s/ Yi He
		Yi He
		Chief Executive Officer
Date: August 14, 2006	By:	/s/ Hongkeung Lam
		Hongkeung Lam
		Chief Financial and Accounting Officer

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