F-1/A

As filed with the Securities and Exchange Commission on June 17, 2004

Registration No. 333-116172

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 1 to

Form F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

KongZhong Corporation

(Exact Name of Registrant as Specified in Its Charter)

Cayman Islands	7374	Not Applicable
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(IRS Employer Identification Number)

8/F, Tower A, Yuetan Building

No. 2 Yuetan North Street

Beijing, China 100045

(8610) 6808-1818

(Address and telephone number of Registrant’s principal executive offices)

CT Corporation System

111 Eighth Avenue

New York, New York 10011

(212) 664-1666

(Name, address and telephone number of agent for service)

Copies to:

Chun Wei, Esq.
Sullivan & Cromwell LLP
28th Floor
Nine Queen’s Road Central
Hong Kong Jonathan H. Lemberg, Esq.
Morrison & Foerster LLP
425 Market Street
San Francisco, California 94105-2482
U.S.A.

        Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

        If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, please check the following box.    o

        If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

        If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

        If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

        If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.    o

CALCULATION OF REGISTRATION FEE

	Proposed Maximum
Title of Each Class of	Aggregate Offering	Amount of
Securities to be Registered	Price(1)(2)	Registration Fee
Ordinary shares par value $0.0000005 per share(3)	$138,000,000	$17,485(4)

(1)	Estimated solely for the purpose of determining the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.
(2)	Includes shares initially offered and sold outside the United States that may be resold from time to time in the United States, including shares that may be purchased by the underwriters pursuant to over-allotment options. The shares are not being registered for the purpose of sales outside the United States.
(3)	American Depositary Shares issuable upon deposit of the ordinary shares registered hereby will be registered under a separate registration statement on Form F-6. Each American depositary share represents 40 ordinary shares.
(4)	$12,670 of the registration fee was paid with the registration statement publicly filed with the Commission on June 4, 2004, and $4,815 is paid with this amendment.

        The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

________________________________________________________________________________

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

PRELIMINARY PROSPECTUS Subject to Completion June 17, 2004

10,000,000 American Depositary Shares

KongZhong Corporation

Representing 400,000,000 Ordinary Shares

This is our initial public offering of American Depositary Shares, or ADSs. Each ADS represents 40 of our ordinary shares. We are selling 8,000,000 ADSs, representing 320,000,000 ordinary shares, and our selling shareholders are selling 2,000,000 ADSs, representing 80,000,000 ordinary shares. No public market currently exists for our ADSs or ordinary shares. The initial offering price of our ADSs is expected to be between $10 and $12 per ADS.

We have applied to list our ADSs on the Nasdaq National Market under the symbol “KONG.”

Before buying any ADSs, you should read the discussion of material risks of investing in our ADSs in “Risk factors” beginning on page 13.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

	Per ADS	Total
Initial public offering price	$	$
Underwriting discounts and commissions	$	$
Proceeds, before expenses, to us	$	$
Proceeds, before expenses, to the selling shareholders	$	$

The underwriters may also purchase up to 1,500,000 ADSs from us at the public offering price, less underwriting discounts and commissions, within 30 days from the date of this prospectus. The underwriters may exercise this option only to cover over-allotments, if any. We will not receive any proceeds from the sale of ADSs by the selling shareholders.

At our request, the underwriters have reserved at the initial public offering price up to 5% of the ADSs for sale to certain of our business associates, friends and family of employees and directors of our company, and other persons associated with us who have expressed an interest in purchasing our ADSs in this offering.

The underwriters are offering the ADSs as set forth under “Underwriting.” Delivery of the ADSs will be made on or about                               , 2004.

UBS Investment Bank

Banc of America

CIBC World Markets

You should only rely on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, ADSs only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of ADSs.

TABLE OF CONTENTS

Prospectus summary	1
Risk factors	13
Special note regarding forward-looking statements	28
Our corporate structure	29
Use of proceeds	33
Dividend policy	34
Dilution	35
Capitalization	37
Exchange rate information	39
Selected consolidated financial and operating data	40
Management’s discussion and analysis of financial condition and results of operations	42
Industry overview	60
Business	65
Management	84
Regulation	89
Related party transactions	94
Principal and selling shareholders	99
Description of share capital	102
Description of American Depositary Shares	110
Shares eligible for future sale	121
Taxation	123
Underwriting	129
Legal matters	135
Experts	135
Expenses related to this offering	136
Where you can find more information	137
Enforceability of civil liabilities	138
Index to financial statements	F-1

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Prospectus summary

This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully. Unless the context otherwise requires, information contained in this prospectus assumes that the underwriters will not exercise their option to purchase additional ADSs in this offering. All references to “KongZhong,” “we,” “us,” or “our” include KongZhong Corporation and its subsidiary and operating companies as a combined entity. All references to and statements regarding China, the People’s Republic of China, or the PRC, in this prospectus do not apply to Hong Kong, Macau and Taiwan. All references to “RMB” or “Renminbi” are to the legal currency of China and all references to “US dollars” and “$” are to the legal currency of the United States.

OUR BUSINESS

We are the leading provider of advanced second generation, or 2.5G, wireless interactive entertainment, media and community services, in terms of revenue, to customers of China Mobile Communications Corporation, or China Mobile, which has the largest mobile subscriber base in the world. China Mobile ranked KongZhong as the number one wireless value-added service provider on its network in terms of revenue for 2.5G wireless value-added services in 2003 and the first quarter of 2004. In addition, we have recently begun to provide wireless value-added services on the networks of China United Telecommunications Corporation, or China Unicom, China Telecommunications Corporation, or China Telecom, and China Network Communications Group Corporation, or China Netcom. Each of China Mobile, China Unicom, China Telecom and China Netcom is a state-owned enterprise, the majority of the equity interest of which is owned by the People’s Republic of China. We are headquartered in Beijing and provide our services throughout China.

We primarily deliver our services through the 2.5G wireless standard. The higher transmission capacity of 2.5G allows users to access higher quality graphics and richer content and interactivity, in comparison with the second generation, or 2G, wireless standard, which has slightly lower service fees and may be accessed through less expensive mobile handsets. We deliver our 2.5G services through wireless access protocol, or WAP, multimedia messaging services, or MMS, and Java^TM technology platforms. We also offer a range of data and voice services based on the 2G wireless standard through short messaging services, or SMS, interactive voice response, or IVR, and color ring back tones, or CRBT, technology platforms.

We deliver a broad range of services, through multiple technology platforms, which users can access directly from their mobile phones by choosing an icon embedded in select models of handsets, or from a mobile operator’s portal or web site. Our services are organized in three major categories, consisting of:

†	Interactive entertainment. Our interactive entertainment services include mobile games, pictures, karaoke, electronic books and mobile phone personalization features, such as ringtones, wallpaper, clocks and calendars.
†	Media. Our media services provide content such as domestic and international news, entertainment, sports, fashion, lifestyle and other special interest areas.
†	Community. Our community services include interactive chat, message boards, photo albums, dating and networking.

Our focus on establishing a leadership position in the rapidly growing advanced wireless value-added services market in China and our ability to cultivate cooperation arrangements with the mobile operators, mobile handset manufacturers and distributors, content providers and other business partners to produce, promote and market our services in the Chinese market have resulted in rapid growth of our financial and operating performance. Through these cooperation arrangements, we provide or promote our services and obtain content, and pay service fees to these mobile operators,

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mobile handset manufacturers, mobile handset distributors, content providers and other partners, where relevant.

Since commencing operations in May 2002, we have:

†	Grown our revenues and net income to $7.8 million and $2.4 million, respectively, in 2003;
†	Grown our revenues and net income to $7.1 million and $3.1 million, respectively, in the first quarter of 2004;
†	Grown our gross revenues and net income by 86% and 101%, respectively, in the first quarter of 2004 over the previous quarter;
†	Maintained our focus on 2.5G services, with 2.5G services contributing approximately 73% of our gross revenues in the first quarter of 2004; and
†	Increased our number of registered users to 9.4 million, of which 5.8 million users were classified as active users during the first quarter of 2004.

INDUSTRY OVERVIEW

The wireless value-added services market, which provides services that allow mobile phone users to receive and transmit text, images and other forms of digital data or voice content via their mobile handsets, represents a new and fast-growing sector within China’s rapidly evolving telecommunications industry. Analysys Consulting Ltd., or Analysys, estimates that total wireless value-added services revenue in China rose from $211.5 million in 2002 to $452.5 million in 2003 and is expected to grow to $800.4 million in 2004. Chinese consumers have been quick to adopt and use new wireless value-added services as a means of communication, as well as a source of information and entertainment, partly due to the proliferation of mobile phones as a more accessible alternative to both fixed-line phone services and personal computer-based Internet services in China.

The evolution of the market for mobile services in China has thus far closely followed the industry development experienced in Japan and Korea, where mobile operators have provided platforms for third party service providers to offer services to customers of the mobile operator.

China Mobile launched its Monternet^TM platform for wireless value-added services in November 2000 and China Unicom launched its Uni-Info^TM platform in May 2001, using a business model similar to the model used in Japan and Korea. Key characteristics of China’s wireless value-added services market include the rapid expansion of China’s mobile telecommunications industry, increasing user receptivity, the availability of more advanced handsets in the Chinese market and support from mobile operators.

The wireless value-added services market in China is evolving as mobile telecommunications technology becomes more advanced. China Mobile began operating its 2.5G network in May 2002 and China Unicom began operating its 2.5G network in November 2002. Gartner Dataquest estimates that 48% and 60% of the mobile handsets sold in China in 2004 and 2005, respectively, will be General Packet Radio Services, or GPRS, handsets with 2.5G capability. Analysys estimates that the market for WAP services will increase to $97.9 million in 2004 from $25.7 million in 2003, representing an increase of 280%, and MMS services will increase to $82.8 million in 2004 from $27.8 million in 2003, representing an increase of 198%.

OUR STRENGTHS AND CHALLENGES

We are an early entrant in China’s 2.5G wireless value-added services market. Since our establishment, we have moved quickly to identify market trends, develop technologically advanced services and capture market share, with particular focus on the rapidly growing market for 2.5G services. As a result, we believe that we are well-positioned to capture the growth opportunities in China’s wireless value-added services market. We have developed the following principal strengths:

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†	Established market position with a well-recognized brand name in wireless interactive entertainment, media and community services;
†	Strategic relationships with China’s largest mobile operator and key content and distribution partners, including handset manufacturers;
†	Leadership in understanding and addressing customer needs by offering a diversified portfolio of innovative services;
†	Product development team devoted to enhancing current and developing new services; and
†	Experienced management team.

Our ability to realize our business objectives and execute our strategies is subject to risks and uncertainties, including the following:

†	Our dependence on China Mobile for substantially all of our revenue and our dependence on its billing system;
†	Our limited operating history and dependence on our key personnel;
†	The possibility that the PRC government could determine that the agreements that establish our operating structure do not comply with PRC government restrictions on foreign investment in the value-added telecommunications industry;
†	The intense competition that we face in the wireless value-added services market due to low barriers to entry;
†	The rapidly evolving wireless value-added industry, which makes predicting future consumer acceptance and demand difficult;
†	Investors may not be able to exercise their right to vote the ordinary shares underlying our ADSs;
†	Cayman Islands law may provide shareholders with fewer rights than they would be afforded under the United States law; and
†	The uncertain legal and regulatory environment in China, which could limit the legal protections available to foreign investors.

Users can purchase our value-added services on a per-use basis and, in most cases, on a subscription basis. We provide our services mainly pursuant to our cooperation arrangements with the mobile operators, the terms of which are generally for one year or less. We do not directly bill our users, and depend on the billing systems and records of the mobile operators to bill and collect all fees. We generally do not have the ability to independently verify the accuracy of the billing systems of the mobile operators. As mobile operators do not provide us detailed revenue breakdown on a service-by-service basis, we depend on our internal database system to monitor revenue derived from each of our services. We make our business decisions based on our internal data, taking into account other factors including strategic considerations.

We initially ascertain the value of our services provided based on delivery confirmations sent to us by the networks of the mobile operators within 72 hours of delivery, but record revenues based solely on the monthly statements provided to us by the mobile operators. There has historically been a discrepancy, of approximately 10% in both 2003 and the first quarter of 2004, between the value we calculate based on delivery confirmations and the value that we are entitled to receive based on the monthly statements provided by the mobile operators. From time to time, for purposes of reporting our quarterly results to the market, we may need to estimate a portion of our reported revenue for the services provided in the event that we have not received monthly statements from the mobile operators by the time we report our earnings for a particular period.

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OUR STRATEGIES

Our strategic objective is to build the leading brand and be the leading provider of wireless interactive entertainment, media and community services to mobile phone users among all mobile operators in China. We intend to undertake strategic initiatives focused on expanding our market presence, diversifying our range of service offerings and sustaining and enhancing our profitability and market position. In particular, we intend to:

†	Further promote and develop the KongZhong brand;
†	Capture market opportunities to strengthen and diversify our business and revenue streams;
†	Continue to develop and expand the scope of strategic relationships with key industry players;
†	Continue to develop and diversify our portfolio of service offerings to attract new customers and to increase usage among our existing customers;
†	Enhance our profitability by optimizing our product mix and focusing on the development and marketing of advanced wireless value-added services; and
†	Selectively acquire businesses that enhance our service portfolio, proprietary content, distribution channels and technology.

CORPORATE STRUCTURE

We were incorporated in May 2002 under the laws of the Cayman Islands. We conduct our business in China solely through our wholly-owned subsidiary, KongZhong Beijing. In order to meet domestic ownership requirements under PRC law, which restrict us and KongZhong Beijing, as foreign or foreign-invested companies, from operating in certain value-added telecommunications and Internet services, we have established Beijing AirInbox in China, which is wholly-owned by PRC citizens. In addition, we have recently established Beijing Boya Wuji in China, which is also wholly-owned by PRC citizens. We do not have any equity interest in Beijing AirInbox or Beijing Boya Wuji, but instead enjoy the economic benefits of these companies through a series of contractual arrangements which we and KongZhong Beijing have entered into with these companies and their respective shareholders. These contractual arrangements include agreements on provision of loans, provision of services, license of intellectual property, and certain corporate governance and shareholder rights matters.

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The chart below sets forth our corporate and share ownership structure as of the date of this prospectus, after giving effect to this offering, and assuming that (i) all of our preferred shares are converted into ordinary shares and (ii) the underwriters do not exercise their over-allotment options.

PRINCIPAL EXECUTIVE OFFICES

Our principal executive office is currently located at 8/F, Tower A, Yuetan Building, No. 2 Yuetan North Street, Beijing, China 100045, and will be moved to 33/F, Tengda Building, No. 168, Xiwai Avenue, Haidian District, Beijing, China, 100044 in August 2004. Our telephone number is (8610) 6808-1818. Our web site address is http://www.kongzhong.com. Information contained on our web site does not constitute a part of this prospectus. Our agent for service of process is CT Corporation System at 111 Eighth Avenue, New York, New York 10011.

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THE OFFERING

Unless otherwise indicated, information in this prospectus assumes that the underwriters will not exercise the over-allotment option to purchase additional American Depositary Shares, or ADSs. See “Underwriting.”

The Offering	10,000,000 ADSs, representing 400,000,000 ordinary shares.
ADSs	Each ADS represents 40 ordinary shares that will be held by Citibank, N.A., as depositary. At the request of our investors or their representatives, the ADSs will be evidenced by American Depositary Receipts, or ADRs. As an ADR holder, you will not be treated as one of our shareholders. You will have rights as provided in the deposit agreement. Under the deposit agreement, you may instruct the depositary to vote the shares underlying the ADRs. The depositary will pay you the cash dividends or other distributions it receives on shares after deducting fees and expenses. You must pay a fee for each issuance or cancellation of an ADS, distribution of securities by the depositary or any other depositary service. You may turn in your ADRs at the depositary’s office and, after payment of some fees and expenses, the depositary will deliver the deliverable shares underlying your ADSs to you. To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled “Description of American depositary shares.” We also encourage you to read the deposit agreement, which is an exhibit to the registration statement that includes this prospectus.
Ordinary Shares	Shares in our registered capital, par value of $0.0000005 per share.
Over-allotment Option	To the extent that the underwriters sell more than 10,000,000 ADSs, they have the option to purchase up to an additional 1,500,000 ADSs from us at the initial public offering price less underwriting discounts and commissions.
Price per ADS in the Offering	We currently estimate that the initial public offering price per ADS will be between $10 and $12. The initial public offering price per ADS is payable in U.S. dollars.
Use of Proceeds	Our net proceeds from this offering are expected to be approximately $80 million (assuming an initial public offering price of $11, the mid-point of the range shown on the front cover page). We anticipate using these net proceeds for acquisitions or investments in businesses that we believe are complementary to our existing business, product development and sales and marketing and general

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corporate purposes. See “Use of proceeds.” We will not receive any proceeds from the sale of ADSs by the selling shareholders.

Directed Share Program	At our request, the underwriters have reserved at the initial public offering price up to 5% of the ADSs for sale to certain of our business associates, friends and family of our employees and directors and other persons associated with us who have expressed an interest in purchasing our ADSs in this offering.
Risk Factors	See “Risk factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our ADSs.
ADSs Offered by Us	8,000,000 ADSs
ADSs Offered by Our Selling Shareholders	2,000,000 ADSs
Ordinary Shares Outstanding After the Offering	1,370,000,000 ordinary shares.
ADS Equivalents Outstanding After the Offering	34,250,000 ADSs
Listing	We have applied to have our ADSs included for quotation on the Nasdaq National Market.
Proposed Nasdaq Symbol for Our ADSs	“KONG”

CONVENTIONS

The information in this prospectus gives effect to the automatic conversion of all of our outstanding Series A convertible preferred shares, or Series A preferred shares, and Series B redeemable convertible preferred shares, or Series B preferred shares, into an aggregate of 581,000,000 ordinary shares, which conversion will occur concurrently with the consummation of this offering. In addition, unless specifically indicated otherwise or unless the context otherwise requires, the information in this prospectus gives effect to the 20-for-1 share split of our ordinary shares as effected on March 18, 2004.

The number of ordinary shares outstanding after this offering is based on the number of shares outstanding as of March 31, 2004 and does not include: (i) 86,120,000 ordinary shares subject to options outstanding, of which 18,045,000 were exercisable, as of March 31, 2004 and (ii) 18,880,000 additional ordinary shares that are reserved for issuance under our 2002 Equity Incentive Plan, or the 2002 Plan. See “Management— Stock options.”

Unless otherwise noted, all translations from RMB to U.S. dollars and from U.S. dollars to RMB were made at the noon buying rate in the City of New York for cable transfers in RMB per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York on March 31, 2004, which was RMB8.2770 = $1.00.

We make no representation that the RMB or U.S. dollar amounts referred to herein could have been or could be converted to U.S. dollars or RMB, as the case may be, at any particular rate.

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Summary consolidated financial and operating data

The following summary consolidated financial data should be read in conjunction with our audited consolidated financial statements, the notes thereto and “Management’s discussion and analysis of financial condition and results of operations” included elsewhere in this prospectus. We commenced operations in May 2002. The summary consolidated statements of operations data for the period from May 6, 2002 to December 31, 2002, for the year ended December 31, 2003 and the three months ended March 31, 2004, and the summary consolidated balance sheet data as of December 31, 2002 and 2003 and March 31, 2004 set forth below are derived from our audited consolidated financial statements included elsewhere in this prospectus. Our audited consolidated financial statements have been prepared and presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, and audited by Deloitte Touche Tohmatsu. Due to the relatively new and rapidly evolving nature of the wireless value-added services industry in China, the short history of our company and other factors affecting our business as described under “Risk factors,” our results of operations in any period are not necessarily indicative of the results that may be expected for any future period.

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		For the						For the		For the
		period from			For the			three months		three months
		May 6, 2002 to			year ended			ended		ended
Consolidated statements of operations data		December 31, 2002			December 31, 2003			March 31, 2003		March 31, 2004
		(in thousands of U.S. dollars, except share and per share data)
Gross revenues		$	200.3		$	7,806.7		$	703.0	$	7,147.6
Cost of revenues			(84.3	)		(2,284.0	)		(146.5)		(2,239.0	)
Gross profit			116.0			5,522.7			556.5		4,908.6
Operating expenses:
	Product development		164.2			1,369.5			176.2		716.5
	Sales and marketing		128.9			841.4			140.7		294.1
	General and administrative		317.3			882.7			142.4		675.7
	Amortization of deferred stock compensation		—			22.0			—		80.8
Total operating expenses			610.4			3,115.6			459.3		1,767.1
Income (loss) from operations			(494.4	)		2,407.1			97.2		3,141.5
Other expenses			—			—			—		(0.7	)
Interest income, net			0.5			1.0			(0.1)		1.3
Net income (loss) before income taxes			(493.9	)		2,408.1			97.1		3,142.1
Income tax expense			—			—			—		—
Net income (loss)		$	(493.9	)	$	2,408.1		$	97.1	$	3,142.1
Net income (loss) per share:
	Basic		(0.12) cent			0.51 cent			0.02 cent		0.67 cent
	Diluted		(0.12) cent	(1)		0.22 cent			0.01 cent		0.29 cent
Shares used in calculating net income (loss) per share:
	Basic		415,547,794			469,000,000			469,000,000		469,000,000
	Diluted		415,547,794	(1)		1,094,824,434			1,090,364,373		1,098,206,555
Pro forma net income (loss) per share (unaudited)
	Basic		(0.08) cent			0.23 cent			0.01 cent		0.30 cent
	Diluted		(0.08) cent	(1)		0.22 cent			0.01 cent		0.29 cent
Shares used in calculating pro forma net income (loss) per share
	Basic		622,124,999			1,050,000,000			1,050,000,000		1,050,000,000
	Diluted		622,124,999	(1)		1,094,824,434			1,090,364,373		1,098,206,555
Pro forma net income (loss) per ADS equivalent
	Basic		(3.18) cent			9.17 cent			0.37 cent		11.97 cent
	Diluted		(3.18) cent			8.80 cent			0.36 cent		11.44 cent

(1) Anti-dilutive preferred shares and options were excluded from the weighted average ordinary shares outstanding for the diluted per share calculation. For 2002, basic loss per share did not differ from diluted loss per share.

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	As of
	December 31,		December 31,		March 31,		March 31,
Consolidated balance sheet data	2002		2003		2004		2004
							Pro forma
	(in thousands of U.S. dollars)				(unaudited)		(unaudited)(1)
Cash and cash equivalents	$	2,646.2	$	3,742.6	$	5,736.2	$	5,736.2
Accounts receivable	$	132.3	$	1,703.9	$	3,268.8	$	3,268.8
Property and equipment, net	$	251.0	$	848.5	$	1,104.2	$	1,104.2
Total assets	$	3,101.3	$	6,567.5	$	10,518.1	$	10,518.1
Total current liabilities	$	75.0	$	1,047.3	$	1,654.4	$	1,654.4
Series B redeemable convertible preferred shares	$	2,970.0	$	2,970.0	$	2,970.0	$	—
Total shareholders’ equity	$	56.3	$	2,550.1	$	5,772.9	$	8,742.9
Total liabilities and shareholders’ equity	$	3,101.3	$	6,567.5	$	10,518.1	$	10,518.1

(1) The unaudited pro forma balance sheet information as of March 31, 2004 assumes the conversion upon completion of the initial public offering of all shares of convertible preferred shares outstanding as of March 31, 2004 into ordinary shares.

		For the				For the
		period from		For the		three months
		May 6, 2002 to		year ended		ended
Operating data		December 31, 2002		December 31, 2003		March 31, 2004
		(in thousands)
2.5G(1)
	Subscriptions(2)		351.6		9,021.3		5,508.0
	Downloads(3)		—		2,722.1		2,334.2
2G(4)
	Subscriptions(2)		50.0		1,925.4		2,194.2
	Downloads(3)		800.0		6,127.4		1,634.6
Total
	Subscriptions(2)		401.6		10,946.7		7,702.3
	Downloads(3)		800.0		8,849.5		3,968.8

(1)	Includes WAP, MMS and JavaTM. We began to provide WAP, MMS and JavaTM services on a paid basis in September 2002, April 2003 and November 2003, respectively.
(2)	Total number of paid monthly subscriptions in the relevant period.
(3)	Total number of paid downloads in the relevant period, excluding downloads made pursuant to subscriptions.
(4)	Includes SMS, IVR and CRBT. We began to provide SMS, IVR and CRBT services on a paid basis in July 2002, December 2003 and October 2003, respectively.

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Summary unaudited consolidated quarterly financial and operating data

The following summary unaudited consolidated quarterly financial data should be read in conjunction with our audited consolidated financial statements, the notes thereto and “Management’s discussion and analysis of financial condition and results of operations” included elsewhere in this prospectus. The summary unaudited consolidated quarterly financial data for each of the periods presented below were derived from our management financial information, which was prepared on substantially the same basis as our audited consolidated financial statements and includes all adjustments that we consider necessary for a fair presentation of our financial position and operating results for the periods presented. Due to the relatively new and rapidly evolving nature of the wireless value-added services industry in China, the short history of our company and other factors affecting our business as described under “Risk factors,” our results of operations in any period are not necessarily indicative of the results that may be expected for any future periods.

		For the three months ended
		June 30,			September 30,			December 31,			March 31,			June 30,			September 30,			December 31,			March 31,
Consolidated statements of operations data		2002(1)			2002			2002			2003			2003			2003			2003			2004
		(in thousands of U.S. dollars)
Gross revenues		$	—		$	43.2		$	157.1		$	703.0		$	1,226.4		$	2,030.8		$	3,846.5		$	7,147.6
Cost of revenues			—			(18.2	)		(66.1	)		(146.5	)		(330.7	)		(651.1	)		(1,155.7	)		(2,239.0	)
Gross profit			—			25.0			91.0			556.5			895.7			1,379.7			2,690.8			4,908.6
Operating expenses:
	Product development		(27.6	)		(37.1	)		(99.5	)		(176.2	)		(271.3	)		(390.2	)		(531.8	)		(716.5	)
	Sales and marketing		(7.1	)		(15.0	)		(106.8	)		(140.7	)		(212.6	)		(203.7	)		(284.4	)		(294.1	)
	General and administrative		(44.6	)		(70.2	)		(202.5	)		(142.4	)		(175.0	)		(262.7	)		(302.6	)		(675.7	)
	Amortization of deferred stock compensation		—			—			—			—			—			(8.8	)		(13.2	)		(80.8	)
Total operating expenses			(79.3	)		(122.3	)		(408.8	)		(459.3	)		(658.9	)		(865.4	)		(1,132.0	)		(1,767.1	)
Income (loss) from operations			(79.3	)		(97.3	)		(317.8	)		97.2			236.8			514.3			1,558.8			3,141.5
Other expenses			—			—			—			—			—			—			—			(0.7	)
Interest income, net			0.2			—			0.3			(0.1	)		(0.3	)		0.7			0.7			1.3
Net income (loss) before income taxes			(79.1	)		(97.3	)		(317.5	)		97.1			236.5			515.0			1,559.5			3,142.1
Income tax expense			—			—			—			—			—			—			—			—
Net income (loss)		$	(79.1	)	$	(97.3	)	$	(317.5	)	$	97.1		$	236.5		$	515.0		$	1,559.5		$	3,142.1

	For the three months ended
	June 30,		September 30,			December 31,			March 31,			June 30,			September 30,			December 31,			March 31,
Other consolidated financial data	2002(1)		2002			2002			2003			2003			2003			2003			2004
Gross margin		—		57.9	%		57.9	%		79.2	%		73.0	%		67.9	%		70.0	%		68.7	%
Net margin		—		(225.2	)%		(202.1	)%		13.8	%		19.3	%		25.4	%		40.6	%		44.0	%

11

		For the three months ended
		March 31, 2003				June 30, 2003
				Percentage				Percentage
Other consolidated				of				of
financial data		Amount		total revenue		Amount		total revenue
2.5G(2)		$	346.0		49%	$	914.9		75%
	Subscriptions	$	346.0		49%	$	848.8		69%
	Downloads	$	0		0%	$	66.1		5%
2G(5)		$	357.0		51%	$	311.5		25%
	Subscriptions	$	171.3		24%	$	253.0		21%
	Downloads	$	185.7		26%	$	58.5		5%
Total Revenue		$	703.0		100%	$	1,226.4		100%
	Subscriptions	$	517.3		74%	$	1,101.8		90%
	Downloads	$	185.7		26%	$	124.6		10%

[Additional columns below]

[Continued from above table, first column(s) repeated]

		For the three months ended
		September 30, 2003				December 31, 2003				March 31, 2004
				Percentage				Percentage				Percentage
Other consolidated				of				of				of
financial data		Amount		total revenue		Amount		total revenue		Amount		total revenue
2.5G(2)		$	1,604.6		79%	$	3,090.5		80%	$	5,244.4		73%
	Subscriptions	$	1,484.8		73%	$	2,651.2		69%	$	4,806.6		67%
	Downloads	$	119.8		6%	$	439.3		11%	$	437.8		6%
2G(5)		$	426.2		21%	$	756.0		20%	$	1,903.2		27%
	Subscriptions	$	349.9		17%	$	675.0		18%	$	1,824.8		26%
	Downloads	$	76.3		4%	$	81.0		2%	$	78.4		1%
Total Revenue		$	2,030.8		100%	$	3,846.5		100%	$	7,147.6		100%
	Subscriptions	$	1,834.7		90%	$	3,326.2		86%	$	6,631.4		93%
	Downloads	$	196.1		10%	$	520.3		14%	$	516.2		7%

		For the three months ended
		June 30,		September 30,		December 31,		March 31,		June 30,		September 30,		December 31,		March 31,
Operating data		2002(1)		2002		2002		2003		2003		2003		2003		2004
		(in thousands)
2.5G(2)
	Subscriptions(3)		—		40.0		311.6		1,042.2		1,674.5		2,594.5		3,710.2		5,508.0
	Downloads(4)		—		—		—		—		276.3		674.0		1,771.7		2,334.2
2G(5)
	Subscriptions(3)		—		—		50.0		253.0		303.7		402.5		966.2		2,194.2
	Downloads(4)		—		100.0		700.0		2,068.5		826.6		1,805.1		1,427.2		1,634.6
Total
	Subscriptions(3)		—		40.0		361.6		1,295.2		1,978.2		2,997.0		4,676.4		7,702.3
	Downloads(4)		—		100.0		700.0		2,068.5		1,103.0		2,479.1		3,198.9		3,968.8

(1)	We commenced operations in May 2002.
(2)	Includes WAP, MMS and JavaTM. We began to provide WAP, MMS and JavaTM services on a paid basis in September 2002, April 2003 and November 2003, respectively.
(3)	Total number of paid monthly subscriptions in the relevant period.
(4)	Total number of paid downloads in the relevant period, excluding downloads made pursuant to subscriptions.
(5)	Includes SMS, IVR and CRBT. We began to provide SMS, IVR and CRBT services on a paid basis in July 2002, December 2003 and October 2003, respectively.

12

Risk factors

You should carefully consider each of the risks described below and all of the other information in this prospectus before deciding to invest in our ADSs. If any of the following risks actually occur, our business, financial condition or results of operations could be harmed. In such an event, the trading price of our ADSs could decline and you might lose all or part of your investment.

RISKS RELATING TO OUR BUSINESS

We depend on China Mobile for substantially all of our revenue, and any loss or deterioration of our relationship with China Mobile may result in severe disruptions to our business operations and the loss of substantially all of our revenues.

We derive substantially all of our revenues from the provision of wireless value-added services. We rely on the networks and gateways of China Mobile Communications Corporation, or China Mobile, which has the largest mobile subscriber base in the world, to deliver our services. For each of the two years ended December 31, 2002 and 2003, we derived substantially all of our revenues from our cooperation arrangements with China Mobile.

Through Beijing AirInbox Information Technologies Co., Ltd., or Beijing AirInbox, we have entered into a series of cooperation agreements with China Mobile and a number of its provincial subsidiaries to provide wireless value-added services through China Mobile’s networks. Pursuant to our agreements with China Mobile and its provincial subsidiaries, these mobile operators bill and collect fees from mobile phone users for the wireless value-added services we provide.

Our agreements with China Mobile or its subsidiaries are generally for terms of one year or less and approximately 40% of them do not have automatic renewal provisions. We usually renew these agreements or enter into new ones when the prior agreements expire, but on occasion the renewal or new contract can be delayed by periods of one month or more.

If China Mobile ceases to continue to cooperate with us, it will be difficult to find replacement operators with the requisite licenses and permits and comparable infrastructure and customer base to offer our existing wireless value-added services business. In addition, our existing customer base consists almost entirely of subscribers to China Mobile’s mobile telephone services. It is unlikely that such customers would continue to use our services if they are not available through China Mobile.

Due to our reliance on China Mobile for our wireless value-added services, any loss or deterioration of our relationship with China Mobile may result in severe disruptions to our business operations, the loss of substantially all of our revenue and a material adverse effect on our financial condition and results of operations.

The termination or alteration of our cooperation agreements with China Mobile and its subsidiaries would materially and adversely impact our business operations and financial conditions.

Our negotiating leverage with China Mobile is limited given its leading market position. Our revenue and profitability could be materially adversely affected if China Mobile decides to change its transmission fees or its service fees. In addition, China Mobile or its subsidiaries could impose monetary penalties upon us or even terminate cooperation with us under the cooperation agreements with us, for a variety of reasons, such as the following:

† if we fail to achieve the performance standards established by the applicable operator from time to time,

13

Risk factors

†	if we breach certain provisions under the agreements, which include, in many cases, the obligation not to deliver content that violates the operator’s policies and applicable law, or
†	if the operator receives a high level of customer complaints about our services.

Due to our dependence on our relationship with China Mobile and its subsidiaries, any termination or material alteration of our cooperation agreements with China Mobile and its subsidiaries would materially and adversely impact our business operations and financial conditions.

Significant changes in policies or guidelines of China Mobile with respect to services provided by us may result in lower revenue or additional costs for us and materially adversely affect our financial condition or results of operations.

China Mobile may from time to time issue policies or guidelines, requesting or stating its preference for certain actions to be taken by all wireless value-added service providers using its networks. Due to our reliance on China Mobile, a significant change in its policies or guidelines may have a material effect on us. For example, in an effort to improve customer satisfaction, China Mobile recently revised its billing policies to request all wireless value-added service providers to confirm the subscription status of those users who have not been active in the past three months. Such change in policies or guidelines may result in lower revenues or additional operating costs for us, and we cannot assure you that our financial condition and results of operation will not be materially adversely affected by any policy or guideline change by China Mobile in the future.

Our dependence on the substance and timing of the billing systems of China Mobile and its subsidiaries may require us to estimate portions of our reported revenue for wireless value-added services. As a result, subsequent adjustments may have to be made to our wireless value-added services revenue in our financial statements.

As we do not bill our wireless value-added services users directly, we depend on the billing systems and records of the mobile operators, including China Mobile and its subsidiaries, to record the volume of our wireless value-added services provided, charge our users, collect payments and remit to us our portion of the fees. We generally do not have the ability to independently verify or challenge the accuracy of the billing systems of the mobile operators.

We internally tabulate the value of a wireless value-added service provided based on delivery confirmations sent to us by the networks of the mobile operators with respect to each delivery of our services to a user within 72 hours of delivery and record revenues based solely on the monthly statements provided to us by the mobile operators. Generally, within 30 days after the end of each month, statements from the mobile operators confirming the value of our services they billed to users in the month will be delivered to us, and within 30 days after that the mobile operators will pay us for the services, net of their service and transmission fees. However, on occasion such statements for particular operators may be delayed by up to 90 days or more. There has historically been a discrepancy, of approximately 10% in both 2003 and the first quarter of 2004, between the value that we internally tabulate based upon delivery confirmations and the value that we are entitled to receive based on the monthly statements provided by the mobile operators. This discrepancy arises for various reasons, including late notification of delinquent customers, our customer database being out of synchronization with those of mobile operators, duplicate billing and delivery failure. In future periods, we may release our unaudited quarterly financial statements to the market. Due to our past experience with the timing of receipt of the monthly statements from the operators, we expect that we may need to rely on our own internal estimates for the portion of our reported revenues for which we will not have received monthly statements. Our internal estimates will be based on our own internal tabulation of expected revenues from services provided. As the internal tabulation may not be entirely consistent

14

Risk factors

with the actual revenues confirmed by the monthly statements that we eventually receive, we would multiply our internal tabulation of expected revenue from mobile operators from whom we have not received monthly statements by a realization factor applicable to the relevant mobile operator and service and determined according to the average discrepancy over the previous 12 months between our internal tabulations of expected revenues and the actual revenues based on the monthly statements. As a result, we may overstate or understate our revenue for the relevant reporting period. Any difference between our estimated and actual revenue may result in subsequent adjustments to our revenue reported in our financial statements.

We have a limited operating history, which may make it difficult for you to evaluate our business.

We were incorporated in May 2002. As our operating history is limited, the revenue and income potential of our business and markets are unproven. In addition, we face numerous risks, uncertainties, expenses and difficulties frequently encountered by companies at an early stage of development. Some of these risks and uncertainties relate to our ability to:

†	maintain our current, and develop new, cooperation arrangements upon which our business depends;
†	increase the number of our users by expanding the type, scope and technical sophistication of the content and services we offer;
†	respond effectively to competitive pressures;
†	increase awareness of our brand and continue to build user loyalty; and
†	attract and retain qualified management and employees.

We cannot predict whether we will meet internal or external expectations of our future performance. If we are not successful in addressing these risks and uncertainties, our business, financial condition and results of operations may be materially adversely affected.

We have only recently attained profitability, and our historical financial information may not be representative of our future results of operations.

We have only attained profitability since the first quarter of 2003. We have experienced growth in our business in recent periods in part due to the growth in China’s wireless value-added services industry, which may not be representative of future growth or sustainable. We cannot assure you that our historical financial information is indicative of our future operating or financial performance, or our profitability will be sustained.

We depend on our key personnel and our business and growth prospects may be severely disrupted if we lose their services.

Our future success depends heavily upon the continued service of our key executives. In particular, we rely on the expertise and experience of Yunfan Zhou and Nick Yang, our founders and senior officers, in our business operations, and their personal relationships with our other significant shareholders, employees, the regulatory authorities, our clients, our suppliers, the mobile operators and Beijing AirInbox and Beijing Boya Wuji Technologies Co., Ltd., or Beijing Boya Wuji, our operating companies. If Yunfan Zhou or Nick Yang, or both of them, become unable or unwilling to continue in their present positions, or if they join a competitor or form a competing company in contravention of their employment agreements, we may not be able to replace them easily, our business may be

15

Risk factors

significantly disrupted and our financial condition and results of operations may be materially adversely affected. We do not currently maintain key-man life insurance for any of our key personnel.

Each of Yunfan Zhou and Nick Yang was a party to an employment agreement with Sohu.com Inc. that restricted him during the period of his employment with Sohu.com Inc. and for a period of one year after the termination of such employment from (i) participating or otherwise being involved in any entity that operates an Internet portal in China without the prior written authorization of Sohu.com Inc. and (ii) soliciting or hiring any employee of Sohu.com Inc or soliciting business on behalf or for the benefit of any entity that operates an Internet portal in China from any customer, supplier or business partner of Sohu.com Inc. After their resignation from Sohu.com Inc. in March 2002 and incorporation of our company in May 2002, Messrs. Zhou and Yang received claims made by Sohu.com Inc. in respect of breaches by them of these restrictions. We are not aware of any further claims or legal proceedings initiated or threatened by Sohu.com Inc. against Yunfan Zhou, Nick Yang or us. However, we cannot assure you that Sohu.com Inc. would not bring any claims or legal proceedings against Yunfan Zhou, Nick Yang or us in the future.

If the PRC government finds that the agreements that establish the structure for operating our business do not comply with PRC government restrictions on foreign investment in the value-added telecommunications industry, we could be subject to severe penalties.

In December 2001, in order to comply with China’s commitments with respect to its entry into the World Trade Organization, or WTO, the State Council promulgated the Administrative Rules for Foreign Investments in Telecommunications Enterprises, or the Telecom FIE Rules. The Telecom FIE Rules set forth detailed requirements with respect to capitalization, investor qualifications and application procedures in connection with the establishment of a foreign-invested telecommunications enterprise. Pursuant to the Telecom FIE Rules, the ultimate ownership interest of a foreign investor in a foreign-funded telecommunications enterprise that provides value-added telecommunications services, including Internet content services, shall not exceed 50%.

We and our subsidiary, KongZhong Information Technologies (Beijing) Co., Ltd., or KongZhong Beijing, are considered as foreign persons or foreign-invested enterprises under PRC laws. As a result, we operate our wireless value-added services in China through Beijing AirInbox, which is owned by PRC citizens. In addition, we have recently set up Beijing Boya Wuji, which is also owned by PRC citizens, to operate our wireless value-added services through mobile operators other than China Mobile. We do not have any equity interest in these operating companies and instead enjoy the economic benefit of them through contractual arrangements, including agreements on provision of loans, provision of services, license of intellectual property, and certain corporate governance and shareholder rights matters. These operating companies conduct substantially all of our operations and generate substantially all of our revenues. They also hold the licenses and approvals that are essential to our business.

There are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations, including but not limited to the laws and regulations governing the validity and enforcement of our contractual arrangements. Accordingly, we cannot assure you that PRC regulatory authorities will not determine that our contractual arrangements with Beijing AirInbox and Beijing Boya Wuji violate PRC laws or regulations.

16

Risk factors

If we or our operating companies were found to violate any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violation, including, without limitation, the following:

†	levying fines;
†	confiscating our or our operating companies’ income;
†	revoking our or our operating companies’ business license;
†	shutting down the servers or blocking our or our operating companies’ web sites;
†	restricting or prohibiting our use of the proceeds from this offering to finance our business and operations in China;
†	requiring us to restructure our ownership structure or operations; and/or
†	requiring us or our operating companies to discontinue our wireless value-added services business.

Any of these or similar actions could cause significant disruptions to our business operations or render us unable to conduct our business operations and may materially adversely affect our business, financial condition and results of operations.

Our contractual arrangements with Beijing AirInbox and Beijing Boya Wuji may not be as effective in providing operational control as direct ownership of these businesses and may be difficult to enforce.

PRC laws and regulations currently restrict foreign ownership of companies that provide value-added telecommunications services, which include wireless value-added services and Internet content services. As a result, we conduct substantially all of our operations and generate substantially all of our revenues through Beijing AirInbox and Beijing Boya Wuji pursuant to a series of contractual arrangements with them and their respective shareholders. These agreements may not be as effective in providing control over our operations as direct ownership of these businesses. In particular, our operating companies could fail to perform or make payments as required under the contractual agreements, and we will have to rely on the PRC legal system to enforce these agreements, which we cannot be sure would be effective.

Rapid growth and a rapidly changing operating environment may strain our limited resources.

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

†	develop and quickly introduce new services, adapt our existing services and maintain and improve the quality of all of our services, particularly as new mobile technologies such as the third generation, or 3G, are introduced,
†	effectively maintain our relationships with China Mobile,

17

Risk factors

†	expand the percentage of our revenues which are recurring and are derived from monthly subscription-based services,
†	enter into and maintain relationships with desirable content providers,
†	continue training, motivating and retaining our existing employees and attract and integrate new employees, including into our senior management,
†	develop and improve our operational, financial, accounting and other internal systems and controls, and
†	maintain adequate controls and procedures to ensure that our periodic public disclosure under applicable laws, including U.S. securities laws, is complete and accurate.

We may face increasing competition, which could reduce our market share and materially adversely affect our financial condition and results of operations.

The PRC wireless value-added services market has seen increasingly intense competition. China Mobile’s listed subsidiary, China Mobile (Hong Kong) Limited, reported in its 2003 annual results announcement that over 880 service providers supply content and services for its Monternet^TM network in 2003. We compete with these companies primarily on the basis of brand, type and timing of service offerings, content, users as well as business partner and channel relationships. We also compete for experienced and talented employees. While we believe that we have certain advantages over our competitors, some of them may have greater access to capital markets, more human and financial resources than we do, and a longer operating history than us. For instance, Internet portals providing wireless value-added services may have an advantage over us with their more established brand names, user base and Internet distribution channels. Furthermore, our competitors may be able to offer a broader range of products and services than we are presently able to offer.

We are facing increasing competition as additional service providers develop new technology and cooperation relationships with key business partners. Our primary competitors in the advanced second generation, or 2.5G, wireless value-added services market in China include Internet portals as well as wireless value-added service providers focused on 2.5G services. Our competitors that hold significant market shares in wireless access protocol, or WAP, are Beijing Mobile Navi Information Technology Services Company, TOM Online Inc., Shenzhen Xuntian Telecommunication Technology Ltd. and Tencent Technology Limited’s Mobile QQ, and our competitors that hold significant market shares in multimedia messaging services, or MMS, are TOM Online Inc., Sina Corporation, NetEase.com Inc. and Sohu.com Inc.

Competition is particularly intense in China’s second generation, or 2G, based wireless value-added services market as the barriers to entry are relatively low compared to the 2.5G market, resulting in a much higher number of wireless value-added service providers. Our primary competitors in this market include Internet portals. Our competitors that hold significant market shares in this market are Tencent Technology Limited’s Mobile QQ, Sina Corporation, Sohu.com Inc., TOM Online Inc. and NetEase.com Inc.

We may need additional capital and may not be able to obtain such capital on acceptable terms.

Capital requirements are difficult to plan in our rapidly changing industry. We currently expect that we will need capital to fund our future acquisitions, service development, technological infrastructure and sales and marketing activities.

18

Risk factors

Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:

†	investors’ perceptions of, and demand for, securities of telecommunications value-added services companies;
†	conditions of the U.S. and other capital markets in which we may seek to raise funds;
†	our future results of operations, financial condition and cash flows;
†	PRC governmental regulation of foreign investment in value-added telecommunications companies;
†	economic, political and other conditions in China; and
†	PRC governmental policies relating to foreign currency borrowings.

Any failure by us to raise additional funds on terms favorable to us, or at all, may have a material adverse effect on our business, financial condition and results of operations. For example, we may not be able to carry out parts of our growth strategy to acquire assets, technologies and businesses that are complementary to our existing business or necessary to maintain our growth and competitiveness.

The dividends and other distributions on equity we may receive from our subsidiary are subject to restrictions under PRC law or agreements that it may enter into with third parties.

We are a holding company. Our wholly-owned subsidiary, KongZhong Beijing, has entered into contractual arrangements with Beijing AirInbox and Beijing Boya Wuji, through which we conduct our wireless value-added activities and receive substantially all of our revenues in the form of service fees. We rely on dividends and other distributions on equity paid by our subsidiary and service fees from Beijing AirInbox and Beijing Boya Wuji for our cash requirements in excess of any cash raised from investors and retained by us. If our subsidiary incurs debt in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. In addition, PRC law requires that payment of dividends by our subsidiary can only be made out of its net income, if any, determined in accordance with PRC accounting standards and regulations. Under PRC law, our subsidiary is also required to set aside no less than 10% of its after-tax net income each year to fund certain reserve funds unless such reserve funds have reached 50% of the registered capital of our subsidiary, and these reserves are not distributable as dividends. See note 12 to our historical consolidated financial statements included in this prospectus. Any limitation on the payment of dividends by our subsidiary could materially adversely affect our ability to grow, fund investments, make acquisitions, pay dividends, and otherwise fund and conduct our business.

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

We believe the copyrights, service marks, trademarks, trade secrets and other intellectual property we use are important to our business, and any unauthorized use of such intellectual property by third parties may adversely affect our business and reputation. We rely on the intellectual property laws and contractual arrangements with our employees, clients, business partners and others to protect such intellectual property rights. Third parties may be able to obtain and use such intellectual property without authorization. Furthermore, the validity, enforceability and scope of protection of intellectual property in the Internet and wireless value-added related industries in China is uncertain and still evolving, and these laws may not protect intellectual property rights to the same extent as the laws of some other jurisdictions, such as the United States. Moreover, litigation may be necessary in the future to enforce our intellectual property rights, which could result in substantial costs and diversion of our resources, and have a material adverse effect on our business, financial condition and results of operations.

19

Risk factors

Due to the manner in which we obtain, collect, produce and aggregate content and applications for our wireless value-added services, and because our services may be used for the distribution of information, claims may be filed against us for defamation, negligence, copyright or trademark infringement or other violations. In addition, third parties could assert claims against us for losses in reliance on information distributed by us. For example, if we are found to have infringed any intellectual property rights of others, we may be enjoined from using such intellectual property, and we may incur licensing fees or be forced to develop alternative intellectual property. We may also incur significant costs in investigating and defending the claims, even if they do not result in liability. We have not purchased liability insurance for these types of claims.

We may not be able to register the Chinese name of our service mark “KongZhong Network” in China, and we may not be able to effectively prevent its unauthorized use by third parties.

The Chinese name of our service mark “KongZhong Network” may be deemed a generic term under existing PRC trademark laws and regulations, which prohibit registration of generic terms as trademarks or service marks. We are in the process of applying for registration of the Chinese name of “KongZhong Network” as our service mark. Our applications, however, may not be accepted and we may not be able to register the Chinese name of “KongZhong Network” as a service mark in China. As a result, we may not be able to effectively prevent the unauthorized use of the Chinese name of our service mark, “KongZhong Network”, and our brand name and reputation may be adversely affected by such unauthorized use.

Future acquisitions may have an adverse effect on our ability to manage our business.

Selective acquisitions form part of our strategy to further expand our business. If we are presented with appropriate opportunities, we may acquire additional businesses, technologies, services or products that are complementary to our core wireless value-added services business. Future acquisitions and the subsequent integration of new companies into ours would require significant attention from our management, in particular to ensure that the acquisition does not disrupt our relationships with the mobile operators, or affect our users’ opinion of our services and customer support and is effectively integrated with our existing operations and wireless value-added services. The diversion of our management’s attention and any difficulties encountered in any integration process could have an adverse effect on our ability to manage our business. Future acquisitions would expose us to potential risks, including risks associated with the assimilation of new operations, services and personnel, unforeseen or hidden liabilities, the diversion of resources from our existing businesses and technologies, the inability to generate sufficient revenue to offset the costs and expenses of acquisitions and potential loss of, or harm to, relationships with employees and content providers as a result of integration of new businesses. Given the sophisticated technologies used in the wireless value-added services industry, the successful, cost-effective integration of other businesses’ technology platforms and services into our own would also be a critical, and highly complex, aspect of any acquisition.

We have limited business insurance coverage.

The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products, and do not, to our knowledge, offer business liability insurance. As a result, we do not have any business liability insurance coverage for our operations. Moreover, while business disruption insurance is available, we have determined that the risks of disruption and cost of the insurance are such that we do not require it at this time. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources.

20

Risk factors

RISKS RELATING TO OUR INDUSTRY

Our ability to generate revenues could suffer if the PRC market for advanced wireless value-added services does not develop as anticipated.

The wireless value-added services market in China has evolved rapidly over the past four years, with the introduction of new and advanced services, development of consumer preferences, market entry by new competitors and adaptation of strategies by existing competitors. Accordingly, it is extremely difficult to accurately predict consumer acceptance and demand for various existing and potential new offerings and services, and the future size, as well as composition and growth, of this market. Furthermore, given the limited history and rapidly evolving nature of our market, we cannot predict the price that wireless users will be willing to pay for our services or whether users will have concerns about security, reliability, cost and quality of service associated with advanced wireless value-added services. If acceptance of our advanced wireless value-added services is different than anticipated, our ability to maintain or increase our revenue and net income could be materially and adversely affected.

The laws and regulations governing the wireless value-added telecommunications and Internet industry in China are developing and subject to future changes. Substantial uncertainties exist as to the interpretation and implementation of those laws and regulations.

Although wireless value-added services are subject to general regulation regarding telecommunications services, we believe that currently, there are no PRC laws at the national level specifically governing wireless value-added services, such as our services related to WAP, MMS, short messaging services, or SMS, Java^TM, interactive voice response, or IVR, and color ring back tones, or CRBT.

Beijing AirInbox operates Internet web sites in China, which constitute one of the channels through which our services are offered. In recent years, the PRC government has begun to promulgate laws and regulations applicable to Internet-related services and activities, many of which are relatively new and untested and subject to future changes. In addition, various regulatory authorities of the central PRC government, such as the State Council, the Ministry of Information Industry, or MII, the State Administration of Industry and Commerce, or SAIC, and the Ministry of Public Security, are empowered to issue and implement rules to regulate certain aspects of Internet-related services and activities. Furthermore, some local governments have also promulgated local rules applicable to Internet companies operating within their respective jurisdictions. As the Internet industry itself is at an early stage of development in China, there will likely be new laws and regulations promulgated in the future to address issues that may arise from time to time. As a result, uncertainties exist regarding the interpretation and implementation of current and future PRC Internet laws and regulations.

Beijing AirInbox has obtained various value-added telecommunications services licenses for the provisions of its services. In addition, it is in the process of applying for a trans-regional value-added telecommunications license with the MII, in order to provide services in multiple provinces, autonomous regions and municipalities. In addition, Beijing Boya Wuji is in the process of applying for certain licenses required for its services. We cannot assure you that we will obtain these licenses or that the regulatory authorities will not take any action against us if we fail to obtain them. If Beijing AirInbox or Beijing Boya Wuji fails to obtain or maintain any of the required licenses or permits, it may be subject to various penalties, including redressing the violations, confiscation of income, imposition of fines or even suspension of its operations. Any of these measures could materially disrupt our operations and materially and adversely affect our financial condition and results of operations.

21

Risk factors

The PRC government or the telecommunications operators may prevent us from distributing, and we may be subject to liability for content that any of them believes is inappropriate.

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

The telecommunications operators also have their own policies that restrict the distribution by wireless value-added service providers of content they deem inappropriate. For instance, they have punished certain providers for distributing content deemed by them to be obscene. Such punishments have included censoring of content, delays in payments of fees by the mobile operators to the offending service provider, forfeiture of fees owed by the mobile operators to the offending service provider and suspension of the service on the mobile operators’ networks. Accordingly, even if we comply with PRC governmental regulations relating to licensing and foreign investment restrictions, if the PRC government or the mobile operators were to take any action to limit or prohibit the distribution of information we provide or to limit or regulate any current or future content or services available to our users, our revenues could be reduced and our reputation harmed.

Unexpected network interruptions, security breaches or computer virus attacks could have a material adverse effect on our business, financial condition and results of operations.

Any failure to maintain the satisfactory performance, reliability, security and availability of our network infrastructure may cause significant harm to our reputation and our ability to attract and maintain users. Major risks involved in such network infrastructure include, among others, any break-downs or system failures resulting in a sustained shutdown of all or a material portion of our servers, including failures which may be attributable to sustained power shutdowns, or efforts to gain unauthorized access to our systems causing loss or corruption of data or malfunctions of software or hardware.

Our network systems are vulnerable to damage from fire, flood, power loss, telecommunications failures, computer viruses, hackings and similar events. Any network interruption or inadequacy that causes interruptions in the availability of our services or deterioration in the quality of access to our services could reduce our user satisfaction and competitiveness. In addition, any security breach caused by hacking, which involves efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses could have a material adverse effect on our business, financial condition and results of operations. We do not maintain insurance policies covering losses relating to our systems and we do not have business interruption insurance.

The growth of our business may be adversely affected due to public concerns over the security and privacy of confidential user information.

The growth of our business may be inhibited if the public concern over the security and privacy of confidential user information transmitted over the Internet and wireless networks is not adequately addressed. Our services may decline and our business may be adversely affected if significant breaches of network security or user privacy occur.

22

Risk factors

RISKS RELATING TO THE PEOPLE’S REPUBLIC OF CHINA

Substantially all of our assets are located in China and substantially all of our revenue is derived from our operations in China. Accordingly, our results of operations and prospects are subject, to a significant extent, to the economic, political and legal developments in China.

The PRC’s economic, political and social conditions, as well as government policies, could affect our business. The PRC economy differs from the economies of most developed countries in many respects.

According to Global Insight, since 1978, China has been one of the world’s fastest-growing economies in terms of gross domestic product, or GDP, growth. We cannot assure you, however, that such growth will be sustained in the future. Moreover, the recent slowdown in the economies of the United States, the European Union and certain Asian countries may adversely affect economic growth in China.

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

The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the PRC government has implemented measures emphasizing the use of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. It also exercises significant control over PRC economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. We cannot assure you that China’s economic, political or legal systems will not develop in a way that is detrimental to our business, results of operations and prospects.

Any future outbreak of Severe Acute Respiratory Syndrome or any other epidemic in China may have a material adverse effect on our business operations, financial condition and results of operations.

From December 2002 to June 2003, China and certain other countries experienced an outbreak of a new and highly contagious form of atypical pneumonia now known as severe acute respiratory syndrome, or SARS. On July 5, 2003, the World Health Organization declared that SARS had been contained. However, in recent months, a few new cases of SARS have been reported in Asia. An outbreak in the future may disrupt our business operations and have a material adverse effect on our financial condition and results of operations. In addition, health or other government regulations may require temporary closure of our offices, or the offices of our advertisers, content providers or partners, which may severely disrupt our business operations and have a material adverse effect on our financial condition and results of operations. We have not adopted any written preventive measures or contingency plans to combat any future outbreak of SARS or any other epidemic.

23

Risk factors

Government control of currency conversion may adversely affect our financial condition and results of operations.

We receive substantially all of our revenues in Renminbi, which currently is not a freely convertible currency. A portion of these revenues must be converted into other currencies to meet our foreign currency obligations including, among others, payment of dividends declared, if any, in respect of our ordinary shares.

Under China’s existing foreign exchange regulations, our subsidiary, KongZhong Beijing, is able to pay dividends in foreign currencies, without prior approval from the State Administration of Foreign Exchange, by complying with certain procedural requirements. However, we cannot assure you that the PRC government will not take measures in the future to restrict access to foreign currencies for current account transactions.

Foreign exchange transactions under the capital accounts of our subsidiary, KongZhong Beijing, and Beijing AirInbox and Beijing Boya Wuji continue to be subject to significant foreign exchange controls and require the approval of PRC governmental authorities, including the State Administration of Foreign Exchange, or SAFE. In particular, if KongZhong Beijing borrows foreign currency loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance KongZhong Beijing by means of additional capital contributions, these capital contributions must be approved by certain government authorities including the Ministry of Commerce or its local counterparts. In addition, if we finance Beijing AirInbox or Beijing Boya Wuji by loans, we must obtain approval from SAFE. These limitations could affect the ability of KongZhong Beijing, Beijing AirInbox and Beijing Boya Wuji to obtain foreign exchange through debt or equity financing.

Fluctuation of the Renminbi could adversely affect the value of and dividends payable on our ADSs.

The value of the Renminbi fluctuates and is subject to changes in PRC political and economic conditions. Since 1994, the conversion of Renminbi into foreign currencies, including U.S. dollars, 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. Since 1994, the official exchange rate for the conversion of Renminbi to U.S. dollars has generally been stable. Any devaluation of the Renminbi, however, may adversely affect the value of, and dividends, if any, payable on, our ordinary shares in foreign currency terms, since we will receive substantially all of our revenues, and express our profits, in Renminbi.

The PRC legal system embodies uncertainties which could limit the legal protections available to you and us.

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

24

Risk factors

You may experience difficulties in effecting service of legal process and enforcing judgments against us and our management.

We are a company incorporated under the laws of the Cayman Islands, and our subsidiary and substantially all of our assets are located outside the United States. In addition, some of our directors and officers and their assets are located outside the United States. As a result, it may not be possible to effect service of process within the United States upon our directors or officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws.

Our PRC legal counsel, Llinks Law Office, has advised us that the PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States, the United Kingdom or most other western countries. As a result, recognition and enforcement in China of judgments of a court obtained in those jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or impossible. See “Enforceability of civil liabilities.”

We have been advised by Maples and Calder Asia, our Cayman Islands legal advisers, that the courts of the Cayman Islands are unlikely (i) to recognize or enforce against us judgments of courts of the United States predicated upon certain of the civil liability provisions of the securities laws of the United States or any State thereof and (ii) in original actions brought in the Cayman Islands, to impose liabilities against us predicated upon certain of the civil liability provisions of the securities laws of the United States or any State thereof, if and to the extent that such provisions are penal in nature. However, in the case of laws that are not penal in nature, although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, the courts of the Cayman Islands will generally recognize and enforce a judgment of a foreign court of competent jurisdiction without retrial on the merits. A Cayman Islands court may stay proceedings if concurrent proceedings are being brought elsewhere.

RISKS RELATING TO OUR ADSs

If an active trading market for our ADSs does not develop, the price of our ADSs may suffer and may decline below the initial offering price.

There is no public market for our ADSs or our ordinary shares underlying the ADSs prior to this offering. If an active public market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs may be adversely affected. We have applied to have our ADSs approved for quotation on the Nasdaq National Market. We can provide no assurances that a liquid public market for our ADSs will develop.

The initial public offering price for our ADSs will be determined by negotiation between us and the underwriters based upon several factors, and we can provide no assurance that the price at which the ADSs are traded after this offering will not decline below the initial public offering price.

Sales of substantial amounts of ADSs in the public market, or the perception that such sales may occur, could adversely affect the prevailing market price of the ADSs.

Upon completion of this offering, we will have 1,370,000,000 ordinary shares outstanding (including those represented by ADSs), of which 400,000,000 ordinary shares represented by 10,000,000 ADSs, or approximately 29.2%, will be publicly held by investors participating in this offering. The ADSs sold in this offering will be freely tradable in the United States without restriction or further registration under the Securities Act, and the ordinary shares held by our existing shareholders may be deposited into the ADS facility and sold in the public market in the future pursuant to, and subject to the restrictions contained in, Rule 144 under the Securities Act and the deposit agreement. If any

25

Risk factors

existing shareholders sell or are perceived as intending to sell a substantial number of our ordinary shares, the prevailing market price for our ADSs could be adversely affected.

You will experience immediate dilution in the book value of the ADSs that you purchase because the initial public offering price per ADS is higher than the net tangible book value per ADS.

The initial public offering price per ADS is higher than the net tangible book value per ADS prior to this offering. Therefore, when you purchase ADSs from this offering at the initial public offering price, you will incur an immediate dilution of $8.36 per ADS. If we issue additional ADSs, you may experience further dilution.

You may not be able to exercise your right to vote the ordinary shares underlying your ADSs.

Under the terms of the ADSs and the deposit agreement, you have a general right to vote the ordinary shares underlying the ADSs that you hold. You may instruct the depositary bank, Citibank, N.A., to vote the ordinary shares underlying our ADSs, subject to the terms of the deposit agreement and only if we request Citibank to ask for your instructions. Otherwise, you will not be able to exercise your right to vote unless you withdraw the ordinary shares underlying the ADSs. However, you may not receive voting materials in time to ensure that you are able to instruct Citibank to vote your shares or receive sufficient notice of a shareholders’ meeting to permit you to withdraw your ordinary shares to allow you to cast your vote with respect to any specific matter. In addition, Citibank and its agents may not be able to timely send out your voting instructions or carry out your voting instructions in the manner you have instructed. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ordinary shares are not voted as you requested. See “Description of American Depositary Shares— Voting rights.”

We are incorporated under Cayman Islands law and it may be difficult for you to protect your interests as a shareholder, as Cayman Islands law provides significantly less protection to investors when compared to the laws of the U.S., and your ability to protect your rights through the U.S. federal courts may be limited.

Our corporate affairs are governed by our Memorandum and Articles of Association, by the Companies Law (2003 Revision) and the common law of the Cayman Islands. The rights of shareholders to take legal action against our directors or us, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands laws are to a large extent governed by the common law of the Cayman Islands. The common law in the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands and from English common law, the decisions of whose courts are of persuasive authority but are not binding on a court in the Cayman Islands. Cayman Islands law in this area may not be as established and may differ from provisions under statutes or judicial precedent in existence in jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws as compared to the United States, and provides significantly less protection to investors. In addition, shareholders of Cayman Islands companies may not have standing to initiate shareholder derivative actions before the federal courts of the United States. As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in actions against the management, directors or our major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States, and our ability to protect our interests if we are harmed in a manner that would otherwise enable us to sue in a United States federal court may be limited. See “Description of share capital— Differences in corporate law,” where we explain that dissenting shareholders do not enjoy rights

26

Risk factors

comparable to appraisal rights upon the reconstruction and amalgamation of companies, and give more details with respect to shareholder suits.

If our dividend is declared and paid in a foreign currency, you may be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive.

You will be taxed on the U.S. dollar value of your dividends at the time you receive them, even if you actually receive a smaller amount of U.S. dollars when the payment is in fact converted into U.S. dollars. Specifically, if a dividend is declared and paid in a foreign currency, the amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the payments made in the foreign currency, determined at the spot rate of the foreign currency to the U.S. dollar on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Thus, if the value of the foreign currency decreases before you actually convert the currency into U.S. dollars, you will be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will actually ultimately receive.

You may be subject to limitations on transfers of our ordinary shares.

Our ordinary shares are transferable subject to restrictions in our articles of association. However, our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share without assigning any reasons therefore. In addition, the registration of transfers may be suspended and the register closed as our board of directors may determine, for up to 45 days in any year.

RISKS RELATING TO THE OFFERING

The trading prices of our ADSs are likely to be volatile, which could result in substantial losses to investors.

The trading prices of our ADSs are likely to be volatile and could fluctuate widely in response to factors beyond our control. In particular, the market prices for shares of Internet and technology-related companies often reach levels that may bear no established relationship to the operating performance of these companies. These broad market and industry factors may significantly affect the market prices of our ADSs, regardless of our actual operating performance. The market prices of our ADSs following the offering may be volatile.

Other factors that may affect the volatility in the price and trading volumes for our ADSs include:

†	actual or anticipated fluctuations in our quarterly operating results;
†	announcements of new services by us or our competitors;
†	changes in financial estimates by securities analysts;
†	conditions in the wireless value-added services market;
†	announcements by our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
†	additions or departures of key personnel;
†	potential litigation; or
†	performance and fluctuation of the market prices of other PRC-related companies or technology companies which have securities listed or quoted in the U.S. market.

Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade. We cannot give you any assurance that these factors will not occur in the future.

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Special note regarding forward-looking statements

These statements relate to our future prospects, developments and business strategies. The statements contained in this prospectus that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. We have used the words “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “intend,” “hope” and similar expressions in this prospectus to identify forward-looking statements. These forward-looking statements are made based on our current expectations and beliefs concerning future events affecting us and are subject to risks, uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements.

In addition, these forward-looking statements reflect our current views with respect to future events and are not a guarantee of future performance. Actual results may differ materially from the information contained in the forward-looking statements as a result of a number of factors, including, without limitation, the risks set forth in “Risk factors.”

Because of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus might not occur in the way we expect, or at all. We do not intend to update or otherwise revise the forward-looking statements in this prospectus, whether as a result of new information, future events or otherwise. Accordingly, you should not place undue reliance on any forward-looking information.

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Our corporate structure

OVERVIEW

We were incorporated in May 2002 under the laws of the Cayman Islands as Communication Over The Air Inc., an exempted limited liability company. In March 2004, we changed our name to KongZhong Corporation. Our founders, Yunfan Zhou and Nick Yang, each beneficially owns 27.4% of our company, while the remaining 45.2% is owned by 10 institutional and individual investors. See “Principal and selling shareholders.”

We conduct our business in China solely through our wholly-owned subsidiary, KongZhong Beijing. In order to meet domestic ownership requirements under PRC law, which restrict us and KongZhong Beijing, as a foreign or foreign-invested company, from operating in certain value-added telecommunications and Internet services, we have established Beijing AirInbox in China, which is wholly-owned by PRC citizens. We have also recently established Beijing Boya Wuji in China, which is also wholly-owned by PRC citizens. We do not have any equity interests in Beijing AirInbox or Beijing Boya Wuji, but instead enjoy the economic benefits of these companies through a series of contractual arrangements as described below.

OUR CORPORATE STRUCTURE

The chart below sets forth our corporate and share ownership structure as of the date of this prospectus, after giving effect to this offering, and assuming that (i) all of our preferred shares are converted into ordinary shares and (ii) the underwriters do not exercise their over-allotment option.

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Our corporate structure

(1)	Other investors include Global Lead Technology Limited, Draper Fisher Jurvetson ePlanet Ventures L.P., Draper Fisher Jurvetson ePlanet Partners Fund, LLC, Draper Fisher Jurvetson ePlanet Ventures GmbH KG & Co., Lucky Dragon Holdings Group Ltd., eGarden I, Calver Investments Limited, eGarden Ventures (HK), Ltd., Yin Alice Chau and CENO Investment Limited.
(2)	We provided loans to each of the shareholders of Beijing AirInbox for their equity contributions into the registered capital of Beijing AirInbox.
(3)	We do not have any ownership interest in Beijing AirInbox or Beijing Boya Wuji. We and our subsidiary, KongZhong Beijing, have entered into a series of contractual arrangements with these companies and their respective shareholders.

PRC regulations currently restrict foreign ownership of companies that provide value-added telecommunications services, which include wireless value-added services. See also “Regulation.” To comply with PRC regulations, we conduct substantially all of our operations through Beijing AirInbox, which is 45% owned by Yang Cha, one of our employees, 42% by Songlin Yang, an uncle of our co-founder, Nick Yang, 10% by Yunfan Zhou, our co-founder and 3% by Zhen Huang, the wife of Nick Yang. We also established in March 2004 Beijing Boya Wuji, which is equally owned by each of Yunfan Zhou and Zhen Huang, to conduct our wireless value-added services through mobile operators other than China Mobile. We do not have any equity interest in Beijing AirInbox or Beijing Boya Wuji, but instead enjoy the economic benefits of these companies through a series of contractual

30

Our corporate structure

arrangements, which we and KongZhong Beijing have entered into with these companies and their respective shareholders as described below. For a description of each of these agreements, see “Related party transactions—Other related party agreements.”

As part of these contractual arrangements, we have entered into loan agreements with each of the shareholders of Beijing AirInbox, pursuant to which long-term loans were provided to each of these shareholders to be invested exclusively in Beijing AirInbox. Each shareholder has also agreed to repay these loans only in the form of a transfer of all of his or her interest in Beijing AirInbox to either KongZhong Beijing or our designees to the extent allowed by PRC law under certain circumstances. We currently do not plan to extend any additional loans to the shareholders of Beijing AirInbox or any loans to the shareholders of Beijing Boya Wuji in the future. See “Related party transactions— Other related party agreements.”

Beijing AirInbox and Beijing Boya Wuji and their respective shareholders have also entered into exclusive share option agreements with KongZhong Beijing. Pursuant to these agreements, each of the shareholders of Beijing AirInbox and Beijing Boya Wuji has granted an exclusive option to KongZhong Beijing or our designees to purchase all or part of such shareholder’s equity interest in Beijing AirInbox or Beijing Boya Wuji, as applicable, in accordance with PRC law, and has covenanted not to encumber such equity interest in any manner other than as permitted by KongZhong Beijing.

KongZhong Beijing has entered into certain business operation agreements with Beijing AirInbox and Beijing Boya Wuji and their respective shareholders. Pursuant to these agreements, Beijing AirInbox and Beijing Boya Wuji and their respective shareholders agreed to appoint individuals designated by KongZhong Beijing to the management team of Beijing AirInbox and Beijing Boya Wuji, and to refrain from taking certain actions that may materially affect these companies’ operations. Each of the shareholders of Beijing AirInbox and Beijing Boya Wuji has also executed an irrevocable power of attorney in favor of individuals designated by KongZhong Beijing. Pursuant to the powers of attorney, those designated individuals have full power and authority to exercise all of such shareholders’ rights with respect to their equity interests in Beijing AirInbox or Beijing Boya Wuji.

KongZhong Beijing has entered into an exclusive technical and consulting services agreement with each of Beijing AirInbox and Beijing Boya Wuji. Pursuant to these exclusive technical and consulting services agreements, KongZhong Beijing provides technical and consulting services to Beijing AirInbox and Beijing Boya Wuji in exchange for services fees. Each of the shareholders of Beijing AirInbox and Beijing Boya Wuji also entered into equity pledge agreements with Beijing KongZhong, pursuant to which these shareholders pledged their interest in Beijing AirInbox and Beijing Boya Wuji, respectively, for the performance of these companies’ payment obligations under the respective exclusive technical and consulting services agreements.

KongZhong Beijing has entered into an exclusive trademark license agreement and domain name agreement with each of Beijing AirInbox and Beijing Boya Wuji. Pursuant to these agreements, KongZhong Beijing granted each of Beijing AirInbox and Beijing Boya Wuji a non-exclusive license to use its trademarks and domain names in exchange for a fee.

In the opinion of our PRC legal counsel, Llinks Law Office, the ownership structures of KongZhong Beijing, Beijing AirInbox and Beijing Boya Wuji, our contractual arrangements with these companies and their respective shareholders and the businesses and operations of these companies as described in this prospectus, are in compliance with all existing PRC laws and regulations and are enforceable in accordance with their terms and conditions. In addition, our PRC legal counsel is of the opinion that, with respect to Beijing AirInbox, no consent, approval or license, other than those already obtained, is required under any of the existing PRC laws and regulations for the effectiveness and enforceability of the ownership structures, contractual arrangements, businesses and operations of these companies except for a trans-regional value-added telecommunications services permit. As a newly incorporated

31

Our corporate structure

company, Beijing Boya Wuji is in the process of applying for certain licenses and permits that are necessary for its business. Nevertheless, there are substantial uncertainties regarding the interpretation and implementation of current PRC laws and regulations. See “Risk factors— Risks relating to our business— PRC laws and regulations restrict foreign investment in China’s telecommunications services industry, and substantial uncertainties exist with respect to our contractual arrangements with Beijing AirInbox and Beijing Boya Wuji due to uncertainties regarding the interpretation and application of current or future PRC laws and regulations,” and “—Our contractual arrangements with Beijing AirInbox and Beijing Boya Wuji may not be as effective in providing operational control as direct ownership of these businesses” and “Regulation.” As discussed in those risk factors, certain events may cause us to lose the benefits and control intended to be created by these arrangements.

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Use of proceeds

We estimate we will receive net proceeds from the offering of approximately $80 million from the sale of 8,000,000 ADSs after deducting the underwriting discounts and expenses payable by us in the offering and assuming an initial public offering price of $11 per ADS. We will not receive any proceeds from the sale of ADSs by the selling shareholders. We currently intend to use the net proceeds to us as follows, though the allocation of the use of proceeds may change along with evolving business conditions and other management considerations:

†	up to $40 million for acquisitions or investments in businesses that we believe are complementary to our existing business, although no acquisitions or investments are pending;
†	up to $8 million for product development;
†	up to $8 million for sales and marketing; and
†	any remaining balance for general corporate purposes.

To the extent that the net proceeds we receive from this offering are not immediately applied for the above purposes, we intend to use them for our working capital, to purchase U.S. Treasury debt securities and other short-term investment grade debt securities or to deposit the proceeds into interest-bearing bank accounts. These investments may have a material adverse effect on the U.S. federal income tax consequences of an investment in our ADSs. It is possible that we may become a passive foreign investment company, or PFIC, for United States federal income taxpayers, which could result in negative tax consequences to you. These consequences are described in more detail in “Taxation.”

Our industry is evolving rapidly and could cause significant and rapid changes to our strategies and business plans. Accordingly, the actual application of the proceeds may change. As new business opportunities arise or circumstances change, we may reallocate all or part of the net proceeds to other business plans or new projects or hold such funds in temporary investments.

33

Dividend policy

We currently intend to retain future earnings, if any, to finance our business and to fund growth and expansion of our business and, therefore, do not expect to pay any cash dividends in the foreseeable future. Any future determination to pay dividends will be made at the discretion of our board of directors and will be based upon our financial results, shareholders’ interests, general business conditions and strategies, capital requirements, contractual restrictions on the payment of dividends and any other conditions our board of directors deems relevant.

Holders of ADSs will be entitled to receive dividends, subject to the terms of the deposit agreement, to the same extent as the holders of our ordinary shares. Cash dividends will be paid to the depositary in U.S. dollars and paid to holders of ADSs according to the terms of the deposit agreement. Other distributions, if any, will be paid by the depositary to holders of ADSs by any means it deems legal and practical. Under the deposit agreement, the depositary is required to distribute dividends to the holders of ADS unless such distribution is prohibited by law or is impracticable. The amounts distributed to holders will be net of fees, expenses, taxes and other governmental charges payable by holders under the deposit agreement. See “Description of American Depositary Shares— Dividends and distributions.”

34

Dilution

Dilution is the amount by which the initial public offering price paid by purchasers of the ADSs offered hereby will exceed the pro forma net tangible book value per ADS after the offering. As of March 31, 2004, our pro forma net tangible book value per ADS was $0.33, or $0.01 per ordinary share. Net tangible book value per ordinary share represents our total tangible assets minus our total liabilities and liquidation values of our preferred shares, divided by the total number of ordinary shares outstanding as of March 31, 2004. Net tangible book value per ADS is equal to 40 times the net tangible book value per ordinary share. Our pro forma net tangible book value per ordinary share represents the amount of net tangible book value per ordinary share after giving effect to the automatic conversion of all of our outstanding Series A convertible preferred shares and Series B redeemable convertible preferred shares into our ordinary shares.

After giving effect to the sale of our ADSs offered in this offering (assuming an initial public offering price of $11 per ADS) and after deducting underwriting discounts and commissions and other estimated expenses of this offering, but without taking into account any other changes in such tangible book value after March 31, 2004, our net tangible book value per ADS would increase to $2.64 per ADS. This represents an immediate increase of $2.31 in net tangible book value per ADS to our existing shareholders and an immediate dilution of $7.59, or $8.36 before deducting underwriting discounts and commissions and other estimated expenses of this offering, per ADS equivalent to purchasers of our ADSs purchasing at the initial public offering price.

The following table illustrates the immediate dilution per ADS to new investors:

Assumed initial public offering price per ADS				$	11.00
	Pro forma net tangible book value per ADS as of December 31, 2003	$	0.33
	Increase in net tangible book value per ADS attributable to the sale of our ADSs	$	2.31
Pro forma net tangible book value per ADS after this offering				$	2.64
Dilution in net tangible book value per ADS to new investors				$	8.36

The following table summarizes, on a pro forma basis as of March 31, 2004, the differences between existing shareholders and new investors with respect to the number of ordinary shares purchased from us, the total consideration paid to us and the average price per ordinary share paid by existing shareholders and by new investors purchasing the ADSs in this offering assuming the initial public offering price of $11 per ADS and without giving effect to underwriting discounts and commissions and other estimated offering expenses payable by us.

		Ordinary
		Shares Purchased					Total Consideration					Average Price
												Per Ordinary		Average Price
		Number		%			Amount		%			Share		Per ADS
Existing shareholders			1,050,000,000		76.6	%	$	3,520,271		3.8	%	$	0.003	$	0.13
New investors			320,000,000		23.4	%	$	88,000,000		96.2	%	$	0.275	$	11.00
	Total		1,370,000,000		100.0	%	$	91,520,271		100.0	%

The foregoing discussion and table assumes no exercise of any outstanding stock options. As of March 31, 2004, there were stock options outstanding to purchase an aggregate of 86,120,000 ordinary shares, of which 18,045,000 were exercisable, at a weighted average exercise price of $0.0060 per share. If all these options had been exercised on March 31, 2004, before giving effect to

35

Dilution

this offering, our pro forma net tangible book value would have been approximately $0.33 per ADS, or $0.01 per ordinary share, the increase in net tangible book value attributable to new investors would have been $2.28 per ordinary share, or $0.06 per ADS, and the dilution in pro forma net tangible book value to new investors would have been $8.39 per ADS, or $0.21 per ordinary share.

36

Capitalization

The following table sets forth our capitalization as of March 31, 2004:

†

on a pro forma basis reflecting conversion of outstanding Series A and Series B preferred shares; and

†

on a pro forma as adjusted basis to reflect this offering, assuming an initial public offering price of $11 per ADS, which is the mid-point of the estimated price range of between $10 and $12, after deducting underwriting discounts and commissions and other estimated expenses payable by us in relation to the offering, as if such sale occurred, and assuming the underwriters do not exercise the over-allotment option.

Except as set forth below, there has been no material change in our consolidated capitalization since March 31, 2004.

This information should be read in conjunction with “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus.

37

Capitalization

			As of March 31, 2004
									Pro forma
			Actual			Pro forma			as adjusted
			(in thousands of U.S. dollars,
			except share data)
Minority interest			$	120.8		$	120.8		$	120.8
Series B preferred shares, net of issuance costs of $30,000 ($0.0000005 par value; 350,000,000 shares authorized, 350,000,000 issued and outstanding in 2003; redeemable in 2007 at $0.0085715 per share) (nil issued and outstanding on a pro forma and pro forma as adjusted basis) (liquidation value $4,499,950)			$	2,970.0		$	—		$	—
Shareholder’s equity:
	Series A preferred shares ($0.0000005 par value; 231,000,000 shares authorized, 231,000,000 shares issued and outstanding in 2003) (nil issued and outstanding on a pro forma and pro forma as adjusted basis) (liquidation value $550,011)		$	0.1		$	—		$	—
	Ordinary shares ($0.0000005 par value; 999,419,000,000 shares authorized, 469,000,000 shares issued and outstanding in 2003) (1,050,000,000 shares issued and outstanding on a pro forma basis as of March 31, 2004)(1) (1,370,000,000 shares issued and outstanding on a pro forma as adjusted basis)			0.2			0.5			0.6
	Additional paid-in capital			3,020.9			5,990.7			87,830.6
	Deferred stock compensation			(2,303.2	)		(2,303.2	)		(2,303.2	)
	Accumulated other comprehensive loss			(1.5	)		(1.5	)		(1.5	)
	Retained earnings			5,056.4			5,056.4			5,056.4
		Total shareholders’ equity	$	5,772.9		$	8,742.9		$	90,582.9

(1) The number of ordinary shares outstanding as of March 31, 2004 does not include: (i) 86,120,000 ordinary shares subject to options outstanding as of March 31, 2004 and (ii) 18,880,000 additional ordinary shares that are reserved for issuance under our 2002 Equity Incentive Plan, or the 2002 Plan.

38

Exchange rate information

We present our historical consolidated financial statements in U.S. dollars. In addition, certain pricing information is presented in U.S. dollars and certain contractual amounts that are in Renminbi include a U.S. dollar equivalent solely for the convenience of the reader. Except as otherwise specified, this pricing information and these contractual amounts are translated at RMB8.2770 = $1.00, the prevailing rate on March 31, 2004. The translations are not a representation that the Renminbi amounts could actually be converted to U.S. dollars at this rate. For a discussion of the exchange rates used for the presentation of our financial statements, see note 2 to our financial statements.

The People’s Bank of China sets and publishes daily a base exchange rate with reference primarily to the supply and demand of Renminbi against the U.S. dollar in the market during the prior day. The People’s Bank of China also takes into account other factors such as the general conditions existing in the international foreign exchange markets. Although Chinese governmental policies were introduced in 1996 to reduce restrictions on the convertibility of Renminbi into foreign currency for current account items, conversion of Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or security, requires the approval of the State Administration for Foreign Exchange and other relevant authorities.

The noon buying rates in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York were RMB8.2766 = $1.00 on June 16, 2004. The following table sets forth the high and low noon buying rates between Renminbi and U.S. dollars for each of the periods shown:

	Noon Buying Rate
	RMB per $1.00
Period	High		Low
December 2003		8.2772		8.2765
January 2004		8.2772		8.2767
February 2004		8.2773		8.2769
March 2004		8.2774		8.2767
April 2004		8.2772		8.2768
May 2004		8.2773		8.2768
June 2004 (through June 16, 2004)		8.2768		8.2766

The following table sets forth the period-end noon buying rates and the average noon buying rates between Renminbi and U.S. dollars for each of 1999, 2000, 2001, 2002, 2003 and 2004 (through May 28), calculated by averaging the noon buying rates on the last day of each month of the periods shown:

	Average Noon
	Buying
	Rate
	RMB per $1.00
1999		8.2785
2000		8.2784
2001		8.2772
2002		8.2772
2003		8.2771
2004 (through June 16, 2004)		8.2770

39

Selected consolidated financial and operating data

The following selected consolidated financial data should be read in conjunction with our audited consolidated financial statements, the notes thereto and “Management’s discussion and analysis of financial condition and results of operations” included elsewhere in this prospectus. The selected consolidated statements of operations data for the period from May 6, 2002 to December 31, 2002 and for the year ended December 31, 2003 and the three months ended March 31, 2004 (unaudited), and the selected consolidated balance sheet data as of December 31, 2002 and 2003 and March 31, 2004 (unaudited) set forth below are derived from our audited consolidated financial statements included elsewhere in this prospectus. Our audited consolidated financial statements have been prepared and presented in accordance with U.S. GAAP and audited by Deloitte Touche Tohmatsu. We commenced operations in May 2002. Due to the relatively new and rapidly evolving nature of the wireless value-added services industry in China, the short history of our company and other factors affecting our business as described under “Risk factors,” our results of operations in any period are not necessarily indicative of the results that may be expected for any future period.

		For the period from
		May 6, 2002 to			For the year ended			For the three months
Consolidated statements of operations data		December 31, 2002			December 31, 2003			ended March 31, 2004
		(in thousands of U.S. dollars)
Gross revenues		$	200.3		$	7,806.7		$	7,147.6
Cost of revenues			(84.3	)		(2,284.0	)		(2,239.0	)
Gross profit			116.0			5,522.7			4,908.6
Operating expenses:
	Product development		164.2			1,369.5			716.5
	Sales and marketing		128.9			841.4			294.1
	General and administrative		317.3			882.7			675.7
	Amortization of deferred stock compensation		—			22.0			80.8
Total operating expenses			610.4			3,115.6			1,767.1
Income (loss) from operations			(494.4	)		2,407.1			3,141.5
Other expenses			—			—			(0.7	)
Interest income, net			0.5			1.0			1.3
Net income (loss) before income taxes			(493.9	)		2,408.1			3,142.1
Income tax expense			—			—			—
Net income (loss)		$	(493.9	)	$	2,408.1		$	3,142.1
Net income (loss) per share:
	Basic		(0.12) cent			0.51 cent			0.67 cent
	Diluted		(0.12) cent	(1)		0.22 cent			0.29 cent
Shares used in calculating net income (loss) per share:
	Basic		415,547,794			469,000,000			469,000,000
	Diluted		415,547,794	(1)		1,094,824,434			1,098,206,555
Pro forma net income (loss) per share (unaudited)
	Basic		(0.08) cent			0.23 cent			0.30 cent
	Diluted		(0.08) cent	(1)		0.22 cent			0.29 cent
Shares used in calculating pro forma net income (loss) per share
	Basic		622,124,999			1,050,000,000			1,050,000,000
	Diluted		622,124,999	(1)		1,094,824,434			1,098,206,555
Pro forma net income (loss) per ADS equivalent
	Basic		(3.18) cent			9.17 cent			11.97 cent
	Diluted		(3.18) cent			8.80 cent			11.44 cent

(1) Anti-dilutive preferred shares and options were excluded from the weighted average ordinary shares outstanding for the diluted per share calculation. For 2002, basic loss per share did not differ from diluted loss per share.

40

Selected consolidated financial data

	As of
Consolidated balance sheet data	December 31, 2002		December 31, 2003		March 31, 2004		March 31, 2004
							Pro forma
	(in thousands of U.S. dollars)						(unaudited)(1)
Cash and cash equivalents	$	2,646.2	$	3,742.6	$	5,736.2	$	5,736.2
Accounts receivable	$	132.3	$	1,703.9	$	3,268.8	$	3,268.8
Property and equipment, net	$	251.0	$	848.5	$	1,104.2	$	1,104.2
Total assets	$	3,101.3	$	6,567.5	$	10,518.1	$	10,518.1
Total current liabilities	$	75.0	$	1,047.4	$	1,654.4	$	1,654.4
Series B redeemable convertible preferred shares	$	2,970.0	$	2,970.0	$	2,970.0	$	—
Total shareholders’ equity	$	56.3	$	2,550.1	$	5,772.9	$	8,742.9
Total liabilities and shareholders’ equity	$	3,101.3	$	6,567.5	$	10,518.1	$	10,518.1

(1) The unaudited pro forma balance sheet information as of March 31, 2004 assumes the conversion upon completion of the initial public offering of all shares of convertible preferred shares outstanding as of March 31, 2004 into ordinary shares.

		For the						For the
		period from			For the			three months
		May 6, 2002 to			year ended			ended
Other consolidated financial data		December 31, 2002			December 31, 2003			March 31, 2004
		(in thousands of U.S. dollars)
Net cash provided by (used in):
	Operating activities	$	(579.7	)	$	1,959.7		$	2,243.7
	Investing activities	$	(292.4	)	$	(864.0	)	$	(370.8	)
	Financing activities	$	3,520.3		$	—		$	120.8

		For the				For the
		period from		For the		three months
		May 6, 2002 to		year ended		ended
Operating data		December 31, 2002		December 31, 2003		March 31, 2004
		(in thousands)
2.5G(1)
	Subscriptions(2)		351.6		9,021.3		5,508.0
	Downloads(3)		—		2,722.1		2,334.2
2G(4)
	Subscriptions(2)		50.0		1,925.4		2,194.2
	Downloads(3)		800.0		6,127.4		1,634.6
Total
	Subscriptions(2)		401.6		10,946.7		7,702.3
	Downloads(3)		800.0		8,849.5		3,968.8

(1)	Includes WAP, MMS and JavaTM. We began to provide WAP, MMS and JavaTM services on a paid basis in September 2002, April 2003 and November 2003, respectively.
(2)	Total number of paid monthly subscriptions in the relevant period.
(3)	Total number of paid downloads in the relevant period, excluding downloads made pursuant to subscriptions.
(4)	Includes SMS, IVR and CRBT. We began to provide SMS, IVR and CRBT services on a paid basis in July 2002, December 2003 and October 2003, respectively.

41

Management’s discussion and analysis of financial condition

and results of operations

The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the related notes thereto and other information appearing elsewhere in this prospectus. Our audited consolidated financial statements have been prepared in accordance with U.S. GAAP. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information provided under the caption “Risk factors.”

OVERVIEW

We are the leading provider of 2.5G wireless interactive entertainment, media and community services to customers of China Mobile, which has the largest mobile subscriber base in the world. We primarily deliver our services through the more advanced 2.5G wireless standard. The higher transmission capacity of 2.5G allows users to access higher quality graphics and richer content and interactivity, in comparison with the 2G wireless standard. We also offer a range of services based on the 2G wireless standard. We deliver our 2.5G services through WAP, MMS and Java^TM technology platforms and our 2G services through SMS, IVR and CRBT technology platforms.

We were incorporated under the laws of the Cayman Islands on May 6, 2002. Our gross revenues for the year ended December 31, 2003 were $7.8 million, whereas our gross revenues for the period from May 6, 2002 to December 31, 2002 were $0.2 million. Our net income for the year ended December 31, 2003 was $2.4 million, as compared to a net loss of $0.5 million for the period from May 6, 2002 to December 31, 2002. In the first quarter of 2004, our gross revenues and net income reached $7.1 million and $3.1 million, respectively, compared to gross revenues of $0.7 million and net income of $97,100 in the first quarter of 2003 and gross revenues of $3.8 million and net income of $1.6 million in the fourth quarter of 2003.

For each quarter since our founding, we have devoted significant resources to product development. We have steadily built up our product development team in order to analyze consumer demands and to expand the range of our service offerings to attract new customers and increase usage among our existing customers. The size of our product development team increased from 79 persons as of March 31, 2003 to 149 persons as of December 31, 2003 and to 201 persons as of March 31, 2004. We expect to remain committed in the coming year to enhancing our product development capabilities through a managed enlargement of our product development team while focusing on research for and development of proprietary technology and content.

We have also committed significant resources since our founding to building our sales and marketing team, which we believe has been crucial in promoting our brand and placing our services in the hands of users by building our relationships with mobile operators and distribution channels. The size of our sales, marketing and customer services team increased from 20 persons as of March 31, 2003 to 54 persons as of December 31, 2003 and to 78 persons as of March 31, 2004. In addition to growing our sales and marketing team, we have also participated in joint promotional arrangements to promote our brand and services. We expect our focus on sales and marketing efforts to continue in the coming year.

PRC regulations currently restrict foreign ownership of companies that provide value-added telecommunications services, which include wireless value-added services and Internet content services. According to PRC laws and regulations, as of December 11, 2003, foreign investors are permitted to hold up to 50% of a company in China engaged in value-added telecommunications services.

42

Management’s discussion and analysis of financial condition and results of operations

However, uncertainty exists as to how these regulations will be implemented. The PRC government authorities are still in the process of drafting detailed rules with respect to the procedures for the application for and approval of establishing a foreign-invested value-added telecommunications services enterprise. As a result, we conduct substantially all of our operations through Beijing AirInbox, which is owned by PRC citizens. We have also recently established Beijing Boya Wuji, through which we intend to conduct operations with mobile operators other than China Mobile. We have entered into loan agreements with each of the shareholders of Beijing AirInbox, pursuant to which we provided interest-free loans to each of the shareholders of Beijing AirInbox for a term of 10 years, in an aggregate amount of $1.2 million (RMB$10 million) to be invested exclusively in Beijing AirInbox. We have also entered into a series of contractual arrangements with Beijing AirInbox, Beijing Boya Wuji and their shareholders, including the exclusive technical and consulting services agreements and trademark and domain name license agreements pursuant to which we are entitled to receive service and license fees. In addition, we have entered into equity pledge agreements with each of the shareholders of our operating companies, pursuant to which each of the shareholders pledged all of his or her interest in our operating companies to us as security for the performance by each of our operating companies of their obligations under the exclusive technical and consulting services agreements. As a result of these contractual arrangements, under U.S. GAAP, we are the primary beneficiary of the investments in our operating companies and we consolidate their results of operations in our consolidated financial statements. For a description of the PRC regulations restricting foreign ownership of companies that provide wireless value-added services and Internet content services in China, see “Regulation.” For a description of the contractual arrangements with our operating companies, see “Our corporate structure” and “Related party transactions.” For a discussion of the tax implications of charging service fees pursuant to the contractual arrangements with our operating companies, see “—Taxation.” For a description of the consolidation of our financial statements, see note 2 to the audited consolidated financial statements.

We have a limited operating history on which to base an evaluation of our business and prospects. Our prospects should be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in the early stages of their development, particularly in new and rapidly evolving markets such as wireless value-added services.

The major factors affecting our results of operations and financial condition include:

†	Growth of the wireless value-added services consumer market in China;
†	Technological advancement of the mobile telecommunications market, including the adoption of 2.5G and subsequent standards of mobile handsets and networks, in China;
†	Attractiveness and variety of our services;
†	Change in the number, scope and terms of our cooperation arrangements with the mobile operators, content providers, mobile handset manufacturers, mobile handset distributors and other key players in China’s mobile telecommunications industry;
†	Our product development efforts to capitalize on market opportunities; and
†	Expansion of our marketing and promotion activities.

In particular, our business may be adversely affected if the terms or conditions of our contractual arrangements with mobile operators should change with regard to any particular type of service. In order to reduce the risk that our results of operations and financial conditions would be overly dependent upon, and disproportionately impacted by, any particular service offering, technology platform or mobile operator, we have sought to broaden the range of our services, develop new relationships with mobile operators and expand our distribution channels. The growth of our product

43

Management’s discussion and analysis of financial condition and results of operations

development and sales and marketing teams underscores our focus on enhancing our ability to bring new services to market quickly and effectively so that we can preserve our leading position on key 2.5G services with China Mobile. Meanwhile, we have also begun developing our relationship with other mobile operators in order to broaden the base of our operation. In addition, we have entered into distribution arrangements with major mobile handset manufacturers to further enhance the distribution of our services and promote our brand.

REVENUES

We derive revenues from providing wireless value-added services to mobile phone users, substantially all of whom are customers of China Mobile and its subsidiaries.

The following table sets forth the historical consolidated revenue attributable to services derived from each of our 2.5G and 2G technology platforms in terms of amount and as a percentage of our total gross revenues for the periods indicated:

	For the period from								For the three				For the three
	May 6, 2002 to				For the year ended				months ended				months ended
	December 31, 2002				December 31, 2003				March 31, 2003				March 31, 2004
			Percentage				Percentage				Percentage				Percentage
	Amount		of revenue		Amount		of revenue		Amount		of revenue		Amount		of revenue
	(in thousands of U.S. dollars, except percentages)
2.5G services(1)		$131.3		66%		$5,956.0		76%		$346.0		49%		$5,244.4		73%
2G services(2)		69.0		34%		1,850.7		24%		357.0		51%		1,903.2		27%
Total gross revenues		$200.3		100%		$7,806.7		100%		$703.0		100%		$7,147.6		100%

(1)	Includes WAP, MMS and JavaTM.
(2)	Includes SMS, IVR and CRBT.

We derive our revenue primarily through contracts with mobile operators that are nationwide in scope or that cover large geographic areas of China. However, we believe that users in Guangdong province and the coastal provinces of China constitute the most significant portion of our user base. As a result, we allocate additional resources to these areas, including establishing sales offices in most of these provinces.

Prior to 2004, we generated all of our revenues from fees paid by mobile phone users who use our services through China Mobile’s network. In the first quarter of 2004, we began to receive revenue from services provided on the network of China United Telecommunications Corporation, or China Unicom. We recognize revenue derived from our services before deducting the service fees and the net transmission charges paid to the mobile operators. Fees for our services are either charged on a transaction or monthly subscription basis, and vary according to the type of services delivered. For a description of our fees and arrangements with the mobile operators, see “Business— Our services— Strategic relationships— Mobile operators.” We recognize all revenues in the period in which the services are performed. For a description of our revenue recognition policy, see “—Critical accounting policies.”

As mobile operators do not provide us detailed revenue breakdown on a service-by-service basis, we depend on our internal database system to monitor revenue derived from each of our services. We make our business decisions including research and development of new services and reallocation of resources to popular services based on our internal data, taking into account other factors including strategic considerations.

44

Management’s discussion and analysis of financial condition and results of operations

COST OF REVENUES

Our cost of revenues includes the following:

†	Service fees due to the mobile operators, which are generally 15% of the gross revenues;
†	Payments to content providers for the use of their content, and to mobile handset manufacturers and other industry partners with whom we have cooperation arrangements, in the form of a fixed fee or a percentage of our aggregate net cash received from the mobile operators with respect to services provided through the cooperation arrangements;
†	Net transmission charges payable by us to the mobile operators, calculated as the number of messages we send to users in excess of the number of message requests received by us multiplied by a per message transmission fee, which varies depending on the total volume of messages sent in any given month; and
†	Bandwidth leasing charges and depreciation and facility costs relating to equipment used to provide wireless-value added services.

Our cost of revenues for the period from May 6, 2002 to December 31, 2002 and the year ended December 31, 2003 was $84,335 and $2.3 million, respectively. For the first quarter of 2004, our cost of revenues reached $2.2 million, compared to $0.1 million from the first quarter of 2003 and $1.2 million for the fourth quarter of 2003. Our cost of revenues increased substantially in 2003 as a result of the increase in the volume of our services and our cooperation arrangements with additional business partners; however, we were able to increase our gross margin and operating margin through economies of scale, as certain royalty payments to third party content owners are fixed in amount regardless of how widely we distribute the content and the depreciation and fees associated with server facilities are fixed regardless of the level of utilization. As part of our business strategy, we intend to pursue more cooperation arrangements, which may increase our cost of revenues in the future.

OPERATING EXPENSES

Our operating expenses include product development, sales and marketing, general and administrative expenses and amortization of deferred stock compensation.

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

	For the period from										For the three					For the three
	May 6, 2002 to					For the year ended					months ended					months ended
	December 31, 2002					December 31, 2003					March 31, 2003					March 31, 2004
			Percentage					Percentage					Percentage					Percentage
	Amount		of revenue			Amount		of revenue			Amount		of revenue			Amount		of revenue
	(in thousands of U.S. dollars, except percentages)
Product development		$164.2		82.0	%		$1,369.5		17.5	%		$176.2		25.1	%		$716.5		10.0	%
Sales and marketing		128.9		64.3	%		841.4		10.8	%		140.7		20.0	%		294.1		4.1	%
General and administrative		317.3		158.4	%		882.7		11.3	%		142.4		20.3	%		675.7		9.5	%
Amortization of deferred stock compensation		—		—	%		22.0		0.3	%		—		—	%		80.8		1.1	%
Total		$610.4		304.7	%		$3,115.6		39.9	%		$459.3		65.4	%		$1,767.1		24.7	%

Product Development Expenses. Our product development expenses consist primarily of the compensation and benefits for our product development team, which focuses on developing and improving our services and adapting them for next generation technology platforms. While our product development expenses have increased since our formation due to the increase in the size of our

45

Management’s discussion and analysis of financial condition and results of operations

product development team, our product development expenses as a percentage of our gross revenues have decreased significantly since our inception in May 2002. We expect our product development expenses to increase in absolute terms as our company grows, but expect such expenses to remain stable or decrease slightly as a percentage of our gross revenues.

Sales and Marketing Expenses. Our sales and marketing expenses consist primarily of advertising, sales and marketing expenses, including expenses associated with sponsoring promotional events, and the compensation and benefits for our sales, marketing and customer service departments. Our sales and marketing expenses have increased since our inception, primarily due to the growth of our sales and marketing team as well as an expansion of our marketing efforts. We expect that our sales and marketing expenses will increase as we further promote our KongZhong brand name in future periods.

General and Administrative Expenses. Our general and administrative expenses consist primarily of business tax, compensation and benefits for general management, finance and administrative personnel, professional fees, lease expenses and other office expenses. Our general and administrative expenses have increased since our inception, but have decreased significantly as a percentage of our gross revenues. We expect our general and administrative expenses to increase as our business expands in future periods and as a result of the increased administrative costs we expect to incur upon becoming a publicly listed company.

Amortization of Deferred Stock Compensation. In June 2002, we adopted our 2002 Plan, which governs the stock option grants we have made. We grant options to purchase our shares to our employees and we record a compensation charge for the excess of the fair value of the stock at the measurement date over the amount our employee must pay to acquire the stock. Deferred stock compensation is amortized on a straight-line basis and charged to expense over the vesting period of the underlying options, which is generally over four years. See “Management— Stock options” for a description of our stock option plan and grants.

CRITICAL ACCOUNTING POLICIES

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

Revenue recognition

Our revenues are primarily derived from providing wireless interactive entertainment, media and community value-added services to customers of China Mobile and its subsidiaries. The fees for such services are determined by us in consultation with the mobile operators, are charged on a transaction basis or on a monthly subscription basis and vary according to the type of services delivered.

We deliver wireless value-added services to users through the mobile operators’ networks and we rely upon the mobile operators to provide us with billing and collection services. We have, however, developed an internal system that records the number of transactions that are sent from our servers, which we then compare to the confirmations received from the relevant mobile operator. Generally, within 15 to 30 days after the end of each month, each of the mobile operators delivers to us a statement confirming the value of the wireless value-added services provided by us for which they

46

Management’s discussion and analysis of financial condition and results of operations

billed to users in that month, and usually within 60 days after the end of each month, the mobile operator will pay us for the wireless value-added services, less their service fees and net transmission charges.

We internally tabulate the value of the wireless value-added services provided based upon individual delivery confirmations sent to us by the mobile operators each time we deliver a service to the mobile operator for delivery to a user. We also receive monthly statements from the mobile operators with respect to the total volume of services delivered to users in that month. Historically, there has been a discrepancy between the value based on the delivery confirmations and the value set forth in the monthly statements. This discrepancy arises for various reasons, including:

†	Late notification of delinquent customers. The mobile operators may from time to time classify certain customers as delinquent customers for non-payment of services. The mobile operators request all service providers to cease delivering services to customers once they are classified as delinquent. However, time lags often exist between when a customer is classified as delinquent and when we receive such information from the mobile operations. As a result, we occasionally unintentionally provide services to these delinquent customers for which the mobile operators will not make payments to us.
†	Customer database out of synchronization. Customers may cancel their subscriptions through the mobile operators. Although we synchronize our and the mobile operators’ databases of customer information on an ongoing basis, our databases are not always completely in synchronization with those of the mobile operators. As a result, until our databases are synchronized with the mobile operators’, we could provide services to customers who have cancelled their subscriptions, for which we are not entitled to receive revenue.
†	Duplicate billing. China Mobile typically generates system identification numbers to identify customers who use our WAP services, rather than directing the real phone numbers to us. Occasionally the platform operators inadvertently generate multiple identification numbers for one mobile number. In such case, the multiple bills for the multiple identification numbers have to be eliminated from the monthly statement the mobile operators provide to us.
†	Delivery failure. When mobile operators send us delivery confirmations within 72 hours of our delivery of value-added services, the confirmations will indicate three possible outcomes: success, failure, or unknown. Our internal system recognizes successful confirmations as services provided. As a result, there exist discrepancies between our records and the monthly statement provided by the mobile operators for confirmations marked as “unknown” where our services were successfully delivered or where the confirmation was incorrect.

In future periods, we may release our unaudited quarterly financial statements to the market. Due to our past experience with the timing of receipt of the monthly statements from the operators, we expect that we may need to rely on our own internal estimates for the portion of our reported revenues for which we will not have received monthly statements. Our internal estimates will be based on our own internal tabulation of expected revenues from services provided. As the internal tabulation may not be entirely consistent with the actual revenues confirmed by the monthly statements that we eventually receive, we would multiply our internal tabulation of expected revenue by a realization factor determined according to the average discrepancy over the previous 12 months between our internal tabulations of expected revenues and the actual revenues based on the monthly statements. As a result, we may overstate or understate our revenue for the relevant report period. Any difference between our estimated and actual revenue may result in subsequent adjustments to our revenue reported in our financial statements.

47

Management’s discussion and analysis of financial condition and results of operations

Pursuant to the cooperation agreements that we have entered into with China Mobile and its subsidiaries, we generally do not bear credit risk with respect to outstanding receivables from the mobile users, with the exception of our SMS services provided through Chongqing Mobile Telecommunication Corporation, or Chongqing Mobile, for which we bear the risk of customer default. We derived less than 1% of our revenue from SMS services provided through Chongqing Mobile in both 2003 and the three months ended on March 31, 2004.

We evaluate our cooperation arrangements with the mobile operators to determine whether to recognize our revenue on a gross basis or net of the services fees and net transmission charges paid to the mobile operators. Our determination is based upon an assessment of whether we act as a principal or agent when providing our services. We have concluded that we act as a principal in the arrangement. Factors that support our conclusion include:

†	We are able to establish prices within ranges prescribed by the mobile operators;
†	We determine the service specifications of the services we will be rendering; and
†	We are able to control the selection of our content suppliers.

Although the mobile operators must approve the prices of our services in advance, we have been able to adjust our prices from time to time to reflect or react to changes in the market. In addition, the mobile operators usually will not pay us if users do not receive the services or cannot be billed due to transmission and billing failures. As a result, we bear a portion of the delivery and billing risks for our portion of the revenues generated with respect to our services.

Based on these factors, we believe that recognizing revenues on a gross basis is appropriate.

Stock-based compensation expense

Our stock-based employee compensation plan is described in more detail under “Management— Stock options.” We grant stock options to our employees and we record a compensation charge for the excess of the fair value of the stock at the measurement date over the amount an employee must pay to acquire the stock. We amortize deferred stock compensation using the straight-line method over the vesting periods of the related options, which are generally four years.

We have recorded deferred stock-based compensation to represent the difference between the deemed fair value of our ordinary shares for accounting purposes and the option exercise price. We determined the deemed fair value of our ordinary shares based upon several factors, including a valuation report from an independent appraiser and the price of our then most recent preferred share placement. We recorded deferred stock-based compensation expense of $0, $0.2 million and $2.2 million for stock options granted to employees for the period from May 6, 2002 to December 31, 2002, the year ended December 31, 2003 and the three months ended March 31, 2004, respectively, and we amortized $0, $21,986 and $80,738 for the period from May 6, 2002 to December 31, 2002, the year ended December 31, 2003 and the three months ended March 31, 2004, respectively. If we had used different assumptions or criteria to determine the deemed fair value of our ordinary shares, materially different amounts of stock-based compensation could have been reported.

Pro forma information regarding net income (loss) and net income (loss) per share is required in order to show our net income (loss) as if we had accounted for employee stock options under the fair value method. We use the Black-Scholes option pricing model to compute the fair value. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the expected stock price volatility. We use projected volatility rates, which are based upon historical volatility rates experienced by comparable public companies. Because our employee stock options have characteristics significantly different from those of publicly traded

48

Management’s discussion and analysis of financial condition and results of operations

options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in our management’s opinion the existing models do not necessarily provide a reliable single measure of the fair value of our stock options.

The historical pro forma net income (loss) and pro forma net income (loss) per share that we used in calculating the fair value of the options granted to employees may not be representative of the pro forma effects in future years of net income (loss) and earnings per share for the following reasons:

†	The number of future shares to be issued under these plans is not known; and
†	The assumptions used to determine the fair value can vary significantly.

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth our supplemental selected unaudited quarterly results of operations for the periods indicated. This information should be read in conjunction with the consolidated financial statements and related notes contained elsewhere in this prospectus. In our management’s opinion, we have prepared our quarterly results of operations on substantially the same basis as our audited consolidated financial statements. This information includes all adjustments that we consider necessary for the fair presentation of our financial position and operating results for the periods presented. Due to the relatively new and rapidly evolving nature of the wireless value-added services industry in China, the short history of our company and other factors affecting our business as described under “Risk factors,” our results of operations in any period are not necessarily indicative of the results that may be expected for any future periods.

		For the three months ended
		June 30, 2002(1)					September 30, 2002						December 31, 2002						March 31, 2003						June 30, 2003
					Percentage					Percentage						Percentage						Percentage						Percentage
					of					of						of						of						of
		Amount			revenues		Amount			revenues			Amount			revenues			Amount			revenues			Amount			revenues
		(in thousands of U.S. dollars, except percentages)
Gross revenues
	2.5G(2)	$	—			—	$	37.1			85.9	%	$	94.2			60.0	%	$	346.0			49.2	%	$	914.9			74.6	%
	2G(3)		—			—		6.1			14.1	%		62.9			40.0	%		357.0			50.8	%		311.5			25.4	%
	Total gross revenues		—			—		43.2			100.0	%		157.1			100.0	%		703.0			100.0	%		1,226.4			100.0	%
Cost of revenues			—			—		(18.2	)		(42.1	)%		(66.1	)		(42.1	)%		(146.5	)		(20.8	)%		(330.7	)		(27.0	)%
Gross profit			—			—		25.0			57.9	%		91.0			57.9	%		556.5			79.2	%		895.7			73.0	%
Operating expenses:
	Product development		(27.6	)		—		(37.1	)		(85.9	)%		(99.5	)		(63.3	)%		(176.2	)		(25.1	)%		(271. 3	)		(22.1	)%
	Sales and marketing		(7.1	)		—		(15.0	)		(34.7	)%		(106.8	)		(68	)%		(140.7	)		(20.0	)%		(212. 6	)		(17.3	)%
	General and administrative		(44.6	)		—		(70.2	)		(162.5	)%		(202.5	)		(128.9	)%		(142.4	)		(20.3	)%		(175.0	)		(14.3	)%
	Amortization of deferred stock compensation		—			—		—			—	%		—			—	%		—			—	%		—			—	%
Total operating expenses			(79.3	)		—		(122.3	)		(283.1	)%		(408.8	)		(260.2	)%		(459.3	)		(65.4	)%		(658.9	)		(53.7	)%
Income (loss) from operations			(79.3	)		—		(97.3	)		(225.2	)%		(317.8	)		(202.3	)%		97.2			13.8	%		236.8			19.3	%
Other expenses			—			—		—			—	%		—			—	%		—			—	%		—			—	%
Interest income, net			0.2			—		—			—	%		0.3			0.2	%		(0.1	)		—	%		(0.3	)		—	%
Net income (loss)		$	(79.1	)		—	$	(97.3	)		(225.2	)%	$	(317.5	)		(202.1	)%	$	97.1			13.8	%	$	236.5			19.3	%

[Additional columns below]

[Continued from above table, first column(s) repeated]

		For the three months ended
		September 30, 2003						December 31, 2003						March 31, 2004
					Percentage						Percentage						Percentage
					of						of						of
		Amount			revenues			Amount			revenues			Amount			revenues
		(in thousands of U.S. dollars, except percentages)
Gross revenues
	2.5G(2)	$	1,604.6			79.0	%	$	3,090.5			80.3	%	$	5,244.4			73.4	%
	2G(3)		426.2			21.0	%		756.0			19.7	%		1,903.2			26.6	%
	Total gross revenues		2,030.8			100.0	%		3,846.5			100.0	%		7,147.6			100.0	%
Cost of revenues			(651.1	)		(32.1	)%		(1,155.7	)		(30	)%		(2,239.0	)		(31.3	)%
Gross profit			1,379.7			67.9	%		2,690.8			70.0	%		4,908.6			68.7	%
Operating expenses:
	Product development		(390.2	)		(19.2	)%		(531.8	)		(13.8	)%		(716.5	)		(10.0	)%
	Sales and marketing		(203.7	)		(10.0	)%		(284.4	)		(7.4	)%		(294.1	)		(4.1	)%
	General and administrative		(262.7	)		(12.9	)%		(302.6	)		(7.9	)%		(675.7	)		(9.5	)%
	Amortization of deferred stock compensation		(8.8	)		(0.4	)%		(13.2	)		(0.3	)%		(80.8	)		(1.1	)%
Total operating expenses			(865.4	)		(42.5	)%		(1,132.0	)		(29.4	)%		(1,767.1	)		(24.7	)%
Income (loss) from operations			514.3			25.4	%		1,558.8			40.6	%		3,141.5			44.0	%
Other expenses			—			—	%		—			—	%		(0.7	)		—	%
Interest income, net			0.7			—	%		0.7			—	%		1.3			—	%
Net income (loss)		$	515.0			25.4	%	$	1,559.5			40.6	%	$	3,142.1			44.0	%

(1)	We commenced operations in May 2002.
(2)	Includes WAP, MMS and JavaTM. We began to provide WAP, MMS and JavaTM services on a paid basis in September 2002, April 2003 and November 2003, respectively.
(3)	Includes SMS, IVR and CRBT. We began to provide SMS, IVR and CRBT services on a paid basis in July 2002, December 2003 and October 2003, respectively.

Gross Revenues. Our business has grown quickly, which has resulted in significant increases in our gross revenues each quarter throughout the comparison periods. Substantially all of these increases resulted from rapid growth in China’s 2.5G wireless value-added services market and the usage volume

49

Management’s discussion and analysis of financial condition and results of operations

of our WAP, MMS, and SMS services. We commercially launched MMS services in April 2003. In addition, during various quarters, we have promoted certain services, which further increased revenues during such quarters. For example, we entered into an exclusive cooperation arrangement to promote the movie “Hero” through WAP and SMS, which generated $0.2 million in revenues in the first quarter of 2003. We also launched many new services in the first and second quarters of 2003, which resulted in increases in our revenues in that quarter. For example, we launched WAP based ringtone and picture download services in April 2003, which generated $0.1 million, $0.3 million, $0.8 million and $1.4 million in revenues in the second, third and fourth quarters of 2003 and the first quarter of 2004, respectively. Our gross revenues increased by 86% to $7.1 million in the first quarter of 2004 from $3.8 million in the fourth quarter of 2003. This increase was driven by strong growth in our services across both 2G and 2.5G technology platforms, as a result of continuing growth in China’s wireless value-added services market.

Cost of Revenues. Our cost of revenues has increased substantially each quarter throughout the comparison periods. This increase was primarily due to the increases in the service fees and net transmission charges paid to the mobile operators as a result of the increase in our revenue and usage volume. Our service and other fees paid under our cooperation arrangements with our content and distribution partners also resulted in an increase in our cost of revenues as we increased the number and scope of our cooperation arrangements. For the first quarter of 2004, our cost of revenues increased 94% to $2.2 million from $1.2 million in the fourth quarter of 2003. The increase was driven primarily by increases in service fees and transmission charges that we paid to mobile operators and fees that we paid to handset manufacturers and content partners. We expect our cost of revenues will continue to increase, particularly as our newly added distribution channels begin to increase their contribution and we continue to add distribution channels.

Gross Profit. Our gross profit has increased throughout the comparison periods. Our gross profit as a percentage of gross revenues, or gross margin, has fluctuated over the periods as a result of certain promotional activities or increases in cooperation arrangements. The major factors affecting the fluctuations in our gross margin include the amount of fees we pay to the mobile operators, content providers and distribution partners, which depends primarily on the number and scope of our cooperation arrangements, economies of scale and net transmission charges we pay to the mobile operators, which may be affected by the proportion of revenues from WAP to total revenues. For the first quarter of 2004, our gross profit increased by 82% to $4.9 million from $2.7 million for the fourth quarter of 2003. This increase was driven by the increase in our revenues.

Operating Expenses. Our operating expenses have increased throughout the comparison periods, driven primarily by increases in our product development expenses, sales and marketing expenses and general and administrative expenses. For the first quarter of 2004, our total operating expenses increased by 56% to $1.8 million from $1.1 million in the fourth quarter of 2003. As a percentage of gross revenues, our operating expenses have declined from our inception through the first quarter of 2004.

Our product development expenses have increased as a result of the expansion of our product development team as our business grew. However, our product development expenses as a percentage of gross revenues have continuously declined from our inception through the first quarter of 2004 as a result of economies of scale.

Our sales and marketing expenses have increased as a result of an expansion in marketing activities to promote our brand name and to establish additional distribution channels. We expect our sales and marketing expenses will continue to increase, particularly as we establish sales presences in additional geographic areas in China.

50

Management’s discussion and analysis of financial condition and results of operations

Our general and administrative expenses have increased as a result of the expansion of our business, including an increase in our business tax, the compensation and benefits for general management, finance and administrative personnel, professional fees, lease expenses and other office expenses. In the first quarter of 2004, our general and administrative expenses increased significantly, primarily as a result of increases in professional fees, business tax, salary for general management, finance and administrative personnel, travel expenses, and other office expenses.

We recorded amortization of deferred stock compensation in the third and fourth quarters of 2003 and the first quarter of 2004 as a result of the issuance of stock options to our employees under the 2002 Plan, which also contributed to the increase in our operating expenses.

Year ended December 31, 2003 compared to the period from May 6, 2002 (date of inception) through December 31, 2002

The following table sets forth, for the periods presented, certain data from our consolidated results of operations. This information should be read in conjunction with the consolidated financial statements and related notes contained elsewhere in this prospectus.

		For the period from
		May 6, 2002 to						For the year ended
		December 31, 2002						December 31, 2003
					Percentage						Percentage
		Amount			of revenue			Amount			of revenue
		(in thousands of U.S. dollars, except percentages)
Gross revenues
	2.5G(1)	$	131.3			65.6	%	$	5,956.0			76.3	%
	2G(2)		69.0			34.4	%		1,850.7			23.7	%
	Total gross revenues		200.3			100.0	%		7,806.7			100.0	%
Cost of revenues			(84.3	)		(42.1	)%		(2,284.0	)		(29.3	)%
Gross profit			116.0			57.9	%		5,522.7			70.7	%
Operating expenses:
	Product development		164.2			82.0	%		1,369.5			17.5	%
	Sales and marketing		128.9			64.3	%		841.4			10.8	%
	General and administrative		317.3			158.4	%		882.7			11.3	%
	Amortization of deferred stock compensation		—			—	%		22.0			0.3	%
Total operating expenses			610.4			304.7	%		3,115.6			39.9	%
Income (loss) from operations			(494.4	)		(246.8	)%		2,407.1			30.8	%
Interest income, net			0.5			0.2	%		1.0			—
Net income (loss)		$	(493.9	)		(246.6	)%	$	2,408.1			30.8	%

(1)	Includes WAP, MMS and JavaTM. We began to provide WAP, MMS and JavaTM services on a paid basis in September 2002, April 2003 and November 2003, respectively.
(2)	Includes SMS, IVR and CRBT. We began to provide SMS, IVR and CRBT services on a paid basis in July 2002, December 2003 and October 2003, respectively.

Gross Revenues. Our gross revenues substantially increased to $7.8 million in 2003 from $0.2 million for the period from May 6, 2002 to December 31, 2002. The increase in our gross revenues was largely due to the additional services that we provided in 2003, which generated $2.1 million in revenue in 2003. We offered a total of 470 2.5G based services and 204 2G based services in 2003, as compared to 16 services based on 2.5G platforms and 41 services based on 2G

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Management’s discussion and analysis of financial condition and results of operations

platforms in 2002. The increase was also due to the full year effect of our operating results in 2003, during which we expanded our business to develop additional services and establish more distribution channels and partners. The number of subscriptions of our services increased to 10.9 million in 2003 from 0.4 million for the period from May 6, 2002 to December 31, 2002. The number of downloads of our services increased to 8.8 million in 2003 from 0.8 million for the period from May 6, 2002 to December 31, 2002.

Cost of Revenues. Our cost of revenues increased substantially to $2.3 million in 2003 from $84,335 for the period from May 6, 2002 to December 31, 2002. This increase was driven by the increase in the service fees and net transmission charges paid to the mobile operators as a result of the increase in our revenue and usage volume. An increase in the service fees relating to our cooperation arrangements with other business partners also resulted in an increase in our cost of revenues as we increased the number and scope of our cooperation arrangements.

Gross Profit. Our gross profit in 2003 increased substantially from 2002 primarily due to a substantial increase in the volume of our services and related revenues. We achieved a gross profit of $5.5 million in 2003 as compared to $0.1 million in 2002. As our gross revenues have increased at a higher rate than our cost of revenues, our gross margin increased in 2003.

Operating Expenses. Our operating expenses increased substantially to $3.1 million in 2003 from $0.6 million for the period from May 6, 2002 to December 31, 2002. This increase was primarily driven by an increase in our product development expenses and sales and marketing expenses. Increases in our general and administrative expenses and amortization of deferred stock compensation also contributed to the increase in our operating expenses. Our total number of employees increased to 229 as of December 31, 2003 from 51 as of December 31, 2002.

Our product development expenses increased to $1.4 million in 2003 from $0.2 million for the period from May 6, 2002 to December 31, 2002, primarily due to the expansion of our product development team as our business grew. We expanded our product development team to 149 employees as of December 31, 2003 from 27 employees as of December 31, 2002.

Our sales and marketing expenses increased to $0.8 million in 2003 from $0.1 million for the period from May 6, 2002 to December 31, 2002 as a result of an increase in marketing activities to promote our brand name and to establish additional distribution channels. We expanded our sales, marketing and customer services team to 54 employees as of December 31, 2003 from 14 employees as of December 31, 2002.

Our general and administrative expenses increased to $0.9 million in 2003 from $0.3 million for the period from May 6, 2002 to December 31, 2002 as a result of the expansion of our business, including increases in our professional fees, business tax, the compensation and benefits for general management, finance and administrative personnel, travel expenses, lease expenses and other office expenses. Our general and administrative staff grew to 18 employees as of December 31, 2003 from 8 employees as of December 31, 2002.

Our amortization of deferred stock compensation increased to $21,986 in 2003 from $0 for the period from May 6, 2002 to December 31, 2002 as a result of the issuance of stock options to our employees under the 2002 Plan.

52

Management’s discussion and analysis of financial condition and results of operations

Three months ended March 31, 2004 compared to three months ended March 31, 2003

The following table sets forth, for the periods presented, certain data from our unaudited consolidated results of operations. This information should be read in conjunction with the consolidated financial statements and related notes contained elsewhere in this prospectus.

		For the three months						For the three months
		ended						ended
		March 31, 2003						March 31, 2004
					Percentage of						Percentage of
		Amount			revenues			Amount			revenues
		(in thousands of U.S. dollars, except for percentage)
Gross revenues
2.5G(1)		$	346.0			49.2	%	$	5,244.4			73.4	%
2G(2)			357.0			50.8	%		1,903.2			26.6	%
Total gross revenues			703.0			100.0	%		7,147.6			100.0	%
	Cost of revenues		(146.5	)		(20.8	)%		(2,239.0	)		(31.3	)%
	Gross profit		556.5			79.2	%		4,908.6			68.7	%
	Operating expenses:
Product development			176.2			25.0	%		716.5			10.0	%
Sales and marketing			140.7			20.1	%		294.1			4.1	%
General and administrative			142.4			20.2	%		675.7			9.5	%
Amortization of deferred stock compensation			—			—	%		80.8			1.1	%
Total operating expenses			459.3			65.3	%		1,767.1			24.7	%
	Income (loss) from operations		(97.2	)		(13.8	)%		3,141.5			44.0	%
	Other expenses		—			—	%		(0.7	)		—	%
	Interest income, net		—			—	%		1.3			—	%
	Net income (loss)	$	(97.1	)		(13.8	)%	$	3,142.1			44.0	%

(1)	Includes WAP, MMS and JavaTM. We began to provide WAP, MMS and JavaTM services on a paid basis in September 2002, April 2003 and November 2003, respectively.
(2)	Includes SMS, IVR and CRBT. We began to provide SMS, IVR and CRBT services on a paid basis in July 2002, December 2003 and October 2003, respectively.

Gross Revenues. Our gross revenues substantially increased to $7.1 million for the three months ended March 31, 2004 compared to $0.7 million for the same period in 2003. This increase in our gross revenues was largely due to the rapid growth in China’s 2.5G wireless value-added services market and the usage volume of our WAP, MMS and SMS services. We commercially launched our MMS services in April 2003 and our Java^TM services in November 2003. We also launched our WAP services in September 2002 and introduced a number of additional WAP services in 2003. The number of subscriptions of our services increased to 7.7 million for the three months ended March 31, 2004 from 1.3 million for the same period in 2003.

Cost of Revenues. Our cost of revenues increased substantially to $2.2 million for the three months ended March 31, 2004 from $0.1 million for the same period in 2003. This increase was primarily driven by an increase in the service fees and net transmission charges paid to the mobile operators as a result of the increase in our revenue and usage volume. An increase in the service fees relating to our cooperative arrangements with other business partners also contributed to the increase in our cost of revenues as we increased the number and scope of our cooperation arrangements.

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Management’s discussion and analysis of financial condition and results of operations

Gross Profit. Our gross profit for the three months ended March 31, 2004 increased substantially from the same period in 2003 primarily due to a substantial increase in the volume of our services and related revenues. We achieved a gross profit of $4.9 million for the three months ended March 31, 2004 as compared to $0.6 million for the same period in 2003.

Operating Expenses. Our operating expenses increased substantially to $1.8 million for the three months ended March 31, 2004 from $0.5 million for the same period in 2003. This increase was primarily driven by an increase in our product development expenses and general and administrative expenses. Increases in our sales and marketing expenses and amortization of deferred stock compensation also contributed to the increase in our operating expenses. Our total number of employees increased to 314 as of March 31, 2004 from 79 as of March 31, 2003.

Our product development expenses increased to $0.7 million for the three months ended March 31, 2004 from $0.2 million for the same period in 2003, primarily due to the expansion of our product development team as our business grew. We expanded our product development team to 201 employees as of March 31, 2004 from 49 employees as of March 31, 2003.

Our sales and marketing expenses increased to $0.3 million for the three months ended March 31, 2004 from $0.1 million for the same period in 2003 as a result of an increase in marketing activities to promote our brand name and to establish additional distribution channels. We expanded our sales, marketing and customer services team to 78 employees as of March 31, 2004 from 20 employees as of March 31, 2003.

Our general and administrative expenses increased to $0.7 million for the three months ended March 31, 2004 from $0.1 million for the same period in 2003 as a result of the expansion of our business, including increases in our professional fees, business tax, the compensation and benefits for general management, finance and administrative personnel, travel expenses and other office expenses. Our general and administrative staff grew to 23 employees as of March 31, 2004 from 10 employees as March 31, 2003.

Our amortization of deferred stock compensation increased to $80,738 from $0 for the same period in 2003 as a result of the issuance of stock options to our employees under the 2002 Plan.

LIQUIDITY AND CAPITAL RESOURCES

Cash flows and working capital

The following table sets forth our cash flows with respect to operating, investing and financing activities for the periods indicated.

	For the period						For the			For the
	from May 6,			For the year			three months			three months
	2002 to			ended			ended			ended
	December 31,			December 31,			March 31,			March 31,
	2002			2003			2003			2004
	(in thousands of U.S. dollars)
Net cash provided by (used in) operating activities	$	(579.7	)	$	1,959.8		$	(246.6	)	$	2,243.7
Net cash used in investing activities		(292.3	)		(863.9	)		(69.4	)		(370.8	)
Net cash provided by financing activities		3,520.3			—			—			120.8
Effect of exchange rate changes		(2.0	)		0.6			0.3			(0.1	)
Net increase in cash and cash equivalents		2,646.2			1,096.4			(315.7	)		1,993.6
Cash and cash equivalents, beginning of period		—			2,646.2			2,646.2			3,742.6
Cash and cash equivalents, end of period	$	2,646.2		$	3,742.6		$	2,330.5		$	5,736.2

54

Management’s discussion and analysis of financial condition and results of operations

Our primary sources of liquidity have historically been capital contributions from our founders, private placements of preferred shares to investors and cash generated from operating activities. In the future, we anticipate that our primary sources of liquidity will come from cash flow from operating activities and the proceeds of this offering. As of December 31, 2003 and March 31, 2004, our cash and cash equivalents were $3.7 million and $5.7 million, respectively.

We do not bill or collect payment from users of our services directly, but instead depend on the billing systems and records of China Mobile and other mobile operators to record the volume of our services provided, charge our users, collect payments and remit to us our revenue, less transmission fees and service fees. If China Mobile ceases to continue to cooperate with us, we will explore further cooperation with other mobile service providers and explore alternative billing systems to collect bills from users.

Net cash provided by operating activities was $2.0 million in 2003 compared to net cash used in operating activities of $0.6 million for the period from May 6, 2002 to December 31, 2002, and our net cash provided by operating activities was $2.2 million for the first quarter of 2004, as compared to net cash used in operating activities of $0.2 million for the same period in 2003. This difference was primarily due to the net income we generated.

Net cash used in investing activities increased significantly to $0.9 million in 2003 from $0.3 million for the period from May 6, 2002 to December 31, 2002. For the first quarter of 2004, our net cash used in investing activities reached $0.4 million, as compared to $69,000 for the same period in 2003. Our net cash used in investing activities has primarily been used to purchase computer, transmission and office equipment in connection with the expansion of our business.

We had no cash provided by or used in financing activities in 2003. Net cash provided by financing activities in the first quarter of 2004 was $0.1 million, as a result of the contribution by Yunfan Zhou and Zhen Huang to the registered capital of our affiliate, Beijing Boya Wuji. For the period from May 6, 2002 to December 31, 2002, cash provided by financing activities was $3.5 million, which consisted of the proceeds from our issuance of ordinary shares, Series A preferred shares and Series B preferred shares to investors.

We believe that our current cash and cash equivalents, cash flow from operations and the proceeds from this offering will be sufficient to meet our anticipated cash needs, including for working capital purposes, capital expenditures and various contractual obligations, for at least the next 12 months. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these sources are insufficient to satisfy our cash requirements, we may seek to sell debt securities or additional equity or to obtain a credit facility. The sale of convertible debt securities or additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in incurring debt service obligations and could result in operating and financial covenants that would restrict our operations. Given our short operating history, we currently do not have any lines of credit or loans with any commercial banks. As a result, we are unlikely to rely on any bank loans to meet our liquidity needs. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

Indebtedness

As of March 31, 2004, we did not have any indebtedness, and we did not have any material debt securities, material contingent liabilities or material mortgages or liens.

We intend to meet our future funding needs through cash flow generated from operating activities and the proceeds of this offering. Our treasury objective is to maintain safety and liquidity of our cash.

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Management’s discussion and analysis of financial condition and results of operations

Therefore, we intend to keep our cash and cash equivalents in short-term deposits and short-term government bills or bonds.

The following table sets forth our indebtedness as of the dates indicated:

	As of		As of		As of
	December 31,		December 31,		March 31,
	2002		2003		2004
	(in thousands of U.S. dollars)
Short-term debt		$5.0		$90.0	$	—
Total debt		$5.0		$90.0	$	—

As of March 31, 2004, we did not have any outstanding loan capital issued or agreed to be issued, bank overdrafts, loans, debt securities or other similar indebtedness, liabilities under acceptance (other than normal trade bills) or acceptance credits, debentures, mortgages, charges, finance leases or purchase commitments, guarantees or other material contingent liabilities. In addition, there has not been any material change in our indebtedness, commitments and contingent liabilities since March 31, 2004.

Contractual obligations and commercial commitments

The following table sets forth our contractual obligations as of March 31, 2004:

	Payments due by period
			Within
	Total		2004		2005		2006		Thereafter
	(in thousands of U.S. dollars)
Short-term debt	$	—	$	—	$	—	$	—	$	—
Operating lease obligations		243		225		18		—		—
Other contractual commitments*		13		13		—		—		—
Total	$	256	$	238	$	18	$	—	$	—

* Represents facility service fees.

We have entered into certain leasing arrangements relating to our office premises. Pursuant to our additional leasing arrangements entered into in May 2004, as of May 31, 2004, our operating lease obligations are $0.6 million, 1.0 million and 0.4 million in 2004, 2005 and 2006, respectively, and 1.9 million in total. As of March 31, 2004, we do not have any long-term debt obligations or purchase obligations.

Capital Expenditures

Our total capital expenditures for plant and equipment in 2003 and for the period from May 6, 2002 to December 31, 2002 were $0.9 million and $0.3 million, respectively. Our total capital expenditures for the first quarter of 2004 were $0.4 million. We currently have approximately $0.2 million worth of capital expenditures in progress, which will primarily be used in China. Our capital expenditures in progress are financed primarily from cash flows from operating activities, as well as capital contributions by our founders and proceeds from the issuance of shares in our company to investors. We have not had any material capital divestitures and do not have any in progress.

Our capital expenditure is spent primarily on servers, transmission equipment and personal computers. In general, there is a positive correlation between our revenue and the amount of traffic that passes through our servers and transmission equipment. From time to time we need to purchase additional

56

Management’s discussion and analysis of financial condition and results of operations

servers and transmission equipment as a result of increased business traffic. Our purchase of personal computers is primarily driven by headcount increases.

As mobile operators do not provide us detailed revenue breakdown on a service-by-service basis, we depend on our internal database system to monitor revenue derived from each of our services. We make our business decisions based on our internal data, taking into account other factors including strategic considerations.

Off-balance sheet arrangements

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our own shares and classified as shareholder’s equity, or that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

Quantitative and qualitative disclosures about market risk

Interest rate risk

Our exposure to market risk for changes in interest rates relates primarily to the interest income generated by our cash deposits with our banks. We have not used any derivative financial instruments in our investment portfolio. Interest earning instruments carry a degree of interest rate risk. We have not been exposed, nor do we anticipate being exposed, to material risks due to changes in interest rates. However, our future interest income may fall short of expectations due to changes in interest rates.

Foreign currency risk

While our reporting currency is the U.S. dollar, to date, virtually all of our revenues and costs are denominated in Renminbi and the majority of our assets and all of our liabilities are denominated in Renminbi. Following this offering, most of our assets will be denominated in U.S. dollars. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be impacted by fluctuations in the exchange rate between U.S. dollars and Renminbi. If the Renminbi depreciates against the U.S. dollar, the value of our Renminbi revenues and assets as expressed in our U.S. dollar financial statements will decline. See “Risk factors— Risks relating to the People’s Republic of China— Fluctuation of the Renminbi could materially affect the value of our ADSs.”

We have experienced de minimis foreign exchange gains or losses to date. We do not engage in any hedging activities, and may in the future experience economic loss as a result of any foreign currency exchange rate fluctuations.

Inflation

In recent years, China has not experienced significant inflation, and thus inflation has not had a significant effect on our business since our inception. According to the China Statistical Bureau, China’s overall national inflation rate, as represented by the general consumer price index, was approximately 1.2%, (0.8%) and 0.7% in 2003, 2002 and 2001, respectively.

Taxation

The Cayman Islands currently do not levy any taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty.

57

Management’s discussion and analysis of financial condition and results of operations

In addition, pursuant to Section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, we have obtained an undertaking from the Governor-in-Council that (i) no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciation shall apply to us or our operations and (ii) no tax to be levied on profits, income gains or appreciations or which is in the nature of estate duty or inheritance tax shall be payable by us on or in respect of our shares, debentures or other obligations or by way of the withholding in whole or in part of any relevant payment as defined in Section 6(3) of the Tax Concessions Law (1999 Revision). This undertaking is for a period of 20 years from May 21, 2002.

KongZhong Beijing, Beijing AirInbox and Beijing Boya Wuji are incorporated in the PRC and subject to the Income Tax Law of the PRC Concerning Foreign Investment and Foreign Enterprises and various local income tax laws. Generally, PRC companies are subject to an enterprise income tax of 33%. However, KongZhong Beijing benefits from preferential tax treatment as a high technology enterprise, pursuant to which its net income is tax exempt until 2005, subject to a 7.5% enterprise income tax for the following three years and subject to a 15% enterprise income tax thereafter. Beijing AirInbox also benefits from preferential tax treatment as a high technology enterprise, pursuant to which its net income is tax exempt until the end of this year, subject to a 7.5% enterprise income tax for the following three years and subject to a 15% enterprise income tax thereafter. Beijing AirInbox will need to apply for confirmation of the 7.5% enterprise income tax treatment at the end of this year. Beijing Boya Wuji has been certified as a high technology enterprise, pursuant to which it will be entitled to preferential tax treatment similar to that Beijing AirInbox currently enjoys. Each of KongZhong Beijing, Beijing AirInbox and Beijing Boya Wuji’s high technology enterprise status is subject to periodic review by the relevant PRC governmental authority. If any of these entities is found not to qualify as a high technology enterprise for PRC tax purposes, then such entity will not be eligible for the preferential tax treatment.

KongZhong Beijing and Beijing AirInbox have recorded net losses in the past, which they may carry forward for five years from the end of the period in which the loss was recorded to offset future net income for tax purposes. We cannot, however, give any assurances that KongZhong Beijing and Beijing AirInbox will record sufficient net income within the carry forward periods to realize the full tax benefit of these past net losses, and therefore, have recorded a full valuation allowance on the deferred tax asset balance. For a discussion of our deferred tax valuation allowance accounting policy, see “—Critical accounting policies.” The tax losses carried forward as of December 31, 2003 amounted to $1.1 million and will expire by 2008.

In addition, our revenues are subject to business taxes. Since August 2003, both Beijing AirInbox and Beijing Boya Wuji are subject to a 3% business tax for wireless value-added services and a 5% business tax for other services. KongZhong Beijing is subject to a 5% business tax. In future periods, we expect that a substantial portion of our revenues will be generated through Beijing AirInbox and Beijing Boya Wuji. In addition, pursuant to the arrangements that KongZhong Beijing has entered into with each of Beijing AirInbox and Beijing Boya Wuji, Beijing AirInbox and Beijing Boya Wuji pay us service and license fees. The amount of such payments will be subject to the 5% business tax payable by KongZhong Beijing. See “Related party transactions— Other related party agreements.”

Recent accounting pronouncements

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. The Statement establishes standards for how an issuer classifies and measures certain financial instruments. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Statement requires that certain financial instruments that, under previous guidance, issuers could account for as equity be classified as liabilities

58

Management’s discussion and analysis of financial condition and results of operations

(or assets in some circumstances) in statements of positions or consolidated balance sheets, as appropriate. The financial instruments within the scope of this Statement are: (i) mandatorily redeemable shares that an issuer is obligated to buy back in exchange for cash or other assets; (ii) financial instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets; and (iii) financial instruments that embody an obligation that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuer’s shares (excluding certain financial instruments indexed partly to the issuer’s equity shares and partly, but not predominantly, to something else). This Statement does not apply to features embedded in a financial instrument that is not a derivative in its entirety. The Statement also requires disclosures about alternative ways of settling the instruments and about capital structure of entities all of whose shares are mandatorily redeemable. The adoption of SFAS No. 150 did not have a material impact on the Company’s financial position, cash flows or results of operations.

In November 2002, the FASB issued Interpretation Number (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. This interpretation requires certain disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of FIN No. 45 are effective for interim and annual periods ending after December 15, 2002 and have been adopted in the financial statements. The initial recognition and initial measurement requirements of FIN No. 45 are effective prospectively for guarantees issued or modified after December 31, 2002. The adoption of the recognition and initial measurement requirements of FIN No. 45 did not have a material impact on the Company’s financial position, cash flows or results of operations.

In January 2003, the FASB issued FIN 46. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” and provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and how to determine when and which business enterprise should consolidate the VIEs. This new model for consolidation applies to an entity in which either: (1) the equity investors (if any) lack one or more characteristics deemed essential to a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. FIN 46 was applicable for periods ending December 15, 2003. In December 2003 the FASB issued FIN 46R which provides for the deferral of the implementation date to the end of the first reporting period after December 15, 2004 unless the Company has a special purpose entity in which case the provisions must be applied for fiscal years ending December 31, 2003. However, the Company has retroactively adopted the provisions as of 2002.

In November 2002, the Emerging Issue Task Force (“EITF”) reached a consensus on Issue No. 00-21 (“EITF No. 00-21”), “Revenue Arrangements with Multiple Deliverables”. EITF No. 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities. EITF No. 00-21 will be effective for fiscal periods beginning after June 15, 2003. The Company has adopted EITF No. 00-21 and it did not have a material impact on the Company’s financial position, cash flows or results of operations.

59

Industry overview

OVERVIEW

The telecommunications industry in China

In recent years, the telecommunications industry in China has grown at a rapid pace, particularly in the mobile telecommunications market segment. China is now the largest mobile telecommunications market in the world, with over 268.7 million mobile phone users as of the end of 2003, according to data published by China’s MII. Chinese consumers have been quick to adopt and use new wireless value-added services as a means of communication, as well as a source of information and entertainment, partly due to the proliferation of mobile phones as a more accessible alternative to both fixed-line phone services and personal computer-based Internet services in China.

The table below sets forth certain data with respect to demographics, mobile and fixed-line phone users and Internet users in China for the periods indicated:

	As of or for the year ended December 31,
	2000					2001					2002					2003
			Penetration					Penetration					Penetration					Penetration
	Amount		rate(1)			Amount		rate(1)			Amount		rate(1)			Amount		rate(1)
	(in millions, except per capita amounts and percentages)
Population		1,267.4					1,276.3					1,284.5					1,292.3
GDP per capita		$856.1					$924.4					$988.8					$1,091.1
Mobile phone users		84.5		6.7	%		145.2		11.3	%		206.0		16.1	%		268.7		20.8	%
Fixed-line phone users		144.8		11.4	%		180.4		14.1	%		214.2		16.1	%		263.3		20.4	%
Internet users		22.5		1.8	%		33.7		2.6	%		59.1		4.6	%		79.5		6.2	%

(1) Determined by dividing the number of users by the total population of China.

Source: Data in respect of China’s population and GDP is derived from information published by the National Bureau of Statistics of China; data in respect of mobile phone and fixed-line phone users is derived from information published by the MII; data in respect of Internet users is derived from information published by the China Internet Network Information Center, or CNNIC.

While the growth in the number of users and penetration rate in the fixed-line segment has been significant in recent years, the annual growth rate of fixed-line users is expected to be significantly lower than that of mobile phone users. Norson Telecom Consulting, an independent research agency, projects that fixed-line phone users will grow to 318.2 million by the end of 2005, representing a compound annual growth rate of 8.8% from 2003. International Data Corporation, or IDC, estimates that China will have 361.5 million mobile phone users by the end of 2005, representing a compound annual growth rate of 14.3% from 2003. Despite significant growth in mobile phone users, the mobile phone penetration rate in China remains low compared to the rate in other countries, such as Korea, Japan, the United Kingdom and the United States.

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Industry overview

The table below sets forth comparative industry and economic information for certain countries and regions.

	As of or for the year ended December 31, 2002
			GDP		Mobile		Mobile
	Population		per capita		subscribers		penetration
	(in millions)		(in thousands)
India		1,046.1	$	480		10,480		1.0%
Indonesia		214.2		807		11,573		5.4%
Brazil		172.5		2,500		33,188		19.2%
Philippines		84.5		993		15,280		18.1%
United States		287.7		36,406		141,477		49.2%
Japan		127.5		31,457		73,243		57.4%
South Korea		47.6		10,739		32,342		67.9%
Germany		82.4		24,301		59,159		71.8%
United Kingdom		60.1		26,002		50,934		84.7%
Hong Kong		6.8		23,730		6,219		91.6%
Singapore		4.2		20,921		3,245		78.0%

Source: Data in respect of population, mobile subscribers and mobile penetration is derived from information published by Gartner Dataquest, except for (i) the population data for the United States and Brazil, which are derived from information published by the Economist Intelligence Unit, 2004 and (ii) the mobile penetration data for the United States and Brazil, which are calculated from the population and subscriber data set forth in this table. Data in respect of GDP per capita is derived from information published by the Economist Intelligence Unit, 2004.

THE PRC WIRELESS VALUE-ADDED SERVICES MARKET

Introduction

The wireless value-added services market, which provides services that allow mobile phone users to receive and transmit text, images and other forms of digital data or voice content via their mobile handsets, represents a new and fast-growing sector within China’s rapidly evolving telecommunications industry. Analysys Consulting Ltd., or Analysys, estimates that total wireless value-added services revenue in China rose from $211.5 million in 2002 to $452.5 million in 2003 and is expected to grow to $800.4 million in 2004. Wireless value-added service providers deliver their services through the telecommunications infrastructure of mobile operators and rely on the mobile operators for billing and payment collection services. Wireless value-added services are provided to mobile phone users through the cooperation of several players in the value chain. Content providers, such as the media, create the basic content, which service providers, such as ourselves, produce, aggregate and repackage as wireless value-added services to be delivered through the mobile operators’ networks. Mobile phone users

61

Industry overview

receive services through mobile phones produced by mobile handset manufacturers. The following figure illustrates the wireless value-added services industry value chain:

The 2.5G wireless value-added services market reflects the evolution of wireless data services in China as handsets and wireless networks become more sophisticated and are able to handle higher data transmission speeds. This enables users to access richer and more complex content via their mobile phones with higher levels of interactivity. China Mobile and China Unicom have only begun to introduce 2.5G wireless data services over their networks in the last two years. Analysys estimates that the number of users of WAP and MMS increased by 454% between 2002 and 2003 and that the market for WAP and MMS will grow to $180.6 million in 2004, from $53.5 million in 2003, representing a 237% increase over the same time period.

China Mobile launched its Monternet^TM platform for wireless value-added services in November 2000 and China Unicom launched its Uni-Info^TM platform in May 2001 using a business model similar to the model used in Japan and Korea. The industry development experienced in Japan and Korea is described below:

†

i-mode in Japan. In Japan, NTT DoCoMo Inc., the country’s largest mobile operator, launched its highly successful i-mode service, a packet-based service for mobile phones offered by NTT DoCoMo Inc., in February 1999. The i-mode business model is based upon the mobile operator providing a platform for third party service providers to offer services to customers of the mobile operator. This model encouraged the development of innovative and popular content that capitalized on the distinct cultural characteristics and preferences of Japanese consumers. Japan’s youth are entertainment and technology oriented and view early adoption of new services as a sign of being current and popular. As a result, wireless value-added services flourished in Japan, and according to Pyramid Research, an independent research organization, the revenue generated from such services grew from $1.1 billion in 1999 to $12.0 billion in 2002. i-mode provides a high quality user experience similar to 2.5G. NTT DoCoMo Inc. became the first mobile operator in the world to offer commercial service based on third generation, or 3G, technology in 2001.

†

n.TOP in Korea. SK Telecom, Korea’s sole wireless provider until 1996, was able to use its dominant market position to further the growth of wireless data services. In particular, SK Telecom sought to capitalize on the popularity of the Internet in Korea, which has the world’s highest broadband penetration rate. In 1999, SK Telecom launched its highly successful n.TOP wireless data and Internet service, which allows subscribers to access information, send and receive Internet e-mail and effect e-commerce transactions. According to Pyramid Research, the total value of Korea’s wireless value-added services market grew from $85 million in 1999 to $949 million in 2002. According to Pyramid Research, in 2000, SK Telecom launched the world’s first Code Division Multiple Access 1X, or CDMA 1x, RTT high speed data network.

62

Industry overview

Key market characteristics

The following describes key characteristics of China’s wireless value-added services market:

†	Rapid expansion of China’s mobile telecommunications industry. With the rapid development of mobile telecommunications infrastructure to provide cheaper and more accessible alternatives to fixed-line phone services, mobile telecommunications services are becoming an increasingly important medium of communication and source of information and entertainment. Despite the substantial growth in recent years, the mobile phone penetration rate in China remains low compared to the penetration rate in more developed countries, providing a potential for continued growth. IDC estimates that the number of mobile phone users in China will reach 493.0 million by the end of 2008, representing a compound annual growth rate of 11.8% from 2003 to 2008.
†	Increasing user receptivity. Given the rapid growth of the economy and the rise of GDP per capita in China, Chinese consumers have more disposable income to purchase advanced mobile phones and to spend on wireless value-added services. As disposable income increases and users become more receptive to adopting more advanced wireless value-added services as a means of communication and sources of information and entertainment, the market for 2.5G wireless value-added services is expected to continue growing.
†	Availability of more advanced handsets in the Chinese market. Global System for Mobile Communication, or GSM, network is the 2G digital technology used by China Mobile for its network. While the penetration rate of 2.5G mobile phones is relatively low in China currently, Gartner estimates that 48% and 60% of the handsets based on General Packet Radio Services, or GPRS, a pack-based wireless communications services on GSM networks, sold in 2004 and 2005, respectively, will utilize the 2.5G wireless standard, creating opportunities for growth in more advanced wireless value-added services. The advancement of mobile handsets from 2G to 2.5G has led to an evolution in the wireless value-added services market over the past few years, from simple point-to-point text messaging via SMS to more advanced services delivered over the 2.5G wireless standard that allow users to access higher quality graphics and richer content and interactivity, such as WAP-based mobile games and media, MMS-based content and JavaTM-based mobile games.
†	Support from mobile operators. Mobile operators have been upgrading and expanding the mobile telecommunications infrastructure in China, including the building of nationwide 2.5G-enabled mobile networks that provide high-speed data and voice transmission capacity. China Mobile launched its 2.5G network in May 2002, to provide WAP services on a trial basis. China Mobile and China Unicom have promoted the development and usage of wireless value-added services on their networks to mobile phone users. For example, in April 2003, China Mobile launched a marketing initiative called M-ZoneTM, which promotes wireless value-added services to younger mobile phone users and had attracted over 10 million subscribers by the end of 2003, according to China Mobile’s 2003 annual results announcement.

Future growth

The wireless value-added services market is evolving as mobile telecommunications technology becomes more advanced. As this market increasingly shifts towards more advanced wireless standards, mobile operators are upgrading their networks and users are upgrading to new handsets enabled with more advanced 2.5G technology platforms such as WAP, MMS and Java^TM.

China Mobile provides its 2.5G mobile data services using GPRS. It launched its WAP services in May 2002 and MMS services in October 2002. China Unicom, which provides its 2.5G mobile data services using its CDMA 1x network, launched its MMS service, in November 2002 and WAP services in April 2003. Analysys reported that the number of users in China of WAP and MMS increased in 2003 to

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7.9 million and 1.8 million, respectively, from 1.8 million and none in 2002, representing a combined WAP and MMS growth rate of 454%. Analysys estimates that the market for WAP services will increase to $97.9 million in 2004 from $25.7 million in 2003, representing an increase of 280%, and MMS services will increase to $82.8 million in 2004 from $27.8 million in 2003, representing an increase of 198%. In comparison with 2.5G services, Analysys estimates that the market for SMS in China was $398.7 million in 2003, representing an increase of 90% from 2002, and will grow to $611.2 million in 2004, representing an increase of 54.5% from 2003.

Mobile operators in China have plans to upgrade their networks to offer third generation, or 3G, wireless telecommunications services, which will enable users to transmit larger amounts of data more quickly, including more sophisticated content, such as streaming media and multi-player mobile games. The PRC government is conducting tests of internationally recognized standards for 3G wireless telecommunications services as a preliminary step before issuing 3G telecommunications operator licenses. No timetable for issuing 3G licenses has been announced by the PRC government. The greater ease of data transmission, as facilitated by new and upgraded technologies and networks, is expected to lead to increased demand for enhanced wireless value-added services, including services that utilize more sophisticated content such as streaming media and multi-player mobile games. See “Special note regarding forward-looking statements.”

TECHNOLOGY PLATFORMS

Wireless value-added services are provided through various technology platforms. Technology platforms utilizing the 2.5G wireless standard include, among others, WAP, MMS and Java^TM. Technology platforms utilizing the 2G wireless standard include, among others, SMS, IVR and CRBT.

†	Short Messaging Services (SMS). SMS allows mobile phone users to send and receive text messages as well as download and transmit ringtones, e-mail alerts, news information and other content. The data capacity of SMS is 140 bytes per message, which limits the type and complexity of content that can be transmitted.
†	Wireless Access Protocol (WAP). WAP allows users to directly access and browse the Internet on their mobile phones and download specially configured information from Internet portals.
†	Multimedia Messaging Services (MMS). MMS allows users to enhance their messages with sound and images. In October 2002, China Mobile introduced MMS, which has a data capacity of 50 kilobytes, which is 366 times the SMS capacity. Its ability to integrate text, visual and audio messages makes it more attractive than traditional SMS.
†	JavaTM. Wireless value-added services based on JavaTM technology allows mobile phone users to play interactive games and download applications to expand the functionality of their mobile phones.
†	Interactive Voice Response (IVR). IVR services allow users to access voice content from their mobile phones. For example, users can choose to send songs to other users, chat in voice chat-rooms, use voice-dating services and receive information through voice rather than data. The dating and chat-room services allow users to talk to each other.
†	Color Ring Back Tones (CRBT).CRBT allows a mobile phone user to customize the sound callers hear when ringing the user’s mobile phone.

New wireless value-added services have been entering the market each year as Chinese mobile operators have sought to tap new sources of revenue. The operators are currently working with content providers to bring to the market streaming media, animation and personal information management.

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OVERVIEW

We are the leading provider of 2.5G wireless interactive entertainment, media and community services in terms of revenue to customers of China Mobile, which has 166.1 million mobile phone users as of December 31, 2003, the largest mobile subscriber base in the world. China Mobile ranked KongZhong as the number one wireless value-added service provider on its network in terms of revenue for 2.5G wireless value-added services in 2003 and the first quarter of 2004. In addition, we have recently begun to provide wireless value-added services on the networks of China Unicom, China Telecommunications Corporation, or China Telecom, and China Network Communications Group Corporation, or China Netcom. Each of China Mobile, China Unicom, China Telecom and China Netcom is a state-owned enterprise, the majority of the equity interest of which is owned by the People’s Republic of China. We are headquartered in Beijing and provide our services throughout China.

We primarily deliver our services through the more advanced 2.5G wireless standard. The higher transmission capacity allows users to access higher quality graphics and richer content and interactivity, in comparison with the 2G wireless standard at similar costs. We deliver our 2.5G services through WAP, MMS and Java^TM technology platforms. We also offer a range of data and voice services based on the 2G wireless standard through SMS, IVR and CRBT technology platforms.

We deliver a broad range of services, through multiple technology platforms, which users can access directly from their mobile phones, by choosing an icon embedded in select models of handsets, or from a mobile operator’s portal or web site. Our services are organized in three major categories, consisting of:

†	Interactive entertainment. Our interactive entertainment services include mobile games, pictures, karaoke, electronic books and mobile phone personalization features, such as ringtones, wallpaper, clocks and calendars.
†	Media. Our media services provide content such as domestic and international news, entertainment, sports, fashion, lifestyle and other special interest areas.
†	Community. Our community services include interactive chat, message boards, photo albums, dating and networking.

Users can purchase our value-added services on a per use basis and, in most cases, on a subscription basis. We provide our services mainly pursuant to our cooperation arrangements with the mobile operators, the terms of which are generally for one year or less. We do not directly bill our users, and depend on the billing systems and records of the mobile operators to bill and collect all fees. We generally do not have the ability to independently verify the accuracy of the billing systems of the mobile operators. As mobile operators do not provide us detailed revenue breakdown on a service-by-service basis, we depend on our internal database system to monitor revenue derived from each of our services. We make our business decisions based on our internal data, taking into account our historical experience in reconciling our internal data to our actual results of operations and other factors including strategic considerations.

Our focus on establishing a leadership position in the rapidly growing advanced wireless value added services market in China and our ability to cultivate partnerships with key industry players in the

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Chinese market have resulted in rapid growth of our financial and operating performance. Since commencing operations in May 2002, we have:

†	Grown our revenues and net income to US$7.8 million and $2.4 million, respectively, in 2003;
†	Grown our revenues and net income to $7.1 million and $3.2 million, respectively, in the first quarter of 2004;
†	Grown our gross revenues and net income by 86% and 106%, respectively, in the first quarter of 2004 over the previous quarter;
†	Maintained our focus on 2.5G services with 2.5G services contributing approximately 73% of our gross revenues in the first quarter of 2004; and
†	Increased our number of registered users to 9.4 million, of which 5.8 million users were classified as active users during the first quarter of 2004.

We were incorporated in the Cayman Islands on May 6, 2002 as Communication Over The Air Inc., an exempted limited liability company. See “Description of share capital— General.” In March 2004, we changed our name to KongZhong Corporation. Our principal executive office is currently located at 8/F, Tower A, Yuetan Building, No. 2 Yuetan North Street, Beijing, China 100045, and will be moved to 33/F, Tengda Building, No. 168, Xiwai Avenue, Haidian District, Beijing, China, 100044 in August 2004. Our telephone number is (8610) 6808-1818.

CHALLENGES IN CHINA’S WIRELESS VALUE-ADDED SERVICES MARKET

We believe the major challenges faced by wireless value-added service providers in China in the near future include:

†	Establishing a differentiated brand name and services through a combination of market positioning and knowledge of evolving customer needs;
†	Cultivating strong relationships with the mobile operators and other key content and distribution partners in China and abroad;
†	Identifying and targeting specific customer segments in order to build loyal user communities and a diversified revenue stream through the use of multiple distribution partners; and
†	Managing transitions among the rapidly changing technologies and wireless standards and developing compelling high-quality services in order to accelerate the migration to more sophisticated and attractive wireless value-added services.

OUR STRENGTHS

We are an early entrant in China’s 2.5G wireless value-added services market. Since our establishment, we have moved quickly to identify market trends, develop technologically advanced services and capture market share, with particular focus on the rapidly growing market for 2.5G services. As a result, we believe that we are well-positioned to capture the growth opportunities in China’s wireless value-added services market. We have developed the following principal strengths:

Strong market position with a well-recognized brand name in wireless interactive entertainment, media and community services.

We have capitalized on our early-mover advantage, to establish a strong market position and build a brand name recognized by consumers and industry participants. In particular,

† We were able to become profitable in less than one year from inception;

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†	We have achieved the number one ranking in terms of revenue generated through the usage of each of the three principal 2.5G technology platforms— WAP, MMS and JavaTM— on China Mobile’s GPRS network, based on data provided by China Mobile;
†	Leveraging off our market position, we have focused on developing a reputation for introducing trendsetting services that attract young and trend-conscious consumers, who we believe lead other consumers to use our services and as a result are key in widening our user base; and
†	We have built our brand recognition among industry participants seeking to develop productive commercial relationships with a wireless service provider attuned to evolving consumer demands.

Strategic relationships with China’s largest mobile operator, key content and distribution partners, including handset manufacturers.

Since our establishment, we have focused on building our business by strengthening our relationship with China Mobile, the largest mobile network in terms of subscribers in China. This has been achieved through our consistent performance as one of China Mobile’s top 2.5G wireless value-added service providers. As a result, we are able to achieve the following:

†	Cooperate with China Mobile to promote and develop 2.5G wireless value-added services. We were one of the first wireless value-added service providers to embed WAP services in GSM mobile phones utilizing China Mobile’s network.
†	Enhance our attractiveness as a partner to strategic content, technology and distribution companies. We have established mutually beneficial partnerships with mobile handset manufacturers, such as Motorola, Ningbo Bird, Samsung and Panasonic, as well as other content suppliers and mobile handset distributors in China.

Demonstrated leadership in understanding and addressing customer needs by offering a diversified portfolio of innovative services.

A cornerstone of our strong market position is our commitment to understanding our market and developing and improving the services that meet and shape the demands of our current and prospective customers. By conducting customer and market research and focusing our product development strategies accordingly, we are able to achieve the following:

†	Provide a diversified portfolio of services through multiple technology platforms. Our broad range of services covers a wide array of interests in interactive entertainment, media and community, allowing us to target multiple customer segments to form a loyal customer base.
†	Establish ourselves as an important partner to consumer services companies. Our knowledge of our user base and distribution channels makes us an attractive industry partner for companies looking to cross-sell or market their own products and services into our user base.

Strong product development team devoted to enhancing current and developing new services.

With over 190 programmers and product development specialists, who design, test and operate our services, we believe we have one of the largest product development teams in the wireless interactive and information business in China. Our knowledge of the demands and preferences of our target customer segments, combined with our advanced technology and product expertise, allows us to develop and introduce services to meet our users’ changing requirements. Our services have won awards in several categories, including the number one WAP game by China Mobile in May 2002, the

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first prize in China Mobile’s MMS contest in October 2002 and the first prize in China Mobile’s Java contest in May 2003. As a result, we are able to achieve the following:

†

Proactively anticipate market demand for innovative services. We were one of the first wireless service providers in China to introduce a number of innovative 2.5G wireless value-added services, including WAP community and mobile games services, MMS services and JavaTM games. This early-mover position helps us to establish a loyal user base who in turn lead others to use our services and to secure limited resources, such as cooperation relationships with key industry players, which reinforces our early-mover competitive advantage.

†

Develop a variety of proprietary programming tools that allow us to bring services to market quickly and efficiently. In response to the current lack of a standard operating system among mobile phones produced by different manufacturers, we have developed software tools that allow our services to be readily adapted for use on most mobile phones on the market to ensure a consistent user experience. Such tools reduce the marginal cost of adapting our services to additional models of mobile phones.

Proven and innovative management team.

Our management team has extensive operating experience in China’s telecommunications and Internet industries, experience in Nasdaq-listed companies and proven entrepreneurial success. In particular,

†	Our Chief Executive Officer and President acquired substantial experience through their start-up, development and sale of a successful Internet portal in China;
†	Our Chief Executive Officer and President have each served in a senior management position in Sohu.com Inc., a Nasdaq-listed Internet portal company and our Chief Financial Officer has served as chief financial officer in ASE Test Limited, a Nasdaq-listed company engaged in independent semiconductor testing services;
†	Our management has developed KongZhong into a reputable and popular brand in the wireless value-added services market; and
†	Our management has built an agile, entrepreneurial corporate culture in which our team is focused on achieving and maintaining a leading position in the advanced wireless value-added services market.

OUR STRATEGIES

Our strategic objective is to build the leading brand and be the leading provider of wireless interactive entertainment, media and community services to mobile phone users across all mobile operators in China. We will undertake strategic initiatives focused on expanding our market presence, diversifying our range of service offerings and enhancing and sustaining our profitability and market position. In particular, we intend to:

Further promote and develop the KongZhong brand.

The strength of our brand and reputation in the market depends on the distinctiveness and quality of our services. With China at an early and formative stage in the development of consumer brand consciousness and the wireless value-added services market in China still relatively fragmented, we intend to continue to develop our KongZhong brand to harness the growing receptiveness among Chinese consumers for brand-based product differentiation. We intend to:

† Continue building our reputation as a trendsetter among wireless value-added services users by actively linking our branding campaigns and activities with our service offerings;

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†	Promote our services through multiple channels, including the Internet, radio, television, print media and billboards; and
†	Develop innovative joint brand-promotion campaigns with key industry partners by actively promoting our company as the preferred channel of publicity among media-savvy enterprises seeking to reach trend-conscious consumers and as the preferred partner in collaborative lifestyle marketing in China by trend-setting international brands.

Capture market opportunities to strengthen and diversify our business and revenue streams.

We intend to leverage on the strength of our position as the leading provider of wireless interactive entertainment, media and community services on China Mobile’s Monternet^TM network to diversify our revenue streams. We intend to:

†	Foster cooperation relationships with additional mobile operators and new business partners to facilitate long-term diversification of our partnerships; for example, we have recently commenced providing our services through China Unicom’s networks;
†	Further build our sales team throughout China; and
†	Proactively seek alternative business opportunities, such as mobile advertising and mobile commerce, or transacting business using a mobile phone as an access device and method of payment.

Continue to develop and expand the scope of strategic relationships with key industry players.

We intend to continue to build valuable strategic relationships with key industry players in order to enhance our services offerings and to expand our distribution channels. We intend to:

†	Continue working closely with mobile operators on product development and marketing initiatives to develop and offer new services to mobile phone users across different technology platforms, particularly focusing on advanced 2.5G and subsequent wireless standards;
†	Expand our cooperation arrangements with mobile handset manufacturers and other distribution partners in order to expand our distribution channels through which we can increase the volume of services we sell; for instance, in addition to extending the number of mobile phones with embedded KongZhong services, we will also seek to work with off-line media outlets to help sell KongZhong services through their channels; and
†	Identify and seek cooperation arrangements with content providers and owners of proprietary content and brands to develop and offer appealing wireless value-added services utilizing their content and intellectual property.

Continue to develop and diversify our portfolio of service offerings to attract new customers and to increase usage among our existing customers.

One of the key strengths of our business is our ability to identify lifestyle trends and innovative product concepts from around the world and translate such trends and concepts into commercially viable offerings to Chinese consumers. In light of the short product cycles in the wireless value-added market, we aim to bring a steady, expanding stream of services to market through in-house development and cooperation with third-party content developers both within and outside of China to attract new customers and retain existing customers. We intend to:

† Continue devoting resources within our company to assessing articulated demands and unarticulated potential demands of consumers and develop innovative proprietary service offerings in 2.5G and 3G wireless standards that would channel and serve these demands;

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†	Scout out and develop cooperation arrangements with innovative emerging content developers within China; and
†	Monitor developments in markets overseas and localizing advanced wireless entertainment and information services from outside China to meet and shape the demands of consumers in China.

Enhance our profitability by optimizing our product mix and focusing on the development and marketing of advanced wireless value-added services.

We seek to optimize our product mix in order to enhance and sustain our profitability and create value for our shareholders. We intend to:

†	Analyze the margin characteristics of our services to determine the optimal mix of services to achieve greater profitability;
†	Develop and promote technologically advanced value-added services; and
†	Develop and promote subscription-based services in order to increase our recurring revenue.

Selectively acquire businesses and form strategic alliances that enhance our service portfolio, proprietary content, distribution channels and technology.

To complement the organic growth of our company and extend our product development and distribution capabilities, we intend to acquire businesses and form strategic partnerships when suitable opportunities arise. We seek to capture these opportunities by actively identifying and analyzing potential acquisition targets and strategic partners that would:

†	Strengthen our leading position in 2.5G services, such as opportunities to augment our supply of innovative proprietary content or to further enhance our management team; and
†	Expand our sources of revenue geographically or through alternative distribution channels.

OUR SERVICES

We provide interactive entertainment, media and community services through multiple technology platforms to mobile phone users. We provide most of our services through 2.5G technology platforms, including WAP, MMS and Java^TM, which offer higher quality graphics, richer content and interactivity. We also offer services through 2G technology platforms, including SMS, IVR and CRBT.

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The following diagram illustrates how our services are provided through technology platforms to users.

Users have the option of ordering our services directly from our web site, www.KongZhong.com, or their mobile phones by ordering our services through our access code or by choosing the icon embedded in select models of handsets. Users may also order some of our services from a mobile operator’s portal or web site. Substantially all of our services are ordered by users directly through their mobile phones and all services are delivered through mobile phones. Depending on the type of service, users can order our services on a transaction basis or subscribe to our services on a monthly basis.

We continuously produce and source new content that appeals to our target consumers for advanced value-added services. Utilizing software we have developed, our experienced team of editors and producers edit, redesign and repackage our content for our different services and technology platforms in a manner that appeals to consumers and ensures a consistent user experience across different mobile handset models. We obtain our content through in-house writers, freelance writers and third-party suppliers. Through contractual arrangements, we have exclusive rights over the content produced by our in-house writers, the content specifically produced for us by freelance writers and some of the content sourced from third-party suppliers.

Our wireless services

The following is a brief description of our services.

† Interactive Entertainment. We offer a wide range of interactive entertainment services, including mobile games, pictures and logos, karaoke, color ring back tones, electronic books and mobile phone personalization features, such as ringtones, wallpaper, icons, clocks and calendars. We provide our interactive entertainment services through all of our technology platforms. Our product development team tailors our mobile games to maximize ease of play and ensure a consistency of user experience across different handset models. Mobile phone users can download on demand or subscribe for regular downloads of our interactive entertainment services, although

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most of our mobile games are offered on a transaction basis. Some of our most popular interactive entertainment services include:

— Mobile Games. We primarily offer mobile games based on WAP and Java^TM. Our mahjong game has networking capacity that enables mobile phone users to play this mobile game with other players through the China Mobile network. Other popular mobile games include an interactive shooting game and a role-playing game in which players assume the roles of historical heroes engaged in various battles. We also offer karaoke, which allows users to sing along to melodies while the words and pictures change on the mobile phone screen.

— Pictures and Logos. Mobile phone users can download pictures and logos to personalize the background of their mobile phone screens. Such pictures include models, pets and scenic photos.

— Polyphonic Ringtones. Our ringtones enable a mobile phone user to personalize their ringtones to the melodies of their favorite songs or special sound effects.

† Media. Users can download our media content on either a transaction basis or a monthly subscription basis. Mobile phone users can download information on demand or subscribe for periodic messages, which includes content covering international and domestic news, entertainment, sports, fashion, lifestyle and other special interest areas. Some of our most popular media services include:

— News. We offer international and domestic news, delivered in a format easy for the reader to peruse. Our WAP version enables users to easily search for news that interests them.

— Entertainment. Our entertainment magazine focuses on high-profile celebrities and includes star biographies, interviews and photos.

— Autos. Our auto magazine features information on different makes and models of automobiles and on the automobile industry generally.

† Community. Users can engage in community-oriented activities such as interactive chatting, message boards, photo albums, dating and networking. Users may only access our community services on a monthly subscription basis. Some of our most popular community services include:

— Chat. We offer a variety of chat services. For instance, we have a virtual reality game that allows mobile phone users to choose the lifestyle they dream of and interact with the city’s other inhabitants/ players.

— Photo Albums. Our photo albums allow mobile users to post and arrange their photos taken with their mobile handsets into albums accessible via their handsets. Utilizing the WAP technology platform, mobile users can access photo albums in a similar manner to accessing photo albums on the Internet.

— Dating. Our dating mobile services are highly popular. We have a mobile chat and dating service available on WAP and MMS, which allows users to utilize the enhanced features of advanced technology of 2.5G to choose their chatting partners from a selection of pictures taken with users’ mobile phone cameras. We also offer a WAP-based dating service designed to simulate a campus environment tailored for students.

Our Technology platforms

2.5G Wireless Standard Services

We deliver our 2.5G services primarily to users of GSM-based mobile phones utilizing GPRS technology through WAP, MMS and Java^TM technology platforms.

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†	Wireless Application Protocol (WAP). WAP allows users to browse content on their mobile phones so that users can request and receive information in a manner similar to accessing information on Internet web sites through personal computers. We provide our WAP service over GPRS networks, which allows users to download color and animated pictures, logos and wallpaper, interactive mobile games, customized ringtones and other Internet content. We launched WAP services in May 2002, but did not begin to receive revenue for such services until September 2002, when China Mobile started to allow service providers to charge fees for WAP services. We currently offer over 231 WAP services, substantially all of which are only available on a subscription basis. As of March 31, 2004, we had a total of approximately 3.9 million WAP registered users. In the first quarter of 2004, we had approximately 2.6 million active WAP users. According to China Mobile, we were ranked number one in terms of revenue for WAP on China Mobile’s network for each of the four quarters in 2003 and for the first quarter of 2004.
†	Multimedia Messaging Services (MMS). MMS is a messaging service that we deliver over GPRS networks and, in China, allows up to 50 kilobytes of data to be transmitted in a single message, compared to 140 bytes of data via SMS. As a result, MMS enables users to download colorful pictures and advanced ringtones. We launched MMS services in October 2002, but did not begin to receive revenue for such services until April 2003, when China Mobile started to allow service providers to charge fees for MMS. Our monthly subscription services automatically send information to users’ mobile phones, and include news, beauty, celebrity photographs and special collectible items. Our services that can be downloaded on a transaction basis include pictures, screensavers, ringtones and special sound effects. We currently offer over 235 MMS services. As of March 31, 2004, we had a total of approximately 2.1 million MMS registered users. In the first quarter of 2004, we had approximately 1.5 million active MMS users. According to China Mobile, we were ranked number one in terms of revenue for MMS on China Mobile’s network in each quarter since its commercial launch of MMS services in April 2003.
†	JavaTM. JavaTM technology allows mobile phone users to play interactive and networking mobile games and karaoke and download applications to customize their mobile phone settings, such as screensavers and clocks. We launched services based on the JavaTM programming language in September 2003, but did not begin to receive revenue for such services until November 2003, when China Mobile started to allow service providers to charge fees for JavaTM services. We currently offer over 186 JavaTM services. For the first quarter of 2004, we had a total of approximately 0.3 million JavaTM downloads. We expect revenue from our JavaTM-based services to increase as more models of mobile phones sold in China incorporate this technology and we develop new JavaTM services utilizing the JavaTM language. According to China Mobile, we were ranked number one in terms of revenue for JavaTM on China Mobile’s network in the first quarter of 2004.

2G Wireless Standard

We deliver our 2G services primarily through SMS, IVR and CRBT technology platforms.

†

Short Messaging Services (SMS). SMS is the basic form of mobile messaging service, allowing users to access our products through their mobile phones on a subscription or transaction basis, and is supported by substantially all mobile phone models currently sold. We launched and began receiving revenue from SMS in July 2002. We currently offer over 259 SMS services, including jokes, entertainment and horoscopes. As of March 31, 2004, we had a total of approximately 3.3 million registered users of our SMS services. According to China Mobile, we were ranked number 25 in terms of revenue for SMS on China Mobile’s network in the first quarter of 2004.

†

Interactive Voice Response (IVR). Interactive voice response services allow users to access voice content from their mobile phones. We launched and began receiving revenue from IVR services in

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December 2003 and currently offer three IVR products, including chat and English language education. We expect revenue from our IVR services to increase as IVR becomes more popular and we develop new IVR services. As of March 31, 2004, we had a total of approximately 65,000 registered users of our IVR services. According to China Mobile, we were ranked number eight in terms of revenue for IVR services on China Mobile’s network in the first quarter of 2004.

†

Color Ring Back Tone (CRBT). Color ring back tones allow a mobile phone user to customize the sound callers hear when ringing the user’s mobile phone. We offer a variety of entertaining content, including pre-recorded messages, movie dialogues and soundtracks and a wide range of classical and popular music. We launched and began receiving revenue from our CRBT services in October 2003 in Beijing and have subsequently begun to offer CRBT services in other provinces. We plan to expand geographically our offering of CRBT services in 2004. China Mobile does not rank service providers in terms of revenue for CRBT services as the overall revenue derived from all CRBT services is relatively small compared to other types of value-added services on China Mobile’s network.

The following table sets forth certain operating data for our various wireless value-added services as of, or for the periods ended on, the dates indicated:

		As of or for the three months ended
		March 31,		June 30,		September 30,		December 31,		March 31,
		2003		2003		2003		2003		2004
		(in thousands)
2.5G(1)
	Registered users(2)		597		1,295		2,403		4,086		6,049
	Active users(3)		520		930		1,590		2,580		4,093
	Subscriptions(4)		1,042		1,674		2,594		3,710		5,508
	Downloads(5)		—		276		674		1,772		2,334
2G(6)
	Registered users(2)		449		734		1,158		2,089		3,321
	Active users(3)		440		460		570		1,189		1,704
	Subscriptions(4)		253		304		403		966		2,194
	Downloads(5)		2,069		827		1,805		1,427		1,635
Total
	Registered users(2)		1,046		2,029		3,561		6,175		9,370
	Active users(3)		960		1,390		2,160		3,769		5,797
	Subscriptions(4)		1,295		1,978		2,997		4,676		7,702
	Downloads(5)		2,069		1,103		2,479		3,199		3,969

(1)	Includes WAP, MMS and JavaTM. We began charging for our MMS services in April 2003 and JavaTM services in November 2003.
(2)	Total number of users of our services that have registered with us since our launch of such services in May 2002, irrespective of activity level.
(3)	Total number of users who utilized our services during the relevant period.
(4)	Total number of paid monthly subscriptions in the relevant period.
(5)	Total number of paid downloads in the relevant period, excluding downloads made pursuant to subscriptions.
(6)	Includes SMS, IVR and CRBT. We began charging for our IVR services in December 2003 and CRBT services in October 2003.

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STRATEGIC RELATIONSHIPS

We have established cooperation arrangements with mobile operators, mobile handset manufacturers, content providers and other business partners to produce, promote and market our services. We provide our wireless value-added services mainly pursuant to cooperation agreements through China Mobile’s Monternet^TM network. We also recently began providing our wireless value-added services through China Unicom’s Uni-Info^TM network and each of China Netcom’s and China Telecom’s Personal Handyphone Systems, or PHS systems. In addition, we cooperate with several of China’s leading mobile handset manufacturers, which manufacture select handset models with a wireless value-added services icon in the handset’s menu that enables users to access our services directly. Furthermore, we have established promotion arrangements with Internet companies pursuant to which they promote our products on their web sites. We pay service fees to the mobile operators, mobile handset manufacturers, mobile handset distributors, content providers and other partners, where relevant.

Mobile operators

China Mobile is the world’s largest mobile telecommunications network operator in terms of subscribers. Our working relationship with China Mobile is critical to the operation and continued development of our business. See “Risk factors—Risks relating to our business—We depend on China Mobile for substantially all of our revenue, and any loss or deterioration of our relationship with China Mobile may result in severe disruptions to our business operations and the loss of substantially all of our revenues.” As of December 31, 2003, we have entered into approximately 20 cooperation agreements for our different services with various provincial subsidiaries of China Mobile to provide wireless value-added services in China. We derive substantially all of our revenue through these mobile operators and work with them in the development and promotion of wireless value-added services. We were one of the first wireless service providers to work with China Mobile to develop and offer WAP, MMS and Java^TM. In addition, we have jointly promoted wireless value-added services with China Mobile, which is generally more cost effective and wide reaching than our promoting these services through traditional advertising.

We establish the fees to the users of our services in consultation with the mobile operators and pay a service fee to the mobile operator through which our services are provided. We charge our users content fees on either a transaction or a monthly subscription basis, which vary among our different services.

Pursuant to our agreements with the subsidiaries of China Mobile, generally we pay to the mobile operator 15% of the fees we generate from providing our services to users through the mobile operator’s network. In addition, the mobile operator deducts a net transmission charge from our portion of the fees. Such transmission charge is equivalent to the transmission fee set forth in the table below multiplied by the number of messages we send through the mobile operator’s network in excess of the number of messages we receive from users requesting our services. The amount of such transmission fee differs for WAP, MMS, Java^TM, SMS, IVR and CRBT and varies depending on the volume of messages sent. Generally, the term of these agreements is for a period of one year or less, but are automatically renewable unless either party objects.

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The following table sets forth our principal fees charged to users for our services and service and transmission charges paid to China Mobile and its subsidiaries as of December 31, 2003.

	Fees we charge to users				Fees we pay to mobile operators
			Monthly					Net transmission
	Transaction		subscription		Service fees to			charge per
	fee per unit(1)		fee		mobile operators			message(2)
	(in RMB(3), except percentages)
WAP		0.50-2.00		3.00- 8.00		15	%		None
MMS		1.00-3.00		8.00-28.00		15	%		0.20-0.30(4)
JavaTM		3.00-6.00		4.00- 8.00		15	%		None
SMS		0.10-2.00		3.00-30.00		15	%		0.05-0.08
IVR		0.30-1.00		N/A		30	%		None
CRBT		0.50-2.00		N/A		15	%		None

(1)	Transaction fees are based on units of downloads for WAP, MMS, JavaTM, SMS and CRBT and minutes for IVR.
(2)	A transmission fee is assessed for each message we send in excess of the number of messages we receive. The amount of the transmission fee for each month depends on the volume of messages sent in that month. While no transmission fees are assessed for IVR services, users pay an airtime fee in addition to the content fees on a per minute basis.
(3)	Our content fees are charged in Renminbi. The noon buying rate certified by the Federal Reserve Bank of New York was RMB8.2770 = $1.00 on March 31, 2004.
(4)	During the period from November 2003 to March 2004, we received a 50% promotional discount on transmission fees for MMS as a strategic partner of China Mobile.

We rely primarily on the mobile operators to provide billing and collection services for us. The fees for our services are incorporated into the mobile operator’s invoices, which are sent to users on a monthly basis. We receive monthly statements from each of the mobile operators, which indicate the aggregate amount of fees that were charged to users for services that we provided. For a description of our revenue recognition policy, see “Management’s discussion and analysis of financial condition and results of operations—Critical accounting policies—Revenue recognition.” Also see “Risk factors—Risks relating to our business—We depend on China Mobile for substantially all of our revenue, and any loss or deterioration of our relationship with China Mobile may result in severe disruptions to our business operations and the loss of substantially all of our revenues.”

Material contracts with mobile operators

The term of our contracts with the mobile operators is generally one year or shorter. We usually renew these contracts or enter into new ones when the prior contracts expire, but on occasion, the renewal or the execution of new contracts can be delayed by a period of one month or longer. Based on our historical experience in the event that a contract expires and is not promptly renewed, the mobile operator typically continues to honor the expired contract until such time that a new contract is entered into. We cannot assure you that any mobile operator will in fact continue to honor an expired contract. The specific termination and other material provisions of our more significant contracts with the mobile operators are set forth below.

On May 23, 2003, Beijing AirInbox entered into a cooperation agreement with China Mobile to provide WAP services on the Monternet^TM portal. Pursuant to this agreement, Beijing AirInbox pays a service fee of 15% of the revenues charged to users to China Mobile, less net transmission charges. Beijing AirInbox may not provide the same content that it provides to China Mobile under this agreement to other operators or WAP portals. Any violation of such provision entitles China Mobile to terminate this agreement. The agreement will expire on September 30, 2004.

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On June 5, 2003, Beijing AirInbox entered into a cooperation agreement with China Mobile to provide MMS services on China Mobile’s network. Pursuant to this agreement, Beijing AirInbox pays a service fee of 15% of the revenues charged to users to China Mobile, less net transmission charges. Beijing AirInbox may not provide the same content that it provides to China Mobile under this agreement to other mobile operators. Any violation of such provision entitles China Mobile to terminate this agreement. This agreement will expire on June 4, 2004, but will be automatically renewed if neither party objects.

On May 1, 2004, Beijing AirInbox renewed a cooperation agreement with Beijing Mobile Telecommunication Co., Ltd., or Beijing Mobile, a subsidiary of China Mobile, to provide SMS services through China Mobile’s network. Pursuant to this agreement, Beijing AirInbox pays to Beijing Mobile a service fee of 15% of the revenues charged to users, less net transmission charges. Beijing Mobile has a right to terminate this agreement prior to expiration under certain circumstances, including the delivery of content by Beijing AirInbox in violation of applicable PRC law or policies of Beijing Mobile. This agreement will expire on October 31, 2004, but will be automatically renewed if neither party objects.

Mobile handset manufacturers

We have also established distribution arrangements with mobile handset manufacturers, such as Motorola, Ningbo Bird, Samsung and Panasonic, which manufacture select handset models with a wireless value-added services icon in the handset’s menu or in the menu of the Monternet^TM portal accessed through the handsets that enables users to access our wireless value-added services directly from their mobile phones. In 2004, we entered into agreements with Samsung and Panasonic, pursuant to which we will establish and maintain their web sites specially designed for wireless value-added services downloads and exclusively manage the provision of wireless value-added services through these web sites to the users of Samsung and Panasonic mobile phones.

We have cooperation arrangements with several leading mobile handset manufacturers. Pursuant to these arrangements, mobile handset manufacturers receive 50% to 70% of the net cash that we receive from mobile operators with respect to wireless value-added services that are accessed through links to our services in the user’s handset or Monternet^TM portal. The terms of these agreements are generally for one year, and pertain to specific mobile handset models. In addition to bundling our services with such mobile handset manufacturers, we also leverage our relationship with them to enter into joint marketing programs.

Content providers

We have also entered into licensing agreements with content providers. Pursuant to these agreements, we contract with our content providers to use their content for a fixed licensing fee or for a certain percentage, approximately 30% to 70%, of the net cash we receive from mobile operators with respect to messages that contain the licensed content. These arrangements are typically for one or two years and not exclusive, except for the content specifically produced for us by our freelance writers and certain content from our third-party content providers. We currently have over 30 content suppliers, including Olarks Mobile Entertainment Co., Ltd., Xiamen Index Corporation and Beijing Zhongbiaoxin Network Technology Development Corp. We have also entered into arrangements with Namco Limited, Gamevil Inc. and NEC Corporation.

Other distribution partners

We have established promotion arrangements with Internet and other companies such as Shenzhen Aisidi Industry Co., Ltd., Baidu (Beijing) Co., Ltd. and China Film Corporation, pursuant to which they promote our products on their web sites in exchange for a fee that is based on the sales of our services on their web sites. Pursuant to these arrangements, we generally pay 20% to 80% of the net

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cash we receive from the mobile operators in connection with the services delivered to users that utilize products on their web sites.

We also work with mobile handset distributors to market our services to mobile handset buyers. Pursuant to our distribution arrangements with mobile handset distributors, they promote our services by setting a unique access code for our services as a default on the handsets they sell, educating buyers about our services and including our promotional pamphlets describing our services in the informational packages provided to buyers. These arrangements provides us with an alternative distribution channel, allowing us to sell and market our services through the distributor’s sales channels. In return, we generally pay the mobile handset distributors 40% to 70% of the net cash we receive from the mobile operators in connection with the services accessed through the unique access code.

PRODUCT DEVELOPMENT

As our business focus is on technologically advanced wireless value-added services, our product development team focuses on creating innovative products that utilize new wireless standards. China Mobile started operating its 2.5G network in May 2002, for its WAP services on a trial basis. This new wireless standard enables wireless value-added service providers to send more data in a shorter period of time, thereby facilitating the transmission of more advanced data services. Our product development team focuses on refining and upgrading our current services, as well as creating new and innovative services that utilize the latest technology. We were one of the first wireless value-added service providers to work with China Mobile to develop and offer MMS and WAP services and have continued to be a leading developer of innovative services compatible with such technology platforms. We believe that our timely delivery of new services that meet the mobile operator’s specifications demonstrates our technical capabilities and strengthens our cooperation relationship with China Mobile. In addition, we plan to work with the mobile operators to offer new services that are compatible with more advanced technologies, such as personal digital assistants, flash animation and audio/ video services.

In addition to developing a range of innovative services, we have also developed a variety of programming tools that allow us to enhance consumer’s enjoyment of our services. For instance, in response to the current lack of a standard operating system among mobile phones produced by different manufacturers in China, which may result in inconsistent user experiences for users accessing our services through different handset models, we have developed software tools that allow our services to be readily adapted for use on most mobile phones on the market. Such tools reduce the marginal cost of adapting our services to additional models of mobile phones and optimize user experience in terms of format and presentation of our services. Thus, we are able to input content into our system which will be recalibrated and tailored for a user’s mobile phone or formatted for a particular technology platform.

As of March 31, 2004, our product development team consisted of 201 people, organized into departments based on platforms such as WAP, MMS, Java^TM and SMS. Within each department, the team is further divided into specific product areas such as media, community and interactive entertainment. Our product development team includes engineers with a wide range of technical experience across different technology platforms in the wireless telecommunications sector.

SALES, MARKETING AND CUSTOMER SERVICE

We are committed to establishing our KongZhong name as a well-recognized and reputable brand not only among mobile phone users, but also among mobile operators, key industry players and owners of brand names. We sell our services principally to and through China Mobile, as well as other

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distribution partners. We market through our web site, promotional events, direct marketing and media advertising. We provide customer support to China Mobile and our end users.

Sales and marketing

We focus on marketing our KongZhong brand name, as we believe branding is important in the wireless interactive entertainment, media and community services market. We have registered KongZhong Network as a commercial website with the State Administration on Industry and Commerce. As a result, no one else may operate a website, whether commercial or otherwise, by using the name of KongZhong Network. We are also the registered owner of the www.kongzhong.com, www.kongzhong.com.cn, www.kongzhong.net and www.kongzhong.net.cn domain names, and are in the process of applying for the registration of the Chinese name of “KongZhong Network” as our service mark. Even in the event we are not able to acquire a service mark for the Chinese name of “KongZhong Network,” we do not expect to face a proliferation of counterfeit services or products without any legal remedy as we may seek remedy for piracy under China’s Anti-Unfair Competition Law, by bringing a suit against a third party that uses the Chinese name of “KongZhong Network” if the overall design or appearance of that third party’s services is substantially the same as that of the well-known or established services provided by us. Moreover, the primary focus of our brand promotion is on our logo, the KongZhong thumb, which is a legally registered trademark in China, and this registration and the investment that we have made in the logo should not be affected by whether we are able to acquire a service mark for the Chinese name of “KongZhong Network”.

We utilize our leading position among providers of wireless interactive entertainment, media and community services and our knowledge of our customers to attract joint promotion arrangements with brand-owners seeking effective channels of publicity among trend-conscious consumers. Through select distribution channels, we target young and fashion-driven consumers who we believe set trends for consumer products and services in China. We promote our services through joint promotional events with China Mobile, its subsidiaries, mobile handset manufacturers, mobile handset distributors and other business partners. We also participate in marketing campaigns with China Mobile. For example, we are currently working with China Mobile in its M-Zone^TM marketing initiatives, which promote its wireless value-added services to younger mobile phone users. We also engage in joint promotional events with other partners. We seek to be the preferred partners for brand-owners seeking to reach trend-conscious consumers through wireless channels and a preferred wireless partner in collaborative lifestyle marketing in China. For example, we promoted the movie “Hero” pursuant to a joint promotional arrangement under which we offered exclusive wireless value-added services containing pictures and other content relating to the movie. Such promotion significantly increased our revenue, generating over 280,000 SMS and WAP subscriptions and $0.2 million in revenue for Hero-related services in the first quarter of 2003. In addition, we market through traditional offline media venues, such as through newspapers, magazines and flyers.

Substantially all of our services are provided through the networks of China Mobile. Accordingly, we devote significant resources to maintaining, expanding and strengthening our relationship with China Mobile and its subsidiaries. As of March 31, 2004, our sales and marketing department consisted of 52 persons strategically located in 15 provinces in China to work closely with the mobile operators throughout China at the provincial and local level, where pricing and other important decisions on marketing and operations are made. Our localized sales team also helps us gain insight into developments in the local markets and the competitive landscape, as well as new market opportunities.

We also seek alternative distribution channels, such as mobile handset manufacturers and mobile handset distributors. In addition, we sell our services by advertising in media forums, including newspapers, magazines and on television. Our sales force also works with other distribution partners to promote our services.

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To motivate our sales professionals, a portion of their compensation is based on the usage of our services in the relevant region. Sales quotas are assigned to all sales personnel according to quarterly sales plans. We intend to increase our marketing budget and staff to further increase awareness of our brand name. We are also exploring a range of other joint marketing strategies in order to maximize our cooperation arrangements and resources.

Customer service

Customer service is important to us as it is key to building our brand and our relationships with the mobile operators. We train our customer service representatives with an emphasis on customer satisfaction. Our customer service center handles calls, faxes and e-mails from our users, as well as inquiries forwarded from the mobile operators. Our customer service representatives interact on a regular basis with, and provide training materials to, customer service representatives of mobile operators from over 30 provinces to enhance our users’ experience with our services.

COMPETITION

There are numerous players in China’s wireless value-added services market. China Mobile’s listed subsidiary, China Mobile (Hong Kong) Limited, reported in its 2003 annual results announcement that over 880 service providers supply content and services for its Monternet^TM network in 2003. We compete with these companies primarily on the basis of brand, the type and timing of service offerings, content, users and business partner and channel relationships. We also compete for experienced and talented employees.

Some of our competitors may have greater access to capital markets, more human and financial resources than we do, and a longer operating history than we have. For instance, Internet portals providing wireless value-added services may have an advantage over us with their longer operating history, more established brand name, larger user base and Internet distribution channels. Furthermore, our competitors may be able to offer a broader range of services than we are presently able to offer. See “Risk factors— Risks relating to our business— We may face increasing competition, which could reduce our market share and materially adversely affect our financial condition and results of operations.”

2.5G wireless standard services

Our primary competitors in the 2.5G wireless value-added services market in China include Internet portals such as Sina Corporation, Sohu.com Inc., NetEase.com Inc. and TOM Online Inc., as well as providers focused on wireless value-added services such as Tencent Technology Limited’s Mobile QQ, Hurray! Solutions Limited and Beijing Mobile Navi Information Technology Services Company. According to Analysys, in 2003, we, Beijing Mobile Navi Information Technology Services Company, TOM Online Inc., Shenzhen Xuntian Telecommunication Technology Ltd. and Tencent Technology Limited’s Mobile QQ were ranked 1 through 5, respectively, in market share in the WAP services market, and we, TOM Online Inc., Sina Corporation, NetEase.com Inc. and Sohu.com Inc. were ranked 1 through 5, respectively, in market share in the MMS services market.

2G wireless standard services

Competition is particularly intense in China’s 2G-based wireless value-added services market as the barriers to entry are relatively low compared to the 2.5G market, resulting in a much higher number of wireless value-added service providers. As the market for wireless value-added services in China continues to evolve into 2.5G, our focus is primarily on developing our 2.5G services. However, we also offer SMS in our portfolio of services. Our primary competitors in this market include Internet portals such as Sina Corporation, Sohu.com Inc., Netease.com Inc. and TOM Online Inc., and providers focused on wireless value-added services such as Tencent Technology Limited’s Mobile QQ,

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LinkTone Limited, Mtone Wireless Corp., New Palm Information Technology Co. and Honglian 95 Information Shareholding Limited. According to Analysys, Tencent Technology Limited’s Mobile QQ, Sina Corporation, Sohu.com Inc., TOM Online Inc. and NetEase.com Inc. were ranked 1 through 5, respectively, in market share in the SMS services market in 2003.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

We regard our copyrights, trademarks, trade secrets and other intellectual property rights as critical to our business. We rely on trademark and copyright law, trade secret protection, non-competition, confidentiality and licensing agreements with our senior officers, clients, partners and others to protect our intellectual property rights. Despite our efforts to protect our proprietary rights, we cannot be certain that the steps we have taken will prevent misappropriation of our content or technology, particularly in foreign countries where the relevant laws may not protect our proprietary rights as fully as in the United States. For a description of the regulations applicable to our industry in China, see “Regulation.”

We have registered the domain names kongzhong.com, kongzhong.com.cn, kongzhong.net, kongzhong.net.cn, cota.com.cn and cota.cn. We have applied to register certain trademarks in China; however, we are unable to register the Chinese name of our service mark “KongZhong Network” in China because PRC laws and regulations do not permit the registration of generic terms as trademarks or service marks, and the Chinese name of “KongZhong Network” is deemed a generic term. See “Risk factors— Risks relating to our business— We may not be able to adequately protect our intellectual property, and we may be exposed to infringement claims by third parties.”

INFORMATION TECHNOLOGY SYSTEMS AND INFRASTRUCTURE

We maintain most of our servers at the premises of Beijing Communication Corporation, which is the administrator of the central hub of the ChinaNet backbone. We also maintain servers at other Internet data centers, including Beijing Mobile Communication Company Limited, Chongqing Mobile Communication Company Limited and Hangzhou Mobile Communication Company Limited. We believe that utilizing these hosting partners provides significant operating benefits, such as protecting our systems from power loss, break-ins and other potential external causes of service interruption. In addition, we back up all of our data. We believe we will be able to increase our server capacity as needed to accommodate future growth.

EMPLOYEES

General

Our senior management and many of our employees have had prior experience in the Internet portal or telecommunications-related industries. Our employees receive a base salary and a performance-based bonus. Our bonuses are available to all employees and the amounts of such bonus are calculated based on the performance ranking of the employee. We have a broad-based stock option plan pursuant to which we grant stock options from time to time to employees who have passed their initial probation period. We also offer internal training programs tailored to different job requirements to help enhance our employees’ talents and skills. We believe that these initiatives have contributed to the growth of our business.

In general, our technical personnel and most of our senior executives work for our subsidiary, KongZhong Beijing, and the rest of our employees work for Beijing AirInbox or Beijing Boya Wuji.

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As of March 31, 2004, we had 314 employees, including five part-time employees. The table below sets forth the number of our employees by function as of the end of the periods indicated:

		As of					As of					As of
		December 31, 2002					December 31, 2003					March 31, 2004
				% of					% of					% of
		Number		Total			Number		Total			Number		Total
Sales, marketing and business development			11		21.6	%		36		15.7	%		52		16.6	%
Customer service			3		5.9	%		18		7.9	%		26		8.3	%
Product development			27		52.9	%		149		65.0	%		201		64.0	%
Networking operation			2		3.9	%		8		3.5	%		12		3.8	%
General and administrative			8		15.7	%		18		7.9	%		23		7.3	%
	Total		51		100.0	%		229		100.0	%		314		100.0	%

We increased the number of our employees by 516% from a total of 51 employees as of December 31, 2002, reflecting our rapid growth.

We believe that we maintain a good working relationship with our employees and we have not experienced any significant labor disputes or any difficulty in recruiting staff for our operations. Our employees are not represented by any collective bargaining agreements or labor unions.

Employee benefits plan

As stipulated by PRC regulations, we participate in various housing programs, medical care, welfare subsidies, unemployment insurance and pension benefits through defined contribution plans that are organized by municipal and provincial governments for Beijing AirInbox’s employees. We are required under PRC law to accrue for these benefits based on a percentage of approximately 14% of the salaries, bonuses and certain allowances paid to our employees. A member of the retirement plan is entitled to a pension equal to a fixed proportion of the salary prevailing at the member’s retirement date. The total amounts we accrued under our employee benefits plan for the period from May 6, 2002 to December 31, 2002 and in 2003 were approximately $41,625 and $0.3 million, respectively. We are required to make contributions to the plans out of the amounts accrued for medical and pension benefits. The total amounts of contributions we made for such employee benefit plans for the period from May 6, 2002 to December 31, 2002 and in 2003 were approximately $6,203 and $0.1 million, respectively.

We have granted stock options to our employees pursuant to our 2002 Plan, as described in “Management— stock options.”

PROPERTIES

Our principal executive office currently occupies over 1,900 square meters of office space in Beijing, China. Starting from August 2004, our principle executive office will occupy approximately 5,000 square meters of office space in Beijing, China, primarily under leases that will expire in May 2006. We also lease sales offices in 10 provinces throughout China.

LEGAL PROCEEDINGS

There are no material legal proceedings pending or, to our knowledge, threatened against us. Despite our efforts to comply with the intellectual property rights of third parties, we cannot be certain that we have not, and will not, infringe on the intellectual property rights of others, which may subject us

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to legal proceedings and claims in the ordinary course of our business from time to time. Such legal proceedings or claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources. In addition, we may also initiate litigation to protect our intellectual property rights. See “Risk factors— Risks relating to our business— We may not be able to adequately protect our intellectual property, and we may be exposed to infringement claims by third parties.”

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GENERAL

The functions and powers of our board of directors include, among others:

†	convening shareholders’ meetings and reporting its work to shareholders at such meetings;
†	implementing shareholders’ resolutions;
†	determining our business plans and investment proposals;
†	formulating our profit distribution plans and loss recovery plans;
†	formulating our debt and finance policies and proposals for the increase or decrease in our issued capital and the issuance of debentures;
†	formulating our major acquisition and disposal plans, and plans for merger, division or dissolution;
†	formulating proposals for any amendments to our memorandum and articles of association; and
†	exercising any other powers conferred by the shareholders’ meetings or under our memorandum and articles of association.

DIRECTORS AND SENIOR OFFICERS

The following table sets forth certain information concerning our directors and senior officers. The business address of each of our directors and executive officers is 8/F, Tower A, Yuetan Building, No. 2 Yuetan North Street, Beijing, China 100045.

Name	Age		Position
Yunfan Zhou		29	Chairman of the Board of Directors and Chief Executive Officer
Nick Yang		28	Director, President and Chief Technology Officer
Fan Zhang		31	Director
Charlie Y. Shi		42	Independent Director
Yongqiang Qian		31	Independent Director
Richard Wei		41	Chief Financial Officer
Xianghong Chen		33	Marketing Director

Yunfan Zhou, 29, one of our founders, has served as the chairman of the board of directors of our company and our chief executive officer since our inception in May 2002. Prior to establishing our company, Mr. Zhou served as vice president, executive vice president and general manager of Sohu.com Inc., an Internet portal company, from October 2000 to March 2002. In June 1999, Mr. Zhou co-founded ChinaRen Inc., an Internet portal and community company, and served as chief operating officer and general manager until October 2000, when ChinaRen Inc. merged into Sohu.com Inc. Mr. Zhou holds a master’s degree in electrical engineering from Stanford University and a bachelor’s degree in electronic engineering from Tsinghua University.

Nick Yang, 28, one of our founders, has served as president, director and chief technology officer of our company since our inception in May 2002. Prior to establishing our company, Mr. Yang served as vice president of technology and chief technology officer of Sohu.com Inc. from October 2000 to March 2002. In June 1999, Mr. Yang co-founded ChinaRen Inc. and served as chief technology officer until October 2000, when ChinaRen Inc. merged into Sohu.com Inc. Mr. Yang holds a master’s degree

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in electrical engineering from Stanford University and a bachelor’s degree from the University of Michigan.

Fan Zhang, 31, is a director of our company. Mr. Zhang has been a Senior Vice President of Draper Fisher Jurvetson ePlanet Ventures, which together with its affiliates holds 8.9% of our shares before the offering. He also holds directorships in a number of private companies. From 1997 to 1999, Mr. Zhang served as a financial analyst in the Investment Banking Division of Goldman Sachs (Asia) L.L.C. He was an engineer at Focus Graphics, Inc. in California from 1992 to 1994. Mr. Zhang holds an MBA degree from Stanford University Graduate School of Business and a bachelor’s degree in economics from Stanford University.

Charlie Y. Shi, 42, is an independent director of our company. Mr. Shi has been a member of the Investment Committee of CMT ChinaValue Capital Advisors Limited since May 2004. From April 2001 to April 2004, Mr. Shi served as a managing director of China Assets Investment Management Limited, a Hong Kong-based investment management company. China Assets Investment Management Limited is the sole investment manager of China Assets (Holding) Limited, a Hong Kong registered investment fund which owns 100% of the shares of Global Lead Technology Limited, a holding company which holds 13.3% of the shares of our company before the offering. From February 2000 to March 2001, Mr. Shi was the senior vice president of SOFTBANK China Venture Capital Limited. He served as deputy managing director of Toplap Investments Limited, an investment advisory and management subsidiary of China Insurance (Hong Kong) Group, from February 1998 to December 1999, and served at Merrill Lynch & Co. from March 1992 to January 1998, holding the last position as assistant vice president. Mr. Shi holds an MBA degree from California Lutheran University and a bachelor’s degree in economics from Fudan University in Shanghai. He is also a graduate of the Harvard Business School Advanced Management Program.

Yongqiang Qian, 31, is an independent director of our company. Mr. Qian is also the chief executive officer of New Oriental Online Company, an entity specializing in online education that he founded in December 2000. He was also a director and vice president of Beijing New Oriental Education and Technology Group, the parent company of New Oriental Online Company, from 2000 to 2004. From 1993 to 1997, he was a co-founder and project manager at Beijing New Oriental School, a company providing educational and training services, and an affiliate of Beijing New Oriental Education and Technology Group. Mr. Qian holds an MBA degree from Yale University School of Management and a bachelor’s degree from North China University of Technology.

Richard Wei, 41, is the chief financial officer of our company. Prior to joining our company in February 2004, Mr. Wei served as the chief financial officer of ASE Test Limited, a leading independent semiconductor testing services provider, from August 2002 to February 2004 and ISE Labs Inc., a subsidiary of ASE Test Limited, from September 2000 to July 2002. Mr. Wei was a research analyst at Lehman Brothers Asia from 1996 to 2000, a research analyst at Morgan Stanley from 1994 to 1996 and a research associate at the Harvard Business School from 1993 to 1994. He also served as a systems engineer at IBM Inc. from 1985 to 1991. Mr. Wei holds an MBA degree from Cornell University and a bachelor’s degree in computer science from the Massachusetts Institute of Technology.

Xianghong Chen, 33, is the marketing director of our company. Prior to joining our company in March 2004, Ms. Chen served as a senior marketing manager of Sprint from 1998 to February 2004. She also served as an operations consultant at Boise Cascade Paper Co. in 1997 and a sales and distribution manager at International Import and Export Corporation at Hangzhou, China from 1992 to 1996. Ms. Chen holds a MBA degree from Indiana University and a bachelor’s degree in arts from Nanjing International Relations University.

There is no family relationship between any of our directors or senior officers.

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Management

Each of our senior officers has entered into an employment agreement and a non-compete agreement with us. Pursuant to the employment agreements, each of our senior officers is entitled to receive a basic salary and may also receive an annual bonus if a certain level of performance has been achieved. All of the senior officers are bound by the confidentiality and non-competition provisions in each of their employment agreements and non-compete agreements with us.

Each of Yunfan Zhou and Nick Yang was a party to an employment agreement with Sohu.com Inc. that restricted him during the period of his employment with Sohu.com Inc. and for a period of one year after the termination of such employment from (i) participating or otherwise being involved in any entity that operates an Internet portal in China without the prior written authorization of Sohu.com Inc. and (ii) soliciting or hiring any employee of Sohu.com Inc or soliciting business on behalf or for the benefit of any entity that operates an Internet portal in China from any customer, supplier or business partner of Sohu.com Inc. Both Yunfan Zhou and Nick Yang resigned from Sohu.com Inc. on March 18, 2002. Messrs. Zhou and Yang received claims made by Sohu.com Inc. in respect of breaches by them of these restrictions, but such claims were amicably resolved between Sohu.com Inc. and each of Messrs. Zhou and Yang in September 2002. We are not aware of any further claims or legal proceedings initiated or threatened by Sohu.com Inc. against Yunfan Zhou, Nick Yang or us.

BOARD PRACTICE

To enhance our corporate governance, our board of directors established three board committees: an audit committee, a nominations committee and a compensation committee, which are comprised solely of independent directors.

Audit Committee

We have established an audit committee in accordance with the Nasdaq Listing Rules, which reviews our internal accounting procedures and considers and reports to our board of directors with respect to other auditing and accounting matters, including the selection of our independent auditors, the scope of annual audits, fees to be paid to our independent auditors and the performance of our independent auditors. The members of our audit committee are Charlie Y. Shi and Yongqiang Qian, both of whom are our independent directors.

Nominations Committee

We have established a nominations committee, which identifies individuals qualified to become directors and recommends director nominees to be approved by our board. The members of our nominations committee are Charlie Y. Shi and Yongqiang Qian, both of whom are our independent directors.

Compensation Committee

We have established a compensation committee to determine the salaries and benefits of our directors and senior officers. The members of our compensation committee are Charlie Y. Shi and Yongqiang Qian, both of whom are our independent directors.

COMPENSATION OF DIRECTORS AND SENIOR OFFICERS

Our senior officers receive compensation in the form of salaries, annual bonuses and share options. We have entered into service agreements with our senior officers. None of these service agreements provide benefits to our senior officers upon termination. The aggregate remuneration paid and benefits in kind granted to our senior officers for the period from May 6, 2002 to December 31, 2002 and the year ended December 31, 2003 were approximately $10,316 (RMB85,382) and $62,228 (RMB0.5 million), respectively. We do not pay any compensation to our non-executive directors.

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We accrued $0.3 million in 2003 and $0.2 million in the first quarter of 2004 to provide housing, medical and pension benefits, unemployment insurance, and staff welfare for all employees, including our executive directors and senior officers.

STOCK OPTIONS

The 2002 Plan was adopted by our shareholders at a meeting held on June 6, 2002. The 2002 Plan is intended to provide incentives to our directors, officers and employees as well as consultants and advisors of our company and its present or future parent company or subsidiaries, or the related corporations. Pursuant to the 2002 Plan, we originally reserved a total of 3,500,000 (adjusted to 70,000,000 following our share split) ordinary shares for issuance under two categories of options: incentive share options, which may only be granted to officers and employees of the related corporations, and non-qualified options, which may be granted to any employee, officer, director, consultant or advisor of the related corporations. We have increased the number of ordinary shares reserved for issuance in the 2002 Plan to 5,250,000 (adjusted to 105,000,000 following our share split) on February 15, 2004. Such increase should be approved by our shareholders meeting to be held before August 15, 2004.

We have granted an aggregate of 86,120,000 options which are outstanding, of which 18,045,000 were exercisable, as of March 31, 2004 as adjusted by cancellations following initial grants and our share split at exercise prices ranging from $0.0025 to $0.25 per ordinary share.

With respect to the options that we have granted, the vesting schedule for the incentive share options provides for 25% of the options to vest on the first anniversary of the date of the grant, and the remaining 75% to vest in 12 equal quarterly installments beginning one calendar quarter after the date of such anniversary. The non-qualified options vested immediately upon grant of such options. The expiration date for each option is ten years from the date of grant. The exercise price of each option was the estimated fair market value as determined by our board of directors after taking into consideration all factors in good faith.

The 2002 Plan provides for acceleration of awards upon the occurrence of certain consolidations, mergers, acquisitions or sale of all of substantially all assets or shares of our company. In any such case, our board shall take one of more of the following actions, among others, accelerate the date of exercise of such options or any installment of such options, provide a fixed period of time that the grantees must exercise or terminate all options in exchange for cash payment.

Our board of directors administers the 2002 Plan and has wide discretion in awarding share options. Subject to the provisions of the 2002 Plan, our board of directors determines who will be granted options, the type and timing of options to be granted, the vesting schedule and other terms and conditions of the options, including the exercise price.

Generally, if an outstanding incentive share option granted under the 2002 Plan has not vested by the date of termination of the grantee’s employment with us, no further installments of his or her incentive share options will become exercisable following the date of such cessation of employment, and his or her incentive share options will terminate after a period of 90 days from such cessation of employment.

Our board of directors may terminate or amend the 2002 Plan at any time; provided, however, that our board of directors must seek our shareholders’ approval with respect to certain major modifications to the 2002 Plan, and, if such amendment or termination would adversely affect the rights of a grantee under any option granted, the approval of such grantee would be required. Without further action by our board of directors, the 2002 Plan will terminate on June 6, 2012.

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The following table sets forth information on stock options that have been granted and are outstanding as of March 31, 2004 pursuant to the 2002 Plan.

						Approximate
						percentage of our
			Number of shares			issued share
			to be issued			capital immediately
			upon exercise			after completion of
Name of grantee			of options		Expiration date	this offering
Senior Officers
	Richard Wei(1)(2)			14,000,000	February 17, 2014		1.0	%
	Xianghong Chen(1)(2)			2,000,000	February 17, 2014		0.1	%
All directors and senior officers as a group				16,000,000	February 17, 2014		1.2	%
	Other employees (comprising 247 individuals)			70,120,000	Varies from June 30, 2012 to February 17, 2014		5.1	%
		Total		86,120,000	Varies from June 30, 2012 to February 17, 2014		6.3	%

(1)	The exercise price of the stock options is $0.25 per ordinary share.
(2)	The options will vest periodically, starting from February 18, 2005.

Stock-based compensation expense

We grant stock options to our employees and we record a compensation charge for the excess of the fair value of the stock at the measure date over the amount an employee must pay to acquire the stock compensation using the straight-line method over the vesting periods of the related options, which are generally four years.

We have recorded deferred stock compensation to represent the difference between the deemed fair value of our ordinary shares for accounting purposes and the option exercise prices. We determined the deemed fair value of our ordinary shares based upon several factors, including a valuation report from an independent appraiser and the price of our then most recent preferred share placement. We recorded deferred stock-based compensation expense of $0, $0.2 million and $2.2 million for stock options granted to employees, and amortized $0, $21,986 and $80,738, for the period from May 6, 2002 to December 31, 2002, 2003 and the first quarter of 2004, respectively.

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GENERAL

The telecommunications industry, including computer information and Internet access services, is highly regulated by the PRC government. Regulations issued or implemented by the State Council, the MII, and other relevant government authorities cover virtually every aspect of telecommunications network operations, including entry into the telecommunications industry, the scope of permissible business activities, interconnection and transmission line arrangements, tariff policy and foreign investment.

In March 1998, the National People’s Congress of the PRC approved a government restructuring plan that directed the MII to assume, among other things, the regulatory, administrative and other responsibilities of, and rights previously exercised by, the former Ministry of Post and Telecommunications.

The MII, under the leadership of the State Council, is responsible for, among other things:

†	formulating and enforcing telecommunications industry policy, standards and regulations;
†	granting licenses to provide telecommunications and Internet services;
†	formulating tariff and service charge policies for telecommunications and Internet services;
†	supervising the operations of telecommunications and Internet service providers; and
†	maintaining fair and orderly market competition among operators.

In September 2000, the PRC State Council promulgated the Telecommunications Regulations, or the Telecom Regulations. The Telecom Regulations categorize all telecommunications businesses in China as either infrastructure telecommunications businesses or value-added telecommunications businesses, with wireless value-added services classified as value-added telecommunications businesses. The Telecom Regulations also set forth extensive guidelines with respect to different aspects of telecommunications operations in China.

In December 2001, in order to comply with China’s commitments with respect to its entry into the WTO, the State Council promulgated the Telecom FIE Rules. The Telecom FIE Rules set forth detailed requirements with respect to capitalization, investor qualifications and application procedures in connection with the establishment of a foreign invested telecommunications enterprise. Pursuant to the Telecom FIE Rules, the ultimate capital contribution ratio of the foreign investor(s) in a foreign-funded telecommunications enterprise that provides value-added telecommunications services shall not exceed 50%. In addition, all principal investors in such an enterprise must be themselves telecommunications operators. Pursuant to the Foreign Investment Industrial Guidance Catalogue, as of December 11, 2003, the permitted foreign investment ratio of value-added telecommunications services is no more than 50%. However, uncertainty exists as to how these regulations will be implemented. The PRC government authorities are still in the process of drafting detailed rules with respect to the procedures for the application for and approval of establishing a foreign-invested value-added telecommunications services enterprise. To comply with these PRC regulations, we conduct substantially all of our operations through Beijing AirInbox and Beijing Boya Wuji, which are wholly-owned by PRC citizens and incorporated in the PRC. We do not have any equity interests in these operating companies, but instead enjoy the economic benefits of these operating companies through a series of contractual arrangements, which we and our wholly-owned subsidiary have entered into with Beijing AirInbox and Beijing Boya Wuji and their respective shareholders as described in “Our corporate structure” and “Related party transactions.” In the opinion of Llinks Law Office, our PRC legal counsel, the

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ownership structures of, and our contractual agreements with, these operating companies comply with all existing PRC laws and regulations, including the Telecom FIE Rules.

In addition to the regulations promulgated by the central PRC government, some local governments have also promulgated local rules applicable to Internet or other value-added telecommunications companies operating within their respective jurisdictions. In Beijing, the Beijing Municipal Administrative Bureau of Industry and Commerce, or the Beijing AIC, has promulgated a number of Internet-related rules. In 2002, the Beijing AIC invalidated a previously issued circular and adopted a new set of rules requiring owners of the domain names of commercial web sites located within Beijing to register their web site names and commercial web sites with the Beijing AIC.

REGULATION OF INTERNET CONTENT SERVICES

Subsequent to the State Council’s promulgation of the Telecom Regulations and the Internet Information Services Administrative Measures, or the Internet Information Measures, in September 2000, the MII and other regulatory authorities formulated and implemented a number of Internet-related regulations, including but not limited to the Internet Electronic Bulletin Board Service Administrative Measures, or the BBS Measures. The Internet Information Measures require that commercial Internet content providers must obtain an Internet information license from the appropriate telecommunications authorities in order to carry on any commercial Internet content operations within China. Internet content operators must display their operating license numbers in a conspicuous location on their home page. Internet content operators are obliged to police their web sites in order to remove categories of harmful content that are broadly defined. This obligation reiterates Internet content restrictions that have been promulgated by other ministries over the past few years. In addition, the Internet Information Measures also provide that Internet content operators which operate in sensitive and strategic sectors, including news, publishing, education, health care, medicine and medical devices, must obtain additional approvals from the relevant authorities in charge of those sectors as well. The BBS Measures provide that any Internet content operator engaged in providing online BBS is subject to a special approval and filing process with the relevant governmental telecommunications authorities. Of particular note to foreign investors, the Internet Information Measures stipulate that Internet content operators must obtain the consent of the MII prior to establishing an equity or cooperative joint venture with a foreign partner.

Certain local governments have promulgated local rules applicable to Internet companies operating within their respective jurisdictions. In Beijing, the Beijing AIC, has promulgated a number of Internet-related rules. In 2002, the Beijing AIC invalidated a previously issued circular and adopted a new set of rules requiring owners of the domain names of commercial web sites located within Beijing to register their web site names and commercial web sites with the Beijing AIC.

The Beijing Telecommunications Administration Bureau issued to Beijing AirInbox a telecommunications and information services operating license for its Internet content business. These licenses are subject to standard annual reviews. Beijing Boya Wuji is in the process of applying for these licenses.

REGULATION OF WIRELESS VALUE-ADDED SERVICES

Pursuant to the Telecom Regulations, a commercial operator of Internet content services must obtain an operating license. Other than this requirement, PRC legislation on wireless telecommunications is generally aimed at regulating equipment and infrastructure rather than applications and value-added service providers.

The Administrative Measures for Telecommunications Business Operating Licenses, or Telecom License Measures, were promulgated by the MII on December 26, 2001. The Telecom License Measures

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confirm that there are two types of telecommunications operations licenses for operators in China (including foreign-invested telecommunications enterprises), namely, licenses for infrastructure services and licenses for value-added services, for which a distinction is made as to whether a license is granted for intra-provincial or trans-regional, or inter-provincial, activities. An appendix to the license details the permitted activities of the enterprise to which it was granted. An approved telecommunications service operator must conduct its business, for both infrastructure and value-added services types of businesses, according to the specifications recorded on its Telecom Business Operating License. The MII is the competent approval authority for foreign-invested telecommunications enterprises and for granting trans-regional licenses to value-added telecommunications enterprises.

Other than a general classification of wireless information services as a value-added telecommunications services by an appendix to the Telecom Regulations, as amended, there is currently no nationwide legislation that specifically addresses the provision of wireless value-added services, such as SMS, MMS, WAP, Java^TM, IVR or CRBT services. At this time, it is uncertain when national legislation might be enacted to regulate this business.

Each of Beijing AirInbox and Beijing Boya Wuji has obtained a value-added telecommunications business operation permit to operate wireless value-added businesses in Beijing. Beijing AirInbox is also in the process of applying for a trans-regional value-added telecommunications license with the MII.

REGULATION OF INTERNET CULTURE ACTIVITIES

On May 10, 2003, the Ministry of Culture of the PRC promulgated the Internet Culture Administration Tentative Measures, or the Internet Culture Measures, which became effective as of July 1, 2003. The Internet Culture Measures require Internet content providers which engage in Internet culture activities to obtain an Internet culture business operations license from the Ministry of Culture in accordance with the Internet Culture Measures. The term “Internet culture activities” includes, among other things, acts of online dissemination of Internet cultural products, such as audio-visual products, game products, performances of plays or programs, works of art and cartoons, and the production, reproduction, importation, sale (wholesale or retail), leasing and broadcasting of Internet cultural products.

Beijing AirInbox has obtained, and Beijing Boya Wuji is in the process of applying for, an Internet culture business operations license with the Ministry of Culture.

REGULATION OF INFORMATION SECURITY AND CENSORSHIP

PRC legislation concerning information security and censorship specifically prohibits the use of Internet infrastructure where it results in a breach of public security, the provision of socially destabilizing content or the divulgence of State secrets.

†	“A breach of public security” includes a breach of national security or disclosure of state secrets; infringement on state, social or collective interests or the legal rights and interests of citizens; or illegal or criminal activities.
†	“Socially destabilizing content” includes any action that incites defiance or violation of PRC laws; incites subversion of state power and the overturning of the socialist system; fabricates or distorts the truth, spreads rumors or disrupts social order; advocates cult activities; or spreads feudal superstition, involves obscenities, pornography, gambling, violence, murder, or horrific acts or instigates criminal acts.
†	“State secrets” are defined as “matters that affect the security and interest of the State.” The term covers such broad areas as national defense, diplomatic affairs, policy decisions on State affairs,

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national economic and social development, political parties and “other State secrets that the State Secrecy Bureau has determined should be safeguarded.”

According to the aforementioned legislation, it is mandatory for Internet companies in China to complete security filing procedures with the local public security bureau and for them to update their filings regularly with the local public security bureau regarding information security and censorship systems for their web sites. In this regard, the Detailed Implementing Rules for the Measures for the Administration of Commercial Web Site Filings for the Record, promulgated in July 2002 by the Beijing AIC, state that web sites must comply with the following requirements:

†	they must file with the Beijing AIC and obtain electronic registration marks;
†	they must place the registration marks on their web sites’ homepages; and
†	they must register their web site names with the Beijing AIC.

We have successfully filed and registered our web sites and web site names with the Beijing AIC. Accordingly, we have obtained an electronic registration mark.

REGULATION OF ADVERTISEMENTS

The principle legislation governing advertisements in China is the Advertising Law (1996) and the Administrative Regulations of Advertisements (1987), pursuant to which an entity conducting advertising activities must obtain a permit from the local AIC. The SAIC is the government agency responsible for regulating advertising activities in China. In February 2000, the SAIC issued a circular requiring any Internet content operator engaging in advertising activities to obtain an advertising license. The SAIC has not promulgated regulations specifically aimed at wireless advertising through a media other than the Internet, such as through SMS or MMS services.

As part of our non-mobile operator marketing activities, we have developed integrated marketing campaigns with traditional media companies and multinational corporations through certain cross-selling efforts with these companies. If the SAIC were to treat our integrated marketing campaigns or other activities as being advertising activities, we would need to apply to the Beijing SAIC for an advertising license to conduct wireless advertising business (through SMS or MMS, for example). We cannot assure you that such application would be approved by the SAIC. Failure to obtain such approval could result in penalties including being banned from engaging in online advertising activities, confiscation of illegal earnings and fines.

REGULATION OF NEWS DISSEMINATION

On November 17, 2000, the Internet News Measures were promulgated by the State Council News Office and the MII. These measures stipulate that general web sites established by non-news organizations may publish news released by certain official news agencies if such web sites satisfy the requirements set forth in Article 9 of the measures and have acquired the requisite approval, but may not publish news items produced by themselves or news sources from elsewhere. All the news that we publish and disseminate originates from official news agencies approved by the PRC government.

State Council News Office and MII have not specified whether the Internet News Measures apply to dissemination of news through SMS, MMS, WAP, Java^TM, IVR, CRBT or other wireless technologies. If, in the future, the State Council News Office and MII clarify that the Internet News Measures are applicable to wireless services operators or issue new regulations or rules regulating wireless news dissemination, we may need to apply for a license or permit from governmental agencies in charge of news dissemination. We cannot assure you that such application would be approved by the relevant governmental agencies.

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REGULATION OF ONLINE PUBLICATIONS

The State News and Publications Administration, or SNPA, is the government agency responsible for regulating publishing activities in China. On June 27, 2002, MII and SNPA jointly promulgated the Tentative Internet Publishing Administrative Measures, or the Internet Publishing Measures, which took effect on August 1, 2002. The Internet Publishing Measures require Internet publishers to secure approval from SNPA. The term “Internet publishing” is defined as an act of online dissemination whereby Internet information service providers select, edit and process works created by themselves or others (including content from books, newspapers, periodicals, audio and video products, electronic publications, and other sources that have already been formally published or works that have been made public in other media) and subsequently post the same on the Internet or transmit the same to users via the Internet for browsing, use or downloading by the public.

SNPA and MII have not specified whether the aforementioned approval in the Internet Publishing Measures is applicable to dissemination of works through SMS, MMS, WAP, Java^TM, IVR, CRBT or other wireless technologies. If, in the future, SNPA and MII clarify that the Internet Publishing Measures are applicable to wireless value-added telecommunications services operators or issue new regulations or rules regulating wireless publishing, we may need to apply for a license or permit from governmental agencies in charge of publishing. We cannot assure you that such application would be approved by the relevant governmental agencies.

REGULATION OF FOREIGN EXCHANGE CONTROL

The principal regulations governing foreign exchange in China are the Foreign Exchange Control Regulations (1996) and the Administration of Settlement, Sale and Payment of Foreign Exchange Regulations (1996), or the Exchange Regulations. Under the Exchange Regulations, the Renminbi is freely convertible into foreign exchange for current account items, including the distribution of dividends. Conversion of Renminbi for capital account items, such as direct investment, loans, security investment and repatriation of investment, however, is still subject to the approval of the State Administration of Foreign Exchange, or SAFE.

Under the Exchange Regulations, foreign-invested enterprises are required to open and maintain separate foreign exchange accounts for capital account items (but not for other items). In addition, foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from SAFE.

Capital investments by foreign-invested enterprises outside of China (excluding Hong Kong, Macau and Taiwan) are also subject to limitations, which include approvals by the Ministry of Commerce, SAFE and the State Reform and Development Commission.

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OVERVIEW

In order to comply with PRC regulations, we operate our business in China through Beijing AirInbox and Beijing Boya Wuji, companies wholly owned by Yang Cha, Songlin Yang, Yunfan Zhou and Zhen Huang, all of whom are PRC citizens. We have entered into a series of contractual arrangements with Beijing AirInbox, Beijing Boya Wuji and their respective shareholders, including agreements on provision of loans, provision of services, license of trademarks and domain names, and certain corporate governance and shareholder rights matters.

We have entered into a shareholders agreement with our shareholders. In addition, we have entered into certain consulting agreements with companies controlled by our current and former shareholders for provision of business advisory services.

Below is a summary of the material provisions of these agreements.

RELATED PARTY TRANSACTIONS BETWEEN US AND OUR CURRENT AND FORMER SHAREHOLDERS AND OTHER AFFILIATES

Loan Agreement. On March 31, 2004, we entered into a loan agreement with Yunfan Zhou, Songlin Yang and Zhen Huang, pursuant to which we amended and restated the terms and conditions of our long-term loans in the total principal amount of $0.2 million (RMB2 million) that we provided to Yunfan Zhou, Songlin Yang and Zhen Huang, in the proportion of their shareholding percentages in Beijing AirInbox. The loans are interest-free and the proceeds have been invested into Beijing AirInbox as a capital contribution by the borrowers. Pursuant to the loan agreement, each of the borrowers agreed to transfer his or her interest in Beijing AirInbox to KongZhong Beijing when permitted under PRC law as repayment of the loan. Each of the borrowers also undertook to us that the loan will become due and payable if, among other things, (i) either Yunfan Zhou or Nick Yang resigns or is removed from office by KongZhong Beijing or its affiliates, (ii) the respective borrower commits a criminal offense, (iii) any third party raises against the respective borrower a claim of more than $60,411 (RMB0.5 million), (iv) foreign investment in a telecommunications value-added services business is permitted and the relevant government authorities start approving such foreign investment, or (v) the borrower dies or becomes incapacitated. In addition, the loan shall be repaid only in the form of a transfer of each borrower’s entire equity interest in Beijing AirInbox to us or, if transfer of ownership to us is prohibited under applicable law, to our designees. Upon the transfer of each borrower’s equity interest in Beijing AirInbox, any proceeds from the transfer shall be used to offset his or her loan repayment obligation to us or our designees. The term of the loan agreement is ten years, automatically renewable at our option.

On March 31, 2004, we entered into a loan agreement with Yang Cha, one of our employees, and Songlin Yang, pursuant to which we have agreed to grant loans to Yang Cha in the amount of $0.5 million (RMB4.5 million) and to Songlin Yang in the amount of $0.4 million (RMB3.5 million). These loans are interest-free and the proceeds are to be exclusively invested into Beijing AirInbox as contribution to the capital increase in Beijing AirInbox by Yang Cha and Songlin Yang. The terms and conditions of this loan agreement are substantially the same as the loan agreement that we entered into with Yunfan Zhou, Songlin Yang and Zhen Huang on March 31, 2004. See “—Other related party agreements.”

Termination Agreement. On March 31, 2004, we entered into a termination agreement with KongZhong Beijing, Beijing AirInbox, Yunfan Zhou, Songlin Yang and Zhen Huang, pursuant to which the parties terminated previously existing loan agreements between us and such individuals. The

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terminated loan agreements contained substantially similar terms and conditions as those of a superseding loan agreement between us and the same individuals, which was entered into on March 31, 2004. In addition, pursuant to the termination agreement, a previously existing exclusive cooperation agreement has been terminated and superseded by various other agreements entered into by the parties on March 31, 2004, including the Exclusive Technical and Consulting Services Agreement, Equity Pledge Agreement and Business Operation Agreement. See “—Other related party agreements.”

Consulting Agreement. On October 2, 2002, we entered into a consulting agreement with Mobileren Inc., our 27.4% shareholder which is 100% beneficially owned by Yunfan Zhou. Pursuant to this agreement, Mobileren Inc. provided us investment advisory services. In return, we paid Mobileren Inc. a consulting fee in the amount of $90,000.

Consulting Agreement. On April 1, 2003, we entered into a consulting agreement with Wirelessrock Inc., which held a 10% equity interest in us until September 2003 and is 100% owned by Leilei Wang. Pursuant to this agreement, Wirelessrock Inc. provided us investment advisory services. In return, we paid Wirelessrock Inc. a consulting fee in the amount of $90,000.

Other Related Party Agreements

Option Agreement. Yunfan Zhou, Songlin Yang, Yang Cha and Zhen Huang, the shareholders of Beijing AirInbox, entered into an amended and restated exclusive option agreement with KongZhong Beijing on May 10, 2004 pursuant to which each of these shareholders granted KongZhong Beijing an exclusive option to acquire all of his or her interest in Beijing AirInbox at the price of $12,083.1 (RMB100,000) per one percent of its registered capital. The term of this agreement is the earlier of (i) 10 years from the date of execution and (ii) the date all of the equity interests in Beijing AirInbox have been purchased by KongZhong Beijing.

Yunfan Zhou and Zhen Huang, the shareholders of Beijing Boya Wuji, entered into an exclusive option agreement with KongZhong Beijing on March 31, 2004, pursuant to which each of these shareholders granted KongZhong Beijing an exclusive option to acquire all of his or her interest in the Beijing Boya Wuji at the price of $1,208.2 (RMB10,000) per one percent of its registered capital. The term of this agreement is the earlier of (i) 10 years from the date of execution and (ii) the date all of the equity interests in Beijing Boya Wuji have been purchased by KongZhong Beijing.

Exclusive Technical and Consulting Services Agreements. Beijing AirInbox entered into an exclusive technical and consulting services agreement with KongZhong Beijing on March 31, 2004, pursuant to which KongZhong Beijing will provide ongoing technical and consulting services to Beijing AirInbox on an exclusive basis. The services to be provided under the agreement include, among others, network and web site design and maintenance, research and development and consulting on sales, marketing, customer services, human resources, market research and public relations. The service fees will be calculated quarterly, based on a certain percentage of the revenues of Beijing AirInbox for such quarter. KongZhong Beijing may partially waive any quarterly payment as long as (i) the cash and cash equivalents owned by Beijing AirInbox is below $12.1 million (RMB100 million) and (ii) the payment of service fees by AirInbox is no less than $0.6 million (RMB5 million) for such quarter. The term of this agreement is for 10 years from the date of execution, automatically renewable at KongZhong Beijing’s option. Beijing AirInbox previously entered into an exclusive technical and consulting services agreement with KongZhong Beijing on October 10, 2003 for KongZhong Beijing to provide similar services to Beijing AirInbox in the last three months of 2003. This agreement expired on December 31, 2003.

Beijing Boya Wuji entered into an exclusive technical and consulting services agreement with KongZhong Beijing on March 31, 2004, pursuant to which KongZhong Beijing will provide certain

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technical and consulting services to Beijing Boya Wuji on an exclusive basis. The services to be provided under the agreement include, among others, network and web site design and maintenance, research and development and consulting services on sales, marketing, customer services, human resources, market research and public relations. The service fees will be calculated quarterly, based on a certain percentage of the revenues of Beijing Boya Wuji for such quarter, provided that Beijing Boya Wuji is profitable. The term of each of these agreements is for 10 years from the date of execution, automatically renewable at KongZhong Beijing’s option.

Equity Pledge Agreements. Yunfan Zhou, Songlin Yang, Yang Cha and Zhen Huang, the shareholders of Beijing AirInbox, entered into an amended and restated equity pledge agreement with KongZhong Beijing on May 10, 2004. Pursuant to this agreement, each of these shareholders pledged all of his or her interest in Beijing AirInbox to KongZhong Beijing to guarantee the performance by Beijing AirInbox of its obligations under the exclusive technical and consulting services agreement and the domain name license agreement, dated March 31, 2004, and the trademark license agreement dated May 10, 2004 between Beijing AirInbox and KongZhong Beijing. The term of the agreement is from the date on which the pledges are recorded on the shareholders register of Beijing AirInbox until all obligations of Beijing AirInbox guaranteed under this agreement have been fully performed.

Yunfan Zhou and Zhen Huang, the shareholders of Beijing Boya Wuji, entered into an equity pledge agreement with KongZhong Beijing on March 31, 2004. Pursuant to this agreement, each of these shareholders of Beijing Boya Wuji pledged all of his or her interest in Beijing Boya Wuji to KongZhong Beijing to guarantee the performance by Beijing Boya Wuji of its obligations under the exclusive technical and consulting services agreement, the trademark license agreement and the domain name license agreement, dated March 31, 2004, between Beijing Boya Wuji and KongZhong Beijing. The term of this agreement is from the date on which the pledges are recorded on the shareholders register of Beijing Boya Wuji until all obligations of Beijing Boya Wuji guaranteed under this agreement have been fully performed.

Business Operation Agreements. Beijing AirInbox, its shareholders, Yunfan Zhou, Songlin Yang, Yang Cha and Zhen Huang and KongZhong Beijing entered into an amended and restated business operation agreement on May 10, 2004. Pursuant to this agreement, Beijing AirInbox and its shareholders agreed that, without the prior written consent of KongZhong Beijing or its designees, Beijing AirInbox will not engage in any transactions which may have a material adverse effect on its assets, liabilities, equity or operations, including (i) lending to or assuming any obligations of a third party, (ii) selling or purchasing any assets or rights valued at more than $24,164 (RMB0.2 million), (iii) replacing or dismissing any directors or senior officers, (iv) incurring any security interest over its assets and intellectual property to any third party or assigning to any third party its rights or obligations under this agreement, (v) amending the articles of association or changing the business scope of Beijing AirInbox, and (vi) changing the normal operational process or amending any material internal guidelines of Beijing AirInbox. In addition, Beijing AirInbox and its shareholders will appoint the designees of KongZhong Beijing, who must be employees of KongZhong Beijing, as the directors, general manager and other senior officers of Beijing AirInbox. Each of the shareholders has also agreed to execute a power of attorney to grant the designees of KongZhong Beijing full power and authority to exercise all of the respective shareholder’s rights in Beijing AirInbox. The term of this agreement is for 10 years from the date of execution, automatically renewable at KongZhong Beijing’s option. In addition, according to a letter agreement between KongZhong Beijing and us, determination of any designees by KongZhong Beijing must be approved by the majority of our board of directors.

Beijing Boya Wuji, its shareholders, Yunfan Zhou and Zhen Huang, and KongZhong Beijing entered into a business operation agreement on March 31, 2004. Pursuant to this agreement, Beijing Boya Wuji and its shareholders agreed that, without the prior written consent of KongZhong Beijing or its designees, Beijing Boya Wuji will not engage in any transactions which may have a material adverse

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effect on its assets, liabilities, equity or operations, including (i) lending to or assuming any obligations of a third party, (ii) selling or purchasing any assets or rights valued at more than $24,164 (RMB0.2 million), (iii) replacing or dismissing any directors or senior officers, (iv) incurring any security interest over its assets and intellectual property to any third party or assigning to any third party its rights or obligations under this agreement, (v) amending the articles of association or changing the business scope of Beijing Boya Wuji and (vi) changing the normal operations or amending any material internal guidelines of Beijing Boya Wuji. In addition, Beijing Boya Wuji and its shareholders will appoint the designees of KongZhong Beijing, who must be employees of KongZhong Beijing, as directors, general manager and other senior officers of Beijing Boya Wuji. Each of the shareholders has also agreed to execute a power of attorney to grant the designees of KongZhong Beijing full power and authority to exercise all of the respective shareholder’s rights in Beijing Boya Wuji. The term of this agreement is for 10 years from the date of execution, automatically renewable at KongZhong Beijing’s option. In addition, according to a letter agreement between KongZhong Beijing and us, determination of any designees by KongZhong Beijing must be approved by the majority of our board of directors.

Powers of Attorney. Each of Yunfan Zhou, Songlin Yang, Yang Cha and Zhen Huang, the shareholders of Beijing AirInbox, executed an irrevocable power of attorney on May 10, 2004, granting Yunfan Zhou or any other designee of KongZhong Beijing full power and authority to exercise all of his or her rights as a shareholder in Beijing AirInbox.

Each of Yunfan Zhou and Zhen Huang, the shareholders of Beijing Boya Wuji, executed an irrevocable power of attorney on March 31, 2004, granting Yunfan Zhou or any other designee of KongZhong Beijing full power and authority to exercise all of his or her rights as a shareholder in Beijing Boya Wuji.

Intellectual Property Agreements. KongZhong Beijing entered into an amended and restated trademark license agreement with Beijing AirInbox on May 10, 2004, granting Beijing AirInbox a non-exclusive license to use certain trademarks for a quarterly fee equal to 5% of the gross revenues of Beijing AirInbox, which is waived before KongZhong has obtained registration of such trademarks in China. In addition, such fee may be waived by KongZhong Beijing if it believes such waiver is necessary for the business of Beijing AirInbox. The term of the agreement is 10 years from the date of execution, automatically renewable at KongZhong Beijing’s option.

KongZhong Beijing entered into a domain name license agreement with Beijing AirInbox on March 31, 2004, granting Beijing AirInbox a non-exclusive license to use the domain names owned by KongZhong Beijing for a quarterly fee equal to 5% of the gross revenues of Beijing AirInbox, which may be waived by KongZhong Beijing if it believes such waiver is necessary for the business of Beijing AirInbox. The term of the agreement is 10 years from the date of execution, automatically renewable at KongZhong Beijing’s option.

KongZhong Beijing entered into an amended and restated trademark license agreement with Beijing Boya Wuji on May 10, 2004, granting Beijing Boya Wuji a non-exclusive license to use certain trademarks for a quarterly fee equal to 5% of the gross revenues of Beijing Boya Wuji, which is waived before KongZhong has obtained registration of such trademarks in China. In addition, such fee may be waived by KongZhong Beijing if it believes such waiver is necessary for the business of Beijing Boya Wuji. The term of the agreement is ten years from the date of execution, automatically renewable at KongZhong Beijing’s option.

KongZhong Beijing entered into a domain name license agreement with Beijing Boya Wuji on March 31, 2004, granting Beijing Boya Wuji a non-exclusive license to use the domain names owned by KongZhong Beijing for a quarterly fee equal to 5% of the gross revenues of Beijing AirInbox, which may be waived by Kongzhong Beijing if it believes such waiver is necessary for the business of

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Beijing Boya Wuji. The term of the agreement is 10 years from the date of execution, automatically renewable at KongZhong Beijing’s option.

SHAREHOLDERS AGREEMENT

On September 12, 2002, we entered into a shareholders agreement with the holders of our Series A and Series B preferred shares and the holders of our ordinary shares.

Pursuant to the shareholders agreement, the rights of the holders of our Series A and Series B preferred shares under these agreements shall terminate upon the closing of this offering, except that, upon receipt of demand within six months following this offering, we are obligated to register for public offering all or any portion of the ordinary shares issuable upon conversion of our preferred shares. The holders of our Series A and Series B preferred shares are also entitled to participate in certain registrations of securities that we initiate after this offering. See “Description of share capital—Registration rights.”

In addition, without the prior written consent of our shareholders representing no less than 66 2/3% of the ordinary shares held by the investors who had purchased our Series B preferred shares, none of Yunfan Zhou and Nick Yang, our founders, may directly or indirectly transfer any of our ordinary shares held by him, or any equity interests of Beijing AirInbox held or controlled by him, or, in the case of Yunfan Zhou, any equity interests of Mobileren Inc., within 180 days after the closing of this offering.

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Principal and selling shareholders

The table below sets forth information with respect to the beneficial ownership, within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, of our ordinary shares, as of March 31, 2004, (1) assuming the conversion of all of our preferred shares into ordinary shares, and (2) as adjusted to reflect the sale of our ADSs offered in this offering for:

†	each person whom we know owns beneficially more than 5% of our ordinary shares;
†	each of our directors and each of our senior officers who beneficially own our ordinary shares; and
†	each other selling shareholder who will participate in this offering.

The number of our ordinary shares outstanding used in calculating the percentage of each listed person includes our ordinary shares underlying options held by such person that are exercisable immediately, but excludes ordinary shares underlying options held by any other person.

	Shares beneficially					Shares being					Shares beneficially
	owned prior to this					sold in the					owned after this
	offering					offering(1)					offering(1)
Name	Number		Percent			Number		Percent			Number		Percent
Yunfan Zhou (shares held through Mobileren Inc.)		287,500,000		27.4	%		16,000,000		1.5	%		271,500,000		19.8	%
Nick Yang		287,500,000		27.4	%		16,000,000		1.5	%		271,500,000		19.8	%
Global Lead Technology Limited		140,000,000		13.3	%		14,717,477		1.4	%		125,282,523		9.1	%
Draper Fisher Jurvetson ePlanet Ventures L.P.(2)		89,880,000		8.6	%		9,448,620		0.9	%		80,431,380		5.9	%
Draper Fisher Jurvetson ePlanet Partners Fund, LLC(2)		1,866,680		0.2	%		196,234		—	%		1,670,446		0.1	%
Draper Fisher Jurvetson ePlanet Ventures GmbH KG & Co.(2)		1,586,660		0.2	%		166,797		—	%		1,419,863		0.1	%
eGarden I(3)		59,500,000		5.7	%		6,254,928		0.6	%		53,245,072		3.9	%
Calver Investments Limited(3)		24,500,000		2.3	%		2,575,558		0.2	%		21,924,442		1.6	%
eGarden Ventures (HK), Ltd. (3)		3,500,000		0.3	%		367,937		—	%		3,132,063		0.2	%
Lucky Dragon Holdings Group Ltd.		81,666,660		7.8	%		8,585,195		0.8	%		73,081,465		5.3	%
Yin Alice Chau		52,500,000		5.0	%		5,519,054		0.5	%		46,980,946		3.4	%
Yang Cha(4)		1,600,000		0.2	%		168,200		—	%		1,431,800		0.1	%
Fan Zhang		—		—			—		—	%		—		—	%
Charlie Shi		—		—			—		—	%		—		—	%
Richard Wei		—		—			—		—	%		—		—	%
Xianghong Chen		—		—			—		—	%		—		—	%
All directors and senior officers as a group of 7 persons.(5)		575,000,000		54.8	%		32,000,000		3.0	%		543,000,000		39.6	%

(1) Assumes that the underwriters do not exercise the over-allotment option.

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Principal and selling shareholders

(2)	Draper Fisher Jurvetson ePlanet Ventures L.P., Draper Fisher Jurvetson ePlanet Partners Fund, LLC and Draper Fisher Jurvetson ePlanet Ventures GmbH KG & Co. together hold 8.9% of our company prior to the offering and 6.1% following this offering.
(3)	eGarden I, Calver Investments Limited and eGarden Ventures (HK), Ltd. together hold 8.3% of our company prior to this offering and 5.7% following this offering.
(4)	Represents stock options to acquire ordinary shares which are exercisable immediately. The options have an exercise price of $0.0025 per ordinary share.
(5)	Includes Yunfan Zhou and Nick Yang.

Mobileren Inc., a British Virgin Islands company, is 100% owned by one of our founders, Yunfan Zhou. Prior to September 2002, Mr. Zhou directly held 11,725,000 ordinary shares of our company. In September 2002, Mobileren Inc. purchased 3,150,000 Series A preferred shares from us, of which 500,000 were transferred to CENO Investment Limited in September 2003. The address of Mobileren Inc. is c/o Yunfan Zhou, 8/F, Tower A, Yuetan Building, No. 2 Yuetan North Street, Beijing, China 100045 until July 31, 2004, and will be c/o Yunfan Zhou, 33/F, Tengda Building, No. 168, Xiwai Avenue, Haidian District, Beijing China, 100044 starting from August 1, 2004. As adjusted by our share split, Mr. Zhou and his family member beneficially hold 234,500,000 ordinary shares and 105,500,000 Series A preferred shares of our company in aggregate.

Nick Yang is one of the founders of our company. In May and September 2002, he purchased 11,725,000 ordinary shares of our company and 3,150,000 Series A preferred shares of our company from us, of which 500,000 were transferred to CENO Investment Limited in September 2003. His address is 8/F, Tower A, Yuetan Building, No. 2 Yuetan North Street, Beijing, China 100045 until July 31, 2004, and will be 33/F, Tengda Building, No. 168, Xiwai Avenue, Haidian District, Beijing China, 100044 starting from August 1, 2004. As adjusted by our share split, Mr. Yang holds 234,500,000 ordinary shares and 53,000,000 Series A preferred shares of our company.

Global Lead Technology Limited is a British Virgin Islands company, a wholly-owned subsidiary of China Assets (Holdings) Ltd., a publicly traded company listed on the Hong Kong Stock Exchange. The voting and investment power over our ordinary shares owned by Global Lead Technology Limited is controlled by the board of directors of China Assets (Holdings) Limited, whose members are Yuan Yi Lao, Jun Yan Wang, Shu Lin Xin (alternate director to Yuan Yi Lao), Yu Qiao Zhao, Frank Che Yin Tsui, Wei Jiang, Wai Kin Yeung, Peter Duncan Neil Robertson, Jia Yan Fan and Ming Yu Wu. As adjusted by our share split, Global Lead Technology Limited holds 140,000,000 Series B preferred shares of our company. Its address is 19th Floor, Wing On House, 71 Des Voeux Road, Central, Hong Kong.

Draper Fisher Jurvetson ePlanet Ventures L.P., together with its affiliates, Draper Fisher Jurvetson ePlanet Partners Fund, LLC and Draper Fisher Jurvetson ePlanet Ventures GmbH KG & Co. hold 93,333,340 Series B preferred shares of our company, as adjusted by our share split. Their address is 2882 Sand Hill Rd., Suite 150, Menlo Park, CA 94025, U.S. The voting and investment power over our ordinary shares owned by Draper Fisher Jurvetson ePlanet Ventures LP, a Cayman Islands limited partnership, is controlled by the board of directors of Draper Fisher Jurvetson ePlanet Partners, Ltd., the general partner of the limited partnership. The directors of Draper Fisher Jurvetson ePlanet Partners, Ltd. are Timothy C. Draper, John H. N. Fisher, Steve T. Jurvetson and Asad Jamal. The voting and investment power over our ordinary shares owned by Draper Fisher Jurvetson ePlanet Partners Fund, LLC, a California limited liability company, is controlled by its managing members, Timothy C. Draper, John H. N. Fisher and Steve T. Jurvetson. The voting and investment power over our ordinary shares owned by Draper Fisher Jurvetson ePlanet Ventures GmbH KG & Co., a German partnership, is controlled by the managing directors of Draper Fisher Jurvetson ePlanet Verwaltungs GmbH, Ltd., the general partner of the partnership. The managing directors of Draper Fisher

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Principal and selling shareholders

Jurvetson ePlanet Verwaltungs GmbH, Ltd. are Timothy C. Draper, John H. N. Fisher, Steve T. Jurvetson and Asad Jamal.

eGarden I, a Cayman Islands company, together with its affiliates, Calver Investments Limited, a Channel Islands company controlled by Samuel Shin Fang, and eGarden Ventures (HK), Ltd., a British Virgin Islands company equally owned by John Zhao and Samuel Shin Fang, hold 87,500,000 shares, including 52,500,000 Series A preferred shares and 35,000,000 Series B preferred shares, of our company in aggregate, as adjusted by our share split. In July 2003, our former shareholder Wirelessrock Inc. transferred 1,400,000 Series A preferred shares to eGarden I and 1,224,000 Series A preferred shares to Calver Investments Limited. Their address is Unit 412, New East Ocean Center, 9 Science Museum Road, Tsim Sha Tsui, Kowloon, Hong Kong.

Lucky Dragon Holdings Group Ltd. is a British Virgin Islands company controlled by Lam Wu Fu. Prior to March 2004, Chinney Development Company Limited held these shares directly. Its address is 18th Floor, Hang Seng Building, 77 Des Voeux Road, Central, Hong Kong. As adjusted by our share split, it holds 81,666,660 Series B preferred shares of our company.

Yin Alice Chau is a family member of Yunfan Zhou. In October 2003, Wirelessrock Inc. transferred 2,625,000 Series A preferred shares to Liang Hong, who in return transferred these shares to Yin Alice Chau in February 2004. Her address is c/o Yunfan Zhou, 8/F, Tower A, Yuetan Building, No. 2 Yuetan North Street, Beijing, China 100045 until July 31, 2004, and will be c/o Yunfan Zhou, 33/F, Tengda Building, No. 168, Xiwai Avenue, Haidian District, Beijing China, 100044 starting from August 1, 2004. As adjusted by our share split, she holds 52,500,000 Series A preferred shares of our company.

Yang Cha is our current in-house counsel and former outside legal advisor. He also holds 45% of the equity interest in Beijing AirInbox Information Technologies Co., Ltd. Yang Cha’s address is 8/F, Tower A, Yuetan Building, No. 2 Yuetan North Street, Beijing, China 100045 until July 31, 2004, and will be 33/F, Tengda Building, No. 168, Xiwai Avenue, Haidian District, Beijing China, 100044 starting from August 1, 2004.

Upon the completion of this offering, under the terms of our preferred shares, all of our outstanding Series A and Series B preferred shares will be mandatorily converted into our ordinary shares if (i) the aggregate proceeds to us from this offering are in excess of $12 million and (2) our resulting market capitalization is no less than $50 million.

Among the 12 shareholders of our company, one record holder is in the United States, holding 0.2% of our outstanding shares.

The selling shareholders named above acquired their shares in offerings which were exempt from registration under the U.S. Securities Act of 1933 because they involved either private placements or offshore sales to non-U.S. persons.

To our knowledge, we are not owned or controlled, directly or indirectly, by another corporation, by any foreign company or by any other natural or legal persons, severally or jointly.

None of our existing shareholders has voting rights that will differ from the voting rights of other shareholders after the completion of this offering. We are not aware of any arrangement which may at a later date result in a change of control of our company.

101

Description of share capital

Set forth below is information concerning our share capital and a brief summary of the material provisions of our memorandum and articles of association, the material applicable laws of the Cayman Islands and certain other applicable laws and regulations. See “Risk factors— Risks relating to our ADSs—Shareholder rights under Cayman Islands law may differ materially from shareholder rights in the United States.” You and your advisers should refer to the text of our articles of association and to the texts of applicable laws and regulations for further information.

GENERAL

We were incorporated in the Cayman Islands in May 2002 as Communication Over The Air Inc., an exempted limited liability company, and we are governed by the Companies Law (2003 Second Revision) Cap. 22 of the Cayman Islands, or the Companies Law, and the common law of the Cayman Islands. An exempted company under Cayman Islands law is a company that conducts its business outside of the Cayman Islands, is exempted from certain requirements of the Companies Law, including a filing of an annual return of its shareholders with the Registrar of Companies, does not have to make its register of shareholders open to inspection and may obtain an undertaking against the imposition of any future taxation. In March 2004, we changed our name to KongZhong Corporation and split each share into 20 shares.

As of the date hereof, our authorized share capital is 1,000,000,000,000 shares, divided into 999,419,000,000 ordinary shares, 231,000,000 Series A preferred shares and 350,000,000 Series B preferred shares, par value $0.0000005 per share, and there were 469,000,000 ordinary shares and 581,000,000 preferred shares issued and outstanding. In May 2002, we issued 23,450,000 ordinary shares, or 469,000,000 ordinary shares after giving effect to our share split, at a price of $0.00001 per share. In September and October 2002, we issued and sold 11,550,000 (or 231,000,000 after giving effect to our share split) Series A preferred shares, at the price of $0.04762 per share and 17,500,000 (or 350,000,000 after giving effect to our share split) Series B preferred shares, at the price of $0.17143 per share.

All the outstanding ordinary shares are fully paid and non-assessable. Certificates representing the ordinary shares are issued in registered form. Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their shares.

We granted four tranches of options to our employees and advisors in July and December 2002, August 2003 and February 2004, respectively, at exercise prices ranging from $0.0025 to $0.25 per ordinary share, of which options to purchase an aggregate number of 86,120,000 of our ordinary shares are outstanding as of March 31, 2004. See “Management— Stock options.”

This offering consists of an offering of ADSs representing ordinary shares. The following discussion primarily concerns ordinary shares and the rights of holders of ordinary shares. The holders of ADSs will not be treated as our shareholders and will be required to surrender their ADSs for cancellation and withdrawal from the depositary facility in which the ordinary shares are held in order to exercise shareholders’ rights in respect of ordinary shares. The depositary will agree, so far as it is practical, to vote or cause to be voted the amount of ordinary shares represented by ADSs in accordance with the non-discretionary written instructions of the holders of such ADSs. See “Description of American Depositary Shares— Voting rights.”

102

Description of share capital

SOURCES OF SHAREHOLDERS’ RIGHTS

Currently, the primary sources of our shareholders’ rights are our memorandum of association and articles of association and the Companies Law that, among other things, impose certain standards of conduct, fairness and disclosure on us, our directors and our shareholders.

SHAREHOLDERS’ MEETINGS

An annual general meeting and any extraordinary general meeting called for the passing of a special resolution shall be called by not less than 20 days’ notice in writing. Notice of every general meeting shall be given to all of our shareholders.

Notwithstanding that a meeting is called by shorter notice than that mentioned above, it shall be deemed to have been duly called, if it is so agreed (i) in the case of a meeting called as an annual general meeting, by all of our shareholders entitled to attend and vote at the meeting or their proxies; or (ii) in the case of any other meeting, by a majority of the number of shareholders having a right to attend and vote at the meeting, holding not less than 95% of the ordinary shares.

No business except the appointment of a chairman shall be transacted at any general meeting unless a quorum is present at the commencement of business.

Shareholders present in person or in proxy that represent not less than one third in nominal value of our total issued shares will constitute a quorum.

A corporation shareholder shall be deemed to be present in person if represented by its duly authorized representative. Such duly authorized representative shall be entitled to exercise the same powers on behalf of the corporation which he or she represents as that corporation could exercise if it were our individual shareholder.

ACTIONS BY WRITTEN CONSENT

Our articles of association provide that members may take action by written resolution, provided that the resolution is signed by all members that would be entitled to vote with respect to such action at a general meeting. Under Delaware law, which is discussed for comparative purposes, shareholders may also take action by written consent, provided that the consent is signed by holders of outstanding shares having not less than the minimum number of votes that would be necessary to take such action at a meeting at which all shares entitled to vote thereon were present and voted.

VOTING RIGHTS ATTACHING TO THE ORDINARY SHARES

Each ordinary share is entitled to one vote on all matters upon which the ordinary shares are entitled to vote, including the election of our directors. Voting at any meeting of shareholders is by show of hands unless a poll is demanded. A poll may be demanded by the chairman or any other member present in person or by proxy holding at least 10% in nominal value of our total issued shares giving the right to attend and vote at a meeting.

Share certificates registered in the names of two or more persons are deliverable to the person named in the share register, and if two or more such persons tender a vote, the vote of the person whose name first appears in the share register will be accepted to the exclusion of any other.

While there is nothing under the laws of the Cayman Islands which specifically prohibits or restricts the creation of cumulative voting rights for the election of directors of the company, unlike the requirement under Delaware law that cumulative voting for the election of directors is permitted only if expressly authorized in the certificate of incorporation, it is not a concept that is accepted as a

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Description of share capital

common practice in the Cayman Islands, and indeed the company has made no provisions in its articles of association to allow cumulative voting for such elections.

PROTECTION OF MINORITIES

The Grand Court of the Cayman Islands may, on the application of shareholders holding not less than one fifth of our ordinary shares in issue, appoint an inspector to examine into our affairs and to report thereon in a manner as the Grand Court shall direct.

Any shareholder may petition the Grand Court of the Cayman Islands, which may make a winding-up order, if the court is of the opinion that it is just and equitable that we should be wound up.

Claims against us by our shareholders must, as a general rule, be based on the general laws of contract or tort applicable in the Cayman Islands or their individual rights as shareholders as established by our memorandum and articles of association.

The Cayman Islands courts ordinarily would be expected to follow English case law precedents which permit a minority shareholder to commence a representative action against, or derivative actions in our name to challenge (a) an act which is ultra vires or illegal, (b) an act which constitutes a fraud against the minority and the wrongdoers are themselves in control of us, and (c) an irregularity in the passing of a resolution which requires a qualified (or special) majority.

PREEMPTION RIGHTS

There are no preemption rights applicable to the issue of new ordinary shares under either Cayman Islands statute law or our memorandum and articles of association.

LIQUIDATION RIGHTS

If we are to be liquidated, the liquidator may, with the approval of the shareholders, divide among the shareholders in cash or in kind the whole or any part of our assets, in a manner proportionate to their shareholdings, and may vest the whole or any part of such assets in trustees upon such trusts for the benefit of the shareholders as the liquidator, with the approval of the shareholders, thinks fit, provided that a shareholder shall not be compelled to accept any shares or other assets which would subject such shareholder to liability.

MODIFICATION OF RIGHTS

Except with respect to share capital, as described below, and the location of the registered office, alterations or amendments to our memorandum and articles of association may only be made by special resolution.

Subject to the Companies Law of the Cayman Islands, all or any of the special rights attached to any class, unless otherwise provided for by the terms of issue of the shares of that class, may be varied, modified or abrogated either with the consent in writing of the holders of not less than three-fourths in nominal value of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class. The provisions of our articles of association relating to general meetings shall apply mutatis mutandis to every such separate general meeting, but so that the quorum for the purposes of any such separate general meeting other than an adjourned meeting shall be a person or persons together holding, or represented by proxy, on the date of the relevant meeting not less than one-third in nominal value of the issued shares of that class, every holder of ordinary shares of the class shall be entitled on a poll to one vote for every such share held by such holder and that any holder of shares of that class present in person or by proxy may demand a poll.

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Description of share capital

The special rights conferred upon the holders of any class of shares shall not, unless otherwise expressly provided in the rights attaching to or the terms of issue of such shares, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith.

ALTERATION OF CAPITAL

We may from time to time by ordinary resolution:

†	consolidate and divide all or any of our share capital into shares of larger amount than our existing ordinary shares;
†	cancel any ordinary shares which at the date of the passing of the resolution have not been taken or agreed to be taken by any person, and diminish the amount of our share capital by the amount of the ordinary shares so cancelled, subject to the provisions of the Companies Law; and
†	sub-divide our ordinary shares or any of them into ordinary shares of smaller amount than is fixed by our memorandum of association, subject nevertheless to the Companies Law.

We may, by special resolution, subject to any conditions prescribed by the Companies Law, reduce our share capital, share premium account or any capital redemption reserve in any manner authorized by law.

An ordinary resolution is a resolution passed by a simple majority of the shareholders voting in person or by proxy at a general meeting. An ordinary resolution also includes a unanimous written resolution. A special resolution is a resolution passed by a majority of not less than two-thirds of the shareholders voting in person or by proxy at a general meeting, of which notice specifying the intention to propose the resolution as a special resolution has been duly given. A special resolution also includes a unanimous written resolution.

TRANSFER OF ORDINARY SHARES

Subject to the restrictions of our articles of association, as applicable, any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form approved by our board.

Our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share without assigning any reasons therefor.

If our directors refuse to register a transfer they shall, within two months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal.

The registration of transfers may be suspended and the register closed at such times and for such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 45 days in any year.

SHARE REPURCHASE

We are empowered by the Companies Law and our articles of association to purchase our own ordinary shares, subject to certain restrictions, including that the manner of the purchase has first been authorized by us in a shareholders’ general meeting. Our directors may only exercise this power on our behalf, subject to the Companies Law, our memorandum and articles of association and to any applicable requirements imposed from time to time by the Nasdaq National Market, the Securities and Exchange Commission or by any other recognized stock exchange on which our securities are listed.

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Description of share capital

DIVIDENDS

Subject to the Companies Law and to our articles of association, in general meeting we may declare dividends in any currency, but no dividends shall exceed the amount recommended by our board of directors. No dividend may be declared or paid other than out of our profits and reserves lawfully available for distribution, including share premium.

Unless and to the extent that the rights attached to any ordinary shares or the terms of issue thereof otherwise provide, with respect to any shares not fully paid throughout the period in respect of which the dividend is paid, all dividends shall be apportioned and paid pro rata according to the amounts paid up on the ordinary shares during any portion or portions of the period in respect of which the dividend is paid. For these purposes no amount paid up on an ordinary share in advance of calls shall be treated as paid up on the ordinary share.

Our board of directors may from time to time pay to our shareholders such interim dividends as appear to the directors to be justified by our profits. Our directors may also pay semi-annually or at other intervals to be selected by them at a fixed rate if they are of the opinion that the profits available for distribution justify the payment. The board may also declare and pay special dividends as they think fit.

Our board of directors may retain any dividends or other monies payable on or in respect of an ordinary share upon which we have a lien, and may apply the same in or towards satisfaction of the debts, liabilities or engagements in respect of which the lien exists. Our board of directors may also deduct from any dividend or other monies payable to any shareholder all sums of money, if any, presently payable by him or her to us on account of calls, installments or otherwise.

No dividend shall carry interest against us.

Whenever our board of directors or we in general meeting have resolved that a dividend be paid or declared on our share capital, the board of directors may further resolve: (a) that such dividend be satisfied wholly or in part in the form of an allotment of ordinary shares credited as fully paid up on the basis that the ordinary shares so allotted are to be of the same class as the class already held by the allottee, provided that those of our shareholders entitled thereto will be entitled to elect to receive such dividend, or part thereof, in cash in lieu of such allotment; or (b) that those of our shareholders entitled to such dividend will be entitled to elect to receive an allotment of ordinary shares credited as fully paid up in lieu of the whole or such part of the dividend as our board of directors may think fit on the basis that the ordinary shares so allotted are to be of the same class as the class already held by the allottee. We may upon the recommendation of our board of directors by ordinary resolution resolve in respect of any one particular dividend that notwithstanding the foregoing a dividend may be satisfied wholly in the form of an allotment of ordinary shares credited as fully paid without offering any right to our shareholders to elect to receive such dividend in cash in lieu of such allotment.

Any dividend, interest or other sum payable in cash to a holder of ordinary shares may be paid by check or warrant sent through the post addressed to the registered address of the shareholder entitled, or in the case of joint holders, to the registered address of the person whose name stands first in our register of shareholders in respect of the joint holding to such person and to such address as the holder or joint holders may in writing direct. Every check or warrant so sent shall be made payable to the order of the holder or, in the case of joint holders, to the order of the holder whose name stands first on our register of shareholders in respect of such ordinary shares, and shall be sent at his or their risk and the payment of any such check or warrant by the bank on which it is drawn shall operate as a good discharge to us in respect of the dividend and/or bonus represented thereby, notwithstanding that it may subsequently appear that the same has been stolen or that any endorsement thereon has been forged.

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Description of share capital

Any dividend unclaimed for six years from the date of declaration of such dividend may be forfeited by the board of directors and shall revert to us.

Our board of directors may, with the sanction of the shareholders in general meeting, direct that any dividend be satisfied wholly or in part by the distribution of specific assets of any kind, and in particular of paid up ordinary shares, debentures or warrants to subscribe securities of any other company, and where any difficulty arises in regard to such distribution our directors may settle it as they think expedient, and in particular may disregard fractional entitlements, round the same up or down or provide that the same shall accrue to our benefit, and may fix the value for distribution of such specific assets and may determine that cash payments shall be made to any of our shareholders upon the footing of the value so fixed in order to adjust the rights of all parties, and may vest any such specific assets in trustees as may seem expedient to our board of directors.

UNTRACEABLE SHAREHOLDERS

We are entitled to sell any ordinary share of a shareholder who is untraceable, provided that:

(i)	all checks or warrants, not being less than three in number, for any sums payable in cash to the holder of such ordinary shares have remained uncashed for a period of 12 years;
(ii)	we have not during that time or before the expiry of the three-month period referred to paragraph (iv) below received any indication of the whereabouts or existence of the shareholder or person entitled to such ordinary shares by death, bankruptcy or operation of law;
(iii)	during the 12-year period, at least three dividends in respect of the ordinary shares in question have become payable and no dividend during that period has been claimed by the shareholder; and
(iv)	upon expiration of the 12-year period, we have caused an advertisement to be published in newspapers (or, by electronic communication in the manner in which notices may be served by us by electronic means as provided in our articles of association), giving notice of its intention to sell these ordinary shares, and a period of three months has elapsed since such advertisement.

The net proceeds of any such sale shall belong to us and when we receive these net proceeds we shall become indebted to the former shareholder for an amount equal to such net proceeds.

DIFFERENCES IN CORPORATE LAW

The Companies Law is modeled after that of England but does not follow recent United Kingdom statutory enactments and differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the United States and their shareholders.

Mergers and Similar Arrangements

Cayman Islands law does not provide for mergers as that expression is understood under United States corporate law, therefore, Cayman Islands law may not afford shareholders with the same or comparable protections or rights as the mergers and acquisition rights of shareholders of U.S. companies. However, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement in question is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meetings convened for that purpose. The convening of the meetings and subsequently the arrangement must be

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Description of share capital

sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder would have the right to express to the court the view that the transaction ought not to be approved, the court can be expected to approve the arrangement if it satisfies itself that:

†	the statutory provisions as to majority vote have been complied with;
†	the shareholders have been fairly represented at the meeting in question;
†	the arrangement is such as a businessman would reasonably approve; and
†	the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law.

When a take-over offer is made and accepted by holders of 90% of the shares within four months, the offeror may, within a two-month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands, but this is unlikely to succeed unless there is evidence of fraud, bad faith or collusion. We have not issued preferred shares or adopted other “poison pill” measures that could be used to prevent a takeover attempt as is commonly adopted by U.S. companies. Although neither our articles of association nor Cayman Islands law prevent us from adopting measures that could be used to prevent a takeover attempt, we do not have any intention to adopt such measures at this point in time. If we did adopt such measures, however, shareholders might be prevented from realizing a potential premium on their shares as a result of a takeover attempt.

Cayman Islands law does not require that shareholders approve sales of all or substantially all of a company’s assets as is commonly adopted by U.S. companies.

If the arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of United States corporations, providing rights to receive payment in cash for the judicially determined value of the shares.

Shareholders’ Suits

Our Cayman Islands counsel is not aware of any reported class action having been brought in a Cayman Islands court. In principle, a derivative action may not be brought by a minority shareholder. Instead, we will be the proper plaintiff. However, based on English authorities, which are of persuasive authority in the Cayman Islands, exceptions to the foregoing principle apply in circumstances in which:

†	a company is acting or proposing to act illegally or ultra vires;
†	the act complained of, although not ultra vires, could be effected only if authorized by more than a simple majority vote, which has not be obtained; or
†	those who control the company are perpetrating a “fraud on the minority.”

Indemnification

Cayman Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our articles of association provides for the indemnification of our directors, auditors and other officers against all losses or liabilities incurred or sustained by him or her as a director, auditor or other officer of our company in defending any proceedings, whether civil or criminal, in which judgment is given in his or her favor, or in which he or she is acquitted.

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Description of share capital

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been advised that in the opinion of the Securities Exchange Commission such indemnification is against public policy as expressed in the Securities Act and therefore is unenforceable.

Corporate Governance

While Cayman Islands laws do not restrict transactions with directors, requiring only that directors exercise a duty of care and owe a fiduciary duty to the companies for which they serve, our articles of association restricts transactions between us and our directors.

BOARD OF DIRECTORS

We are managed by a board of directors which currently consists of 5 members. All of our directors in any term are subject to retirement from office at the next annual general meeting. Retiring directors are eligible for re-election. There are no membership qualifications for directors. There are no share ownership qualifications for directors. The compensation committee under our board will determine the remuneration to be paid to the directors.

Meetings of our board of directors may be convened at any time deemed necessary by any members of our board of directors. Advance notice of a meeting is not required if all our directors are present or represented at the meeting concerned and consent to the holding of such meeting.

A meeting of our board of directors shall be competent to make lawful and binding decisions if any two members of our board of directors are present or represented. At any meeting of our directors, each director, be it by his or her presence or by his or her alternate, is entitled to one vote. A director may vote in respect of any contract or transaction in which he is interested, provided, however, that he or she shall disclose the nature of such interest at or prior to its consideration and any vote on that matter.

The directors may exercise all the corporate powers to borrow money or issue debt and to mortgage our properties. Questions arising at a meeting of our board of directors are required to be decided by simple majority votes of the members of our board of directors present or represented at the meeting. In the case of a tie vote, the chairman of the meeting shall have a second or deciding vote. Our board of directors may also pass resolutions without a meeting by unanimous written consent.

Under Cayman Islands laws, our directors have a duty of loyalty and must act honestly and in good faith and in our best interests. Our directors also have a duty to exercise the care, diligence, and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duties to us, our directors must ensure compliance with the memorandum and articles of association and the class rights vested thereunder in the holders of the shares. A shareholder may in certain circumstances have rights to damages if a duty owed by the directors is breached.

INSPECTION OF BOOKS AND RECORDS

Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However, we will provide our shareholders with annual audited financial statements. See “Where you can find more information.”

AUDIT, NOMINATIONS AND COMPENSATION COMMITTEES

Our Audit, Nominations and Compensation Committees are comprised solely of independent directors. See “Management—Board practice” for a description of these committees.

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Description of American Depositary Shares

AMERICAN DEPOSITARY SHARES

Citibank, N.A. has agreed to act as the depositary bank for the American Depositary Shares. Citibank’s depositary offices are located at 111 Wall Street, New York, New York 10043. American Depositary Shares are frequently referred to as “ADSs” and represent ownership interests in securities that are on deposit with the depositary bank. ADSs may be represented by certificates that are commonly known as “American Depositary Receipts” or “ADRs.” The depositary bank typically appoints a custodian to safekeep the securities on deposit. In this case, the custodian is Citibank, N.A., Hong Kong branch.

We have appointed Citibank as the depositary bank pursuant to a deposit agreement. A copy of the deposit agreement is on file with the Securities and Exchange Commission under cover of a registration statement on Form F-6. You may obtain a copy of the deposit agreement from the Securities and Exchange Commission’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 or from the Securities and Exchange Commission’s web site at www.sec.gov. Please refer to Registration Number 333-116228 when retrieving such copy.

We are providing you with a summary description of all of the material terms of the ADSs and of your material rights as an owner of ADSs. Please remember that, although this description covers the material terms of the ADSs, summaries by their nature lack the precision of the information summarized and that a holder’s rights and obligations as an owner of ADSs will be determined by reference to the terms of the deposit agreement and not by this summary. We urge you to review the deposit agreement in its entirety.

Each ADS represents the right to receive 40 ordinary shares on deposit with the custodian. An ADS will also represent the right to receive any other property received by the depositary bank or the custodian on behalf of the owner of the ADS but that has not been distributed to the owners of ADSs because of legal restrictions or practical considerations.

If you become an owner of ADSs, you will become a party to the deposit agreement and therefore will be bound to its terms and, if applicable, to the terms of the ADR that represents your ADSs. The deposit agreement and the ADR specify our rights and obligations as well as your rights and obligations as an owner of ADSs and those of the depositary bank. As an ADS holder you appoint the depositary bank to act on your behalf in certain circumstances. The deposit agreement and the ADRs are governed by New York law. However, our obligations to the holders of ordinary shares will continue to be governed by the laws of the Cayman Islands, which may be different from the laws in the United States.

As an owner of ADSs, you may hold your ADSs either by means of an ADR registered in your name, through a brokerage or safekeeping account, or through an account established by the depositary bank in your name reflecting the registration of uncertificated ADSs directly on the books of the depositary bank (commonly referred to as the “direct registration system” or “DRS”). The direct registration system reflects the uncertificated (book-entry) registration of ownership of ADSs by the depositary bank. Under the direct registration system, ownership of ADSs is evidenced by periodic statements issued by the depositary bank to the holders of the ADSs. The direct registration system includes automated transfers between the depositary bank and The Depository Trust Company (“DTC”), the central book-entry clearing and settlement system for equity securities in the United States. If you decide to hold your ADSs through your brokerage or safekeeping account, you must rely on the procedures of your broker or bank to assert your rights as an ADS owner. Please consult with your broker or bank to determine what those procedures are. This summary description assumes you have

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Description of American Depositary Shares

opted to own the ADSs directly by means of an ADS registered in your name and, as such, we will refer to you as the “holder.” When we refer to “you,” we assume the reader owns ADSs and will own ADSs at the relevant time.

DIVIDENDS AND DISTRIBUTIONS

As a holder, you generally have the right to receive the distributions we make on the securities deposited with the custodian. Your receipt of these distributions may be limited, however, by practical considerations and legal limitations. These practical considerations and legal limitations include situations such as where the value of ordinary shares or rights to be distributed are too low to justify the expense of making the distribution, as well as the inability to distribute rights or other securities to holders of ADSs in a jurisdiction where such distribution would require registration of the securities to be distributed. Holders will receive such distributions under the terms of the deposit agreement in proportion to the number of ADSs held as of a specified record date.

Distributions of Cash

Whenever we make a cash distribution for the securities on deposit with the custodian, we will deposit the funds with the custodian. Upon receipt of such notice and confirmation of the deposit of the requisite funds, the depositary bank will arrange for the funds to be converted into U.S. dollars and for the distribution of the U.S. dollars to the holders, subject to any restrictions imposed by the laws and regulations of the Cayman Islands.

The conversion into U.S. dollars will take place only if practicable and if the U.S. dollars are transferable to the United States. The amounts distributed to holders will be net of the fees, expenses, taxes and governmental charges payable by holders under the terms of the deposit agreement. The depositary will apply the same method for distributing the proceeds of the sale of any property, such as undistributed rights, held by the custodian in respect of securities on deposit.

Distributions of Shares

Whenever we make a free distribution of ordinary shares for the securities on deposit with the custodian, we will deposit the applicable number of ordinary shares with the custodian. Upon receipt of notice of such deposit, the depositary bank will either distribute to holders new ADSs representing the ordinary shares deposited or modify the ADS-to-ordinary shares ratio, in which case each ADS you hold will represent rights and interests in the additional ordinary shares so deposited. Only whole new ADSs will be distributed. Fractional entitlements will be sold and the proceeds of such sale will be distributed as in the case of a cash distribution.

The distribution of new ADSs or the modification of the ADS-to-ordinary shares ratio upon a distribution of ordinary shares will be made net of the fees, expenses, taxes and governmental charges payable by holders under the terms of the deposit agreement. In order to pay such taxes or governmental charges, the depositary bank may sell all or a portion of the new ordinary shares so distributed.

No such distribution of new ADSs will be made if it would violate a law (e.g., the U.S. securities laws) or if it is not operationally practicable. If the depositary bank does not distribute new ADSs as described above, it may sell the ordinary shares received upon the terms described in the deposit agreement and will distribute the proceeds of the sale as in the case of a distribution of cash.

Distributions of Rights

Whenever we intend to distribute rights to purchase additional ordinary shares, we will give prior notice to the depositary bank and we will assist the depositary bank in determining whether it is lawful and reasonably practicable to distribute rights to purchase additional ADSs to holders. If

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Description of American Depositary Shares

registration under the United States Securities Act of 1933, as amended, or the Securities Act, or other applicable law is required, the depositary bank will not offer you the rights unless a registration statement covering the distribution of the rights and the underlying securities to all our ADS holders is effective. We are under no obligation to file a registration statement for any of these rights or underlying securities or to endeavor to cause a registration statement to be declared effective.

The depositary bank will establish procedures to distribute rights to purchase additional ADSs to holders and to enable such holders to exercise such rights if it is lawful and reasonably practicable to make the rights available to holders of ADSs, and if we provide all of the documentation contemplated in the deposit agreement, such as opinions to address the lawfulness of the transaction. You may have to pay fees, expenses, taxes and other governmental charges to subscribe for the new ADSs upon the exercise of your rights. The depositary bank is not obligated to establish procedures to facilitate the distribution and exercise by holders of rights to purchase new ordinary shares other than in the form of ADSs.

The depositary bank will not distribute the rights to you if:

†	We do not timely request that the rights be distributed to you or we request that the rights not be distributed to you;
†	We fail to deliver satisfactory documentation to the depositary bank; or
†	The depositary bank determines that it is not reasonably practicable to distribute the rights.

The depositary bank will sell the rights that are not exercised or not distributed if such sale is lawful and reasonably practicable. The proceeds of such sale will be distributed to holders as in the case of a cash distribution. If the depositary bank is unable to sell the rights, it will allow the rights to lapse.

Elective Distributions

Whenever we intend to distribute a dividend payable at the election of shareholders either in cash or in additional shares, we will give prior notice thereof to the depositary bank and will indicate whether we wish the elective distribution to be made available to you. In such case, we will assist the depositary bank in determining whether such distribution is lawful and reasonably practicable.

The depositary bank will make the election available to you only if it is reasonably practicable and if we have provided all of the documentation contemplated in the deposit agreement. In such case, the depositary bank will establish procedures to enable you to elect to receive either cash or additional ADSs, in each case as described in the deposit agreement.

If the election is not made available to you, you will receive either cash or additional ADSs, depending on what a holder of our ordinary shares would receive upon failing to make an election, as more fully described in the deposit agreement.

Other Distributions

Whenever we intend to distribute property other than cash, ordinary shares or rights to purchase additional ordinary shares, we will notify the depositary bank in advance and will indicate whether we wish such distribution to be made to you. If so, we will assist the depositary bank in determining whether such distribution to holders is lawful and reasonably practicable.

If it is reasonably practicable to distribute such property to you and if we provide all of the documentation contemplated in the deposit agreement, the depositary bank will distribute the property to the holders in the manner it deems practicable.

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Description of American Depositary Shares

The distribution will be made net of fees, expenses, taxes and governmental charges payable by holders under the terms of the deposit agreement. In order to pay such taxes and governmental charges, the depositary bank may sell all or a portion of the property received.

The depositary bank will not distribute the property to you and will sell the property if:

†	We do not request that the property be distributed to you or if we request that the property not be distributed to you;
†	We do not deliver satisfactory documentation to the depositary bank; or
†	The depositary bank determines that all or a portion of the distribution to you is not reasonably practicable.

The proceeds of such a sale will be distributed to holders as in the case of a cash distribution.

Redemption

Whenever we decide to redeem any of the securities on deposit with the custodian, we will notify the depositary bank. If it is reasonably practicable and if we provide all of the documentation contemplated in the deposit agreement, the depositary bank will distribute the property to you in a manner it deems practicable. The custodian will be instructed to surrender the ordinary shares being redeemed against payment of the applicable redemption price. The depositary bank will convert the redemption funds received into U.S. dollars upon the terms of the deposit agreement and will establish procedures to enable you to receive the net proceeds from the redemption upon surrender of your ADSs to the depositary bank. You may have to pay fees, expenses, taxes and other governmental charges upon the redemption of your ADSs. If less than all ADSs are being redeemed, the ADSs to be retired will be selected by lot or on a pro rata basis, as the depositary bank may determine.

NOTICES AND REPORTS

We will give the depositary bank notice in English of any shareholders meeting or any action by shareholders with respect to dividends, redemptions, distributions or offering of rights of deposited securities. We will also give the depositary bank other notices, reports and communications made generally available to our stockholders and our annual reports in English.

At our request, the depositary bank will distribute such notices, reports and other communications to all holders of ADSs by mail, or if designated by the holder of the ADS as an acceptable means of notification, by means of electronic transmission. The depositary bank will make available a copy of any of these notices, reports or communications that we deliver to it for inspection by the holders of the ADSs at the depositary bank’s principal office, at the office of the custodian and at other designated transfer offices.

CHANGES AFFECTING ORDINARY SHARES

The ordinary shares held on deposit for your ADSs may change from time to time. For example, there may be a change in nominal or par value, a split-up, cancellation, consolidation or reclassification of such ordinary shares or a recapitalization, reorganization, merger, consolidation or sale of assets.

If any such change were to occur, your ADSs would, to the extent permitted by law, represent the right to receive the property received or exchanged in respect of the ordinary shares held on deposit. The depositary bank may in such circumstances deliver new ADSs to you or call for the exchange of your existing ADSs for new ADSs. If the depositary bank may not lawfully distribute such property to you, the depositary bank may sell such property and distribute the net proceeds to you as in the case of a cash distribution.

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Description of American Depositary Shares

ISSUANCE OF ADSs UPON DEPOSIT OF ORDINARY SHARES

The depositary bank may create ADSs on your behalf if you or your broker deposit ordinary shares with the custodian. The depositary bank will deliver these ADSs to the person you indicate only after you pay any applicable issuance fees and any charges and taxes payable for the transfer of the ordinary shares to the custodian. Your ability to deposit ordinary shares and receive ADSs may be limited by U.S. and Cayman Islands legal considerations applicable at the time of deposit.

The issuance of ADSs may be delayed until the depositary bank or the custodian receives confirmation that all required approvals have been given and that the ordinary shares have been duly transferred to the custodian. The depositary bank will only issue ADSs in whole numbers.

When you make a deposit of ordinary shares, you will be responsible for transferring good and valid title to the depositary bank. As such, you will be deemed to represent and warrant that:

†	The ordinary shares are duly authorized, validly issued, fully paid, non-assessable and legally obtained;
†	All preemptive, and similar, rights, if any, with respect to such ordinary shares have been validly waived or exercised;
†	You are duly authorized to deposit the ordinary shares;
†	The ordinary shares presented for deposit are free and clear of any lien, encumbrance, security interest, charge, mortgage or adverse claim, and are not, and the ADSs issuable upon such deposit will not be, “restricted securities,” as defined in the deposit agreement; and
†	The ordinary shares presented for deposit have not been stripped of any rights or entitlements.

If any of the representations or warranties are incorrect in any way, we and the depositary bank may, at your cost and expense, take any and all actions necessary to correct the consequences of the misrepresentations.

TRANSFER, COMBINATION AND SPLIT-UP OF ADRs

As an ADR holder, you will be entitled to transfer, combine or split up your ADRs and the ADSs evidenced thereby. For transfers of ADRs, you will have to surrender the ADRs to be transferred to the depositary bank and also must:

†	ensure that the surrendered ADR certificate is properly endorsed or otherwise in proper form for transfer;
†	provide such proof of identity and genuineness of signatures as the depositary bank deems appropriate;
†	provide any transfer stamps required by the State of New York or the United States; and
†	pay all applicable fees, charges, expenses, taxes and other government charges payable by ADR holders pursuant to the terms of the deposit agreement, upon the transfer of ADRs.

To have your ADRs either combined or split up, you must surrender the ADRs in question to the depositary bank with your request to have them combined or split up, and you must pay all applicable fees, charges and expenses payable by ADR holders, pursuant to the terms of the deposit agreement, upon a combination or split-up of ADRs.

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Description of American Depositary Shares

WITHDRAWAL OF ORDINARY SHARES UPON CANCELLATION OF ADSs

As a holder, you will be entitled to present your ADSs to the depositary bank for cancellation and then receive the corresponding number of underlying ordinary shares at the custodian’s offices. Your ability to withdraw the ordinary shares may be limited by U.S. and Cayman Islands legal considerations applicable at the time of withdrawal. In order to withdraw the ordinary shares represented by your ADSs, you will be required to pay to the depositary the fees for cancellation of ADSs and any charges and taxes payable upon the transfer of the ordinary shares being withdrawn. You assume the risk for delivery of all funds and securities upon withdrawal. Once canceled, the ADSs will not have any rights under the deposit agreement.

If you hold an ADS registered in your name, the depositary bank may ask you to provide proof of identity and genuineness of any signature and such other documents as the depositary bank may deem appropriate before it will cancel your ADSs. The withdrawal of the ordinary shares represented by your ADSs may be delayed until the depositary bank receives satisfactory evidence of compliance with all applicable laws and regulations. The depositary bank will only accept ADSs for cancellation that represent a whole number of securities on deposit. If you surrender a number of ADSs for withdrawal representing other than a whole number of common shares, the depositary bank will either return the number of ADSs representing any remaining fractional common shares or sell the common shares represented by the ADSs you surrendered and remit the net proceeds of that sale to you as in the case of a distribution in cash.

You will have the right to withdraw the securities represented by your ADSs at any time except for:

†	Temporary delays that may arise because (i) the transfer books for the ordinary shares or ADSs are closed, or (ii) ordinary shares are immobilized on account of a shareholders’ meeting or a payment of dividends.
†	Obligations to pay fees, taxes and similar charges.
†	Restrictions imposed because of laws or regulations applicable to ADSs or the withdrawal of securities on deposit.

The deposit agreement may not be modified to impair your right to withdraw the securities represented by your ADSs except to comply with mandatory provisions of law.

VOTING RIGHTS

Voting at our shareholders meetings is by show of hands unless a poll is demanded. A poll may be demanded by the chairman or any other shareholder present in person or by proxy holding at least 10% in nominal value of our total issued shares giving the right to vote at a meeting. In the event of voting by show of hands, each shareholder has one vote irrespective of the number of shares held by such person. In the event of poll voting, each shareholder has an amount of votes equal to the number of shares held as of the applicable record date.

As a holder, you generally have the right under the deposit agreement to instruct the depositary bank to exercise the voting rights for the ordinary shares represented by your ADSs. For a description of the voting rights of holders of ordinary shares, see “Description of share capital—Voting rights attaching to the ordinary shares.”

At our request, the depositary bank will distribute to you any notice of a shareholders’ meeting received from us together with information explaining how to instruct the depositary bank to exercise the voting rights of the securities represented by ADSs.

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Description of American Depositary Shares

If the depositary bank timely receives voting instructions from a holder of ADSs, it will endeavor to vote the securities represented by the holder’s ADSs in accordance with such voting instructions. If the depositary bank timely receives voting instructions from a holder of ADSs, the depositary bank will cause the ordinary shares on deposit to be voted as follows: (a) in the event voting takes place at a shareholders’ meeting by show of hands, the depositary bank will instruct the custodian to vote all ordinary shares on deposit in accordance with the voting instructions received from a majority of the holders of ADSs who provided voting instructions; or (b) in the event voting takes place at a shareholders’ meeting by poll, the depositary bank will instruct the custodian to vote the ordinary shares on deposit in accordance with the voting instructions received from holders of ADSs. In the event of voting by poll, ordinary shares in respect of which no timely voting instructions have been received will not be voted (but all ordinary shares held on deposit will be represented at the meeting for quorum purposes if any timely voting instructions have been received from holders of ADSs).

We cannot assure you that you will receive voting materials in time to enable you to return voting instructions to the depositary bank in a timely manner. Securities for which no voting instructions have been received will not be voted.

The ability of the depositary bank to solicit the voting instructions of the holders of ADSs and carry out voting instructions provided by the ADS holders may be limited by

†	practical limitations, such as timing constraints due to time zone differences,
†	legal limitations, for example, limitations on the solicitation of votes in respect of mergers and acquisitions under the Securities Act of 1933, as amended, and
†	the terms of the deposited securities, such as provisions allowing voting by show of hands.

FEES AND CHARGES

As an ADS holder, you will be required to pay the following service fees to the depositary bank:

Service	Fees
Issuance of ADSs	Up to $0.05 per ADS issued
Cancellation of ADSs	Up to $0.05 per ADS canceled
Distribution of cash dividends or other cash distributions	Up to $0.02 per ADS held
Distribution of ADSs pursuant to stock dividends, free stock distributions or exercise of rights	Up to $0.05 per ADS issued
Distribution of securities other than ADSs or rights to purchase additional ADSs	Up to $0.05 per ordinary share (or share equivalent) distributed
Annual Depositary Services Fee	Annually up to $0.02 per ADS held at the end of each calendar year, except to the extent of any cash dividend fee(s) charged during such calendar year
Transfer of ADRs	$1.50 per certificate presented for transfer

As an ADS holder you will also be responsible to pay certain fees and expenses incurred by the depositary bank and certain taxes and governmental charges such as:

†	Fees for the transfer and registration of ordinary shares charged by the registrar and transfer agent for the ordinary shares, i.e., upon deposit and withdrawal of ordinary shares.
†	Expenses incurred for converting foreign currency into U.S. dollars.

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†	Fees and expenses incurred by the depositary in compliance with exchange controls or other regulatory requirements.
†	Expenses for cable, telex and fax transmissions and for delivery of securities.
†	Taxes and duties upon the transfer of securities, i.e., when ordinary shares are deposited or withdrawn from deposit.
†	Fees and expenses incurred in connection with the delivery or servicing of ordinary shares on deposit.

We have agreed to pay certain other charges and expenses of the depositary bank. Note that the fees and charges you may be required to pay may vary over time and may be changed by agreement between us and the depositary bank. You will receive prior notice of such changes. The depositary bank has the right to collect fees by offsetting them against the payment of cash distributions and cash and stock dividends and offsetting the fees and charges against cash paid in lieu of issuance of fractional shares of deposited securities.

AMENDMENTS AND TERMINATION

We may agree with the depositary bank to modify the deposit agreement at any time without your consent. We undertake to give holders 30 days’ prior notice of any modifications that would materially prejudice any of their substantial rights under the deposit agreement. We will not consider to be materially prejudicial to your substantial rights any modifications or supplements that are reasonably necessary for the ADSs to be registered under the Securities Act or to be eligible for book-entry settlement, in each case without imposing or increasing the fees and charges you are required to pay. In addition, we may not be able to provide you with prior notice of any modifications or supplements that are required to accommodate compliance with applicable provisions of law. For a description of the general procedures for such a notice, see “— Notices and reports.”

You will be bound by the modifications to the deposit agreement if you continue to hold your ADSs after the modifications to the deposit agreement become effective. The deposit agreement cannot be amended to prevent you from withdrawing the ordinary shares represented by your ADSs except to comply with applicable law.

We have the right to direct the depositary bank to terminate the deposit agreement. Similarly, the depositary bank may in certain circumstances on its own initiative terminate the deposit agreement. In either case, the depositary bank must give notice to the holders at least 30 days before termination. For a description of the general procedures for such a notice, see “—Notices and reports.”

Upon termination, the following will occur under the deposit agreement:

†

For a period of six months after termination, you will be able to request the cancellation of your ADSs and the withdrawal of the ordinary shares represented by your ADSs and the delivery of all other property held by the depositary bank in respect of those ordinary shares on the same terms as prior to the termination. During this six-month period, the depositary bank will continue to collect all distributions received on the ordinary shares on deposit, i.e., dividends, but will not distribute any property to you until you request the cancellation of your ADSs.

†

After the expiration of this six-month period, the depositary bank may sell the securities held on deposit. The depositary bank will hold the proceeds from such sale and any other funds then held for the holders of ADSs in a non-interest bearing account. At that point, the depositary bank will have no further obligations to holders other than to account for the funds then held for the holders of ADSs still outstanding.

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BOOKS OF DEPOSITARY

The depositary bank will maintain a list of ADS record holders and any reports and communications, including proxy soliciting materials, received from us which are received by the depositary bank or the custodian or made generally available to the holders of the deposited securities, and the registrar shall keep books for the registration of ADSs at its office. You may inspect such books and records at the depositary bank’s offices during regular business hours solely for the purpose of communicating with other holders in the interest of business matters relating to the ADSs and the deposit agreement.

The registrar will maintain in The City of New York facilities to record and process the issuance, cancellation, combination, split-up and transfer of ADSs. These facilities may be closed from time to time, to the extent not prohibited by law.

LIMITATIONS ON OBLIGATIONS AND LIABILITIES

The deposit agreement limits our obligations and the depositary bank’s obligations to you. Please note the following:

†	We and the depositary bank are obligated only to take the actions specifically stated in the deposit agreement without negligence or bad faith.
†	The depositary bank disclaims any liability for any failure to carry out voting instructions, for any manner in which a vote is cast or for the effect of any vote, provided it acts in good faith and in accordance with the terms of the deposit agreement. Citibank will solicit, receive and carry out voting instructions in accordance with the terms and conditions of the deposit agreement. The validity of the vote, once transmitted by the depositary to us, may be questioned under Cayman law as may be the manner in which the voting instructions were collected. Citibank as depositary will not have any liability if on account of an action in the Cayman Islands a vote which was solicited from ADR holders and transmitted to us in compliance with the terms of the deposit agreement may be invalidated or disregarded in the Cayman Islands.
†	The depositary bank disclaims any liability for any failure to determine the lawfulness or practicality of any action, for the content of any document forwarded to you on our behalf or for the accuracy of any translation of such a document, for the investment risks associated with investing in ordinary shares, for the validity or worth of the ordinary shares, for any tax consequences that result from the ownership of ADSs, for the creditworthiness of any third party, for allowing any rights to lapse under the terms of the deposit agreement, for the timeliness of any of our notices or for our failure to give notice.
†	We and the depositary bank will not be obligated to perform any act that is inconsistent with the terms of the deposit agreement.
†	We and the depositary bank disclaim any liability if we are prevented or forbidden from acting on account of any law or regulation, any provision of our articles of association, any provision of any securities on deposit or by reason of any act of God or war or other circumstances beyond our control.
†	We and the depositary bank disclaim any liability by reason of any exercise of, or failure to exercise, any discretion provided for in the deposit agreement or in our articles of association or in any provisions of securities on deposit.
†	We and the depositary bank further disclaim any liability for any action or inaction in reliance on the advice or information received from legal counsel, accountants, any person presenting ordinary shares for deposit, any holder of ADSs or authorized representatives thereof, or any other person believed by either of us in good faith to be competent to give such advice or information.

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†	We and the depositary bank also disclaim liability for the inability by a holder to benefit from any distribution, offering, right or other benefit which is made available to holders of ordinary shares but is not, under the terms of the deposit agreement, made available to you.
†	We and the depositary bank may rely without any liability upon any written notice, request or other document believed to be genuine and to have been signed or presented by the proper parties.
†	We and the depositary bank also disclaim liability for any consequential or punitive damages for any breach of the terms of the deposit agreement.

PRE-RELEASE TRANSACTIONS

The depositary bank may, in certain circumstances, to the extent permitted by applicable laws and regulations, issue ADSs before receiving a deposit of ordinary shares or release ordinary shares before receiving ADSs for cancellation. These transactions are commonly referred to as “pre-release transactions.” The deposit agreement limits the aggregate size of pre-release transactions and imposes a number of conditions on such transactions, i.e., the need to receive collateral, the type of collateral required, the representations required from brokers, etc. The depositary bank may retain the compensation received from the pre-release transactions.

TAXES

You will be responsible for the taxes and other governmental charges payable on your ADSs and the securities represented by your ADSs. We, the depositary bank and the custodian may deduct from any distribution the taxes and governmental charges payable by holders and may sell any and all property on deposit to pay the taxes and governmental charges payable by holders. You will be liable for any deficiency if the sale proceeds do not cover the taxes that are due on your ADSs and the securities represented by your ADSs.

The depositary bank may refuse to issue ADSs, to deliver, transfer, split and combine ADRs or to release securities on deposit until all taxes and charges are paid by you. The depositary bank and the custodian may take reasonable administrative actions to obtain tax refunds and reduced tax withholding for any distributions on your behalf. However, you may be required to provide to the depositary bank and to the custodian proof of taxpayer status and residence and such other information as the depositary bank and the custodian may require to fulfill legal obligations. You are required to indemnify us, the depositary bank and the custodian for any claims with respect to taxes based on any tax benefit obtained for you.

FOREIGN CURRENCY CONVERSION

The depositary bank will arrange for the conversion of all foreign currency received into U.S. dollars if such conversion is practical, and it will distribute the U.S. dollars in accordance with the terms of the deposit agreement. You may be required to pay fees and expenses incurred in converting foreign currency, such as fees and expenses incurred in complying with currency exchange controls and other governmental requirements.

If the conversion of foreign currency is not practical or lawful, or if any required approvals are denied or not obtainable at a reasonable cost or within a reasonable period, the depositary bank may take the following actions in its discretion:

†	Convert the foreign currency to the extent practical and lawful and distribute the U.S. dollars to the holders for whom the conversion and distribution is lawful and practical.
†	Distribute the foreign currency to holders for whom the distribution is lawful and practical.

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† Hold the foreign currency without liability for interest for the applicable holders.

THE CUSTODIAN

The depositary bank has agreed with the custodian that the custodian will receive and hold the deposited securities for the account of the depositary bank in accordance with the deposit agreement. If the custodian resigns or is discharged from its duties under the deposit agreement, the depositary bank will promptly appoint a successor custodian. The resigning or discharged custodian will deliver the deposited securities and related records to the custodian designated by the depositary bank. The depositary bank will immediately give you and us written notice of these changes. If the depositary bank resigns or is discharged from its duties under the deposit agreement, the custodian will continue to act as custodian and will be obligated to comply with the direction of the successor depositary.

GOVERNING LAW

The deposit agreement is governed by the laws of the State of New York. We and the depositary bank have agreed that the federal or state courts in The City of New York shall have jurisdiction to hear and determine any suit, action or proceeding and to settle any dispute between us that may arise out of or in connection with the deposit agreement. We also submit to the jurisdiction of these courts and we have appointed an agent for service of process in The City of New York.

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Prior to this offering, there has been no market for our ADSs in the United States, and there can be no assurance that a significant public market for our ADSs will develop or be sustained after this offering. Future sales of substantial amounts of our ADSs in the public market following this offering or the perception that such future sales may occur could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through sale of our equity securities.

Upon completion of this offering, we will have 1,370,000,000 outstanding ordinary shares, including 400,000,000 represented by 10,000,000 ADSs (assuming the underwriters do not exercise the over-allotment option). The ADSs sold in this offering will be freely tradable without restriction under the U.S. Securities Act of 1933, as amended, or the Securities Act, except for any ADSs purchased by our “affiliates” as that term is defined in Rule 144 under the Securities Act. Rule 144 defines an affiliate of a company as a person that, directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, our company. The remaining 970,000,000 ordinary shares held by our existing shareholders and any ADSs held by our affiliates are “restricted securities” as that term is defined in Rule 144 because they were issued in private transactions not involving a public offering. Restricted ordinary shares may be sold in the public market in the United States only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules are summarized below. This prospectus may not be used in connection with any resale of our ADSs acquired in this offering by our affiliates.

RULE 144

In general, under Rule 144 as currently in effect, a person, or persons, including persons who may be deemed an affiliate of our company, whose ordinary shares must be aggregated and who has beneficially owned restricted ordinary shares for at least one year, would be entitled to sell, within any three-month period, a number of ordinary shares that does not exceed the greater of:

†	one percent of the then outstanding ordinary shares, which will equal approximately 137,000,000 ordinary shares immediately after this offering, assuming the underwriters do not exercise the over-allotment option; or
†	the average weekly reported trading volume of our ordinary shares in the form of ADSs on Nasdaq during the four calendar weeks preceding a sale by such person.

Sales under Rule 144 are also subject to certain manner-of-sale provisions, notice requirements, and the availability of current public information about us.

RULE 144(k)

Under Rule 144(k), a person who has beneficially held restricted ordinary shares for a minimum of two years and who is not, and for three months prior to the sale of those ordinary shares has not been, one of our affiliates is free to sell those ordinary shares immediately following this offering without complying with the volume, manner-of-sale, public notice and other limitations contained in Rule 144.

RULE 701

In general, under Rule 701, any of our employees, directors, officers, or consultants who purchase ordinary shares from us in connection with a compensatory stock or option plan or other written agreement before the effective date of this offering is entitled to sell these ordinary shares 180 days after the effective date of this offering in reliance on Rule 144. Rule 701 provides that affiliates may

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sell their Rule 701 ordinary shares under Rule 144 without having to comply with the holding period and notice filing requirements of Rule 144, and that non-affiliates may sell those ordinary shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice filing requirements under Rule 144.

REGISTRATION RIGHTS

Under the terms of a shareholders agreement with our existing shareholders, at any time six months after the closing of a public offering of our ordinary shares with gross proceeds to us in excess of $12 million and a resulting market capitalization of at least $50 million, any shareholders holding 30% of registrable securities then outstanding may, on three occasions only, require us to register the public sale, all or portion of their registrable securities.

In addition, any holder of registrable securities may require us to effect a registration statement on Form F-3 (or an equivalent registration in a jurisdiction outside the United States) for a public offering of registrable securities provided that proposed aggregate price to the public would be at least $1 million.

In addition, each holder of registrable securities has “piggyback” registration rights, pursuant to which such holder may require us to register its ordinary shares when we register shares to be newly issued or to be sold by other shareholders.

The above registration rights are subject to certain conditions and limitations, including the right of the underwriters in any underwritten offering to limit the number of registrable securities to be registered for public sale.

Registrable securities are (1) any of our ordinary shares issued or issuable upon conversion of our Series A preferred shares or Series B preferred shares, (2) any of our ordinary shares issued as a share dividend or other distribution with respect to, or in exchange for or in replacement of, any Series A preferred shares or Series B preferred shares and (3) any other ordinary shares owned or acquired by the holders of our Series B preferred shares. Upon completion of the offering, 533,000,000 of our ordinary shares, or approximately 38.9% of our outstanding share capital, will be registrable securities.

We are generally required to bear all of the registration expenses incurred in connection with registrations of registrable securities, except underwriting discounts and selling commissions.

LOCK-UPS AND TRANSFER RESTRICTIONS

Our officers, directors and shareholders have agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any of our ADSs or our ordinary shares or securities convertible into or exchangeable or exercisable for any of our ADSs or our ordinary shares, enter into a transaction that would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our ADSs or our ordinary shares, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, or to enter into any transaction, swap, hedge or other arrangement with respect to our ADSs or ordinary shares, without the prior written consent of UBS AG for a period of 180 days after the date of this prospectus (other than any ADSs sold by selling shareholders pursuant to the over-allotment option).

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Taxation

The following summary of the material Cayman Islands and United States federal income tax consequences of an investment in the ADSs is based upon laws and relevant interpretations thereof in effect as of the date of this prospectus, all of which are subject to change. This summary does not deal with all possible tax consequences relating to an investment in the ADSs, such as the tax consequences under state, local and other tax laws.

CAYMAN ISLANDS

To the extent the following discussion relates to Cayman Islands law with respect to income tax consequences of an investment in our ADSs, it represents the opinion of Maples and Calder Asia.

The Cayman Islands currently have no exchange control restrictions and no income, corporate or capital gains tax, estate duty, inheritance tax, gift tax or withholding tax applicable to us or to any holder of ADSs. Accordingly, any payment of dividends or any other distribution made on the ordinary shares will not be subject to taxation in the Cayman Islands, no Cayman Islands withholding tax will be required on such payments to any shareholder and gains derived from the sale of ordinary shares will not be subject to Cayman Islands capital gains tax. The Cayman Islands are not party to any double taxation treaties.

We have received an undertaking from the Governor-in-Council of the Cayman Islands that, in accordance with section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, for a period of 20 years from the date of such undertaking (which was May 21, 2002), no law which is enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciations will apply to us or our operations and, in addition, that no tax to be levied on profits, income, gains or appreciations or which is in the nature of estate duty or inheritance tax will be payable (i) on or in respect of our shares, debentures or other obligations or (ii) by way of the withholding in whole or in part of a payment of dividend or other distribution of income or capital by us.

UNITED STATES

This section describes the material United States federal income tax consequences of the acquisition, ownership and disposition of our ADSs. It applies to you only if you acquire your ADSs in this offering and you hold your ADSs as capital assets for tax purposes. This section is the opinion of Sullivan and Cromwell LLP. This section does not apply to you if you are a member of a special class of holders subject to special rules, including:

†	a bank;
†	a dealer in securities or currencies;
†	a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings;
†	a tax-exempt organization;
†	an insurance company;
†	a person liable for alternative minimum tax;
†	a person that actually or constructively owns 10% or more of our voting stock;
†	a person that holds ADSs that are a hedge or that are hedged against currency risks or as part of a straddle or a conversion transaction; or

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† a U.S. holder (as defined below) whose functional currency is not the U.S. dollar.

This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. There is currently no comprehensive tax treaty between the United States and the Cayman Islands. In addition, this section is based in part upon the representations of the depositary bank and the assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms.

You are a U.S. holder if you are a beneficial owner of ADSs and you are:

†	a citizen or resident of the United States;
†	a domestic corporation;
†	an estate whose income is subject to United States federal income tax regardless of its source; or
†	a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust.

A non-U.S. holder is a beneficial owner of ADSs that is not a United States person for United States federal income tax purposes.

You should consult your own tax advisor regarding the United States federal, state and local tax consequences of owning and disposing of the ADSs in your particular circumstances.

This discussion addresses only United States federal income taxation.

In general, and taking into account the earlier assumptions, for United States federal income tax purposes, if you hold ADSs, you will be treated as the owner of the shares represented by those ADSs. Exchange of shares for ADSs, and ADSs for shares, generally will not be subject to United States federal income tax.

TAXATION OF DIVIDENDS

U.S. Holders. Under the United States federal income tax laws, and subject to the PFIC rules discussed below, if you are a U.S. holder, the gross amount of any dividend we pay out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes) is subject to United States federal income taxation. If you are a non-corporate U.S. holder, dividends paid to you in taxable years beginning before January 1, 2009 that constitute qualified dividend income will be taxable to you at a maximum tax rate of 15% provided that you hold the ADSs for more than 60 days during the 120-day period beginning 60 days before the ex-dividend date and meet other holding period requirements. On February 19, 2004, the IRS announced that it will permit taxpayers to apply a proposed legislative change to the holding period requirement described in the preceding sentence as if such a change were already effective. The legislative “technical correction” would change the minimum required holding period, retroactive to January 1, 2003, to more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. Dividends we pay with respect to the ADSs generally will be qualified dividend income provided that, in the year that you receive the dividend, the ADSs are readily tradable on an established securities market in the United States.

The dividend is taxable to you when the depositary bank receives the dividend, actually or constructively. The depositary will be in constructive receipt of the dividend when the dividend is made unqualifiedly subject to the demand of the depositary. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations. Distributions in excess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a

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non-taxable return of capital to the extent of your basis in the ADSs and thereafter as capital gain. If the dividend is declared and paid in a foreign currency, the amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the payments made in the foreign currency, determined at the spot foreign currency/U.S. dollar rate on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Therefore, since the value of the foreign currency may decrease before you actually convert the currency into U.S. dollars, you may actually be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will ultimately receive. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes.

Dividends will be income from sources outside the United States, but generally will be passive income or financial services income, which is treated separately from other types of income for purposes of computing the foreign tax credit allowable to you.

Non-U.S. Holders. If you are a non-U.S. holder, dividends paid to you in respect of the ADSs will not be subject to United States federal income tax unless the dividends are effectively connected with your conduct of a trade or business within the United States, and the dividends are attributable to a permanent establishment that you maintain in the United States if that is required by an applicable income tax treaty as a condition for subjecting you to United States taxation on a net income basis. In such cases you will be taxed in the same manner as a U.S. holder. If you are a corporate non-U.S. holder, effectively connected dividends may, under certain circumstances, be subject to an additional branch profits tax at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate.

TAXATION OF CAPITAL GAINS

U.S. Holders. Subject to the PFIC rules discussed below, if you are a U.S. holder and you sell or otherwise dispose of your ADSs, you will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you realize and your tax basis, determined in U.S. dollars, in your ADSs. Capital gain of a noncorporate U.S. holder that is recognized before January 1, 2009 is generally taxed at a maximum rate of 15% where the holder has a holding period greater than one year. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes. Your ability to deduct capital losses is subject to limitations.

Non-U.S. Holders. If you are a non-U.S. holder, you will not be subject to United States federal income tax on gain recognized on the sale or other disposition of your ADSs unless:

†	the gain is effectively connected with your conduct of a trade or business in the United States and the dividends are attributable to a permanent establishment that you maintain in the United States if that is required by an applicable income tax treaty as a condition for subjecting you to United States taxation on a net income basis; or
†	you are an individual, you are present in the United States for 183 or more days in the taxable year of the sale and certain other conditions exist.

If you are a corporate non-U.S. holder, effectively connected gains that you recognize, under certain circumstances, may also be subject to an additional branch profits tax at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate.

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PFIC RULES

Although it is not entirely clear how the contractual arrangements that provide us with control over Beijing AirInbox will be treated for purposes of the PFIC rules, we believe that we should be treated as owning all the shares of Beijing AirInbox for U.S. tax purposes, and therefore, the ADSs should not be treated as stock of a PFIC for United States federal income tax purposes. Whether or not we are a PFIC must be determined on an annual basis and, accordingly, our status is subject to change.

In general, if you are a U.S. holder, we will be a PFIC with respect to you if for any taxable year in which you held your ADSs:

†	at least 75% of our gross income for the taxable year is passive income; or
†	at least 50% of the value, determined on the basis of a quarterly average, of our assets is attributable to assets that produce or are held for the production of passive income.

Passive income generally includes dividends, interest, royalties, rents (not including certain rents and royalties derived in the active conduct of a trade or business), annuities and gains from assets that produce passive income. If a foreign corporation owns directly or indirectly at least 25% by value of the stock of another corporation, the foreign corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation, and as receiving directly its proportionate share of the other corporation’s income.

We believe that more than 25% of our gross income is not passive income and that, based upon our earnings history and projected market capitalization, we possess sufficient active assets, including intangible assets, such that more than 50% of the value of our assets is attributable to assets that produce or are held for the production of active income.

If we are treated as a PFIC, and you are a U.S. holder that does not make a mark-to-market election, as described below, you will be subject to special rules with respect to:

†	any gain you realize on the sale or other disposition of your ordinary shares or ADSs; and
†	any excess distribution that we make to you (generally, any distributions to you during a single taxable year that are greater than 125% of the average annual distributions received by you in respect of the ordinary shares or ADSs during the three preceding taxable years or, if shorter, your holding period for the ordinary shares or ADSs).

Under these rules:

†	the gain or excess distribution will be allocated ratably over your holding period for the ordinary shares or ADSs;
†	the amount allocated to the taxable year in which you realized the gain or excess distribution will be taxed as ordinary income;
†	the amount allocated to each prior year, with certain exceptions, will be taxed at the highest tax rate in effect for that year; and
†	the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such year.

Special rules apply for calculating the amount of the foreign tax credit with respect to excess distributions by a PFIC.

If you own ADSs in a PFIC that are treated as marketable stock, you may make a mark-to-market election. If you make this election, you will not be subject to the PFIC rules described above. Instead, in general, you will include as ordinary income each year the excess, if any, of the fair market value of

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your ADSs at the end of the taxable year over your adjusted basis in your ADSs. These amounts of ordinary income will not be eligible for the favorable tax rates applicable to qualified dividend income or long-term capital gains. You will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of your ADSs over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). Your basis in the ADSs will be adjusted to reflect any such income or loss amounts. Your gain, if any, recognized upon the sale of your ADSs will be taxed as ordinary income.

In addition, notwithstanding any election you make with regard to the ADSs, dividends that you receive from us will not constitute qualified dividend income to you if we are a PFIC either in the taxable year of the distribution or the preceding taxable year. Dividends that you receive that do not constitute qualified dividend income are not eligible for taxation at the 15% maximum rate applicable to qualified dividend income. Instead, you must include the gross amount of any such dividend paid by us out of our accumulated earnings and profits (as determined for United States federal income tax purposes) in your gross income, and it will be subject to tax at rates applicable to ordinary income.

If you own ADSs during any year that we are a PFIC, you must file Internal Revenue Service Form 8621.

BACKUP WITHHOLDING AND INFORMATION REPORTING

If you are a noncorporate U.S. holder, information reporting requirements, on Internal Revenue Service Form 1099, generally will apply to:

†	dividend payments or other taxable distributions made to you within the United States, and
†	the payment of proceeds to you from the sale of ordinary shares or ADSs effected at a United States office of a broker.

Additionally, backup withholding may apply to such payments if you are a noncorporate U.S. holder that:

†	fails to provide an accurate taxpayer identification number,
†	is notified by the Internal Revenue Service that you have failed to report all interest and dividends required to be shown on your federal income tax returns, or
†	in certain circumstances, fails to comply with applicable certification requirements.

If you are a non-U.S. holder, you are generally exempt from backup withholding and information reporting requirements with respect to:

†

dividend payments made to you outside the United States by us or another non-United States payor and

†

other dividend payments and the payment of the proceeds from the sale of ordinary shares or ADSs effected at a United States office of a broker, as long as the income associated with such payments is otherwise exempt from United States federal income tax, and the payor or broker does not have actual knowledge or reason to know that you are a United States person and you have furnished the payor or broker:

— an Internal Revenue Service Form W-8BEN or an acceptable substitute form upon which you certify, under penalties of perjury, that you are a non-United States person, or

— other documentation upon which it may rely to treat the payments as made to a non-United States person in accordance with U.S. Treasury regulations, or

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Taxation

— you otherwise establish an exemption.

Payment of the proceeds from the sale of ADSs effected at a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, a sale of ADSs that is effected at a foreign office of a broker will be subject to information reporting and backup withholding if:

†	the proceeds are transferred to an account maintained by you in the United States,
†	the payment of proceeds or the confirmation of the sale is mailed to you at a United States address, or
†	the sale has some other specified connection with the United States as provided in U.S. Treasury regulations,

unless the broker does not have actual knowledge or reason to know that you are a United States person and the documentation requirements described above are met or you otherwise establish an exemption.

In addition, a sale of ADSs effected at a foreign office of a broker will be subject to information reporting if the broker is:

†	a United States person,
†	a controlled foreign corporation for United States tax purposes,
†	a foreign person 50% or more of whose gross income is effectively connected with the conduct of a United States trade or business for a specified three-year period, or
†	a foreign partnership, if at any time during its tax year:

— one or more of its partners are “U.S. persons”, as defined in U.S. Treasury regulations, who in the aggregate hold more than 50% of the income or capital interest in the partnership, or

— such foreign partnership is engaged in the conduct of a United States trade or business,

unless the broker does not have actual knowledge or reason to know that you are a United States person and the documentation requirements described above are met or you otherwise establish an exemption. Backup withholding will apply if the sale is subject to information reporting and the broker has actual knowledge that you are a United States person.

You generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed your income tax liability by filing a refund claim with the United States Internal Revenue Service.

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Underwriting

Under the terms and subject to the conditions contained in an underwriting agreement dated                     , 2004, we and the selling shareholders have agreed to sell to the underwriters named below, for whom UBS AG, 52/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong, is acting as the representative, the following respective numbers of our ADSs:

	Number
Underwriters	of ADSs
UBS AG
Banc of America Securities LLC
CIBC World Markets Corp.
Total		10,000,000

The underwriting agreement provides that the underwriters are obligated to purchase all of the ADSs from us and the selling shareholders in this offering if any are purchased, other than those ADSs covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or this offering may be terminated.

All sales of our ADSs in the United States will be made by U.S. registered broker/ dealers. UBS AG is expected to make offers and sales in the United States through its registered broker-dealer affiliate, UBS Securities LLC.

We have granted to the underwriters a 30-day option to purchase up to 1,500,000 additional ADSs at the initial public offering price less the underwriting discounts and commissions.

The selling shareholders will enter into a custody agreement with us pursuant to which we will hold the ordinary shares represented by the ADSs being offered in this offering and pursuant to the over-allotment option and, upon the offering and the exercise of the over-allotment option, will deliver such ordinary shares to the depositary bank for issuance of ADSs.

The underwriters propose to offer the ADSs initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a selling concession of $       per ADS.

The underwriters and selling group members may allow a discount of $       per ADS on sales to other broker/ dealers. After the initial public offering, the underwriters may change the public offering price, concession and discount to broker/ dealers, and other selling terms.

The following table shows the per ADS and total underwriting discounts and commissions to be paid to the underwriters by us and the selling shareholders. Such amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase 1,500,000 additional ADSs.

	Paid by us		Paid by selling shareholders
	Without	With	Without	With
	over-allotment	over-allotment	over-allotment	over-allotment
Per ADS	$	$	$	$
Total	$	$	$	$

We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act relating to, any of our ADSs or our ordinary shares or securities convertible into or exchangeable or exercisable for any of our ADSs or our ordinary shares or publicly disclose the

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intention to make any offer, sale, pledge, disposition or filing, without the prior written consent of the representative for a period of 180 days after the date of this prospectus except issuances pursuant to the exercise of employee stock options outstanding on the date of this prospectus. Our officers, directors and shareholders have also agreed not to dispose of any of our ADSs or ordinary shares for a period of 180 days after the date of this prospectus. The 180-day lock-up period may be extended under certain circumstances where we release, or pre-announce a release of, our earnings or material news or a material event occurs shortly before or after the termination of the 180-day period.

The underwriters have reserved for sale at the initial public offering price up to 500,000 ADSs, representing not more than 5% of the size of this offering, for our business associates, friends and family of employees and directors of our company, and other persons associated with us who have expressed an interest in purchasing our ADSs in this offering. The number of ADSs available for sale to the general public in this offering will be reduced to the extent these persons purchase the reserved ADSs. Any reserved ADSs not so purchased will be offered by the underwriters to the general public on the same terms as the other ADSs. Certain of these persons, including without limitation persons who invest more than $100,000, will be required, as a condition to their purchase of such reserved ADSs, to agree in writing not to offer, sell, or otherwise dispose of their ADSs for a period of 180 days after the date of this offering.

We and the selling shareholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or contribute to payments that the underwriters may be required to make in that respect.

We have applied to have our ADSs quoted on the Nasdaq National Market under the symbol “KONG.”

Before this offering, there has been no public market for our ordinary shares or ADSs. The public offering price will be determined through negotiations among us and the representative. In addition to prevailing market conditions, the factors to be considered in determining the initial public offering price are:

†	the valuation multiples of publicly traded companies that the representative believes to be comparable to us,
†	our financial information,
†	the history of, and the prospects for, our company and the industry in which we compete,
†	an assessment of our management, our past and present operations, and the prospects for, and timing of, our future revenues,
†	the present state of our development, and
†	the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours.

In connection with this offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions, penalty bids and passive market making in accordance with Regulation M under the Exchange Act.

†	Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.
†	Over-allotment involves sales by the underwriters of our ADSs in excess of the number of our ADSs the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short

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Underwriting

	position, the number of our ADSs over-allotted by the underwriters is not greater than the number of our ADSs that they may purchase in the over-allotment option. In a naked short position, the number of our ADSs involved is greater than the number of our ADSs in the over-allotment option. The underwriters may close out any covered short position by either exercising their over-allotment option and/or purchasing in the open market.
†	Syndicate covering transactions involve purchases of our ADSs in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of our ADSs to close out the short position, the underwriters will consider, among other things, the price of our ADSs available for purchase in the open market as compared to the price at which they may purchase our ADSs through the over-allotment option. If the underwriters sell more of our ADSs than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying our ADSs in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of our ADSs in the open market after pricing that could adversely affect investors who purchase in this offering.
†	Penalty bids permit the representative to reclaim a selling concession from a syndicate member when our ADSs originally sold by the syndicate member are purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.
†	In passive market making, market makers in our ADSs who are underwriters or prospective underwriters may, subject to limitations, make bids for or purchases of our ADSs until the time, if any, at which a stabilizing bid is made.

These stabilizing transactions, syndicate covering transactions, penalty bids and passive market making may have the effect of raising or maintaining the market price of our ADSs or preventing or retarding a decline in the market price of our ADSs. As a result, the price of our ADSs may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time.

A prospectus in electronic format may be made available on the web sites maintained by one or more of the underwriters, or selling group members, if any, participating in this offering. The representative may agree to allocate a number of our ADSs to underwriters and selling group members for sale to their online brokerage account holders.

United Kingdom. Each underwriter acknowledges that this prospectus has not been approved by an authorized person in the United Kingdom and has not been registered with the Registrar of Companies in the United Kingdom. Each underwriter has represented and agreed that (i) it has not offered or sold and, prior to the expiry of a period of six months from the completion of the global offering, will not offer or sell any ADSs or ordinary shares to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses, or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (ii) it has complied and will comply with all applicable provisions of the Financial Services and Markets Act 2000 (the “FSMA”) with respect to anything done by it in relation to any ADSs or ordinary shares in, from or otherwise involving the United Kingdom; and (iii) it only has communicated or caused to be communicated and only will communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the FSMA) received by it in connection with the issue or sale of any ADSs or ordinary shares in circumstances in which section 21(1) of the FSMA does not apply to us.

131

Underwriting

France. Each underwriter has represented and agreed that (i) neither this prospectus nor any offering material relating to ADSs or ordinary shares has been or will be submitted to the “Commission des Opérations de Bourse” for approval (“Visa”) in France; and (ii) it has not offered or sold and will not offer or sell any ADSs or ordinary shares or distribute or cause to be distributed any copies of this prospectus or any offering material relating to the ADSs or ordinary shares, directly or indirectly, in France, except (a) with the prior authorization of the French Ministry for Economy and Finance in accordance with Articles 9 and 10 of the ‘Decret’ of December 29, 1989 regulating financial relations between France and foreign countries, or (b) to qualified investors (“investisseurs qualifiés”) and/or a restricted group of investors (“cercle restreint d’investisseurs,”), in each case acting for their account, all as defined in, and in accordance with, Article L. 411-l and L. 411-2 of the Monetary and Financial Code and “Décret” no. 98-880 dated October 1, 1998.

Germany. Each underwriter has represented and agreed that (i) this prospectus is not a Securities Selling Prospectus (Verkaufsprospekt) within the meaning of the German Securities Prospectus Act (Verkaufsprospektgesetz) of September 9, 1998, as amended, and has not been filed with and approved by the German Federal Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) or any other German governmental authority; and (ii) it has not offered or sold and will not offer or sell any ADSs or ordinary shares or distribute copies of this prospectus or any document relating to the ADSs, directly or indirectly, in Germany except to persons falling within the scope of paragraph 2 numbers 1, 2 and 3 of the German Securities Prospectus Act and by doing so has not taken, and will not take, any steps which would constitute a public offering of the ADSs or ordinary shares in Germany.

Italy. The offering of the ADSs or ordinary shares has not been registered with the Commissione Nazionale per le Società e la Borsa or “CONSOB”, in accordance with Italian securities legislation. Accordingly, each underwriter has represented and agreed that (i) sales of the ADSs or Ordinary Shares in the Republic of Italy shall be effected in accordance with all Italian securities, tax and other applicable laws and regulations; and (ii) it has not offered, sold or delivered, and will not offer, sell or deliver, any ADSs or ordinary shares or distribute copies of this prospectus or any other document relating to the ADSs or ordinary shares in the Republic of Italy unless such offer, sale or delivery of ADSs or ordinary shares or distribution of copies of this prospectus or other documents relating to the ADSs or ordinary shares in the Republic of Italy is to qualified investors (operatori qualificati), as defined by Articles 25 and 31(2) of CONSOB Regulation No. 11522 of 1 July 1998 as subsequently modified (Regulation 11522), except for individuals referred to in Article 31(2) of Regulation 11522 who exercise administrative, managerial or supervisory functions at a registered securities dealing firm (a Societa di Intermediazione Mobiliare or SIM), management companies (societa di gestione del risparmio) authorized to manage individual portfolios on behalf of third parties and fiduciary companies authorized to manage individual portfolios pursuant to Article 60(4) of Legislative Decree no. 415 of 23 July 1996 and may not be reproduced or redistributed or passed on, directly or indirectly, to any other person or published in whole or part. Any offer, sale or delivery of the ADSs or ordinary shares or distribution of copies of this prospectus in Italy must be made solely by entities which are duly authorized to conduct such activities in Italy and must be in full compliance with the provisions contained in Legislative Decree no. 58 of 24 February 1998, Legislative Decree no. 385 of 1 September 1993 and any other applicable laws and regulations and possible requirements or limitations which may be imposed by the Italian competent authorities.

The Netherlands. Each underwriter has represented and agreed that it has not offered, distributed, sold, transferred or delivered, and will not offer, distribute, sell, transfer or deliver, any ADSs or ordinary shares, directly or indirectly, in the Netherlands, as part of their initial distribution or at any time thereafter, to any person other than individuals who or legal entities which trade or invest in securities in the conduct of their profession or business within the meaning of article 2 of the Exemption Regulation issued under the Securities Transactions Supervision Act 1995

132

Underwriting

(“Vrijstellingsregeling Wet toezicht Effectenverkeer 1995”), which includes banks, brokers, pension funds, insurance companies, securities institutions, investment institutions and other institutional investors, including, among others, treasuries of large enterprises, who or which regularly trade or invest in securities in a professional capacity.

Belgium. Neither this prospectus nor any offering material relating to the ADSs or ordinary shares has been or will be submitted to the “Commission Bancaire et Financière/Commissie voor het Banken Financiewezen” for review or approval. Therefore, this prospectus will not constitute a prospectus under Belgium law. Accordingly, each underwriter has represented and agreed that neither this prospectus nor any offering material relating to the ADSs or ordinary shares may be distributed or caused to be distributed, directly or indirectly, to the public in Belgium, no steps may be taken which would constitute or result in a public offering in Belgium as defined in the Royal Decree dated 7 July 1999 on the public character of financial transactions, and no securities may be sold or offered for sale to consumers as such term is defined in the Law dated 14 July 1991 on commercial practices and the information and protection of consumers.

Ireland. Each underwriter has represented and agreed that (i) otherwise than in circumstances which are not deemed to be an offer to the public by virtue of the provisions of the Irish Companies Acts, 1963 to 2001, it has not offered or sold, and will not offer or sell, in Ireland, by means of any document, any ADSs or ordinary shares, unless such offer or sale has been or is made to persons whose ordinary business it is to buy or sell shares or debentures, whether as principal or agent, and it has not issued, and will not issue, in Ireland any form of application for ADSs or ordinary shares; and (ii) it has not made and will not make any offer of ADSs or ordinary shares to the public in Ireland to which the European Communities (Transferable Securities and Stock Exchange) Regulations, 1992 of Ireland would apply, except in accordance with the provisions of those regulations.

Switzerland. Each underwriter has acknowledged that (i) this prospectus does not constitute a prospectus within the meaning of Article 652a and Art. 1156 of the Swiss Code of Obligations (Schweizerisches Obligationenrecht); and (ii) none of this offering, the ADSs and ordinary shares has been or will be approved by any Swiss regulatory authority.

Luxembourg. Each underwriter represents, warrants and agrees that it may not offer the ADSs or ordinary shares in the Grand Duchy of Luxembourg except in circumstances where the requirements of Luxembourg law concerning public offerings of securities have been met. In particular, this offer has not been and may not be announced to the public and offering material may not be made available to the public.

Hong Kong. Each underwriter has represented and agreed that (i) it has not offered or sold, and will not offer or sell, in Hong Kong, by means of any document, any ADSs or ordinary shares other than to persons whose ordinary business is to buy or sell shares or debentures, whether as principal or agent, or in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Chapter 32 of the laws of Hong Kong); and (ii) except as permitted under the securities laws of Hong Kong, it has not issued, and will not issue, in Hong Kong any document, invitation or advertisement relating to the ADSs or ordinary shares other than with respect to ADSs or ordinary shares which are intended to be disposed of to persons outside Hong Kong or only to persons whose business involves the acquisition, disposal or holding of securities, whether as principal or agent.

Japan. Neither the ADSs nor the ordinary shares have been registered under the Securities and Exchange Law of Japan (Law No. 25 of 1948 as amended), or the SEL, and disclosure under the SEL has not been and will not be made with respect to the ADSs or ordinary shares. Accordingly, each underwriter represents and agrees that it has not, directly or indirectly, offered or sold and will not, directly or indirectly, offer or sell any convertible notes in Japan or to, or for the benefit of, any

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Underwriting

resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan) or resell any convertible notes, directly or indirectly in Japan or to, or for the benefit of, any resident of Japan except (1) pursuant to an exemption from the registration requirements of the SEL and (2) in compliance with any other relevant laws and regulations of Japan.

Singapore. This prospectus has not been registered as a prospectus or information memorandum with the Monetary Authority of Singapore. Accordingly, each underwriter has represented and agreed that no advertisement may be made offering or calling attention to an offer or intended offer of the ADSs or ordinary shares to the public in Singapore. It will not offer or sell ADSs or ordinary shares, nor will it make ADSs or ordinary shares the subject of an invitation for subscription or purchase, nor will it circulate or distribute this prospectus or any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of ADSs or ordinary shares, whether directly or indirectly, to the public or any member of the public in Singapore other than:

†	to an institutional investor or other person specified in Section 274 of the Securities and Futures Act 2001, Chapter 289, of Singapore, or the Securities and Futures Act,
†	to a sophisticated investor, and in accordance with the conditions, specified in Section 275 of the Securities and Futures Act, or
†	otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the Securities and Futures Act.

People’s Republic of China. Each underwriter represents and agrees that it has not and will not circulate or distribute this prospectus in the People’s Republic of China and it has not offered or sold, and will not offer or sell to any person for re-offering or resale, directly or indirectly, any ADSs or ordinary shares to any resident of the People’s Republic of China except pursuant to applicable laws and regulations of the People’s Republic of China. For the purposes of this paragraph, the People’s Republic of China excludes Hong Kong, Macau and Taiwan.

134

Legal matters

The validity of the ADSs under New York law will be passed upon for us by Sullivan & Cromwell LLP. Certain legal matters relating to the offering as to United States federal and New York law will be passed upon for the underwriters by Morrison & Foerster LLP. Certain legal matters relating to the offering as to PRC law will be passed upon for us by Llinks Law Office and for the underwriters by Haiwen & Partners. Certain legal matters relating to the offering as to Cayman Islands law will be passed upon for us by Maples and Calder Asia.

Experts

The consolidated financial statements as of December 31, 2002 and 2003 and for the period from May 6, 2002 to December 31, 2002 and for the year ended December 31, 2003, included in this prospectus have been audited by Deloitte Touche Tohmatsu, Certified Public Accountants, independent auditor, 26/F, Wing On Center, 111 Connaught Road, Central, Hong Kong, as stated in their reports appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in auditing and accounting.

135

Expenses related to this offering

The following table sets forth the main estimated expenses in connection with this offering, other than the underwriting discounts and commissions, which we will be required to pay:

U.S. Securities and Exchange Commission registration fee		$	17,485
National Association of Securities Dealers filing fee		$	16,000
Nasdaq listing fee		$	155,000
Legal fees and expenses		$	1,132,000
Accounting fees and expenses		$	350,000
Printing fees		$	104,000
Financial advisory fees		$	—
Other fees and expenses		$	450,000
	Total	$	2,224,485

All amounts are estimated, except the U.S. Securities and Exchange Commission registration fee, the Nasdaq listing fee and the NASD filing fee.

136

Where you can find more information

We have filed with the U.S. Securities and Exchange Commission, or the Commission, a registration statement on Form F-1 (No. 333-116172) under the Securities Act, with respect to the ADSs. This prospectus does not contain all of the information in the registration statements and their exhibits. We have omitted certain portions of these registration statements from this prospectus in accordance with the rules and regulations of the Commission.

You may read and copy this information at the Commission’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 or from the Commission’s web site at www.sec.gov. You can also request copies of the documents we file with the Commission, upon payment of a duplicating fee, by writing to the Public Reference Section of the Commission. Please call the Commission at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. You may also inspect these reports and other information at the offices of the Nasdaq National Market, Reports Section, 1735 K Street, N.W., Washington, D.C. 20006.

Upon completion of the offering, we will become subject to the periodic reporting and other informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, applicable to a foreign private issuer. In accordance with these requirements, we will file annual reports on Form 20-F within six months of our fiscal year end and we will submit other reports and information under cover of Form 6-K with the Commission. These reports and other information can be read and copied at the public reference room at the Commission or from the Commission’s web site at www.sec.gov. You can also obtain copies, upon payment of a prescribed fee, of such material from the public reference room and the regional offices, or by calling or writing to the Commission. As a foreign private issuer, we will not be subject to the proxy rules of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and our officers and directors will not be subject to the insider short-swing profit disclosure and recovery requirements of Section 16 of the Exchange Act.

We will furnish to the depositary bank annual reports prepared in accordance with applicable law. Our annual reports will contain audited consolidated financial statements following the end of each fiscal year, and we intend to make available reports containing unaudited summary consolidated financial information. We will also furnish to the depositary bank all notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders. The depositary bank will make such notices, reports and communications available to the holders of ADSs at our request.

137

Enforceability of civil liabilities

We are an exempted limited liability company incorporated under the laws of the Cayman Islands. An exempted company under Cayman Islands law is a company that conducts its business outside of the Cayman Islands, is exempted from certain requirements of the Companies Law, including a filing of an annual return of its shareholders with the Registrar of Companies, does not have to make its register of shareholders open to inspection and may obtain an undertaking against the imposition of any future taxation. We are incorporated in the Cayman Islands because of certain benefits associated with being a Cayman Islands corporation, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of exchange control or currency restrictions and the availability of professional and support services. However, the Cayman Islands has a less developed body of securities laws as compared to the United States and provides protections for investors to a significantly lesser extent. In addition, Cayman Islands companies do not have standing to sue before the federal courts of the United States.

A substantial majority of our assets are located outside the United States. In addition, some of our directors and officers are nationals and/or residents of countries other than the United States, and all or a substantial portion of our or such persons’ assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us or such persons or to enforce against them or against us, judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof.

We have appointed CT Corporation System at 111 Eighth Avenue, New York, New York 10011, as our agent to receive service of process with respect to any action brought against us in the United States District Court for the Southern District of New York under the federal securities laws of the United States or of any State of the United States or any action brought against us in the Supreme Court of the State of New York in the County of New York under the securities laws of the State of New York.

Maples and Calder Asia, our counsel as to Cayman Islands law, and Llinks Law Offices, our counsel as to PRC law, have advised us that there is uncertainty as to whether the courts of the Cayman Islands and the PRC, respectively, would (1) recognize or enforce judgements of United States courts obtained against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or (2) be competent to hear original actions brought in each respective jurisdiction, against us or such persons predicated upon the securities laws of the United States or any state thereof.

Maples and Calder Asia has further advised us that a final and conclusive judgment in federal or state courts of the United States under which a sum of money is payable, other than a sum payable in respect of taxes, fines, penalties or similar charges, may be subject to enforcement proceedings as a debt in the Courts of the Cayman Islands under the common law doctrine of obligation.

In making an investment decision relating to our ADSs, you should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell our ADSs and seeking offers to buy ADSs only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our ADSs.

138

KongZhong Corporation

(Formerly Communication Over The Air Inc.)

INDEX TO FINANCIAL STATEMENTS
Independent auditors’ report	F-2
Consolidated balance sheets as of December 31, 2002 and 2003 and as of March 31, 2004 (unaudited)	F-3
Consolidated statements of operations for the period from May 6, 2002 to December 31, 2002 and the year ended December 31, 2003 and for the three months ended March 31, 2004 (unaudited)	F-4
Consolidated statements of shareholders’ equity and comprehensive income (loss) for the period from May 6, 2002 to December 31, 2002 and the year ended December 31, 2003 and for the three months ended March 31, 2004 (unaudited)	F-5
Consolidated statements of cash flows for the period from May 6, 2002 to December 31, 2002 and the year ended December 31, 2003 and for the three months ended March 31, 2004 (unaudited)	F-6
Notes to the consolidated financial statements	F-7

F-1

Independent auditors’ report

To the Board of Directors and Shareholders of
KongZhong Corporation (formerly Communication Over The Air Inc.):

We have audited the accompanying consolidated balance sheets of KongZhong Corporation (formerly Communication Over The Air Inc.) and its subsidiaries (the “Company”) as of December 31, 2002 and 2003 and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for the period from May 6, 2002 to December 31, 2002 and the year ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and 2003 and the results of its operations and its cash flows for the above stated periods in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte Touche Tohmatsu

Hong Kong

March 18, 2004

F-2

KongZhong Corporation

(Formerly Communication Over The Air Inc.)

	December 31,						March 31,			March 31,
Consolidated balance sheets	2002			2003			2004			2004
							(Unaudited)			Pro forma
										(Unaudited)
										(Note 2)
	(In U.S. dollars, except share data)
Assets
Current assets:
Cash and cash equivalents	$	2,646,216		$	3,742,607		$	5,736,207		$	5,736,207
Accounts receivable net of allowance of $Nil as of December 31, 2002 and 2003 and March 31, 2004 (unaudited)		132,327			1,703,864			3,268,815			3,268,815
Prepaid expenses and other current assets		71,754			198,286			334,711			334,711
Total current assets		2,850,297			5,644,757			9,339,733			9,339,733
Rental deposits		—			74,234			74,234			74,234
Property and equipment, net		251,041			848,461			1,104,160			1,104,160
Total assets	$	3,101,338		$	6,567,452		$	10,518,127		$	10,518,127
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	23,455		$	563,615		$	1,038,766		$	1,038,766
Accrued expenses and other current liabilities		46,586			393,682			615,659			615,659
Due to a related party		5,000			90,000			—			—
Total current liabilities	$	75,041		$	1,047,297		$	1,654,425		$	1,654,425
Minority interest	$	—		$	—		$	120,815		$	120,815
Series B redeemable convertible preferred shares, net of issuance costs of $30,000 ($0.0000005 par value; 350,000,000 shares authorized, 350,000,000 issued and outstanding in 2002, 2003 and as of March 31, 2004 (unaudited); redeemable in 2007 at $0.0085715 per share) (liquidation value $4,499,950)	$	2,970,025		$	2,970,025		$	2,970,025		$	—
Commitments (Note 13)
Shareholders’ equity
Series A convertible preferred shares ($0.0000005 par value; 231,000,000 shares authorized, 231,000,000 shares issued and outstanding in 2002, 2003 and as of March 31, 2004 (unaudited)) (liquidation value $550,011)	$	115		$	115		$	115		$	—
Ordinary shares ($0.0000005 par value; 999,419,000,000 shares authorized, 469,000,000 shares issued and outstanding in 2002, 2003 and as of March 31, 2004 (unaudited)) (1,050,000,000 shares issued and outstanding on a pro forma basis)		235			235			235			525
Additional paid-in capital		551,842			826,035			3,020,847			5,990,697
Deferred stock compensation		—			(189,086	)		(2,303,160	)		(2,303,160	)
Accumulated other comprehensive loss		(2,046	)		(1,431	)		(1,554	)		(1,554	)
Retained earnings (Accumulated deficit)		(493,874	)		1,914,262			5,056,379			5,056,379
Total shareholders’ equity		56,272			2,550,130			5,772,862			8,742,887
Total liabilities and shareholders’ equity	$	3,101,338		$	6,567,452		$	10,518,127		$	10,518,127

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

F-3

KongZhong Corporation

(Formerly Communication Over The Air Inc.)

		For the period			For the			For the
		from May 6, 2002			year ended			three months
		to December 31,			December 31,			ended March 31,
Consolidated statements of operations		2002			2003			2004
								(Unaudited)
		(In U.S. dollars, except share data)
Gross revenues			$200,319			$7,806,689			$7,147,585
Cost of revenues			(84,335	)		(2,283,972	)		(2,239,037	)
Gross profit			115,984			5,522,717			4,908,548
Operating expenses:
	Product development		164,215			1,369,503			716,474
	Sales and marketing		128,894			841,448			294,116
	General and administrative		317,288			882,635			675,676
	Amortization of deferred stock compensation *		—			21,986			80,738
Total operating expenses			610,397			3,115,572			1,767,004
Income (loss) from operations			(494,413	)		2,407,145			3,141,544
Other expenses			—			—			(743	)
Interest income, net			539			991			1,316
Net income (loss) before income taxes			(493,874	)		2,408,136			3,142,117
Income taxes expense			—			—			—
Net income (loss)			$(493,874	)		$2,408,136			$3,142,117
Net income (loss) per share, basic			(0.12) cent			0.51 cent			0.67 cent
Net income (loss) per share, diluted			(0.12) cent			0.22 cent			0.29 cent
Shares used in calculating basic net income (loss) per share			415,547,794			469,000,000			469,000,000
Shares used in calculating diluted net income (loss) per share			415,547,794			1,094,824,434			1,098,206,555
Pro forma basic net income (loss) per share (unaudited) (Notes 2(u) and 10)			(0.08) cent			0.23 cent			0.30 cent
Pro forma diluted net income (loss) per share (unaudited) (Notes 2(u) and 10)			(0.08) cent			0.22 cent			0.29 cent
Shares used in calculating pro forma basic net income (loss) per share (unaudited) (Notes 2(u) and 10)			622,124,999			1,050,000,000			1,050,000,000
Shares used in calculating pro forma diluted net income (loss) per share (unaudited) (Notes 2(u) and 10)			622,124,999			1,094,824,434			1,098,206,555
* Amortization of deferred stock compensation related to:
	Product development		$—			$13,229			$24,121
	Sales and marketing		—			8,389			13,964
	General and administrative		—			368			42,653
			$—			$21,986			$80,738

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

F-4

KongZhong Corporation

(Formerly Communication Over The Air Inc.)

Consolidated statements of shareholders’ equity and comprehensive income (loss)

	Series A convertible
	preferred shares				Ordinary shares				Additional			Deferred
									paid-in			stock
	Shares		Amount		Shares		Amount		capital			compensation
			(In U.S. dollars, except share data)
Issuance of common shares to founders		—	$	—		469,000,000		$235	$	—		$	—
Issuance of Series A convertible preferred shares		231,000,000		115		—		—		549,896			—
Stock options issued to consultants		—		—		—		—		1,946			—
Foreign currency translation adjustments		—		—		—		—		—			—
Net loss		—		—		—		—		—			—
Balance as of December 31, 2002		231,000,000		115		469,000,000		235		551,842			—
Stock options issued to consultants		—		—		—		—		63,121			—
Deferred stock- based compensation		—		—		—		—		211,072			(211,072	)
Amortization of deferred stock compensation		—		—		—		—		—			21,986
Foreign currency translation adjustments		—		—		—		—		—			—
Net income		—		—		—		—		—			—
Balance as of December 31, 2003		231,000,000		115		469,000,000		235		826,035			(189,086	)
Reversal of deferred stock compensation for employee terminations (unaudited)		—		—		—		—		(10,848	)		10,848
Deferred stock- based compensation (unaudited)		—		—		—		—		2,205,660			(2,205,660	)
Amortization of deferred stock compensation (unaudited)		—		—		—		—		—			80,738
Foreign currency translation adjustments (unaudited)		—		—		—		—		—			—
Net income (unaudited)		—		—		—		—		—			—
Balance as of March 31, 2004 (unaudited)		231,000,000	$	115		469,000,000		$235	$	3,020,847		$	(2,303,160	)

[Additional columns below]

[Continued from above table, first column(s) repeated]

	Accumulated			Retained
	other			earnings			Total
	comprehensive			(Accumulated			shareholders’			Comprehensive
	loss			deficit)			equity			income (loss)
	(In U.S. dollars, except share data)
Issuance of common shares to founders	$	—		$	—		$	235		$	—
Issuance of Series A convertible preferred shares		—			—			550,011			—
Stock options issued to consultants		—			—			1,946			—
Foreign currency translation adjustments		(2,046	)		—			(2,046	)		(2,046	)
Net loss		—			(493,874	)		(493,874	)		(493,874	)
Balance as of December 31, 2002		(2,046	)		(493,874	)		56,272		$	(495,920	)
Stock options issued to consultants		—			—			63,121		$	—
Deferred stock- based compensation		—			—			—			—
Amortization of deferred stock compensation		—			—			21,986			—
Foreign currency translation adjustments		615			—			615			615
Net income		—			2,408,136			2,408,136			2,408,136
Balance as of December 31, 2003		(1,431	)		1,914,262			2,550,130		$	2,408,751
Reversal of deferred stock compensation for employee terminations (unaudited)		—			—			—		$	—
Deferred stock- based compensation (unaudited)		—			—			—			—
Amortization of deferred stock compensation (unaudited)		—			—			80,738			—
Foreign currency translation adjustments (unaudited)		(123	)		—			(123	)		(123	)
Net income (unaudited)		—			3,142,117			3,142,117			3,142,117
Balance as of March 31, 2004 (unaudited)	$	(1,554	)	$	5,056,379		$	5,772,862		$	3,141,994

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

F-5

KongZhong Corporation

(Formerly Communication Over The Air Inc.)

		For the period			For the			For the
		from May 6, 2002			year ended			three months
		to December 31,			December 31,			ended March 31,
Consolidated statements of cash flows		2002			2003			2004
								(Unaudited)
		(In U.S. dollars)
Operating activities:
Net income (loss)			$(493,874	)		$2,408,136			$3,142,117
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
	Amortization of deferred stock compensation		—			21,986			80,738
	Stock options issued to consultants		1,946			63,121			—
	Depreciation and amortization		41,310			266,539			114,368
	Loss on disposal of fixed assets		—			—			743
Changes in operating assets and liabilities:
	Rental deposits		—			(74,234	)		—
	Accounts receivable		(132,327	)		(1,571,537	)		(1,564,951	)
	Prepaid expenses and other current assets		(71,754	)		(126,532	)		(136,425	)
	Accounts payable		23,455			540,160			475,151
	Accrued expenses and other current liabilities		46,586			347,096			221,977
	Due to a related party		5,000			85,000			(90,000	)
Net cash (used in) provided by operating activities			(579,658	)		1,959,735			2,243,718
Investing activities
Purchase of property and equipment			(292,351	)		(863,959	)		(371,172	)
Proceeds from disposal of property and equipment			—			—			362
Net cash used in investing activities			(292,351	)		(863,959	)		(370,810	)
Financing activities
Proceeds from issuance of ordinary shares			235			—			—
Proceeds from issuance of Series A convertible preferred shares			550,011			—			—
Proceeds from issuance of Series B redeemable convertible preferred shares, net of issuance costs			2,970,025			—			—
Capital contribution from minority interest			—			—			120,815
Net cash provided by financing activities			3,520,271			—			120,815
Effect of exchange rate changes			(2,046	)		615			(123	)
Net increase in cash and cash equivalents			2,646,216			1,096,391			1,993,600
Cash and cash equivalents, beginning of period			—			2,646,216			3,742,607
Cash and cash equivalents, end of period			$2,646,216			$3,742,607			$5,736,207
Supplemental disclosures of cash flow information
	Income taxes paid		$—			$—			$—
	Interest paid		$—			$—			$—

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

F-6

KongZhong Corporation

(Formerly Communication Over The Air Inc.)

Notes to the consolidated financial statements

for the period from May 6, 2002 to December 31, 2002 and

the year ended December 31, 2003 and the three months ended March 31, 2004 (unaudited)

(In U.S. dollars, except share data)

1.     ORGANIZATION AND PRINCIPAL ACTIVITIES

KongZhong Corporation (formerly Communication Over The Air Inc.) (“KongZhong”) was incorporated under the laws of the Cayman Islands on May 6, 2002. KongZhong established a wholly foreign owned enterprise, (“KongZhong Beijing”), on July 29, 2002 under the laws of the People’s Republic of China (the “PRC”) and it has an operating period of 30 years which commenced in July 2002. The Company and its consolidated entities (the “Company”) provide wireless interactive entertainment, media and community services to mobile phone users in the PRC and is specialized in the development, marketing and distribution of consumer wireless value-added services.

PRC regulations prohibit direct foreign ownership of business entities providing value-added telecommunications services in the PRC where certain licenses are required for the provision of such services. To comply with these regulations the Company conducts substantially all of its activities through (“Beijing AirInbox”), a variable interest entity established on April 4, 2002 with an initial operating period of 30 years. Beijing AirInbox provides wireless value-added services to China’s cell phone users in the form of SMS, WAP, MMS, Java^TM IVR and CRBT and is legally owned directly by three PRC citizens (the “Registered Shareholders”). Upon establishment, Yunfan Zhou, the Company’s Chief Executive Officer, Songlin Yang, the uncle of Nick Yang, the Company’s President, and Leilei Wang, held 35%, 35% and 30%, respectively of Beijing AirInbox’s total outstanding shares. In September 2003, Leilei Wang transferred his 30% equity interest in Beijing AirInbox to Yunfan Zhou and Zhen Huang, the wife of Nick Yang, in portions of 15% each. In April 2004, the registered capital of Beijing AirInbox has been increased from RMB 2 million to RMB 10 million. The increased registered capital was contributed from Songlin Yang and Yang Cha, a PRC citizen and employee of the Company, for $0.4 million (RMB 3.5 million) and $0.5 million (RMB 4.5 million), respectively.

In March 2004, the Company established another variable interest entity named Beijing Boya Wuji Technologies Co. Ltd. (“Beijing Boya Wuji”) with an operating period of 20 years. Beijing Boya Wuji will provide wireless value-added services to China’s cell phone users in the form of SMS, WAP, MMS, Java^TM IVR and CRBT and a license has been obtained from the PRC government in April 2004. Beijing Boya Wuji is legally owned directly by two PRC citizens (the “Registered Shareholders of Beijing Boya Wuji”). Upon establishment of Beijing Boya Wuji, Yunfan Zhou and Zhen Huang held 50% and 50% respectively of Beijing Boya Wuji. The investment by these two individuals has been done through their personal funds with no loans provided by the Company. Accordingly, the investment amount of $120,815 has been included as a minority interest.

KongZhong and KongZhong Beijing have entered into various operating agreements with Beijing AirInbox and Beijing Boya Wuji, including Exclusive Technical and Consulting Services Agreements. Under these agreements, Beijing AirInbox and Beijing Boya Wuji have the exclusive right to use certain

F-7

Notes to the consolidated financial statements

Beijing Boya Wuji are required to pay the Company licensing and service fees for the use of each domain name and trademark and the technical and consulting services received. The Company is entitled to receive service fees in an amount up to all of the net income of Beijing AirInbox and Beijing Boya Wuji.

In addition, the Company has extended interest-free loans to the Registered Shareholders ($241,546 had been loaned as of December 31, 2002 and 2003 and as of March 31, 2004 (unaudited)) to finance their investments in Beijing AirInbox. In April 2004, Yang Cha and Songlin Yang drew down the loans for the amount of $0.5 million and $0.4 million, respectively for investment into Beijing AirInbox as contribution to the capital increase in Beijing AirInbox by Yang Cha and Songlin Yang. Principal terms of these loan agreements provide that (i) proceeds from the loans are to be used solely for the investments in Beijing AirInbox, (ii) the loans can only be repaid to the Company by transferring the shares of Beijing AirInbox to the Company, (iii) the shares of Beijing AirInbox cannot be transferred without the approval of the Company, (iv) the Company has the right to appoint all directors and senior management personnel of Beijing AirInbox, and (v) all shareholder rights including voting rights and rights to dividends are assigned to KongZhong Beijing. In addition, the Company has the right to require the transfer of the shares of Beijing AirInbox to the Company or any party designated by the Company, at any time, for the amount of the loan outstanding. Since the Company consolidates Beijing AirInbox, the loans to the Registered Shareholders and Yang Cha are treated as investments in Beijing AirInbox and are eliminated upon consolidation for all periods presented.

The Company is the primary beneficiary of Beijing AirInbox because the Company hold all of the variable interests in Beijing AirInbox either directly or through related parties. The only variable interests in Beijing AirInbox not directly held by KongZhong Beijing are the shares which are held by Yunfan Zhou (10%), Songling Yang (42%), Zhen Huang (3%) and Yang Cha (45%). Each of these individuals is a related party of the Company as described in FIN 46 (revised) either because they are management (Yunfan Zhou), a member of the immediate family of management (Zhen Huang), or acting as a de facto agent of the Company (all). The de facto agent relationship is established through the loan agreement, under which the individuals assign all of their rights as shareholders to the Company. Because there are no unrelated variable interests in Beijing AirInbox, the Company is the primary beneficiary.

The Company is the primary beneficiary of Beijing Boya Wuji because the Company holds all of its variable interests in Beijing Boya Wuji through related parties. The only variable interests in Beijing Boya Wuji not directly held by KongZhong Beijing are the shares which are held by Yunfan Zhou (50%) and Zhen Huang (50%). Each of these individuals is a related party of the Company as described in FIN 46 (revised) either because they are management (Yunfan Zhou), a member of the immediate family of management (Zhen Huang), or acting as de facto agent of the Company (all). The de facto agent relationship is established through the pledge agreement under which the individuals assign all of their rights as shareholders to the Company. Because there are no unrelated variable interests in Beijing Boya Wuji, the Company is the primary beneficiary.

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation (“FIN”) No. 46, which requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was effective for all new variable interest entities created or acquired after December 15, 2003. In December 2003, the FASB issued FIN 46 (revised) which provides for the deferral of the implementation date to the end of the first reporting period after March 15, 2004 unless the Company has a special purpose entity, in which case the provisions must be applied for fiscal years ending December 31, 2003. However, the Company has

F-8

Notes to the consolidated financial statements

elected to retroactively apply FIN 46 and consolidate its variable interest entities, Beijing AirInbox and Beijing Boya Wuji from its inception.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)    Basis of presentation

The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

(b)    Basis of consolidation

The consolidated financial statements include the financial statements of the Company, its wholly-owned subsidiary and variable interest entities, Beijing AirInbox and Beijing Boya Wuji. All inter-company transactions and balances have been eliminated upon consolidation.

(c)    Cash and cash equivalents

Cash and cash equivalents consist of cash on hand and highly liquid investments which are unrestricted as to withdrawal or use, and which have maturities of three months or less when purchased.

(d)    Use of estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses in the financial statements and accompanying notes. Significant accounting estimates reflected in the Company’s financial statements include useful lives for plant and equipment, accruals for revenue adjustments, cost of revenues, other liabilities and stock compensation expense.

(e)    Certain significant risks and uncertainties

The Company participates in a dynamic high technology industry and believes that changes in any of the following areas could have a material adverse effect on the Company’s future financial position, results of operations, or cash flows: changes in the overall demand for entertainment-oriented wireless value-added services; advances and trends in new technologies and industry standards; changes in key suppliers; changes in certain strategic relationships or customer relationships; regulatory or other factors; risks associated with the ability to maintain strategic relationships with the mobile operators; and risks associated with the Company’s ability to attract and retain employees necessary to support its growth.

(f)    Plant and equipment, net

Plant and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization is calculated on a straight-line basis over the following estimated useful lives:

Computer and transmission equipment	3 years
Furniture and office equipment	3 years
Motor vehicles	3 years
Leasehold improvements	Over the lease term
Communication equipment	1 year

(g)    Impairment of long-lived assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the Company measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and

F-9

Notes to the consolidated financial statements

their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Company would recognize an impairment loss based on the fair value of the assets.

(h)    Revenue recognition and cost of revenues

The Company’s revenues are primarily derived from entertainment-oriented wireless value-added services. Wireless value-added services revenues are derived from providing personalized interactive entertainment, media and community (including ring back services and downloadable ringtones, icons and screen savers) services, to mobile phone customers of China Mobile Communications Corporation and its various subsidiaries (“China Mobile” or the “Mobile Operator”). Fees, established by an arrangement with China Mobile and indicated in the message received on the mobile phone, for these services are charged on a transaction basis or on a monthly subscription basis, and vary according to the type of services delivered. The Company recognizes all revenues in the period in which the services are performed.

The Company contracts with the Mobile Operator for the transmission of wireless value-added services as well as for billing and collection services. The Mobile Operator provides the Company with a monthly statement that represents the principal evidence that service has been delivered and triggers revenue recognition for a substantial portion of the Company’s revenue. In certain instances, when a statement is not received within a reasonable period of time, the Company is required to make an estimate of the revenues and cost of revenues earned during the period covered by the statement based on internally generated information, historical experience and/or other assumptions that are believed to be reasonable under the circumstances.

The Company measures its revenues based on the total amount paid by its customers, for which the Mobile Operator bills and collects on the Company’s behalf. Accordingly, the 15% service fee paid to the Mobile Operator is included in the cost of revenues. In addition, the Mobile Operator charges the Company transmission charges based on a per message fee which varies depending on the volume of messages sent in the relevant month, multiplied by the excess of messages sent over messages received. These transmission charges are likewise retained by the Mobile Operator, and are reflected as costs of revenues in the financial statements.

The Company evaluates the criteria outlined in Emerging Issues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as Principal Versus Net as an Agent,” in determining whether it is appropriate to record the gross amount of revenues and related costs or the net amount earned after deducting service fees and transmission charges paid to the Mobile Operator. The Company records the gross amounts billed to its customers as it is the primary obligor in these transactions as it has latitude in establishing prices, it is involved in the determination of the service specifications and it has the right to select suppliers.

(i)    Foreign currency translation

The functional currency of the Company is Renminbi (“RMB”). Transactions denominated in currencies other than RMB are translated into RMB at the exchange rates quoted by the People’s Bank of China (the “PBOC”) prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into RMB using the applicable exchange rates quoted by the PBOC at the balance sheet dates. The resulting exchange differences are included in the statement of operations.

The consolidated financial statements of the Company are translated into the reporting currency, the United States Dollar, using exchange rates in effect at each year end for assets and liabilities and average exchange rates during each reporting year for the consolidated statements of operations.

F-10

Notes to the consolidated financial statements

Translation adjustments resulting from translation of these consolidated financial statements are reflected as accumulated other comprehensive loss in shareholders’ equity.

(j)    Product development expenses

Product development expenses consist primarily of compensation and related costs for employees associated with the development and programming of mobile data content and are expensed as incurred.

(k)    Income taxes

Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amount in the financial statements, net operating loss carryforwards and credits by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.

(l)    Comprehensive income (loss)

Comprehensive income (loss) includes foreign currency translation adjustments. Comprehensive income (loss) is reported in the statements of shareholders’ equity.

(m)    Fair value of financial instruments

Financial instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities. The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other liabilities approximate their fair values due to their short-term maturities.

(n)    Advertising costs

The Company expenses advertising costs as incurred. Total advertising expenses were $26,620, $52,922 and $2,125 for the period from May 6, 2002 to December 31, 2002, the year ended December 31, 2003 and the three months ended March 31, 2004 (unaudited), respectively and have been included as part of sales and marketing expenses.

(o)    Stock-based compensation

The Company grants stock options to its employees and certain non-employees. The Company records a compensation charge for the excess of the fair value of the stock at the grant date or any other measurement date over the amount an employee must pay to acquire the stock. The compensation expense is recognized over the applicable service period, which is usually the vesting period. The Company accounts for stock-based awards to non-employees by recording a charge for the services rendered by the non-employees using the Black-Scholes option pricing model.

F-11

Notes to the consolidated financial statements

Had compensation cost for options granted to employees under the Company’s stock option plan (the “Plan”) been determined based on the fair value at the grant dates, the Company’s pro forma net income (loss) would have been as follows:

		For the period from		For the year		For the three months
		May 6, 2002 to		ended		ended
		December 31,		December 31,		March 31,
		2002		2003		2004
						(Unaudited)
Net income (loss) as reported:			$(493,874)		$2,408,136		$3,142,117
Add: Stock compensation as reported			—		21,986		80,738
Less: Stock compensation determined using the fair value method			(9,615)		(70,165)		(265,374)
Pro forma net income (loss)			$(503,489)		$2,359,957		$2,957,481
Basic net income (loss) per share:
	As reported		(0.12) cent		0.51 cent		0.67 cent
	Pro forma		(0.12) cent		0.50 cent		0.63 cent
Diluted net income (loss) per share:
	As reported		(0.12) cent		0.22 cent		0.29 cent
	Pro forma		(0.12) cent		0.22 cent		0.27 cent

The fair value of each option grant and share granted is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants during the applicable period.

	December 31,				March 31,
Option Grants	2002		2003		2004
					(Unaudited)
Average risk-free rate of return		5.08%		4.44%		4.05%
Weighted average expected option life		4 years		4 years		4 years
Volatility rate		70%		70%		70%
Dividend yield		0%		0%		0%

(p)    Net income (loss) per share

Basic net income (loss) per share is computed by dividing net income (loss) attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted net income (loss) per ordinary share reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares were exercised or converted into ordinary shares. Ordinary share equivalents are excluded from the computation of the diluted net loss per share in periods when their effect would be anti-dilutive.

(q)    Segment reporting

The Company operates and manages its business as a single segment. The Company generates its revenues solely from mobile phone users in China, and accordingly, no geographical information is presented.

(r)    Recently issued accounting standards

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Such costs

F-12

Notes to the consolidated financial statements

covered by the statement include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operations, plant closings, or other exit or disposal activity. SFAS No. 146 replaces the previous accounting guidance provided by the Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002 and adoption of this statement did not have a material impact on the Company’s financial position, results of operations or cash flows.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation— Transition and Disclosure”. SFAS No. 148 amends FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition to SFAS No. 123’s fair value method of accounting for stock-based employee compensation. Statement 148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28, “Interim Financial Reporting,” to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While SFAS No. 148 does not amend SFAS No. 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS No. 123 or the intrinsic value method of APB Opinion No. 25. As allowed by SFAS No. 123, the Company has elected to continue to utilize the accounting method prescribed by APB Opinion No. 25 and has adopted the disclosure requirements of SFAS No. 148 as of December 31, 2002.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. The Statement establishes standards for how an issuer classifies and measures certain financial instruments. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Statement requires that certain financial instruments that, under previous guidance, issuers could account for as equity be classified as liabilities (or assets in some circumstances) in statements of positions or consolidated balance sheets, as appropriate. The financial instruments within the scope of this Statement are: (i) mandatorily redeemable shares that an issuer is obligated to buy back in exchange for cash or other assets; (ii) financial instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets; and (iii) financial instruments that embody an obligation that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuer’s shares (excluding certain financial instruments indexed partly to the issuer’s equity shares and partly, but not predominantly, to something else). This Statement does not apply to features embedded in a financial instrument that is not a derivative in its entirety. The Statement also requires disclosures about alternative ways of settling the instruments and about the capital structure of entities all of whose shares are mandatorily redeemable. The adoption of SFAS No. 150 did not have a material impact on the Company’s financial position, cash flows or results of operations.

In November 2002, the FASB issued FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. This interpretation requires certain disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of FIN No. 45 are effective for interim and

F-13

Notes to the consolidated financial statements

annual periods ending after December 15, 2002 and have been adopted in the financial statements. The initial recognition and initial measurement requirements of FIN No. 45 are effective prospectively for guarantees issued or modified after December 31, 2002. The adoption of the recognition and initial measurement requirements of FIN No. 45 did not have a material impact on the Company’s financial position, cash flows or results of operations.

In January 2003, the FASB issued FIN 46. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” and provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and how to determine when and which business enterprise should consolidate the VIEs. This new model for consolidation applies to an entity in which either: (1) the equity investors (if any) lack one or more characteristics deemed essential to a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. FIN 46 was applicable for periods ending December 15, 2003. In December 2003 the FASB issued FIN 46R which provides for the deferral of the implementation date to the end of the first reporting period after December 15, 2004 unless the Company has a special purpose entity in which case the provisions must be applied for fiscal years ending December 31, 2003. However, the Company has retroactively adopted the provisions as of 2002.

In November 2002, the Emerging Issue Task Force (“EITF”) reached a consensus on Issue No. 00-21 (“EITF No. 00-21”), “Revenue Arrangements with Multiple Deliverables”. EITF No. 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities. EITF No. 00-21 will be effective for fiscal periods beginning after June 15, 2003. The Company has adopted EITF No. 00-21 and it did not have a material impact on the Company’s financial position, cash flows or results of operations.

(s)    Unaudited pro forma information

The unaudited pro forma balance sheet information as of March 31, 2004 assumes the conversion upon completion of the initial public offering of all shares of convertible preferred shares outstanding as of March 31, 2004 into ordinary shares.

(t)    Unaudited interim financial information

The interim financial information as of March 31, 2004 and for the three months ended March 31, 2004 is unaudited and has been prepared on the same basis as the audited financial statements. In the opinion of management, such unaudited financial information includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the interim information. Operating results for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004.

(u)    Unaudited pro forma net income (loss) per share

Pro forma basic and diluted net income (loss) per ordinary share is computed by dividing net income (loss) attributable to holders of ordinary shares by the weighted average number of ordinary shares outstanding for the period plus the weighted average number of preferred shares outstanding for the period plus the number of ordinary shares resulting from the assumed conversion upon the closing of the planned initial public offering of outstanding convertible preferred shares.

F-14

Notes to the consolidated financial statements

3.     PLANT AND EQUIPMENT, NET

Plant and equipment, net consists of the following:

	December 31,						March 31,
	2002			2003			2004
							(Unaudited)
Computer and transmission equipment		$214,987			$837,467			$1,178,692
Furniture and office equipment		39,639			104,962			112,468
Motor vehicles		—			101,024			101,024
Leasehold improvements		29,258			85,601			85,601
Communication equipment		8,467			27,256			48,151
		292,351			1,156,310			1,525,936
Less: accumulated depreciation and amortization		(41,310	)		(307,849	)		(421,776	)
		$251,041			$848,461			$1,104,160

4.     PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consists of the following:

	December 31,				March 31,
	2002		2003		2004
					(Unaudited)
Tax recoverable		$—		$88,968		$88,968
Staff advances		—		40,907		132,514
Advances to suppliers		21,694		35,125		78,367
Other current assets		1,933		33,286		32,409
Rental and other deposits		48,127		—		2,453
		$71,754		$198,286		$334,711

5.     ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consists of the following:

	December 31,				March 31,
	2002		2003		2004
					(Unaudited)
Accrued welfare benefits		$19,395		$124,214		$161,884
Accrued payroll		—		128,265		77,025
Accrued expenses		—		—		110,000
Amounts due to directors		15,030		12,765		7,280
Others		—		—		6,704
Other tax payables		12,161		128,438		252,766
		$46,586		$393,682		$615,659

6.     INCOME TAXES

The Company is a tax exempted company incorporated in the Cayman Islands. The subsidiaries incorporated in the PRC are governed by the Income Tax Law of the PRC Concerning Foreign Investment and Foreign Enterprises and various local income tax laws (the “Income Tax Law”).

F-15

Notes to the consolidated financial statements

Pursuant to the PRC Income Tax Law, the foreign investment enterprises are subject to income tax at a statutory rate of 33% (30% of state income tax plus 3% local income tax) on PRC taxable income. However, preferential tax treatment of KongZhong Beijing and Beijing AirInbox as “high technology” companies has been agreed with the relevant tax authorities. KongZhong Beijing is entitled to a preferential tax rate of 15% and is entitled to a three-year exemption from income tax commencing in 2003, after taking into account any tax losses brought from prior years, followed by a 50% reduction in tax rates for the succeeding three years, in accordance with the Income Tax Law of the PRC. Beijing AirInbox is also entitled to a two-year exemption from income tax commencing 2003.

The principal components of the deferred income tax assets are as follows:

		December 31,						March 31,
		2002			2003			2004
								(Unaudited)
Deferred tax assets
	Depreciation and amortization		$2,101			$20,973			$25,711
	Net operating loss carryforwards		22,612			80,521			41,260
Deferred tax asset			24,713			101,494			66,971
	Valuation allowance		(24,713	)		(101,494	)		(66,971	)
Deferred tax assets net			$—			$—			$—

The Company did not have any timing differences relating to deferred tax liabilities as of December 31, 2002 and 2003 and as of March 31, 2004 (unaudited).

A full valuation has been established because the Company believes that it is more likely than not that its deferred taxes assets will not be realized. The tax losses carried forward as of December 31, 2003 and March 31, 2004 (unaudited) were approximately $1,073,600 and $550,000 and will expire by 2008 and 2009 respectively.

7.     PREFERRED SHARES

In 2002, the Company issued:

(1)	231,000,000 shares of Series A convertible preferred shares for cash proceeds of $550,011.
(2)	350,000,000 shares of Series B redeemable convertible preferred shares for cash proceeds of $2,970,025 net of share issuance costs of $30,000.

The significant terms of the above Series A convertible preferred shares and Series B redeemable convertible preferred shares (“convertible preferred shares”) are as follow:

Conversion:

Each convertible preferred share is convertible into one ordinary share at a conversion price of $0.002381 and $0.0085715 for Series A convertible preferred shares and Series B redeemable convertible preferred shares, respectively, at the option of the holder at any time after the date of issuance of such shares, or is automatically converted at the consummation of the Company’s sale of ordinary shares in an underwritten initial public offering which results in gross proceeds to the Company in excess of $12,000,000 and a resulting market capitalization of at least $50,000,000. The conversion rate is subject to adjustment for dilution, including but not limited to stock splits, in accordance with the conversion provisions in the Company’s Articles of Association.

F-16

Notes to the consolidated financial statements

Voting rights:

Each convertible preferred share has voting rights equivalent to the number of shares of ordinary shares into which it is convertible.

Dividends:

The holders of Series B redeemable convertible preferred shares are entitled to receive non-cumulative dividends equal to $0.0004285 per share prior to payment of any dividends with respect to the ordinary shares and Series A convertible preferred shares. Such dividends shall be payable when and if declared by the Board of Directors. From inception of the Company through December 31, 2003, no dividends have been declared.

Liquidation preference:

In the event of any liquidation, dissolution or winding up of the Company, as defined, the holders of Series A convertible preferred shares and Series B redeemable convertible preferred shares shall receive $0.002381 and $0.012857 per share, respectively, plus all accrued but unpaid dividends for Series B redeemable convertible shares and Series A convertible preferred shares. The holders of Series A convertible preferred shares would only receive their liquidation preference after payment has been made to the holders of Series B redeemable convertible preferred shares in full. Such amounts will be adjusted for any stock dividends, stock splits or combinations. Subsequently, the remaining liquidation proceeds shall be distributed pro rata amongst all the shareholders, including Series A convertible preferred shareholders and Series B redeemable convertible preferred shareholders, in accordance with each shareholder’s respective shareholding percentage and with each preferred share participating as if converted into ordinary shares.

Redemption:

The holders of Series B redeemable convertible preferred shares are entitled to redeem all of the outstanding Series B redeemable convertible shares on or after October 1, 2007. The redemption price for Series B redeemable convertible shares is $0.0085715 per share plus all the declared but unpaid dividends for Series B redeemable convertible shares and proportionally adjusted for any stock dividends, stock splits or combinations. If on the redemption day, the number of Series B redeemable convertible preferred shares that may then be legally redeemed by the Company is less than the number of such Series B redeemable convertible preferred shares to be redeemed, then the number of Series B redeemable convertible preferred shares then redeemed shall be based ratably on all such shares for which redemption was requested, and the remaining shares to be redeemed shall be carried forward and redeemed as soon as the Company has legally available funds to do so.

8.     STOCK OPTIONS

The Company’s employee stock option plan (the “Plan”) allow the Company to offer a variety of incentive awards to employees, consultants or external service advisors of the Company. Options to purchase 70,000,000 ordinary shares are authorized under the Plan. Under the terms of the Plan, options are generally granted at prices equal to the fair market value as determined by the Board of Directors and expire 10 years from the date of grant and vest over 4 years. As of December 31, 2003, options to purchase 49,720,000 shares of ordinary shares were outstanding. As of December 31, 2003, options to purchase 20,280,000 ordinary shares were available for future grants.

Subsequent to the dates of grant, the Company has obtained a valuation analysis performed by an independent appraiser to reassess the determination of the fair market value of the Company’s ordinary shares. The valuation analysis utilizes generally accepted valuation methodologies such as the income and market approach and discounted cash flow approach to value the Company’s business. Management has concluded that the market value of the ordinary shares was in excess of the exercise

F-17

Notes to the consolidated financial statements

price on the measurement date and recorded a stock compensation expense for the difference between the market value of the ordinary shares and the exercise price of the employee stock options for the stock options granted in August 2003. Accordingly, the Company recorded stock compensation expense of $Nil and $21,986 for the period from May 6, 2002 to December 31, 2002 and the year ended December 31, 2003 and $80,738 for the three months ended March 31, 2004 (unaudited), respectively.

In February 2004, the Company granted 36,760,000 ordinary share options to new and existing employees. The Company determined that the market value of the ordinary shares was in excess of the exercise price on the measurement date and recorded a deferred stock compensation for the difference between the market value of the ordinary shares and the exercise price of the employee stock options for the stock options granted in February 2004. Accordingly, the Company recorded a deferred stock compensation of approximately $2,206,000 of which approximately $69,000 is amortized as compensation expense for the period ending March 31, 2004. The deferred stock compensation is amortized over the vesting period, which is generally 4 years. The market value of the ordinary shares was estimated as the bona fide estimate of the midpoint of the price range for the Company’s initial public offering. In addition, the Board of Directors approved a resolution to increase the number of options authorized under the Plan to 105,000,000. As of March 31, 2004 (unaudited), options to purchase 86,120,000 ordinary shares were outstanding and 18,880,000 ordinary shares were available for future grants.

A summary of the stock option activity is as follows:

	Ordinary shares
				Weighted
	Number of			average
	options			exercise price
Granted		48,180,000		$	0.004
Options outstanding at December 31, 2002		48,180,000
Granted		6,000,000		$	0.050
Cancelled		(4,460,000	)	$	0.043
Options outstanding at December 31, 2003		49,720,000
Granted (unaudited)		36,760,000		$	0.250
Cancelled (unaudited)		(360,000	)	$	0.094
Options outstanding at March 31, 2004 (unaudited)		86,120,000

The weighted average per share fair value of options as of the grant date was as follows:

	December 31,				March 31,
	2002		2003		2004
					(Unaudited)
Ordinary shares		$0.011		$0.066		$0.109

F-18

Notes to the consolidated financial statements

The following table summarizes information with respect to stock options outstanding at March 31, 2004 (unaudited):

		Options outstanding						Options exercisable
				Weighted		Weighted				Weighted
				average		average				average
		Number of		remaining		exercise		Number		exercise
		outstanding		contractual life		price		exercisable		price
Ordinary shares:
	$0.0025		37,020,000		8.25 years	$	0.0025		14,882,500	$	0.0025
	$0.0100		6,920,000		8.65 years	$	0.0100		2,162,500	$	0.0100
	$0.0500		5,500,000		9.33 years	$	0.0500		1,000,000	$	0.0500
	$0.2500 (unaudited)		36,680,000		9.875 years	$	0.2500		—	$	0.2500
Total			86,120,000						18,045,000	$	0.0060

Options to non-employees

The Company granted 1,600,000 and 1,000,000 options to purchase ordinary shares to its external consultants in exchange for certain services in 2002 and 2003, respectively. The Company recorded compensation expense of $1,946 and $63,121 for the period from May 6, 2002 to December 31, 2002 and the year ended December 31, 2003 and $Nil for the three months ended March 31, 2004 (unaudited), respectively, estimated using the Black-Scholes option pricing model as such method provides a more accurate estimate of the fair value of services received by the external consultants. The following assumptions were used in the option pricing model:

	December 31,				March 31,
	2002		2003		2004
					(Unaudited)
Average risk free rate of return		5.08%		4.44%		4.05%
Weighted average contractual option term		4  years		4  years		4 years
Volatility rate		70%		70%		70%
Dividend yield		0%		0%		0%

Ordinary shares reserved for future issuance (unaudited)

Conversion of outstanding preferred shares	581,000,000
Exercise of outstanding and available for future grant options under the Plan	105,000,000
	686,000,000

9.     SEGMENT AND GEOGRAPHIC INFORMATION

The Company is engaged in providing value-added services such as games and interactive entertainment, media and community services, media, and various other related products to mobile phone users. The Company’s chief operating decision maker has been identified as the Chief Executive Officer, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Company. The Company believes it operates in one segment, and all financial segment information can be found in the consolidated financial statements.

Product lines

The Company derives revenues principally from providing wireless interactive entertainment, media and community services. These services are delivered through 2.5G technology platforms including

F-19

Notes to the consolidated financial statements

wireless access protocol (“WAP”), multimedia messaging services (“MMS”) and Java^TM and 2G technology platforms, including short messaging services (“SMS”), interactive voice response (“IVR”) and color ring back tone (“CRBT”). Revenues for the period from May 6, 2002 to December 31, 2002, the year ended December 31, 2003 and for the three months ended March 31, 2004 (unaudited) are as follows:

	For the period from
	May 6, 2000		For the year ended		For the three months
	to December 31,		December 31,		ended March 31,
	2002		2003		2004
					(Unaudited)
2.5 Generation		$131,342		$5,956,043		$5,244,417
2 Generation		68,977		1,850,646		1,903,168
		$200,319		$7,806,689		$7,147,585

Geographic Information

The Company operates in the PRC and all of the Company’s long lived assets are located in the PRC.

10.     NET INCOME (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated:

		For the period from
		May 6, 2002			For the year ended		For the three months
		to December 31,			December 31,		ended March 31,
		2002			2003		2004
							(Unaudited)
Net income (loss) attributable to holders of ordinary shares (numerator), basic and diluted			$(493,874	)		$2,408,136		$3,142,117
Shares (denominator):
	Weighted average ordinary shares outstanding used in computing basic net income (loss) per share		415,547,794			469,000,000		469,000,000
	Weighted average ordinary shares outstanding used in computing diluted net income (loss) per share		415,547,794			1,094,824,434		1,098,206,555
Net income (loss) per share, basic			(0.12) cent			0.51 cent		0.67 cent
Net income (loss) per share, diluted			(0.12) cent			0.22 cent		0.29 cent
Shares used in computing pro forma per share amounts on a converted basis:
	Basic							1,050,000,000
	Diluted							1,098,206,555
Pro forma net income (loss) per share on an as converted basis:
	Basic							0.30 cent
	Diluted							0.29 cent

F-20

Notes to the consolidated financial statements

For 2002, the Company had the following securities outstanding which could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net loss per share in 2002 as their effects would have been antidilutive:

	December 31,
	2002
Series A convertible preferred shares		231,000,000
Series B redeemable convertible preferred shares		350,000,000
Outstanding employee options to purchase ordinary shares		48,180,000
		629,180,000

Common stock equivalents are calculated using the treasury stock method. Under the treasury stock method, the proceeds from the assumed conversion of options are used to repurchase outstanding ordinary stock using a yearly average market price.

11.     CONCENTRATIONS

(a)    Dependence on China Mobile

The revenue of the Company is derived from cooperative arrangements with China Mobile located in the PRC. China Mobile is entitled to a service and transmission fee for the transmission of wireless short messages as well as for billing and collection services. If the strategic relationship with this operator in the PRC is terminated or scaled-back, or if the phone operator alters the arrangement, the Company’s wireless value-added service business would be adversely affected.

Revenue collected through China Mobile for the period from May 6, 2002 to December 31, 2002 and year ended December 31, 2003 are approximately $200,000 and $7,807,000 representing 100% and 100% of revenues, $7,148,000 (unaudited) representing 100% and approximately 100% of revenue for the three months ended March 31, 2004 (unaudited), respectively.

Amounts due from China Mobile as of December 31, 2002 and December 31, 2003 amounted to approximately $132,000 and $1,704,000, representing 100% and 100% of accounts receivable, and approximately $3,269,000, representing approximately 100% of accounts receivable as of March 31, 2004 (unaudited).

(b)    Credit risk

The Company depends on the billing system of China Mobile to charge the mobile phone users through mobile phone bills and collect payments from users. The Company generally does not require collateral for its accounts receivable. The Company has not experienced any significant credit losses for any periods presented.

12.     MAINLAND CHINA CONTRIBUTION PLAN AND PROFIT APPROPRIATION

Full time employees of the Company in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require that the Company accrue for these benefits based on certain percentages of the employees’ salaries. The total provision for such employee benefit was $41,625 and $267,578 for the period from May 6, 2002 to December 31, 2002 and the year ended December 31, 2003, and $95,727 for the three months ended March 31, 2004 (unaudited), respectively.

The Company is required to make contributions to the plan out of the amounts accrued for medical and pension benefits to relevant local labor bureaus. The contributions for the period from May 6, 2002 to December 31, 2002 and the year ended December 31, 2003 amounted to $6,203 and

F-21

Notes to the consolidated financial statements

$142,431, and $72,755 for the three months ended March 31, 2004 (unaudited), respectively. The local labor bureaus are responsible for the medical benefits and pension liability to be paid to these employees. The Company has no further commitments beyond its monthly contribution.

Pursuant to the laws applicable to the PRC’s Foreign Investment Enterprises, the Company’s subsidiary in the PRC must make appropriations from after-tax profit to non-distributable reserve funds as determined by the Board of Directors of the Company. These reserve funds include a (i) general reserve, (ii) enterprise expansion fund and (iii) staff bonus and welfare fund. Subject to certain cumulative limits, the general reserve fund requires annual appropriations of 10% of after-tax profit (as determined under PRC GAAP at each year-end); the other fund appropriations are at the Company’s discretion. These reserve funds can only be used for specific purposes of enterprise expansion and staff welfare and bonus and are not distributable as cash dividends. Appropriations to the staff welfare and bonus fund will be charged to general and administrative expenses.

13.     COMMITMENTS

(a)    Operating lease as lessee

The Company leases certain office premises under non-cancelable leases which expire in 2005. Rental expense under operating leases for the period from May 6, 2002 to December 31, 2002 and the year ended December 31, 2003 were $42,567 and $276,386, and $106,329 for the three months ended March 31, 2004 (unaudited), respectively.

Future minimum lease payments under non-cancelable operating leases agreements were as follows:

Year ending
2004	$276,794
2005	2,739
	$279,533

(b)    Other commitments

In April 2003, the Company entered into agreements with third parties under which the third party companies agreed to provide facility services to the Company which expire in 2004. The service fee for the year ended December 31, 2003 was $144,710 and $64,804 for the three months ended March 31, 2004 (unaudited), respectively. As at December 31, 2003, the facility service fee committed for 2004 is $76,576.

14.     RELATED PARTY TRANSACTIONS

The Company has incurred consultancy fees of $75,000 and $105,000 to a shareholder and a then shareholder for the period from May 6, 2000 to December 31, 2002 and the year ended December 31, 2003 and $Nil for the three months ended March 31, 2004 (unaudited), respectively. Payable to such shareholder was $5,000 and $90,000 outstanding as of December 31, 2002 and 2003 and $Nil as of March 31, 2004 (unaudited), respectively.

15.     SUBSEQUENT EVENTS

(a)	On March 1, 2004, the Company approved a resolution to change its name from Communication Over The Air Inc. to KongZhong Corporation.
(b)	On March 18, 2004, shareholders of the Company approved a 20-for-1 split of the Company’s shares, with immediate effect. The 20-for-1 share split of the Company’s shares has been retroactively applied to all periods presented.

F-22

Through and including               , 2004 (the 25th day after the commencement of this offering), federal securities law may require all dealers selling our ADSs, whether or not participating in this offering, to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

Part II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 6.     Indemnification of Directors and Officers

Cayman Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our articles of association provide for indemnification of officers and directors for losses, damages, costs and expenses incurred in their capacities as such, except if they acted in a willfully negligent manner or defaulted in any action against them.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, we have been informed that in the opinion of the United States Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933, as amended (the “Securities Act”) and is therefore unenforceable as a matter of U.S. law.

Item 7.     Recent Sales of Unregistered Securities

During the past two years, the registrant has issued and sold the securities listed below without registering the securities under the United States Securities Act of 1933, as amended, or the Securities Act,. None of these transactions involved any underwriters’ underwriting discounts or commissions, or any public offering. The registrant believes that each of the following issuances was exempt from registration under the Securities Act in reliance on Regulation S under the Securities Act or pursuant to Section 4(2) of the Securities Act regarding transactions not involving a public offering. We based this determination on our own due diligence and, in the case of the sale of the Series B preferred shares, on written representations of the purchasers.

(1) In May 2002, KongZhong Corporation (formerly known as Communication Over The Air Inc.) issued and sold, for an aggregate purchase price of $234.5 in cash, (A) 11,725,000 ordinary shares, par value $0.00001 per share, at a price of $0.00001 per share to Yunfan Zhou, the registrant’s chief executive officer, which shares were later transferred to Mobileren Inc., an entity solely owned by Yunfan Zhou, and (B) 11,725,000 ordinary shares, par value $0.00001 per share, at a price of $0.00001 per share to Nick Yang, the registrant’s president.

(2) In September 2002, the registrant issued and sold, for an aggregate purchase price of $550,000 in cash, (A) 3,150,000 Series A preferred shares, par value $0.00001 per share, at a price of $0.04762 per share to Mobileren Inc., which later transferred 500,000 shares to CENO Investment Limited, (B) 3,150,000 Series A preferred shares, par value $0.00001 per share, at a price of $0.04762 per share to Nick Yang, who later transferred 500,000 shares to CENO Investment Limited, and (C) 5,250,000 Series A preferred shares, par value $0.00001 per share, at a price of $0.04762 per share to Wirelessrock Inc., which shares were later transferred to eGarden I, Calver Investments Limited and Liang Hong, respectively. The shares held by Liang Hong were later transferred to Yin Alice Chau.

(3) In October 2002, the registrant issued and sold Series B preferred shares, par value $0.00001 per share, at a price of 0.17143 per share, to each of the following shareholders in the following numbers, for an aggregate purchase price of $3.0 million in cash, (A) 7,000,000 shares to Global Lead Technology Limited; (B) 4,494,000 shares to Draper Fisher Jurvetson ePlanet Ventures L.P.; (C) 93,334 shares to Draper Fisher Jurvetson ePlanet Partners Fund, LLC; (D) 79,333 shares to Draper Fisher Jurvetson ePlanet Ventures GmbH KG & Co.; (E) 4,083,333 shares to Chinney Development

Part II

Company Limited, which later transferred these shares to Lucky Dragon Holdings Group Ltd.; (F) 1,575,000 shares to eGarden I; and (G) 175,000 shares to eGarden Ventures (HK) Ltd.

The purchase price for the ordinary shares issued to Yunfan Zhou and Nick Yang is the par value of such ordinary shares. The purchase price for the Series A preferred shares was determined based on arms-length negotiations between the holders of our Series A preferred shares and us. The purchase price for the Series B preferred shares was determined based on arms-length negotiations between the independent venture capital investors and us.

In addition, pursuant to the 2002 Plan, as amended, we have granted an aggregate of 86,120,000 options which are outstanding as of March 31, 2004, as adjusted by cancellation following initial grants and the share split which occurred on March 18, 2004. All of our options have been granted in reliance on Regulation S under the Securities Act. Below is a summary of the options that we have granted under the 2002 Plan.

†	35,420,000 incentive share options, which began to vest periodically from July 1, 2003, were originally granted to certain of our employees on June 6, 2002 at an exercise price of $0.0025 per share;
†	1,600,000 non-qualified options, which vested on July 1, 2002, were granted to our external advisor, Yang Cha, on June 6, 2002 at an exercise price of $0.0025 per share;
†	11,160,000 incentive share options, which began to vest periodically from December 15, 2003, were granted to certain of our employees on December 1, 2002, at an exercise price of $0.01 per share, of which 4,240,000 options were subsequently cancelled and 6,920,000 were outstanding as of March 31, 2004;
†	5,000,000 incentive share options, which began to vest periodically from August 1, 2003, were granted to certain of our employees on August 1, 2003, at an exercise price of $0.05 per share, of which 500,000 options were subsequently cancelled and 4,500,000 were outstanding as of March 31, 2004;
†	1,000,000 non-qualified options, which vested on August 1, 2003, were granted to our consultant, Extra Bright Limited, a business advisory company, on August 1, 2003, at an exercise price of $0.05 per share;
†	36,760,000 incentive share options, which began to vest periodically from February 18, 2005, have been granted to certain of our employees on February 18, 2004, at an exercise price of $0.25 per share, pursuant to a resolution of our board of directors on February 18, 2004, of which 80,000 options were subsequently cancelled and 36,680,000 were outstanding as of March 31, 2004.

With respect to the options that we have granted, the vesting schedule for the incentive share options provides for 25% of the options to vest on the first anniversary of the date of the grant, and the remaining 75% to vest in 12 equal quarterly installments beginning one calendar quarter after the date of such anniversary. The non-qualified options vested immediately upon grant of such options. The expiration date for each option is ten years from the date of grant. The exercise price of each option was the estimated fair market value as determined by our board of directors after taking into consideration all factors in good faith. The expiration date for each option is the tenth anniversary of the date of grant.

Part II

Item 8.     Exhibits and Financial Statement Schedules

(a) Exhibits

Exhibits		Description
	1.1	Form of Underwriting Agreement
	3.1	Amended and Restated Memorandum and Articles of Association †
	4.1	Specimen of Share Certificate†
	4.2	Amended and Restated Memorandum and Articles of Association (filed as Exhibit 3.1 hereof)
	4.3	Form of Deposit Agreement among the registrant, Citibank, N.A., as depositary, and Holders and Beneficial Holders from time to time of American Depositary Shares evidenced by American Depositary Receipts issued thereunder, including the form of American Depositary Receipt(1)
	4.4	Shareholders Agreement†
	5.1	Opinion of Maples and Calder Asia, Cayman Islands counsel to the registrant, as to the validity of the shares
	5.2	Opinion of Llinks Law Office, People’s Republic of China counsel to the registrant, as to the legality of the People’s Republic of China issues†
	8.1	Opinion of Sullivan and Cromwell LLP, United States counsel to the registrant, as to tax matters
	8.2	Opinion of Maples and Calder Asia, Cayman Islands counsel to the registrant, as to tax matters (included in Exhibit 5.1)
	10.1	Loan Agreement among KongZhong Corporation, as the lender, and Yunfan Zhou, Songlin Yang and Zhen Huang, each as a borrower, dated March 31, 2004†
	10.2	Loan Agreement among KongZhong Corporation, as the lender, and Yang Cha and Songlin Yang, as the borrowers, dated March 31, 2004†
	10.3	Exclusive Technical and Consulting Service Agreement between KongZhong Information Technologies (Beijing) Co., Ltd. and Beijing AirInbox Information Technologies Co., Ltd. dated October 10, 2003†
	10.4	Exclusive Technical and Consulting Services Agreement between KongZhong Information Technologies (Beijing) Co., Ltd. and Beijing AirInbox Information Technologies Co., Ltd. dated March 31, 2004†
	10.5	Amended and Restated Trademark License Agreement between KongZhong Information Technologies (Beijing) Co., Ltd. and Beijing AirInbox Information Technologies Co., Ltd. dated May 10, 2004†
	10.6	Domain Name License Agreement between KongZhong Information Technologies (Beijing) Co., Ltd. and Beijing AirInbox Information Technologies Co., Ltd. dated March 31, 2004†
	10.7	Amended and Restated Business Operation Agreement among KongZhong Information Technologies (Beijing) Co., Ltd., Beijing AirInbox Information Technologies Co., Ltd., Yang Cha, Songlin Yang, Yunfan Zhou and Zhen Huang dated May 10, 2004†
	10.8	Amended and Restated Equity Pledge Agreement among KongZhong Information Technologies (Beijing) Co., Ltd., Yang Cha, Songlin Yang, Yunfan Zhou and Zhen Huang dated May 10, 2004†
	10.9	Amended and Restated Option Agreement among KongZhong Information Technologies (Beijing) Co., Ltd., Yang Cha, Songlin Yang, Yunfan Zhou and Zhen Huang dated May 10, 2004†
	10.10	Amended and Restated Power of Attorney by Songlin Yang dated May 10, 2004 (with schedule)†
	10.11	Agreement among KongZhong Information Technologies (Beijing) Co., Ltd, Beijing AirInbox Information Technologies Co., Ltd., Yunfan Zhou, Songlin Yang and Zhen Huang dated March 31, 2004†

Part II

Exhibits		Description
	10.12	Exclusive Technical and Consulting Services Agreement between KongZhong Information Technologies (Beijing) Co., Ltd. and Beijing Boya Wuji Technologies Co., Ltd. dated March 31, 2004†
	10.13	Amended and Restated Trademark License Agreement between KongZhong Information Technologies (Beijing) Co., Ltd. and Beijing Boya Wuji Technologies Co., Ltd. dated May 10, 2004†
	10.14	Domain Name License Agreement between KongZhong Information Technologies (Beijing) Co., Ltd. and Beijing Boya Wuji Technologies Co., Ltd. dated March 31, 2004†
	10.15	Business Operation Agreement among KongZhong Information Technologies (Beijing) Co., Ltd., Beijing Boya Wuji Technologies Co., Ltd., Yunfan Zhou and Zhen Huang dated March 31, 2004†
	10.16	Equity Pledge Agreement among KongZhong Information Technologies (Beijing) Co., Ltd., Yunfan Zhou and Zhen Huang dated March 31, 2004†
	10.17	Option Agreement among KongZhong Information Technologies (Beijing) Co., Ltd., Yunfan Zhou and Zhen Huang dated March 31, 2004†
	10.18	Letter Agreement between KongZhong Information Technologies (Beijing) Co., Ltd. and KongZhong Corporation dated May 10, 2004†
	10.19	Cooperation Agreement on MonternetTM WAP services between China Mobile Telecommunications Group Corporation and Beijing AirInbox Information Technologies Co., Ltd. dated May 23, 2003†
	10.20	Cooperation Agreement on MonternetTM Multimedia Messaging Services between China Mobile Telecommunications Group Corporation and Beijing AirInbox Information Technologies Co., Ltd. dated June 5, 2003†
	10.21	Business Cooperation Agreement on MonternetTM Short-messaging Services between Beijing Mobile Telecommunications Co., Ltd. and Beijing AirInbox Information Technologies Co., Ltd. dated May 1, 2003†
	10.22	Cooperation Agreement on Mobile Content between Motorola (China) Co., Ltd. and Beijing AirInbox Information Technologies Co., Ltd. dated December 9, 2003†
	10.23	Cooperation Agreement on Short-message Services between Guangdong Mobile Telecommunications Corporation and Beijing AirInbox Information Technologies Co., Ltd. dated August 29, 2004†
	10.24	Lease Agreement of Yuetan Building between Beijing Yuetan Building Real Estate Development Company and KongZhong Information Technologies (Beijing) Co., Ltd. dated August 30, 2002†
	10.25	Lease Agreement of Tengda Building between Beijing Gaoling Estate Development Co., Ltd. and KongZhong Information Technologies (Beijing) Co., Ltd. dated May 27, 2004†
	10.26	Lease Agreement of Tengda Building between Beijing Gaoling Estate Development Co., Ltd. and Beijing AirInbox Information Technologies Co., Ltd. dated May 27, 2004†
	10.27	Form of Employment Agreement†
	10.28	Form of Non-Compete Agreement†
	10.29	Consulting Agreement between Communication Over The Air Inc. and Mobileren Inc. dated October 2, 2002†
	21.1	List of subsidiaries of the registrant†
	23.1	Consent of Deloitte Touche Tohmatsu
	23.2	Consent of Llinks Law Office (included in Exhibit 5.2)
	23.3	Consent of Maples and Calder Asia†
	23.4	Consent of Sullivan and Cromwell LLP (included in Exhibit 8.1)
	24.1	Power of Attorney (contained in signature pages to registration statement)†

†  Has been provided in the Registration Statement on Form F-1 (file No. 333-116172) filed with the Securities and Exchange Commission on June 4, 2004.

Part II

(1)  Incorporated by reference to the Registration Statement on Form F-6 (File No. 333-116228) filed with the Securities and Exchange Commission with respect to American Depositary Shares representing ordinary shares.

(b)     Financial Statements

Item 9.     Undertakings

(a) The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

(b) The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424 (b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(3) At such time, if any, as all applicable Cayman Islands laws and regulations shall not prohibit the same, and to the extent Section 14 of the Securities Act as defined so requires, our board of directors shall propose an amendment to the articles of association which would permit shareholders to adjudicate disputes arising between our shareholders, our directors, supervisors or officers by means of judicial proceedings.

(c) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 6, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than payment by a registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

Part II

Signatures

Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Hong Kong, on June 17, 2004.

KongZhong Corporation

By:  /s/ YUNFAN ZHOU

Name: Yunfan Zhou

Title:  Chairman and Chief Executive Officer

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Yunfan Zhou and Richard Wei, and each of them, his or her true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitutions, for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this Registration Statement and any and all related registration statements pursuant to Rule 462(b) of the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons on June 17, 2004 in the capacities indicated.

Signature	Title
/s/ YUNFAN ZHOU	Yunfan Zhou, Chairman and Chief Executive Officer
/s/ NICK YANG	Nick Yang, Director, President and Chief Technology Officer
*	Fan Zhang, Director
*	Charlie Y. Shi, Director
*	Yongqiang Qian, Director
/s/ RICHARD WEI	Richard Wei, Chief Financial Officer
**	Yang Yang, Controller

*     By:  /s/ YUNFAN ZHOU

Yunfan Zhou

(Attorney-in-fact)

**  By:  /s/ RICHARD WEI

Richard Wei

(Attorney-in-fact)

Part II

Signature of authorized representative of the registrant

Pursuant to the Securities Act of 1933, the undersigned, the duly authorized representative in the United States of KongZhong Corporation, has signed this Registration Statement or amendment thereto in the city of Los Angeles, state of California, on June 17, 2004.

Authorized U.S. Representative

By:  /s/ GREG F. LAVELLE

Name: Greg F. Lavelle

Part II

Exhibit index

		Description
Exhibits
	1.1	Form of Underwriting Agreement
	3.1	Amended and Restated Memorandum and Articles of Association †
	4.1	Specimen of Share Certificate†
	4.2	Amended and Restated Memorandum and Articles of Association (filed as Exhibit 3.1 hereof)
	4.3	Form of Deposit Agreement among the registrant, Citibank, N.A., as depositary, and Holders and Beneficial Holders from time to time of American Depositary Shares evidenced by American Depositary Receipts issued thereunder, including the form of American Depositary Receipt(1)
	4.4	Shareholders Agreement†
	5.1	Opinion of Maples and Calder Asia, Cayman Islands counsel to the registrant, as to the validity of the shares
	5.2	Opinion of Llinks Law Office, People’s Republic of China counsel to the registrant, as to the legality of the People’s Republic of China issues†
	8.1	Opinion of Sullivan and Cromwell LLP, United States counsel to the registrant, as to tax matters
	8.2	Opinion of Maples and Calder Asia, Cayman Islands counsel to the registrant, as to tax matters (included in Exhibit 5.1)
	10.1	Loan Agreement among KongZhong Corporation, as the lender, and Yunfan Zhou, Songlin Yang and Zhen Huang, each as a borrower, dated March 31, 2004†
	10.2	Loan Agreement among KongZhong Corporation, as the lender, and Yang Cha and Songlin Yang, as the borrowers, dated March 31, 2004†
	10.3	Exclusive Technical and Consulting Service Agreement between KongZhong Information Technologies (Beijing) Co., Ltd. and Beijing AirInbox Information Technologies Co., Ltd. dated October 10, 2003†
	10.4	Exclusive Technical and Consulting Services Agreement between KongZhong Information Technologies (Beijing) Co., Ltd. and Beijing AirInbox Information Technologies Co., Ltd. dated March 31, 2004†
	10.5	Amended and Restated Trademark License Agreement between KongZhong Information Technologies (Beijing) Co., Ltd. and Beijing AirInbox Information Technologies Co., Ltd. dated May 10, 2004†
	10.6	Domain Name License Agreement between KongZhong Information Technologies (Beijing) Co., Ltd. and Beijing AirInbox Information Technologies Co., Ltd. dated March 31, 2004†
	10.7	Amended and Restated Business Operation Agreement among KongZhong Information Technologies (Beijing) Co., Ltd., Beijing AirInbox Information Technologies Co., Ltd., Yang Cha, Songlin Yang, Yunfan Zhou and Zhen Huang dated May 10, 2004†
	10.8	Amended and Restated Equity Pledge Agreement among KongZhong Information Technologies (Beijing) Co., Ltd., Yang Cha, Songlin Yang, Yunfan Zhou and Zhen Huang dated May 10, 2004†
	10.9	Amended and Restated Option Agreement among KongZhong Information Technologies (Beijing) Co., Ltd., Yang Cha, Songlin Yang, Yunfan Zhou and Zhen Huang dated May 10, 2004†
	10.10	Amended and Restated Power of Attorney by Songlin Yang dated May 10, 2004 (with schedule)†
	10.11	Agreement among KongZhong Information Technologies (Beijing) Co., Ltd, Beijing AirInbox Information Technologies Co., Ltd., Yunfan Zhou, Songlin Yang and Zhen Huang dated March 31, 2004†

Exhibits		Description
	10.12	Exclusive Technical Consulting and Services Agreement between KongZhong Information Technologies (Beijing) Co., Ltd. and Beijing Boya Wuji Technologies Co., Ltd. dated March 31, 2004†
	10.13	Amended and Restated Trademark License Agreement between KongZhong Information Technologies (Beijing) Co., Ltd. and Beijing Boya Wuji Technologies Co., Ltd. dated May 10, 2004†
	10.14	Domain Name License Agreement between KongZhong Information Technologies (Beijing) Co., Ltd. and Beijing Boya Wuji Technologies Co., Ltd. dated March 31, 2004†
	10.15	Business Operation Agreement among KongZhong Information Technologies (Beijing) Co., Ltd., Beijing Boya Wuji Technologies Co., Ltd., Yunfan Zhou and Zhen Huang dated March 31, 2004†
	10.16	Equity Pledge Agreement among KongZhong Information Technologies (Beijing) Co., Ltd., Yunfan Zhou and Zhen Huang dated March 31, 2004†
	10.17	Option Agreement among KongZhong Information Technologies (Beijing) Co., Ltd., Yunfan Zhou and Zhen Huang dated March 31, 2004†
	10.18	Letter Agreement between KongZhong Information Technologies (Beijing) Co., Ltd. and KongZhong Corporation dated May 10, 2004†
	10.19	Cooperation Agreement on MonternetTM WAP services between China Mobile Telecommunications Group Corporation and Beijing AirInbox Information Technologies Co., Ltd. dated May 23, 2003†
	10.20	Cooperation Agreement on MonternetTM Multimedia Messaging Services between China Mobile Telecommunications Group Corporation and Beijing AirInbox Information Technologies Co., Ltd. dated June 5, 2003†
	10.21	Business Cooperation Agreement on MonternetTM Short-messaging Services between Beijing Mobile Telecommunications Co., Ltd. and Beijing AirInbox Information Technologies Co., Ltd. dated May 1, 2004†
	10.22	Cooperation Agreement on Mobile Content between Motorola (China) Co., Ltd. and Beijing AirInbox Information Technologies Co., Ltd. dated December 9, 2003†
	10.23	Cooperation Agreement on Short-messaging Services between Guangdong Mobile Telecommunications Corporation and Beijing AirInbox Information Technologies Co., Ltd dated August 29, 2002†
	10.24	Lease Agreement of Yuetan Building between Beijing Yuetan Building Real Estate Development Company and KongZhong Information Technologies (Beijing) Co., Ltd. dated August 30, 2002†
	10.25	Lease Agreement of Tengda Building between Beijing Gaoling Estate Development Co., Ltd. and KongZhong Information Technologies (Beijing) Co., Ltd. dated May 27, 2004†
	10.26	Lease Agreement of Tengda Building between Beijing Gaoling Estate Development Co., Ltd. and Beijing AirInbox Information Technologies Co., Ltd. dated May 27, 2004†
	10.27	Form of Employment Agreement†
	10.28	Form of Non-Compete Agreement†
	10.29	Consulting Agreement between Communication Over The Air Inc. and Mobileren Inc. dated October 2, 2002†
	21.1	List of subsidiaries of the registrant†
	23.1	Consent of Deloitte Touche Tohmatsu
	23.2	Consent of Llinks Law Office (included in Exhibit 5.2)
	23.3	Consent of Maples and Calder Asia†
	23.4	Consent of Sullivan and Cromwell LLP (included in Exhibit 8.1)
	24.1	Power of Attorney (contained in signature pages to registration statement)†

^† Has been provided in the Registration Statement on Form F-1 (file No. 333-116172) filed with the Securities and Exchange Commission on June 4, 2004.

(1)  Incorporated by reference to the Registration Statement on Form F-6 (File No. 333-116228) filed with the Securities and Exchange Commission with respect to American Depositary Shares representing ordinary shares.

EX-1.1

                                                                     Exhibit 1.1















                              KONGZHONG CORPORATION


           10,000,000 AMERICAN DEPOSITARY SHARES EACH REPRESENTING 40
               ORDINARY SHARES, PAR VALUE US$0.0000005 PER SHARE

                             UNDERWRITING AGREEMENT




                                                               [_________], 2004





                             UNDERWRITING AGREEMENT


                                                               [_________], 2004

UBS AG
as Representative of the several Underwriters
     named in Schedule A hereto
52/F, Two International Finance Centre
8 Finance Street
Central, Hong Kong

Ladies and Gentlemen:


                  KongZhong Corporation, a company incorporated under the laws
of the Cayman Islands (the "Company"), proposes to issue and sell and the
persons listed in Schedule B annexed hereto (the "Selling Shareholders") propose
to sell to the underwriters named in Schedule A annexed hereto (the
"Underwriters"), for whom you are acting as representative, an aggregate of
10,000,000 American Depositary Shares (the "Firm ADSs"), each representing 40
ordinary shares, par value $0.0000005 per share, of the Company (each an
"Ordinary Share" and each American Depositary Share, an "ADS"), consisting of
8,000,000 ADSs to be sold by the Company and 2,000,000 ADSs to be sold by the
Selling Shareholders (the "Selling Shareholder ADSs") in the respective amounts
set forth opposite each such Selling Shareholder's name in Schedule B. In
addition, solely for the purpose of covering over-allotments, the Company
proposes to grant to the Underwriters the option to purchase up to an additional
1,500,000 ADSs (the "Additional ADSs"). The Firm ADSs and the Additional ADSs
are hereinafter collectively referred to as the "Offered ADSs," which term,
unless otherwise specified, also includes the Ordinary Shares underlying the
Firm ADSs and the Additional ADSs.

                  The Company hereby acknowledges that in connection with the
proposed offering of the Offered ADSs, it has requested UBS Financial Services
Inc. ("UBS-FinSvc") to administer a directed share program (the "Directed Share
Program") under which up to 500,000 Firm ADSs, or 5% of the Firm ADSs to be
purchased by the Underwriters (the "Reserved ADSs"), shall be reserved for sale
by UBS AG at the initial public offering price to the Company's officers,
directors, employees and consultants and other persons having a relationship
with the Company as designated by the Company, (the "Directed Share
Participants") as part of the distribution of the Offered ADSs by the
Underwriters, subject to the terms of this Agreement, the applicable rules,
regulations and interpretations of the National Association of Securities
Dealers, Inc. (the "NASD") and all other applicable laws, rules and regulations.
The number of Offered ADSs available for sale to the general public will be
reduced to the extent that Directed Share Participants purchase Reserved ADSs.
The Underwriters may offer any Reserved ADSs not purchased by Directed Share
Participants to the general public on the same basis as the other Offered ADSs
being issued and sold hereunder. The Company has supplied UBS-FinSvc with names,
addresses and telephone numbers of the Directed Share Participants.




                                      -3-


It is understood that any Directed Share Participants may decline to participate
in the Directed Share Program.

                  The Company has prepared and filed, in accordance with the
provisions of the Securities Act of 1933, as amended, and the rules and
regulations thereunder (collectively, the "Act"), with the United States
Securities and Exchange Commission (the "Commission") a registration statement
on Form F-1 (File No. 333-116172) including a prospectus, relating to the
Offered ADSs. The Company has furnished to you, for use by the Underwriters and
by dealers, copies of one or more preliminary prospectuses (each such
preliminary prospectus, being herein called a "Preliminary Prospectus") relating
to the Offered ADSs. Except where the context otherwise requires, the
registration statement, as amended when it became or becomes effective,
including all documents filed as a part thereof, and including any information
contained in a prospectus subsequently filed with the Commission pursuant to
Rule 424(b) under the Act and deemed to be part of the registration statement at
the time of effectiveness pursuant to Rule 430(A) under the Act and also
including any registration statement filed pursuant to Rule 462(b) under the
Act, is herein called the "Registration Statement," and the prospectus, in the
form filed by the Company with the Commission pursuant to Rule 424(b) under the
Act on or before the second business day after the date hereof (or such earlier
time as may be required under the Act) or, if no such filing is required, the
form of final prospectus included in the Registration Statement at the time it
became effective, is herein called the "Prospectus." As used herein, "business
day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is
not a day on which banking institutions in New York are generally authorized or
obligated by law or executive order to close.

                  The Ordinary Shares to be represented by the Offered ADSs may
be evidenced by American Depositary Receipts (the "ADRs") to be issued pursuant
to the Deposit Agreement (the "Deposit Agreement") to be entered into among the
Company, Citibank, N.A., as depositary (the "Depositary"), and the holders and
beneficial owners from time to time of the ADRs.

                  The Company, the Selling Shareholders and the Underwriters
agree as follows:

1. Sale and Purchase. Upon the basis of the representations and warranties and
subject to the terms and conditions herein set forth, the Company agrees to
issue and sell, and the Selling Shareholders agree to sell, to the respective
Underwriters and each of the Underwriters, severally and not jointly, agrees to
purchase from the Company and the Selling Shareholders the number of Firm ADSs
set forth opposite the name of such Underwriter in Schedule A attached hereto,
subject to adjustment in accordance with Section 9 hereof, in each case at a
purchase price of $______ per ADS. The Company and the Selling Shareholders are
advised by you that the Underwriters intend (i) to make a public offering of
their respective portions of the Firm ADSs as soon after the effective date of
the Registration Statement as in your judgment is advisable and (ii) initially
to offer the Firm ADSs upon the terms set forth in the Prospectus. You may from
time to time increase or decrease the public offering price after the initial
public offering to such extent as you may determine.

                  In addition, the Company hereby grants to the several
Underwriters the option to purchase, and upon the basis of the representations
and warranties and subject to the terms and conditions herein set forth, the
Underwriters shall have the right to purchase, severally and not jointly, from


                                      -4-


the Company, all or a portion of the Additional ADSs as may be necessary to
cover over-allotments made in connection with the offering of the Firm ADSs, at
the same purchase price per share to be paid by the Underwriters to the Company
and the Selling Shareholders for the Firm ADSs. This option may be exercised by
you on behalf of the several Underwriters at any time and from time to time on
or before the thirtieth day following the date of the Prospectus, by written
notice to the Company. Such notice shall set forth the aggregate number of
Additional ADSs as to which the option is being exercised, and the date and time
when the Additional ADSs are to be delivered (such date and time being herein
referred to as the "additional time of purchase"); provided, however, that the
additional time of purchase shall not be earlier than the time of purchase (as
defined below) nor earlier than the second business day after the date on which
the option shall have been exercised nor later than the tenth business day after
the date on which the option shall have been exercised. The number of Additional
ADSs to be sold to each Underwriter shall be the number which bears the same
proportion to the aggregate number of Additional ADSs being purchased as the
number of Firm ADSs set forth opposite the name of such Underwriter on Schedule
A hereto bears to the total number of Firm ADSs (subject, in each case, to such
adjustment as you may determine to eliminate fractional shares), subject to
adjustment in accordance with Section 9 hereof. No Additional ADSs shall be sold
or delivered unless the Firm ADSs previously have been, or simultaneously are,
sold and delivered. The right of the Underwriters to purchase the Additional
ADSs or any portion thereof may be exercised from time to time and to the extent
not previously exercised may be surrendered and terminated at any time upon
notice by you to the Company.

2. Payment and Delivery. Payment of the purchase price for the Firm ADSs shall
be made to the Company in respect of proceeds to the Company and in respect of
proceeds to the Selling Shareholders by Federal Funds wire transfer, against
delivery of the certificates for the Firm ADSs to you through the facilities of
The Depository Trust Company ("DTC") for the respective accounts of the
Underwriters. Such payment and delivery shall be made at 10:00 A.M., New York
City time, on _______________, 2004 (unless another time shall be agreed to by
you and the Company or unless postponed in accordance with the provisions of
Section 9 hereof). For the avoidance of doubt, the purchase price for the Firm
ADSs due to the Selling Shareholders shall be made by the Underwriters as a
single payment to the Company as Custodian for the Selling Shareholders. The
time at which such payment and delivery are to be made is hereinafter sometimes
called "the time of purchase." Electronic transfer of the Firm ADSs shall be
made to you at the time of purchase in such names and in such denominations as
you shall specify.

                  Payment of the purchase price for the Additional ADSs shall be
made at the additional time of purchase in the same manner and at the same
office as the payment for the Firm ADSs. Electronic transfer of the Additional
ADSs shall be made to you at the additional time of purchase in such names and
in such denominations as you shall specify.

                  Deliveries of the documents described in Section 7 hereof with
respect to the purchase of the Offered ADSs shall be made at the offices of
Morrison & Foerster LLP, Entertainment Building, 21st and 23rd Floors, 30
Queen's Road, Central, Hong Kong, at 9:00 A.M., New York City time, on the date
of the closing of the purchase of the Firm ADSs or the Additional ADSs, as the
case may be.



                                      -5-


     3. Representations and Warranties of the Company. The Company represents
and warrants to and agrees with each of the Underwriters that:

          (a) The Registration Statement has been declared effective under the
     Act; no stop order of the Commission preventing or suspending the use of
     any Preliminary Prospectus or the effectiveness of the Registration
     Statement has been issued and no proceedings for such purpose have been
     instituted or, to the Company's knowledge after due inquiry, are
     contemplated by the Commission; each Preliminary Prospectus, at the time of
     filing thereof, complied in all material respects to the requirements of
     the Act and the last Preliminary Prospectus distributed in connection with
     the offering did not, as of its date, and does not contain an untrue
     statement of a material fact or omit to state a material fact required to
     be stated therein or necessary to make the statements therein, in light of
     the circumstances under which they were made, not misleading; the
     Registration Statement complied when it became effective, complies and will
     comply, at the time of purchase and any additional time of purchase, in all
     material respects with the requirements of the Act and the Prospectus will
     comply, as of its date and at the time of purchase and any additional times
     of purchase, in all material respects with the requirements of the Act and
     any statutes, regulations, contracts or other documents that are required
     to be described in the Registration Statement or the Prospectus or to be
     filed as exhibits to the Registration Statement have been and will be so
     described or filed; the conditions to the use of Form F-1 have been
     satisfied; the Registration Statement did not when it became effective,
     does not and will not, at the time of purchase and any additional time of
     purchase, contain an untrue statement of a material fact or omit to state a
     material fact required to be stated therein or necessary to make the
     statements therein not misleading and the Prospectus will not, as of its
     date and at the time of purchase and any additional time of purchase,
     contain an untrue statement of a material fact or omit to state a material
     fact required to be stated therein or necessary to make the statements
     therein, in light of the circumstances under which they were made, not
     misleading; provided, however, that the Company makes no warranty or
     representation with respect to any statement contained in any Preliminary
     Prospectus, the Registration Statement or the Prospectus in reliance upon
     and in conformity with information concerning an Underwriter and furnished
     in writing by or on behalf of such Underwriter through you to the Company
     expressly for use in such Preliminary Prospectus, the Registration
     Statement or the Prospectus; and the Company has not distributed and will
     not distribute any offering material in connection with the offering or
     sale of the Offered ADSs other than the Registration Statement, the
     Preliminary Prospectus and the Prospectus;

          (b) a registration statement on Form F-6 (No. 333-116228) relating to
     the Offered ADSs has been filed with the Commission (such registration
     statement, including all exhibits thereto, as amended at the time such
     registration statement becomes effective, being hererinafter referred to as
     the "F-6 Registration Statement"); no stop order of the Commission
     preventing or suspending the effectiveness of the F-6 Registration
     Statement has been issued and no proceedings for such purpose have been
     instituted or, to the Company's knowledge after due inquiry, are
     contemplated by the Commission; the F-6 Registration Statement as of its
     effective date, complied or will comply, and each amendment or supplement
     thereto, when it is filed with the Commission or becomes effective, as the
     case may be, will comply, in all material respects, with the applicable
     requirements of the Act, and did not or will not, as of its


                                      -6-


     effective date, contain any untrue statement of a material fact or omit to
     state a material fact required to be stated therein or necessary to make
     the statements therein not misleading;

          (c) a registration statement on Form 8-A (No. 1-[___]) relating to the
     registration of the Ordinary Shares and the Offered ADSs has been filed
     with the Commission, has been declared effective under the Securities
     Exchange Act of 1934, as amended, and the rules and regulations thereunder
     (collectively, the "Exchange Act") and the Ordinary Shares and the Offered
     ADSs have been duly registered under the Exchange Act pursuant to such
     registration statement. The various parts of such registration statement on
     Form 8-A for the registration of the Ordinary Shares and the Offered ADSs,
     including all exhibits thereto, each as amended at the time such part of
     the registration statement became effective, are hereinafter called the
     "8-A Registration Statement"; no stop order of the Commission preventing or
     suspending the effectiveness of the 8-A Registration Statement has been
     issued and no proceedings for such purpose have been instituted or, to the
     Company's knowledge after due inquiry, are contemplated by the Commission;
     the 8-A Registration Statement, when it became effective and on the date of
     this Agreement, conformed and conforms in all material respects to the
     requirements of the Exchange Act and did not and does not contain any
     untrue statement of a material fact or omit to state any material fact
     required to be stated therein or necessary to make the statements therein
     not misleading.

          (d) as of the date of this Agreement, the Company has an authorized
     and outstanding capitalization as set forth in the section of the
     Registration Statement and the Prospectus entitled "Capitalization" and, as
     of the time of purchase and the additional time of purchase, as the case
     may be, the Company shall have an authorized and outstanding capitalization
     as set forth in the section of the Registration Statement and the
     Prospectus entitled "Capitalization" (subject, in each case, to the
     issuance of Ordinary Shares upon exercise of share options disclosed as
     outstanding in the Registration Statement and the Prospectus and grant of
     share options under existing share option plans described in the
     Registration Statement and the Prospectus); all of the issued and
     outstanding share capital, including the Ordinary Shares and the preferred
     share (all of which will be converted into Ordinary Shares at the time of
     purchase), of the Company have been duly authorized and validly issued and
     are fully paid and non-assessable and have been issued in compliance with
     all federal and state securities laws and were not issued in violation of
     any preemptive right, resale right, right of first refusal or similar
     right;

          (e) the Company has been duly incorporated and is validly existing as
     a corporation in good standing under the laws of the Cayman Islands, with
     full corporate power and authority to own, lease and operate its properties
     and conduct its business as described in the Registration Statement and the
     Prospectus, to execute and deliver this Agreement and to issue, sell and
     deliver the Offered ADSs as contemplated herein;

          (f) the Company is duly qualified to do business as a foreign
     corporation and is in good standing in each jurisdiction where the
     ownership or leasing of its properties or the conduct of its business
     requires such qualification, except where the failure to be so qualified
     and in good standing would not, individually or in the aggregate, have a
     material adverse ef-


                                      -7-


     fect on the business, properties, financial condition, results of
     operation or prospects of the Company and the Subsidiaries (as hereinafter
     defined) taken as a whole (a "Material Adverse Effect");

          (g) the Company has no subsidiaries (as defined in the Act) other than
     KongZhong Information Technologies (Beijing) Co., Ltd. ("KongZhong Beijing"
     and, together with the Affiliated Companies (as hereinafter defined), the
     "Subsidiaries"); the Company owns all of the issued and outstanding equity
     interest in KongZhong Beijing; other than the equity interest in KongZhong
     Beijing, the Company does not own, directly or indirectly, any shares of
     stock or any other equity or long-term debt securities of any corporation
     or have any equity interest in any firm, partnership, joint venture,
     association or other entity; complete and correct copies of the memorandum
     and articles of association or other constitutional documents of the
     Company and the Subsidiaries and all amendments thereto have been delivered
     to you, and except as set forth in the exhibits to the Registration
     Statement no changes therein will be made subsequent to the date hereof and
     prior to the time of purchase or, if later, the additional time of
     purchase; except as disclosed in the Prospectus, each Subsidiary has been
     duly incorporated and is validly existing as a corporation in good standing
     under the laws of the jurisdiction of its incorporation, with full
     corporate power and authority to own, lease and operate its properties and
     to conduct its business as described in the Registration Statement and the
     Prospectus; each Subsidiary is duly qualified to do business as a foreign
     corporation and is in good standing in each jurisdiction where the
     ownership or leasing of its properties or the conduct of its business
     requires such qualification, except where the failure to be so qualified
     and in good standing would not, individually or in the aggregate, have a
     Material Adverse Effect; all of the outstanding equity interest of each of
     the Subsidiaries have been duly authorized and validly issued, are fully
     paid and non-assessable and, except for the Affiliated Companies, are owned
     by the Company subject to no security interest, other encumbrance or
     adverse claims; and, except as disclosed in the Prospectus, no options,
     warrants or other rights to purchase, agreements or other obligations to
     issue or other rights to convert any obligation into equity interest in the
     Subsidiaries are outstanding; all of the issued and outstanding equity
     interest of Beijing AirInbox Information Technologies Co., Ltd. ("Beijing
     AirInbox") is owned directly by Yunfan Zhou, Yang Cha, Songlin Yang and
     Zhen Huang in the amounts set forth in the Prospectus, subject to no
     security interest, other encumbrance or adverse claims, except as disclosed
     in the Prospectus, and all of the issued and outstanding equity interest of
     Beijing Boya Wuji Technologies Co., Ltd. ("Beijing Boya Wuji" and, together
     with Beijing AirInbox, the "Affiliated Companies") (which, together with
     KongZhong Beijing, constitute all the entities that are consolidated in the
     Company's financial statements included in the Registration Statement and
     the Prospectus) is owned directly by Yunfan Zhou and Zhen Huang in the
     amounts set forth in the Prospectus, subject to no security interest, other
     encumbrance or adverse claims, except as disclosed in the Prospectus;


                                      -8-


          (h) except as set forth in the Prospectus and except for those the
     failure to make or obtain which or the withdrawal of which would not,
     individually or in the aggregate, be reasonably expected to result in a
     Material Adverse Effect, all approvals, authorizations, consents, orders,
     registrations, filings and qualifications required for the consummation of
     the transactions concerning the Company's arrangements with the Affiliated
     Companies and the operations of the Affiliated Companies as set forth under
     the captions "Our corporate structure" and "Related party transactions" in
     the Prospectus (the "Structuring") and the execution, delivery and
     performance of the agreements and documents in connection therewith, as set
     forth under the caption "Related party transactions" in the Prospectus (the
     "Structuring Documents") have been made or unconditionally obtained and no
     such approval, authorization, consent, order, registration, filing or
     qualification has been withdrawn or is subject to any condition precedent
     which has not been fulfilled or performed;

          (i) except as set forth in the Prospectus, the Structuring and the
     execution, delivery and performance of the Structuring Documents do not (A)
     contravene any provision of applicable law or statute, rule or regulation
     of any Governmental Agency having jurisdiction over the Company or any of
     the Affiliated Companies, (B) contravene the Memorandum of Association,
     Articles of Association, the business license or other constituent
     documents of the Company or any of the Affiliated Companies, or (C) except
     for any conflict, breach, violation or default that would not, individually
     or in the aggregate, be reasonably expected to result in a Material Adverse
     Effect, conflict with or result in a breach or violation of any of the
     terms or provisions of, or constitute a default under, any license,
     indenture, mortgage, deed of trust, loan agreement, note, lease or other
     agreement or instrument to which the Company or any of the Affiliated
     Companies is a party or by which the Company or any of the Affiliated
     Companies is bound or to which any of the property or assets of the Company
     or any of the Affiliated Companies is subject;

          (j) each of Yunfan Zhou, Yang Cha, Songling Yang and Zhen Huang is a
     citizen of the People's Republic of China, excluding Taiwan, Hong Kong SAR
     and Macau SAR, and no application is pending in any other jurisdiction by
     any of them or on behalf of any of them for naturalization or citizenship
     thereof;

          (k) the Ordinary Shares underlying the Offered ADSs have been duly and
     validly authorized and, when issued and delivered against payment therefor
     as provided herein, will be duly and validly issued, fully paid and
     non-assessable and free of statutory and contractual preemptive rights,
     resale rights, rights of first refusal and similar rights;

          (l) the share capital of the Company, including the Ordinary Shares
     underlying the Offered ADSs, conforms in all material respects to the
     description thereof contained in the Registration Statement and the
     Prospectus and the American Depositary Receipts (the "ADRs") evidencing the
     Offered ADSs are in due and proper form and conform in all material
     respects to the description thereof contained in the Registration Statement
     and the Prospectus;



                                      -9-


          (m) the Registration Statement, the Preliminary Prospectus, the
     Prospectus, the F-6 Registration Statement, the 8-A Registration Statement,
     and the filing of the Registration Statement, the Prospectus, the F-6
     Registration Statement and the 8-A Registration Statement with the
     Commission have each been duly authorized by and on behalf of the Company,
     and the Registration Statement, the F-6 Registration Statement and the 8-A
     Registration Statement have each been duly executed pursuant to such
     authorization by and on behalf of the Company;

          (n) this Agreement has been duly authorized, executed and delivered by
     the Company;

          (o) the Deposit Agreement has been duly authorized, and when executed
     and delivered by the Company and, assuming due authorization, execution and
     delivery by the Depositary, will constitute a valid and legally binding
     obligation of the Company, enforceable in accordance with its terms,
     subject to enforceability to bankruptcy, insolvency, reorganization,
     moratorium and similar laws of general applicability relating to or
     affecting creditors' rights and to general equity principles; upon due
     issuance by the Depositary of the ADRs evidencing the Offered ADSs against
     the deposit of the underlying Ordinary Shares in respect thereof in
     accordance with the provisions of the Deposit Agreement, such ADRs will be
     duly and validly issued and the persons in whose names the ADRs are
     registered will be entitled to the rights specified therein and in the
     Deposit Agreement; the Deposit Agreement and the ADRs conform in all
     material respects to the descriptions thereof contained in the Prospectus;
     upon the sale and delivery to the Underwriters of the Offered ADSs, and
     payment therefor, pursuant to this Agreement, the Underwriters will acquire
     good, marketable and valid title to such Offered ADSs, free and clear of
     all pledges, liens, security interests, charges, claims or encumbrances of
     any kind;

          (p) each of the Structuring Documents has been duly authorized,
     executed and delivered by the Company, the Subsidiaries, Yunfan Zhou, Yang
     Cha, Songlin Yang and Zhen Huang, as the case may be, and assuming due
     authorization, execution and delivery by any other party thereto,
     constitutes a valid and legally binding obligation on the Company, the
     Subsidiaries, Yunfan Zhou, Yang Cha, Songlin Yang and Zhen Huang, as the
     case may be, enforceable in accordance with its terms, subject as to
     enforcement to bankruptcy, insolvency, reorganization and other laws of
     general applicability relating to or affecting creditors' rights generally
     and to general equity principles;

          (q) (1) neither the Company nor any of the Subsidiaries is in breach
     or violation of or in default under (nor has any event occurred which with
     notice, lapse of time or both would result in any breach or violation of,
     constitute a default under or give the holder of any indebtedness (or a
     person acting on such holder's behalf) the right to require the repurchase,
     redemption or repayment of all or a part of such indebtedness under) its
     respective charter documents, or any indenture, mortgage, deed of trust,
     bank loan or credit agreement or other evidence of indebtedness, or any
     license, lease, contract or other agreement or instrument to which the
     Company or any of the Subsidiaries is a party or by which any of them or
     any of their properties may be bound or affected, except for such breach,
     violation or default that (i)


                                      -10-


     would not materially hinder the consummation of the transactions
     contemplated hereunder and (ii) would not have a Material Adverse Effect,
     and (2) the execution, delivery and performance of this Agreement, the
     issuance and sale of the Offered ADSs, the deposit of the Ordinary Shares
     with the Depositary, the compliance by the Company with all of the
     provisions of this Agreement and the Deposit Agreement and the consummation
     of the transactions contemplated hereby and in the Deposit Agreement will
     not conflict with, result in any breach or violation of or constitute a
     default under (nor constitute any event which with notice, lapse of time or
     both would result in any breach or violation of or constitute a default
     under) (A) any indenture, mortgage, deed of trust, bank loan or credit
     agreement or other evidence of indebtedness, or any license, lease,
     contract or other agreement or instrument to which the Company or any of
     the Subsidiaries is a party or by which any of them or any of their
     respective properties may be bound or affected, except for such breach,
     violation or default that (i) would not materially hinder the consummation
     of the transactions contemplated hereunder and (ii) would not have a
     Material Adverse Effect, (B) the charter documents of the Company or any of
     the Subsidiaries, or (C) any federal, state, local or foreign law,
     regulation or rule or any decree, judgment or order applicable to the
     Company or any of the Subsidiaries;

          (r) no approval, authorization, consent or order of or filing with any
     federal, state, local or foreign governmental or regulatory commission,
     board, body, authority or agency is required in connection with the
     issuance and sale of the Offered ADSs or the consummation by the Company of
     the transactions contemplated hereby other than registration of the Offered
     ADSs under the Act, which has been effected, and any necessary
     qualification under the securities or blue sky laws of the various
     jurisdictions in which the Offered ADSs are being offered by the
     Underwriters or under the rules and regulations of the NASD, all of which
     have been made and are in full force and effect as of the date hereof and
     no such governmental authorization has been withdrawn or is subject to any
     condition precedent which has not been fulfilled or performed;

          (s) except as set forth in the Registration Statement and the
     Prospectus, (i) no person has the right, contractual or otherwise, to cause
     the Company to issue or sell to it any Ordinary Shares or other equity
     interests of the Company, (ii) no person has any preemptive rights, resale
     rights, rights of first refusal or other rights to purchase any Ordinary
     Shares or other equity interests of the Company, and (iii) no person has
     the right to act as an underwriter or as a financial advisor to the Company
     in connection with the offer and sale of the Offered ADSs, in the case of
     each of the foregoing clauses (i), (ii) and (iii), whether as a result of
     the filing or effectiveness of the Registration Statement or the sale of
     the Offered ADSs as contemplated thereby or otherwise; except as set forth
     in the Registration Statement and the Prospectus, no person has the right,
     contractual or otherwise, to cause the Company to register under the Act
     any Ordinary Shares or other equity interests of the Company, or to include
     any such Ordinary Shares or equity interests in the Registration Statement
     or the offering contemplated thereby, whether as a result of the filing or
     effectiveness of the Registration Statement or the sale of the Offered ADSs
     as contemplated thereby or otherwise;

          (t) each of the Company and the Subsidiaries has all necessary
     licenses, franchises, permits, authorizations, consents and approvals and
     has made all necessary filings re-


                                      -11-


     quired under any federal, state, local or foreign law, regulation or rule,
     and has obtained all necessary authorizations, consents and approvals from
     other persons, in order to conduct its respective business, except as
     disclosed in the Prospectus; neither the Company nor any of the
     Subsidiaries is in violation of, or in default under, or has received
     notice of any proceedings relating to revocation or modification of, any
     such license, franchises, permits, authorization, consent or approval or
     any federal, state, local or foreign law, regulation or rule or any decree,
     order or judgment applicable to the Company or any of the Subsidiaries,
     except where such violation, default, revocation or modification would not,
     individually or in the aggregate, have a Material Adverse Effect;

          (u) all legal or governmental proceedings, related party transactions,
     off-balance sheet transactions, contracts, licenses, agreements, leases or
     documents of a character required to be described in the Registration
     Statement or the Prospectus or to be filed as an exhibit to the
     Registration Statement have been so described or filed as required;

          (v) there are no actions, suits, claims, investigations or proceedings
     pending or threatened or, to the Company's knowledge after due inquiry,
     contemplated to which the Company or any of the Subsidiaries or any of
     their respective directors or officers is or would be a party or of which
     any of their respective properties is or would be subject at law or in
     equity, before or by any federal, state, local or foreign governmental or
     regulatory commission, board, body, authority or agency, except any such
     action, suit, claim, investigation or proceeding which would not result in
     a judgment, decree or order having, individually or in the aggregate, a
     Material Adverse Effect or preventing consummation of the transactions
     contemplated hereby;

          (w) Deloitte Touche Tohmatsu, whose report on the consolidated
     financial statements of the Company and the Subsidiaries is filed with the
     Commission as part of the Registration Statement and the Prospectus, are
     independent public accountants as required by the Act;

          (x) the audited financial statements included in the Registration
     Statement and the Prospectus, together with the related notes and
     schedules, present fairly the consolidated financial position of the
     Company and the Subsidiaries as of the dates indicated and the consolidated
     results of operations and cash flows of the Company and the Subsidiaries
     for the periods specified and have been prepared in compliance with the
     requirements of the Act and in conformity with generally accepted
     accounting principles applied on a consistent basis during the periods
     involved; any pro forma financial statements or data included in the
     Registration Statement and the Prospectus comply with the requirements of
     Regulation S-X of the Act and the assumptions used in the preparation of
     such pro forma financial statements and data are reasonable, the pro forma
     adjustments used therein are appropriate to give effect to the transactions
     or circumstances described therein and the pro forma adjustments have been
     properly applied to the historical amounts in the compilation of those
     statements and data; the other financial and statistical data set forth in
     the Registration Statement and the Prospectus are accurately presented and
     prepared on a basis consistent with the financial statements and books and
     records of the Company; there are no financial statements or schedules
     (historical or pro


                                      -12-


     forma) that are required to be included in the Registration Statement and
     the Prospectus that are not included as required; and the Company and the
     Subsidiaries do not have any material liabilities or obligations, direct or
     contingent (including any off-balance sheet obligations), not disclosed in
     the Registration Statement and the Prospectus;

          (y) subsequent to the respective dates as of which information is
     given in the Registration Statement and the Prospectus, there has not been
     (i) any material adverse change, or any development involving a prospective
     material adverse change, in the business, properties, management, financial
     condition or results of operations of the Company and the Subsidiaries
     taken as a whole, (ii) any transaction which is material to the Company and
     the Subsidiaries taken as a whole, (iii) any obligation, direct or
     contingent (including any off-balance sheet obligations), incurred by the
     Company or the Subsidiaries, which is material to the Company and the
     Subsidiaries taken as a whole, (iv) any change in the capital stock or
     outstanding indebtedness of the Company or the Subsidiaries or (v) any
     dividend or distribution of any kind declared, paid or made on the capital
     stock of the Company;

          (z) the Company has obtained for the benefit of the Underwriters the
     agreement (a "Lock-Up Agreement"), in the form set forth as Exhibit A
     hereto, of each of its directors and officers and each holder of the
     Company's Ordinary Shares or any security convertible into or exercisable
     or exchangeable for Ordinary Shares, or any warrant or other right to
     purchase Ordinary Shares or any such security (collectively, "Securities");

          (aa) the Company is not and, after giving effect to the offering and
     sale of the Offered ADSs, will not be an "investment company" as defined in
     the Investment Company Act of 1940, as amended (the "Investment Company
     Act");

          (bb) the Company was not a Passive Foreign Investment Company ("PFIC")
     within the meaning of Section 1297(a) of the United States Internal Revenue
     Code of 1986, as amended, and the regulations and published interpretations
     thereunder (the "Code") for its taxable year ended December 31, 2003, and
     has no plan or intention to conduct its business in a manner that would be
     reasonably expected to result in the Company becoming a PFIC in the future
     under current laws and regulations;

          (cc) the Company and each of the Subsidiaries has good and marketable
     title to all property (real and personal) described the Registration
     Statement and in the Prospectus as being owned by each of them, free and
     clear of all liens, claims, security interests or other encumbrances; all
     the property described in the Registration Statement and the Prospectus as
     being held under lease by the Company or a Subsidiary is held thereby under
     valid, subsisting and enforceable leases; and no material default (or event
     which with notice or lapse of time, or both, would constitute such a
     default) by the Company and any of its subsidiaries has occurred and is
     continuing under any such leases;

          (dd) except as disclosed in the Prospectus, the Company and the
     Subsidiaries own, or have obtained valid and enforceable licenses for, or
     other rights to use, the inventions, patent applications, patents,
     trademarks (both registered and unregistered), tradenames, copy-


                                      -13-


     rights, trade secrets and other proprietary information described in the
     Registration Statement and the Prospectus as being owned or licensed by
     them or which are necessary for the conduct of their respective businesses,
     except where the failure to own, license or have such rights would not,
     individually or in the aggregate, have a Material Adverse Effect
     (collectively, "Intellectual Property"); (i) there are no third parties who
     have or, to the Company's knowledge after due inquiry, will be able to
     establish rights to any Intellectual Property, except for the ownership
     rights of the owners of the Intellectual Property which is licensed to the
     Company; (ii) there is no infringement by third parties of any Intellectual
     Property; (iii) there is no pending or threatened action, suit, proceeding
     or claim by others challenging the Company's rights in or to any
     Intellectual Property, and the Company is unaware of any facts which could
     form a reasonable basis for any such claim; (iv) there is no pending or
     threatened action, suit, proceeding or claim by others challenging the
     validity or scope of any Intellectual Property, and the Company is unaware
     of any facts which could form a reasonable basis for any such claim; (v)
     there is no pending or threatened action, suit, proceeding or claim by
     others that the Company infringes or otherwise violates any patent,
     trademark, copyright, trade secret or other proprietary rights of others,
     and the Company is unaware of any facts which could form a reasonable basis
     for any such claim; (vi) there is no patent or patent application that
     contains claims that interfere with the issued or pending claims of any of
     the Intellectual Property; and (vii) there is no prior art that may render
     any patent application owned by the Company of the Intellectual Property
     unpatentable that has not been disclosed to the U.S. Patent and Trademark
     Office;

          (ee) neither the Company nor any of the Subsidiaries is engaged in any
     unfair labor practice; except for matters which would not, individually or
     in the aggregate, have a Material Adverse Effect, (i) there is (A) no
     unfair labor practice complaint pending or, to the Company's knowledge
     after due inquiry, threatened against the Company or any of the
     Subsidiaries before any competent governmental agency, and no grievance or
     arbitration proceeding arising out of or under collective bargaining
     agreements is pending or threatened, (B) no strike, labor dispute, slowdown
     or stoppage pending or, to the Company's knowledge after due inquiry,
     threatened against the Company or any of the Subsidiaries and (C) no union
     representation dispute currently existing concerning the employees of the
     Company or any of the Subsidiaries, and (ii) to the Company's knowledge
     after due inquiry, (A) no union organizing activities are currently taking
     place concerning the employees of the Company or any of the Subsidiaries
     and (B) there has been no violation of any federal, state, local or foreign
     law relating to discrimination in the hiring, promotion or pay of
     employees, any applicable wage or hour laws or any other applicable law or
     regulation concerning the employees of the Company or any of the
     Subsidiaries;

          (ff) the Company and the Subsidiaries and their properties, assets and
     operations are in compliance with, and hold all permits, authorizations and
     approvals required under, Environmental Laws (as defined below), except to
     the extent that failure to so comply or to hold such permits,
     authorizations or approvals would not, individually or in the aggregate,
     have a Material Adverse Effect; there are no past, present or, to the
     Company's knowledge after due inquiry, reasonably anticipated future
     events, conditions, circumstances, activities, practices, actions,
     omissions or plans that could reasonably be expected to give rise to any


                                      -14-


     material costs or liabilities to the Company or the Subsidiaries under, or
     to interfere with or prevent compliance by the Company or the Subsidiaries
     with, Environmental Laws; except as would not, individually or in the
     aggregate, have a Material Adverse Effect, neither the Company nor any of
     the Subsidiaries (i) is the subject of any investigation, (ii) has received
     any notice or claim, (iii) is a party to or affected by any pending or
     threatened action, suit or proceeding, (iv) is bound by any judgment,
     decree or order or (v) has entered into any agreement, in each case
     relating to any alleged violation of any Environmental Law or any actual or
     alleged release or threatened release or cleanup at any location of any
     Hazardous Materials (as defined below) (as used herein, "Environmental Law"
     means any federal, state, local or foreign law, statute, ordinance, rule,
     regulation, order, decree, judgment, injunction, permit, license,
     authorization or other binding requirement, or common law, relating to
     health, safety or the protection, cleanup or restoration of the environment
     or natural resources, including those relating to the distribution,
     processing, generation, treatment, storage, disposal, transportation, other
     handling or release or threatened release of Hazardous Materials, and
     "Hazardous Materials" means any material (including, without limitation,
     pollutants, contaminants, hazardous or toxic substances or wastes) that is
     regulated by or may give rise to liability under any Environmental Law);

          (gg) except as disclosed in the Prospectus, there are no pending
     actions, suits, inquiries, investigations or proceedings before or brought
     by any court or governmental agency, domestic or foreign, against or
     affecting the Company, any of its Subsidiaries or any of their respective
     properties, or challenging the effectiveness of the Structuring, that, if
     determined adversely to the Company or any of its Subsidiaries, would
     individually or in the aggregate have a Material Adverse Effect, or would
     materially and adversely affect properties or assets thereof or the
     consummation of the transactions contemplated in this Agreement, the
     Deposit Agreement or the Structuring Documents or the ability of the
     Company to perform its obligations hereunder or thereunder, or which are
     otherwise material in the context of the sale of the Offered ADSs; and no
     such actions, suits or proceedings are threatened or, to the Company's
     knowledge, contemplated.

          (hh) all tax returns required to be filed by the Company and each of
     the Subsidiaries have been filed, and all taxes and other assessments of a
     similar nature (whether imposed directly or through withholding) including
     any interest, additions to tax or penalties applicable thereto due or
     claimed to be due from such entities have been paid, other than those being
     contested in good faith and for which adequate reserves have been provided;

          (ii) neither the Company nor any of the Subsidiaries has sustained
     since the date of the last audited financial statements included in the
     Registration Statement and the Prospectus any loss or interference with its
     respective business from fire, explosion, flood or other calamity, whether
     or not covered by insurance, or from any labor dispute or court or
     governmental action, order or decree;

          (jj) the Company has not sent or received any communication regarding
     termination of, or intent not to renew, any of the contracts or agreements
     referred to or described in, or filed as an exhibit to, the Registration
     Statement, and no such termination or non-renewal


                                      -15-


     has been threatened by the Company or, to the Company's knowledge after due
     inquiry, any other party to any such contract or agreement;

          (kk) the Company and each of the Subsidiaries maintains a system of
     internal accounting controls sufficient to provide reasonable assurance
     that (i) transactions are executed in accordance with management's general
     or specific authorization; (ii) transactions are recorded as necessary to
     permit preparation of financial statements in conformity with United States
     generally accepted accounting principles and to maintain accountability for
     assets; (iii) access to assets is permitted only in accordance with
     management's general or specific authorization; and (iv) the recorded
     accountability for assets is compared with existing assets at reasonable
     intervals and appropriate action is taken with respect to any differences;

          (ll) the Company has established and maintains disclosure controls and
     procedures (as such term is defined in Rule 13a-14 and 15d-14 under the
     Exchange Act); such disclosure controls and procedures are designed to
     ensure that material information relating to the Company, including its
     consolidated subsidiaries, is made known to the Company's Chief Executive
     Officer and its Chief Financial Officer by others within those entities,
     and such disclosure controls and procedures are effective to perform the
     functions for which they were established; the Company's auditors and the
     Audit Committee of the Board of Directors have been advised of: (i) any
     significant deficiencies in the design or operation of internal controls
     which could adversely affect the Company's ability to record, process,
     summarize, and report financial data; and (ii) any fraud, whether or not
     material, that involves management or other employees who have a role in
     the Company's internal controls; any material weaknesses in internal
     controls have been identified for the Company's auditors; and since the
     date of the most recent evaluation of such disclosure controls and
     procedures, there have been no significant changes in internal controls or
     in other factors that could significantly affect internal controls,
     including any corrective actions with regard to significant deficiencies
     and material weaknesses;

          (mm) the Company has provided you true, correct, and complete copies
     of all documentation pertaining to any extension of credit in the form of a
     personal loan made, directly or indirectly, by the Company to any director
     or executive officer of the Company, or to any family member or affiliate
     of any director or executive officer of the Company; and since July 30,
     2002, except as set forth in the Registration Statement and the Prospectus,
     the Company has not, directly or indirectly, including through any
     subsidiary: (i) extended credit, arranged to extend credit, or renewed any
     extension of credit, in the form of a personal loan, to or for any director
     or executive officer of the Company, or to or for any family member or
     affiliate of any director or executive officer of the Company; or (ii) made
     any material modification, including any renewal thereof, to any term of
     any personal loan to any director or executive officer of the Company, or
     any family member or affiliate of any director or executive officer, which
     loan was outstanding on July 30, 2002;

          (nn) any statistical and market-related data included in the
     Registration Statement and the Prospectus are based on or derived from
     sources that the Company believes to be re-


                                      -16-


     liable and accurate, and the Company has obtained the written consent to
     the use of such data from such sources to the extent required;

          (oo) neither the Company nor any of the Subsidiaries nor, to the
     Company's knowledge after due inquiry, any employee or agent of the Company
     or the Subsidiaries has made any payment of funds of the Company or the
     Subsidiaries or received or retained any funds in violation of any law,
     rule or regulation, which payment, receipt or retention of funds is of a
     character required to be disclosed in the Registration Statement or the
     Prospectus;

          (pp) neither the Company nor any of the Subsidiaries nor any of their
     respective directors, officers, affiliates or controlling persons has
     taken, directly or indirectly, any action designed, or which has
     constituted or might reasonably be expected to cause or result in, under
     the Exchange Act or otherwise, the stabilization or manipulation of the
     price of any security of the Company to facilitate the sale or resale of
     the Ordinary Shares or Offered ADSs;

          (qq) to the Company's knowledge after due inquiry, there are no
     affiliations or associations between any member of the NASD and any of the
     Company's officers, directors or 5% or greater securityholders;

          (rr) the Registration Statement, the F-6 Registration Statement, the
     Prospectus and any preliminary prospectus comply, and any further
     amendments or supplements thereto will comply, with any applicable laws or
     regulations of any foreign jurisdiction in which the Prospectus or any
     preliminary prospectus is distributed in connection with the Directed Share
     Program; and no approval, authorization, consent or order of or filing with
     any governmental or regulatory commission, board, body, authority or
     agency, other than those obtained, is required in connection with the
     offering of the Reserved ADSs in any jurisdiction where the Reserved ADSs
     are being offered;

          (ss) the Company has not offered, or caused the Underwriters to offer,
     any Offered ADSs to any person pursuant to the Directed Share Program with
     the intent to influence unlawfully (i) a customer or supplier of the
     Company or any of the Subsidiaries to alter the customer's or supplier's
     level or type of business with the Company or any of the Subsidiaries, or
     (ii) a trade journalist or publication to write or publish favorable
     information about the Company or any of the Subsidiaries or any of their
     respective products or services;

          (tt) the Company is a "foreign private issuer" within the meaning of
     Rule 405 under the Act;

          (uu) except as disclosed in the Prospectus, under the laws and
     regulations of the Cayman Islands, no transaction, stamp, capital or other
     issuance, registration or transfer taxes or duties are payable in the
     Cayman Islands by or on behalf of the Underwriters to any Cayman Islands
     taxing authority in connection with (i) the issuance, sale and delivery by
     the Company to or for the account of the Underwriters of the Ordinary
     Shares underlying the Offered ADSs, (ii) the initial sale and delivery by
     the Underwriters of the Offered ADSs to purchasers thereof, (iii) the
     holding or transfer of the Offered ADSs outside the Cayman Islands,


                                      -17-


     (iv) the deposit of the Ordinary Shares with the custodian and the issuance
     and delivery of the ADRs, or (v) the execution and delivery of this
     Agreement or the Deposit Agreement;

          (vv) the choice of laws of the State of New York as the governing law
     of this Agreement is a valid choice of law under the laws of the Cayman
     Islands and will be honored by courts in the Cayman Islands. The Company
     has the power to submit, and pursuant to Section 13 of this Agreement, has
     legally, validly, effectively and irrevocably submitted, to the personal
     jurisdiction of each United States federal court and New York state court
     located in the Borough of Manhattan, in The City of New York, New York,
     United States of America (each, a "New York Court"), and the Company has
     the power to designate, appoint and empower, and pursuant to Section 13 of
     this Agreement, has legally, validly, effectively and irrevocably
     designated, appointed and empowered, the Authorized Agent (as defined in
     Section 13 hereof) for service of process in any action arising out of or
     relating to this Agreement or the Offered ADSs in any New York Court, and
     service of process effected on such Authorized Agent will be effective to
     confer valid personal jurisdiction over the Company as provided in Section
     13 hereof;

          (ww) any final judgment for a fixed or readily calculable sum of money
     rendered by a New York Court having jurisdiction under its own domestic
     laws in respect of any suit, action or proceeding against the Company based
     upon this Agreement and the Deposit Agreement would be declared enforceable
     against the Company by Cayman Islands courts without re-examining the
     merits of the case under the common law doctrine of obligation; provided
     that (i) adequate service of process has been effected and the defendant
     has had a reasonable opportunity to be heard, (ii) such judgments or the
     enforcement thereof are not contrary to the law, public policy, security or
     sovereignty of the Cayman Islands, (iii) such judgments were not obtained
     by fraudulent means and do not conflict with any other valid judgment in
     the same matter between the same parties, and (iv) an action between the
     same parties in the same matter is not pending in any Cayman Islands court
     at the time the lawsuit is instituted in the foreign court;

          (xx) neither the Company nor, to the Company's knowledge, any
     director, officer, agent, employee or other person associated with or
     acting on behalf of the Company is using any corporate funds for any
     unlawful contribution, gift, entertainment or other unlawful expenses; is
     making any direct or indirect unlawful payment to any foreign or domestic
     government official or employee from corporate funds; or is in violation of
     any provision of the United States Foreign Corrupt Practices Act of 1977;
     or is making any bribe, rebate, payoff, influence payment, kickback or
     other unlawful payment;

          (yy) the section entitled "Management's discussion and analysis of
     financial condition and results of operations" in the Prospectus accurately
     and fully describes (i) accounting policies that the Company believes are
     the most important in the portrayal of the Company's financial condition
     and results of operations and that require management's most difficult,
     subjective or complex judgments ("Critical Accounting Policies"); (ii)
     methods and uncertainties affecting the application of critical accounting
     policies; and (iii) the likelihood that mate-


                                      -18-


     rially different amounts would be reported under different conditions or
     using different assumptions and an explanation thereof;

          (zz) the Company's directors and management have reviewed and agreed
     with the selection, application and disclosure of Critical Accounting
     Policies and have consulted with its legal advisers and independent
     accountants with regards to such disclosure;

          (aaa) the Prospectus fairly and accurately describes (i) all material
     trends, demands, commitments and events known to the Company, and
     uncertainties, and the potential effects thereof, that the Company believes
     would materially affect liquidity and are reasonably likely to occur; and
     (ii) neither the Company nor any Subsidiary is engaged in any transactions
     with, or have any obligations to, its unconsolidated entities (if any) that
     are contractually limited to narrow activities that facilitate the transfer
     of or access to assets by the Company or such Subsidiary, including,
     without limitation, structured finance entities and special purpose
     entities, or otherwise engage in, or have any obligations under, any
     off-balance sheet transactions or arrangements. As used herein, the phrase
     "reasonably likely" refers to a disclosure threshold lower than "more
     likely than not";

          (bbb) under the laws of the Cayman Islands, each holder of ADRs
     evidencing ADSs issued pursuant to the Deposit Agreement shall be entitled,
     subject to the Deposit Agreement, to seek enforcement of its rights through
     the Depositary or its nominee registered as representative of the holders
     of the ADRs in a direct suit, action or proceeding against the Company;

          (ccc) except as disclosed in the Prospectus, no stamp or other
     issuance or transfer taxes or duties and no capital gains, income,
     withholding or other taxes are or will be payable by or on behalf of the
     Underwriters, or otherwise imposed on any payments made to the
     Underwriters, to the Government of the PRC or the Cayman Islands or any
     political subdivision or taxing authority thereof or therein in connection
     with: (i) the deposit of Ordinary Shares with the Depositary against the
     issuance of ADRs evidencing ADSs, (ii) the sale and delivery of the ADSs to
     or for the respective accounts of the Underwriters as set forth in the
     Prospectus and pursuant to the terms of this Agreement, or (iii) any other
     transaction or payment contemplated by this Agreement or the Deposit
     Agreement; and

          (ddd) except as disclosed in the Prospectus, no governmental approvals
     are currently required in the Cayman Islands in order for the Company to
     pay dividends or other distributions declared by the Company to holders of
     Ordinary Shares, including the Depositary and holders of ADSs, or for the
     conversion by the Depositary of any dividends paid in U.S. dollars or the
     repatriation thereof out of the Cayman Islands and no other withholding or
     other


                                      -19-


     taxes under the laws and regulations of the Cayman Islands will be imposed
     in connection with the declaration and payment by the Company of dividends
     and other distributions in respect of shares of its capital stock.

          In addition, any certificate signed by any officer of the Company or
any of the Subsidiaries and delivered to the Underwriters or counsel for the
Underwriters in connection with the offering of the Offered ADSs shall be deemed
to be a representation and warranty by the Company or Subsidiary, as the case
may be, as to matters covered thereby, to each Underwriter.

     4. Representations and Warranties of the Selling Shareholders. Each Selling
Shareholder, severally and not jointly, represents and warrants to and agrees
with each of the Underwriters and the Company that:

          (a) such Selling Shareholder now has, and at the time of purchase will
     have, valid title to the Selling Shareholder ADSs to be sold by such
     Selling Shareholder at such time of purchase, free and clear of any pledge,
     lien, security interest, encumbrance, claim or equitable interest other
     than pursuant to this Agreement; and upon delivery of such Selling
     Shareholder ADSs hereunder and payment of the purchase price as herein
     contemplated, each of the Underwriters will obtain valid title to the
     Selling Shareholder ADSs purchased by it from such Selling Shareholder,
     free and clear of any pledge, lien, security interest pertaining to such
     Selling Shareholder or such Selling Shareholder's property, encumbrance,
     claim or equitable interest, including any liability for estate or
     inheritance taxes, or any liability to or claims of any creditor, devisee,
     legatee or beneficiary of such Selling Shareholder;

          (b) such Selling Shareholder has duly authorized (if applicable),
     executed and delivered, in the form heretofore furnished to the
     Underwriters, an irrevocable Power of Attorney (the "Power of Attorney")
     appointing [_______] and [_______] as attorneys-in-fact (collectively, the
     "Attorneys" and individually, an "Attorney") and a Letter of Transmittal
     and the Custody Agreement between such Selling Shareholder and the Company,
     as the Custodian; each of the Power of Attorney and the Custody Agreement
     constitutes a valid and binding agreement on the part of such Selling
     Shareholder, enforceable in accordance with its terms, except as the
     enforcement thereof may be limited by applicable bankruptcy, insolvency,
     reorganization, moratorium or other similar laws relating to or affecting
     creditors' rights generally or by general equitable principles; the
     performance of the Power of Attorney and the Custody Agreement and the
     consummation of the transactions contemplated thereunder will not result in
     a breach or violation of any of the terms and provisions of or constitute a
     default under any bond, debenture, note or other evidence of indebtedness,
     or under any lease, contract, indenture, mortgage, deed of trust, loan
     agreement, joint venture or other agreement or instrument to which such
     Selling Shareholder is a party or by which such Selling Shareholder, or any
     Selling Shareholder ADSs to be sold by such Selling Shareholder hereunder,
     may be bound or, to the best of such Selling Shareholders' knowledge,
     result in any violation of any law, order, rule, regulation, writ,
     injunction, judgment or decree of any court, government or governmental
     agency or body, domestic or foreign, having jurisdiction over such Selling
     Shareholder or over the properties of such Selling Shareholder; and each of
     such Selling Shareholder's Attorneys, acting alone, is authorized to
     execute and deliver this Agreement and


                                      -20-


     the certificate referred to in Section 7(n) hereof on behalf of such
     Selling Shareholder, to determine the purchase price to be paid by the
     several Underwriters to such Selling Shareholder as provided in Section 2
     hereof, to authorize the delivery of the Selling Shareholder ADSs under
     this Agreement and to duly endorse (in blank or otherwise) the certificate
     or certificates representing such Selling Shareholder ADSs or a stock power
     or powers with respect thereto, to accept payment therefor, and otherwise
     to act on behalf of such Selling Shareholder in connection with this
     Agreement;

          (c) all consents, approvals, authorizations and orders required for
     the execution and delivery by such Selling Shareholder of the Power of
     Attorney and the Custody Agreement, the execution and delivery by or on
     behalf of such Selling Shareholder of this Agreement and the sale and
     delivery of the Selling Shareholder Shares under this Agreement (other
     than, at the time of the execution hereof (if the Registration Statement
     and the F-6 Registration Statement have not yet been declared effective by
     the Commission), the issuance of the order of the Commission declaring the
     Registration Statement and the F-6 Registration Statement effective and
     such consents, approvals, authorizations or orders as may be necessary
     under state or other securities or Blue Sky laws have been obtained and are
     in full force and effect; and such Selling Shareholder has full legal
     right, power and authority to enter into and perform its obligations under
     this Agreement and such Power of Attorney and Custody Agreement, and to
     sell, assign, transfer and deliver the Selling Shareholder ADSs to be sold
     by such Selling Shareholder under this Agreement;

          (d) such Selling Shareholder will not, during the Lock-up Period (as
     defined in Section 5(n) and as extended pursuant to Section 5(n)), effect
     the Disposition (as defined in Section 5(n)) of any Securities now owned or
     hereafter acquired directly by such Selling Shareholder or with respect to
     which such Selling Shareholder has or hereafter acquires the power of
     disposition, otherwise than (i) as a bona fide gift or gifts, provided the
     donee or donees thereof agree in writing to be bound by this restriction,
     (ii) as a distribution to partners or shareholder of such Selling
     Shareholder, provided that the distributees thereof agree in writing to be
     bound by the terms of this restriction, or (iii) with the prior written
     consent of UBS; the foregoing restriction is expressly agreed to preclude
     the shareholder of the Securities from engaging in any hedging or other
     transaction which is designed to or reasonably expected to lead to or
     result in a Disposition of Securities during the Lock-up Period, even if
     such Securities would be disposed of by someone other than the Selling
     Shareholder; such prohibited hedging or other transactions include, without
     limitation, any short sale (whether or not against the box) or any
     purchase, sale or grant of any right (including, without limitation, any
     put or call option) with respect to any Securities or with respect to any
     security (other than a broad-based market basket or index) that includes,
     relates to or derives any significant part of its value from Securities;
     such Selling Shareholder also agrees and consents to the entry of stop
     transfer instructions with the Company's transfer agent against the
     transfer of the securities held by such Selling Shareholder except in
     compliance with this restriction;

          (e) certificates in negotiable form for all Ordinary Shares to be sold
     by such Selling Shareholder under this Agreement, together with a stock
     power or powers duly en-


                                      -21-


     dorsed in blank by such Selling Shareholder, have been placed in custody
     with the Custodian for the purpose of effecting delivery hereunder;

          (f) if such Selling Shareholder is not a natural person, this
     Agreement has been duly authorized by such Selling Shareholder and has been
     duly executed and delivered by or on behalf of such Selling Shareholder and
     is a valid and binding agreement of such Selling Shareholder, enforceable
     in accordance with its terms, except as rights to indemnification hereunder
     may be limited by applicable law and except as the enforcement hereof may
     be limited by bankruptcy, insolvency, reorganization, moratorium or other
     similar laws relating to or affecting creditors' rights generally or by
     general equitable principles; and the performance of this Agreement and the
     consummation of the transactions herein contemplated will not result in a
     breach or violation of any of the terms and provisions of or constitute a
     default under any bond, debenture, note or other evidence of indebtedness,
     or under any lease, contract, indenture, mortgage, deed of trust, loan
     agreement, joint venture or other agreement or instrument to which such
     Selling Shareholder is a party or by which such Selling Shareholder, or any
     Selling Shareholder ADSs to be sold by such Selling Shareholder hereunder,
     may be bound or result in any violation of any law, order, rule,
     regulation, writ, injunction, judgment or decree of any court, government
     or governmental agency or body, domestic or foreign, having jurisdiction
     over such Selling Shareholder or over the properties of such Selling
     Shareholder;

          (g) such Selling Shareholder has not taken and will not take, directly
     or indirectly, any action designed to or that might reasonably be expected
     to cause or result in stabilization or manipulation of the price of the
     Offered ADSs to facilitate the sale or resale of the Offered ADSs;

          (h) such Selling Shareholder has not distributed and will not
     distribute any prospectus or other offering material in connection with the
     offering and sale of the Offered ADSs;

          (i) all information furnished by or on behalf of such Selling
     Shareholder relating to such Selling Shareholder and the Selling
     Shareholder ADSs that is contained in the representations and warranties of
     such Selling Shareholder in such Selling Shareholder's Power of Attorney or
     set forth in the Registration Statement or the Prospectus at the time the
     Registration Statement became or becomes, as the case may be, effective and
     at all times subsequent thereto up to and at the time of purchase does not,
     and at the time the Registration Statement became or becomes, as the case
     may be, effective and at all times subsequent thereto up to and at the time
     of purchase will not, contain any untrue statement of a material fact or
     omit to state a material fact required to be stated therein or necessary to
     make the statements therein, in the light of the circumstances under which
     they were made, not misleading;

          (j) such Selling Shareholder does not have, or has waived prior to the
     date hereof, any preemptive right, co-sale right or right of first refusal
     or other similar right to purchase any of the Offered ADSs that are to be
     sold by the Company or any of the other Selling Shareholders to the
     Underwriters pursuant to this Agreement; such Selling Shareholder does


                                      -22-


     not have, or has waived prior to the date hereof, any registration right or
     other similar right to participate in the offering made by the Prospectus,
     other than such rights of participation as have been satisfied by the
     participation of such Selling Shareholder in the transactions to which this
     Agreement relates in accordance with the terms of this Agreement; and such
     Selling Shareholder does not own any warrants, options or similar rights to
     acquire, and does not have any right or arrangement to acquire, any capital
     stock, rights, warrants, options or other securities from the Company,
     other than those described in the Registration Statement and the
     Prospectus;

          (k) such Selling Shareholder is not aware that any of the
     representations and warranties of the Company set forth in Section 3 above
     is untrue or inaccurate in any material respect;

          (l) except as disclosed in the Registration Statement, neither such
     Selling Shareholder nor any of his, her or its affiliates directly, or
     indirectly through one or more intermediaries, controls, or is controlled
     by, or is under common control with, or has any other association with
     (within the meaning of Article I, Section 1(dd) of the By-laws of the
     NASD), any member firm of the NASD;

          (m) if such Selling Shareholder is an officer or director of the
     Company, (i) such Selling Shareholder has reviewed the Registration
     Statement and the representations and warranties of the Company contained
     in Section 3 hereof and has no reason to believe that such representations
     and warranties are not true and correct and (ii) the sale of the Ordinary
     Shares underlying the Selling Shareholder ADSs by such Selling Shareholder
     pursuant hereto is not prompted by any information concerning the Company
     or any of its subsidiaries which is not set forth in the Prospectus or any
     supplement thereto;

          (n) if such Selling Shareholder is not an officer or director of the
     Company, the sale of the Ordinary Shares underlying the Selling Shareholder
     ADSs by such Selling Shareholder pursuant hereto is not prompted by any
     information concerning the Company or any of its subsidiaries which is not
     set forth in the Prospectus or any supplement thereto;

          (o) there are no contracts, agreements or understandings between such
     Selling Shareholder and any person that would give rise to a valid claim
     against the Selling Shareholder or any Underwriter for a brokerage
     commission, finder's fee or other like payment in connection with the offer
     and sale of the Selling Shareholder ADSs;

          (p) except as disclosed in the Prospectus, no stamp or other issuance
     or transfer taxes or duties and no capital gains, income, withholding or
     other taxes are or will be payable by or on behalf of the Underwriters, or
     otherwise imposed on any payments made to the Underwriters, to the PRC
     government or any political subdivision or taxing authority thereof or
     therein in connection with: (i) the deposit of Ordinary Shares by such
     Selling Shareholder with the Depositary against the issuance of ADRs
     evidencing ADSs, (ii) the sale and delivery on behalf of the Selling
     Shareholders of the ADSs to or for the respective accounts of the
     Un-


                                      -23-


     derwriters as set forth in the Prospectus and pursuant to the terms of this
     Agreement, or (iii) any other transaction or payment contemplated by this
     Agreement;

          (q) except as described in the Prospectus, all expenses and other
     amounts that may be payable by such Selling Shareholder under this
     Agreement shall be made free and clear of, and without deduction for or on
     account of, any taxes imposed, assessed or levied by the PRC government or
     any political subdivision or taxing authority thereof or therein; there are
     no taxes imposed in the PRC on, or by virtue of, the execution or delivery
     of this Agreement;

          (r) the choice of laws of the State of New York as the governing law
     of this Agreement is a valid choice of law under the laws of the Cayman
     Islands and will be honored by courts in the Cayman Islands. Such Selling
     Shareholder has the power to submit, and pursuant to Section 13 of this
     Agreement, has legally, validly, effectively and irrevocably submitted, to
     the personal jurisdiction of each New York Court, and such Selling
     Shareholder has the power to designate, appoint and empower, and pursuant
     to Section 13 of this Agreement, has legally, validly, effectively and
     irrevocably designated, appointed and empowered, the Authorized Agent (as
     defined in Section 13 hereof) for service of process in any action arising
     out of or relating to this Agreement or the Offered ADSs in any New York
     Court, and service of process effected on such Authorized Agent will be
     effective to confer valid personal jurisdiction over such Selling
     Shareholder as provided in Section 13 hereof; and

          (s) any final judgment for a fixed or readily calculable sum of money
     rendered by a New York Court having jurisdiction under its own domestic
     laws in respect of any suit, action or proceeding against such Selling
     Shareholder based upon this Agreement would be declared enforceable against
     such Selling Shareholder by Cayman Islands courts without re-examining the
     merits of the case under the common law doctrine of obligation; provided
     that (i) adequate service of process has been effected and the defendant
     has had a reasonable opportunity to be heard, (ii) such judgments or the
     enforcement thereof are not contrary to the law, public policy, security or
     sovereignty of the Cayman Islands, (iii) such judgments were not obtained
     by fraudulent means and do not conflict with any other valid judgment in
     the same matter between the same parties, and (iv) an action between the
     same parties in the same matter is not pending in any Cayman Islands court
     at the time the lawsuit is instituted in the foreign court.

     4A.   Representations and Warranties of the Founders. Yunfan Zhou and Nick
Yang (collectively, the "Founders"), jointly and severally, represents and
warrants to and agrees with each of the Underwriters that the Registration
Statement did not when it became effective, does not and will not, at the time
of purchase and any additional time of purchase, contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading and the Preliminary
Prospectus and Prospectus will not, as of their respective dates and at the time
of purchase and any additional time of purchase, contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; provided, however, that each Founder makes
no warranty or representation with respect to any statement contained in any
Prelimi-


                                      -24-


nary Prospectus, the Registration Statement or the Prospectus in reliance upon
and in conformity with information concerning an Underwriter and furnished in
writing by or on behalf of such Underwriter through you to the Company expressly
for use in such Preliminary Prospectus, the Registration Statement or the
Prospectus.

     5.   Certain Covenants of the Company. The Company hereby agrees:

          (a) to furnish such information as may be required and otherwise to
     cooperate in qualifying the Offered ADSs for offering and sale under the
     securities or blue sky laws of such states or other jurisdictions as you
     may designate and to maintain such qualifications in effect so long as you
     may request for the distribution of the Offered ADSs; provided that the
     Company shall not be required to qualify as a foreign corporation or to
     consent to the service of process under the laws of any such jurisdiction
     (except service of process with respect to the offering and sale of the
     Offered ADSs); and to promptly advise you of the receipt by the Company of
     any notification with respect to the suspension of the qualification of the
     Offered ADSs for sale in any jurisdiction or the initiation or threatening
     of any proceeding for such purpose;

          (b) to make available to the Underwriters in New York City, as soon as
     practicable after the Registration Statement becomes effective, and
     thereafter from time to time to furnish to the Underwriters, as many copies
     of the Prospectus (or of the Prospectus as amended or supplemented if the
     Company shall have made any amendments or supplements thereto after the
     effective date of the Registration Statement) as the Underwriters may
     reasonably request for the purposes contemplated by the Act; in case any
     Underwriter is required to deliver a prospectus after the nine-month period
     referred to in Section 10(a)(3) of the Act in connection with the sale of
     the Offered ADSs, the Company will prepare, at its expense, promptly upon
     request such amendment or amendments to the Registration Statement and the
     Prospectus as may be necessary to permit compliance with the requirements
     of Section 10(a)(3) of the Act;

          (c) if, at the time this Agreement is executed and delivered, it is
     necessary for the Registration Statement or any post-effective amendment
     thereto to be declared effective before the Offered ADSs may be sold, the
     Company will endeavor to cause the Registration Statement or such
     post-effective amendment to become effective as soon as practicable and the
     Company will advise you promptly and, if requested by you, will confirm
     such advice in writing, (i) when the Registration Statement and any such
     post-effective amendment thereto has become effective, and (ii) if Rule
     430A under the Act is used, when the Prospectus is filed with the
     Commission pursuant to Rule 424(b) under the Act (which the Company agrees
     to file in a timely manner under such Rule);

          (d) to advise you promptly, confirming such advice in writing, of any
     request by the Commission for amendments or supplements to the Registration
     Statement, the F-6 Registration Statement or the Prospectus or for
     additional information with respect thereto, or of notice of institution of
     proceedings for, or the entry of a stop order, suspending the effectiveness
     of the Registration Statement or the F-6 Registration Statement and, if the
     Commission


                                      -25-


     should enter a stop order suspending the effectiveness of the Registration
     Statement, to use its best efforts to obtain the lifting or removal of such
     order as soon as practicable; to advise you promptly of any proposal to
     amend or supplement the Registration Statement, the F-6 Registration
     Statement or the Prospectus and to provide you and Underwriters' counsel
     copies of any such documents for review and comment a reasonable amount of
     time prior to any proposed filing and to file no such amendment or
     supplement to which you shall object in writing;

          (e) subject to Section 5(d) hereof, to file promptly all reports and
     any definitive proxy or information statement required to be filed by the
     Company with the Commission in order to comply with the Exchange Act
     subsequent to the date of the Prospectus and for so long as the delivery of
     a prospectus is required in connection with the offering or sale of the
     Offered ADSs; and to provide you with a copy of such reports and statements
     and other documents to be filed by the Company pursuant to Section 13, 14
     or 15(d) of the Exchange Act during such period a reasonable amount of time
     prior to any proposed filing, and to promptly notify you of such filing;

          (f) if necessary or appropriate, to file a registration statement
     pursuant to Rule 462(b) under the Act;

          (g) to advise the Underwriters promptly of the happening of any event
     within the time during which a prospectus relating to the Offered ADSs is
     required to be delivered under the Act which could require the making of
     any change in the Prospectus then being used so that the Prospectus would
     not include an untrue statement of material fact or omit to state a
     material fact necessary to make the statements therein, in the light of the
     circumstances under which they are made, not misleading, and, during such
     time, subject to Section 5(d) hereof, to prepare and furnish, at the
     Company's expense, to the Underwriters promptly such amendments or
     supplements to such Prospectus as may be necessary to reflect any such
     change;

          (h) to make generally available to its security holders, and to
     deliver to you, an earnings statement of the Company (which will satisfy
     the provisions of Section 11(a) of the Act) covering a period of twelve
     months beginning after the effective date of the Registration Statement (as
     defined in Rule 158(c) under the Act) as soon as is reasonably practicable
     after the termination of such twelve-month period but not later than [ ],
     2005;

          (i) to furnish to its shareholders as soon as practicable after the
     end of each fiscal year an annual report (including a consolidated balance
     sheet and statements of income, shareholders' equity and cash flow of the
     Company and the Subsidiaries for such fiscal year, accompanied by a copy of
     the certificate or report thereon of nationally recognized independent
     certified public accountants);

          (j) to furnish to you two copies of the Registration Statement and the
     F-6 Registration Statement, as initially filed with the Commission, and of
     all amendments thereto (including all exhibits thereto) and sufficient
     copies of the foregoing (other than exhibits) for distribution of a copy to
     each of the other Underwriters;



                                      -26-


          (k) to furnish to you as early as practicable prior to the time of
     purchase and any additional time of purchase, as the case may be, but not
     later than two business days prior thereto, a copy of the latest available
     unaudited interim and monthly consolidated financial statements, if any, of
     the Company and the Subsidiaries which have been read by the Company's
     independent certified public accountants, as stated in their letter to be
     furnished pursuant to Section 7(b) hereof;

          (l) to apply the net proceeds from the sale of the Offered ADSs in the
     manner set forth under the caption "Use of Proceeds" in the Prospectus;

          (m) to pay all costs, expenses, fees and taxes in connection with (i)
     the preparation and filing of the Registration Statement, each Preliminary
     Prospectus, the Prospectus, and any amendments or supplements thereto, and
     the printing and furnishing of copies of each thereof to the Underwriters
     and to dealers (including costs of mailing and shipment), (ii) the
     registration, issue, sale and delivery of the Offered ADSs including any
     stock or transfer taxes and stamp or similar duties payable upon the sale,
     issuance or delivery of the Offered ADSs to the Underwriters, (iii) the
     producing, word processing and/or printing of this Agreement, any Agreement
     Among Underwriters, any dealer agreements, any Powers of Attorney and any
     closing documents (including compilations thereof) and the reproduction
     and/or printing and furnishing of copies of each thereof to the
     Underwriters and (except closing documents) to dealers (including costs of
     mailing and shipment), (iv) the qualification of the Offered ADSs for
     offering and sale under state or foreign laws and the determination of
     their eligibility for investment under state or foreign law as aforesaid
     (including the legal fees and filing fees and other disbursements of
     counsel for the Underwriters) and the printing and furnishing of copies of
     any blue sky surveys or legal investment surveys to the Underwriters and to
     dealers, (v) any listing of the Offered ADSs on any securities exchange or
     qualification of the Offered ADSs for quotation on the National Association
     of Securities Dealers Automated Quotation National Market System ("NASDAQ")
     and any registration thereof under the Exchange Act, (vi) any filing for
     review of the public offering of the Offered ADSs by the NASD, including
     the legal fees and filing fees and other disbursements of counsel to the
     Underwriters, (vii) the fees and disbursements of any transfer agent or
     registrar for the Offered ADSs, (viii) the costs and expenses of the
     Company relating to presentations or meetings undertaken in connection with
     the marketing of the offering and sale of the Offered ADSs to prospective
     investors and the Underwriters' sales forces, including, without
     limitation, expenses associated with the production of road show slides and
     graphics, fees and expenses of any consultants engaged in connection with
     the road show presentations, travel, lodging and other expenses incurred by
     the officers of the Company and any such consultants, and the cost of any
     aircraft chartered in connection with the road show, (ix) the offer and
     sale of the Reserved ADSs, including all costs and expenses of UBS-FinSvc
     and the Underwriters, including the fees and disbursement of counsel for
     the Underwriters, and (x) the performance of the Company's other
     obligations hereunder; provided that the Underwriters shall contribute up
     to US$1,000,000 for the above costs, expenses, fees and taxes incurred by
     the Company in connection with the transactions contemplated hereunder if
     and when such transactions are consummated;



                                      -27-


          (n) not to, and not to announce its intention to, directly or
     indirectly, issue, sell, offer to sell, contract or agree to sell,
     hypothecate, pledge, grant any option to purchase or otherwise dispose of
     or agree to dispose of, directly or indirectly, any Ordinary Shares or ADSs
     or securities convertible into or exchangeable or exercisable for Ordinary
     Shares or warrants or other rights to purchase Ordinary Shares or any other
     securities of the Company that are substantially similar to Ordinary Shares
     or ADSs, or file or cause to be declared effective a registration statement
     under the Act relating to the offer and sale of any Ordinary Shares or
     securities convertible into or exercisable or exchangeable for Ordinary
     Shares or other rights to purchase Ordinary Shares or any other securities
     of the Company that are substantially similar to Ordinary Shares (each such
     action, a "Disposition") for a period of 180 days after the date hereof
     (the "Lock-Up Period"), without the prior written consent of UBS, except
     for (i) the registration of the Offered ADSs and the sales to the
     Underwriters pursuant to this Agreement, (ii) issuances of Ordinary Shares
     upon the exercise of options or warrants disclosed as outstanding in the
     Registration Statement and the Prospectus, and (iii) the issuance of
     employee stock options not exercisable during the Lock-Up Period pursuant
     to stock option plans described in the Registration Statement and the
     Prospectus; notwithstanding the foregoing, if (i) during the period that
     begins on the date that is 15 calendar days plus three business days before
     the last day of the Lock-Up Period and ends on the last day of the Lock-Up
     Period, the Company issues an earnings release or material news or a
     material event relating to the Company occurs, or (ii) prior to the
     expiration of the Lock-Up Period, the Company announces that it will
     release earnings results during the 16-day period beginning on the last day
     of the Lock-Up Period, the restrictions imposed by this Section 5(n) shall
     continue to apply until the expiration of the date that is 15 calendar days
     plus three business days after the date on which the issuance of the
     earnings release or the material news or material event occurs;

          (o) to use its best efforts to effect and maintain the quotation of
     the Offered ADSs on the NASDAQ and to file with the NASDAQ all documents
     and notices required by the NASDAQ of companies that are traded on the
     NASDAQ and quotations for which are reported by the NASDAQ;

          (p) to maintain a transfer agent and, if necessary under the
     jurisdiction of incorporation of the Company, a registrar for the Ordinary
     Shares;

          (q) to ensure that the Directed Shares will be restricted from sale,
     transfer, assignment, pledge or hypothecation for such period and to such
     extent as may be required by the NASD and its rules; and to comply with all
     applicable securities and other applicable laws, rules and regulations in
     each jurisdiction in which the Reserved ADSs are offered in connection with
     the Directed Share Program;

          (r) if the Offered ADSs are not delivered for any reason other than
     the termination of this Agreement pursuant to the fifth paragraph of
     Section 9 hereof or the default by one or more of the Underwriters in its
     or their respective obligations hereunder, in addition to paying the
     amounts described in Section 5(m) hereof, to reimburse the Underwriters for
     all of their out-of-pocket expenses, including the fees and disbursements
     of their counsel;



                                      -28-


          (s) to file with the NASD, the NASDAQ, the Commission and any other
     governmental or regulatory agency, authority or instrumentality in the
     Cayman Islands, the United States, the PRC, as may be required, such
     reports, documents, agreements and other information which the Company may
     from time to time be required to file, including those relating to the
     implementation and payment of dividends or other distributions on the
     Offered ADSs;

          (t) not to be or become, within one year of the time of purchase, an
     "investment company" as defined in the Investment Company Act;

          (u) not to (and to use its best efforts to cause its affiliates not
     to) take, directly or indirectly, any action which is designed to or which
     constitutes or that might reasonably be expected to cause or result in
     stabilization or manipulation of the price of any security of the Company;

          (v) (i) not to attempt to avoid any judgment obtained by it or denied
     to it in a court of competent jurisdiction outside the Cayman Islands; (ii)
     following the consummation of the offering of the Offered ADSs, to use its
     best efforts to obtain and maintain all approvals required in the Cayman
     Islands to pay and remit outside the Cayman Islands all dividends declared
     by the Company and payable on the Ordinary Shares; and (iii) to use its
     best efforts to obtain and maintain all approvals required in the Cayman
     Islands for the Company to acquire sufficient foreign exchange for the
     payment of dividends and all other relevant purposes;

          (w) to indemnify and hold harmless the Underwriters against any
     documentary, stamp or similar issue tax, including any interest and
     penalties, on the creation, issue and sale of the Offered ADSs and on the
     execution and delivery of this Agreement; to make all payments to be made
     by the Company hereunder without withholding or deduction for or on account
     of any present or future taxes, duties or governmental charges whatsoever
     unless the Company is compelled by law to deduct or withhold such taxes,
     duties or charges, in which event, to pay such additional amounts as may be
     necessary in order that the net amounts received after such withholding or
     deduction shall equal the amounts that would have been received if no
     withholding or deduction had been made; provided, however, that the Company
     shall not be liable for any taxes, duties or governmental charges that
     arise as a result of the distribution of the shares or ADSs by any
     underwriters in a manner other than that is customary in such transactions;

          (x) upon request of any Underwriter, to furnish, or cause to be
     furnished, to such Underwriter an electronic version of the Company's
     trademarks, servicemarks and corporate


                                      -29-


     logo for use on the website, if any, operated by such Underwriter for the
     purpose of facilitating the on-line offering of the ADSs (the "License");
     provided, however, that the License is granted solely for the purpose
     described above, is granted without fee and may not be assigned or
     transferred to any person other than affiliates of such Underwriter; and

          (y) to comply with all applicable securities and other applicable
     laws, rules and regulations, including, without limitation, the
     Sarbanes-Oxley Act, and to use its best efforts to cause the Company's
     directors and officers, in their capacities as such, to comply with all
     applicable securities and other applicable laws, rules and regulations,
     including, without limitation, the Sarbanes-Oxley Act.

     6.   Certain Covenants of the Selling Shareholders. The Selling
Shareholders hereby agree that:

          (a) the Selling Shareholders, severally and not jointly, will pay all
     expenses incident to the performance of their respective obligations under,
     and the consummation of the transactions contemplated by this Agreement,
     including (i) any stamp duties, capital duties and stock transfer taxes, if
     any, payable upon the sale of the Selling Shareholder ADSs to the
     Underwriters, (ii) the fees and disbursements of their respective counsel
     and accountants, except for the fees and expenses, if any, incurred by
     Sullivan & Cromwell LLP on behalf of the Selling Shareholders which will be
     borne by the Company and (iii) any fees and expenses of the Custodian and
     the Depositary in connection with the sale by the Selling Shareholders of
     the Selling Shareholder ADSs;

          (b) prior to any time of purchase, each Selling Shareholder shall
     deposit, or cause to be deposited on its behalf, the Ordinary Shares with
     the Depositary in accordance with the provisions of the Deposit Agreement
     and otherwise to comply with the Deposit Agreement so that ADRs evidencing
     the Selling Shareholder ADSs will be executed (and, if applicable,
     countersigned) and issued by the Depositary against receipt of such
     Ordinary Shares and delivered to the Underwriters at such time of purchase;

          (c) the Selling Shareholders shall not (and shall cause its affiliates
     not to) take, directly or indirectly, any action which is designed to or
     which constitutes or which might reasonably be expected to cause or result
     in stabilization or manipulation of the price of any security of the
     Company or facilitate the sale or resale of the Offered ADSs; and

          (d) the Selling Shareholders will indemnify and hold harmless the
     Underwriters against any documentary, stamp or similar issue tax, including
     any interest and penalties, on the creation, issue and sale of the Offered
     ADSs and on the execution and delivery of this Agreement. All payments to
     be made by the Selling Shareholders hereunder shall be made without
     withholding or deduction for or on account of any present or future taxes,
     duties or governmental charges whatsoever unless the Selling Shareholders
     are compelled by law to


                                      -30-


     deduct or withhold such taxes, duties or charges. In that event, the
     Selling Shareholders shall pay such additional amounts as may be necessary
     in order that the net amounts received after such withholding or deduction
     shall equal the amounts that would have been received if no withholding or
     deduction had been made; provided, however, that such Selling Shareholder
     shall not be liable for any taxes, duties or governmental charges that
     arise as a result of the distribution of the Ordinary Shares or the Offered
     ADSs by any Underwriters in a manner other than that is customary in such
     transactions.

     7.    Conditions of Underwriters' Obligations. The several obligations of
the Underwriters hereunder are subject to the accuracy of the representations
and warranties on the part of the Company and the Selling Shareholders on the
date hereof, at the time of purchase and, if applicable, at the additional time
of purchase, the performance by the Company and the Selling Shareholders of
their obligations hereunder and to the following additional conditions
precedent:

          (a) The Company shall furnish to you at the time of purchase and, if
     applicable, at the additional time of purchase, an opinion of Sullivan &
     Cromwell LLP, United States counsel for the Company and the Selling
     Shareholders, addressed to the Underwriters, and dated the time of purchase
     or the additional time of purchase, as the case may be, with reproduced
     copies for each of the other Underwriters and in form and substance
     satisfactory to the Underwriters, stating that:

               (i) assuming that this Agreement has been duly authorized,
          executed and delivered by the Company and the Selling Shareholders
          under Cayman Islands law, this Agreement has been duly executed and
          delivered by the Company and the Selling Shareholders under New York
          law;

               (ii) assuming that the Deposit Agreement has been duly executed
          and delivered by the Company under Cayman Islands law, the Deposit
          Agreement has been duly executed and delivered by the Company under
          New York law and, assuming due authorization, execution and delivery
          by the Depositary and that each of the Depositary and the Company has
          full power, authority and legal right to enter into and perform its
          obligations thereunder, constitutes a valid and legally binding
          obligation of the Company enforceable in accordance with its terms,
          subject to bankruptcy, insolvency, fraudulent transfer,
          reorganization, moratorium and similar laws of general applicability
          relating to or affecting creditors' rights generally and to general
          principles of equity, except that such counsel need not express any
          opinion with respect to Section [7] of the Deposit Agreement;

               (iii) upon the due issuance by the Depositary of the Offered ADSs
          evidenced by the ADRs against the deposit of Ordinary Shares in
          accordance with the Deposit Agreement and payment therefor in
          accordance with the provisions of this Agreement and the Deposit
          Agreement, such Offered ADSs will be validly issued and persons in
          whose names such ADRs are duly registered will be entitled to the
          rights specified therein and in the Deposit Agreement; the Deposit
          Agreement and the


                                      -31-


          ADRs conform in all material respects to the descriptions thereof
          contained in the Prospectus;

               (iv) the Registration Statement has been declared effective under
          the Act and, to such counsel's knowledge, the Prospectus was filed
          with the Commission pursuant to Rule 424(b) under the Act; and such
          counsel has no knowledge of any stop order having been issued
          suspending the effectiveness of the Registration Statement or of any
          proceedings for that purpose having been instituted or threatened by
          the Commission;

               (v) all regulatory consents, authorizations, approvals and
          filings required to be obtained or made by the Company under the
          federal laws of the United States and the laws of the State of New
          York, as to the Company, for the issuance of the Ordinary Shares and
          the ADRs evidencing the ADSs, as to both the Company and the Selling
          Shareholders, the sale and delivery of the Ordinary Shares or the ADSs
          by the Company and the Selling Shareholders to the Underwriters and
          the deposit with the Depositary of the Ordinary Shares underlying the
          ADSs have been obtained or made;

               (vi) each of (A) the issue and sale of the ADSs and Ordinary
          Shares being delivered at such time of purchase or additional time of
          purchase, (B) the deposit of the Ordinary Shares being deposited by
          the Company and the Selling Shareholders with the Depositary pursuant
          to the Deposit Agreement and (C) the performance by the Company and
          the Selling Shareholders of their obligations under this Agreement and
          by the Company of its obligations under the Deposit Agreement will not
          violate any existing federal law of the United States or law of the
          State of New York applicable to the Company and the Selling
          Shareholders; provided, however, that for the purposes of this
          paragraph, such counsel need not express any opinion with respect to
          federal or state securities laws, other antifraud laws and fraudulent
          transfer laws; provided, further, that insofar as performance by the
          Company and the Selling Shareholders of their obligations under this
          Agreement and by the Company of its obligations under the Deposit
          Agreement is concerned, such counsel need not express any opinion as
          to bankruptcy, insolvency, reorganization, moratorium and similar laws
          of general applicability relating to or affecting creditors' rights;

               (vii) the Company is not and, after giving effect to the offering
          and sale of the Offered ADSs, will not be an "investment company", as
          such terms are defined in the Investment Company Act;


                                      -32-


               (viii) assuming (A) due authorization, execution and delivery of
          this Agreement by the Underwriters and the Deposit Agreement by the
          Depositary and (B) the validity of such actions under Cayman Islands
          law, under the laws of the State of New York relating to submission to
          personal jurisdiction, each of the Company and the Selling
          Shareholders has, pursuant to Section 13 of this Agreement, and the
          Company has pursuant to Section [7.06] of the Deposit Agreement,
          validly and irrevocably submitted to the personal jurisdiction of any
          state or federal court located in the Borough of Manhattan, The City
          of New York, New York (each a "New York Court") in any action arising
          out of or relating to this Agreement, the Deposit Agreement or the
          transactions contemplated hereby and thereby, and has validly and
          irrevocably waived any objection to the venue of a proceeding in any
          such court, has validly waived and agreed not to plead or claim in any
          such court that any such proceeding brought in such court has been
          brought in an inconvenient forum, has validly waived any immunity
          (sovereign or otherwise) relating to any such proceeding, and has
          validly and irrevocably appointed the Authorized Agent (as defined
          herein) as its authorized agent for the purpose described in Section
          13 of this Agreement (as to both the Company and the Selling
          Shareholders) and Section [7.06] of the Deposit Agreement (as to the
          Company); and service of process effected on such agent in the manner
          set forth in Section 13 of this Agreement (as to the Company and the
          Selling Shareholders) and Section [7.06] of the Deposit Agreement (as
          to the Company) will be effective to confer valid personal
          jurisdiction of such court over the Company and the Selling
          Shareholders, as the case may be, in the New York Courts;

               (ix) upon payment for the Offered ADSs sold hereunder and the
          delivery to DTC or its agent of the Offered ADSs in book entry form
          registered in the name of Cede & Co. or such other nominee designated
          by DTC, both as provided for in this Agreement, and the crediting of
          the Offered ADSs to the Underwriters' accounts with DTC, Cede & Co. or
          such other nominee designated by DTC, the Underwriters will acquire a
          valid "security entitlement" (within the meaning of New York Uniform
          Commercial Code Section 8-102) to such Offered ADSs, and no action
          based on an "adverse claim" (as defined in New York Uniform Commercial
          Code Section 8-102) may be asserted against the Underwriters with
          respect to such security entitlement if, at such time, the
          Underwriters do not have notice of any adverse claim within the
          meaning of New York Uniform Commercial Code Section 8-105;

               (x) each Selling Shareholder has duly executed and delivered the
          Power of Attorney and Custody Agreement; and the Power of Attorney and
          Custody Agreement of each Selling Shareholder constitutes a valid and
          binding agreement of such


                                      -33-


          Selling Shareholder, enforceable in accordance with its terms, subject
          to applicable bankruptcy, insolvency, reorganization, moratorium or
          other similar laws relating to or affecting creditors' rights and
          remedies generally, and subject, as to enforceability, to general
          equitable principles (whether relief is sought in a proceeding at law
          or in equity) and except as rights to indemnification and contribution
          thereunder may be limited by applicable law or public policy relating
          thereto;

               (xi) each of the Selling Shareholder has the right, power and
          authority to enter into and to perform its obligations under this
          Agreement and to sell, transfer, assign and deliver the Selling
          Shareholder ADSs to be sold by such Selling Shareholder hereunder;

               (xii) upon the delivery of and payment for the Selling
          Shareholder ADSs as contemplated in this Agreement, each of the
          Underwriters will receive valid marketable title to the Selling
          Shareholder ADSs purchased by it from such Selling Shareholder, free
          and clear of any pledge, lien, security interest, encumbrance, claim
          or equitable interest; in rendering such opinion, such counsel may
          assume that the Underwriters purchase such Selling Shareholder ADSs
          for value, in good faith and without notice of any adverse claim, as
          such terms are defined in the Uniform Commercial Code in effect in the
          State of New York.

               In addition, such counsel shall state that such counsel has
     participated in conferences with officers and other representatives of the
     Company, representatives of the independent public accountants of the
     Company and representatives of the Underwriters at which the contents of
     the Registration Statement and the Prospectus were discussed and, although
     such counsel is not passing upon and does not assume responsibility for the
     accuracy, completeness or fairness of the statements contained in the
     Registration Statement or the Prospectus, the Registration Statement, as of
     its effective date, and the Prospectus, as of its date, appeared on their
     face to be appropriately responsive in all material respects to the
     requirements of the Act; nothing that has come to such counsel's attention
     in the course of their review of the Registration Statement and the
     Prospectus and in the course of the limited procedures, described in such
     counsel's letter, has caused such counsel to believe that the Registration
     Statement, as of its effective date, or the Prospectus, as of its date,
     (other than the financial statements, as to which such counsel need not
     express any opinion) contained any untrue statement of a material fact or
     omitted to state a material fact required to be stated therein or necessary
     to make the statements therein not misleading; and nothing that has come to
     such counsel's attention in the course of the limited procedures described
     in its letter has caused such counsel to believe that the Prospectus, as of
     such time of purchase or additional time of purchase, (other than the
     financial statements, as to which such counsel need not express any
     opinion) contains any untrue statement of a material fact or omits to state
     any material fact required to be stated therein or necessary to make the
     statements therein, in light of the circumstances under which they were
     made, not misleading. Such counsel may state that they do not assume
     responsibility for the accuracy, completeness or fairness of the statements
     contained in the Registration Statement or the Prospectus, except for those
     made under the captions "Description of American Depositary Receipts", in
     the Prospectus, insofar as they relate


                                      -34-


     to the provisions of the ADRs and the Deposit Agreement described therein,
     "Taxation - United States", insofar as they relate to provisions of Federal
     tax laws of the United States described therein, and "Underwriting",
     insofar as they relate to the provisions of this Agreement.

          (b) The Company shall furnish to you at the time of purchase and, if
     applicable, at the additional time of purchase, an opinion of Maples and
     Calder Asia, Cayman Islands counsel for the Company and the Selling
     Shareholders, addressed to the Underwriters, and dated the time of purchase
     or the additional time of purchase, as the case may be, with reproduced
     copies for each of the other Underwriters, stating that:

               (i) the Company has been duly incorporated and is validly
          existing as an exempted company with limited liability and is validly
          existing and in good standing under the laws of the Cayman Islands,
          with full corporate power and authority to own, lease and operate its
          property and assets and to conduct its business as described in the
          Registration Statement and the Prospectus, to execute and deliver this
          Agreement and to issue, sell and deliver the Offered ADSs as
          contemplated herein;

               (ii) the Company has an authorized capital as set forth in the
          Registration Statement and the Prospectus; all of the issued shares in
          the capital of the Company (including the Ordinary Shares underlying
          the Offered ADSs when issued and sold in accordance with the terms of
          this Agreement) have been duly and validly authorized and issued, are
          fully paid and non-assessable, are not subject to any pre-emptive or
          similar rights under Cayman Islands law or the Memorandum and Articles
          of Association and conform to the description thereof contained in the
          Prospectus;

               (iii) when issued and sold in accordance with the terms of this
          Agreement, the Ordinary Shares underlying the Offered ADSs have been
          duly authorized and validly issued and are fully paid and
          non-assessable;

               (iv) all the outstanding issued preferred shares of the Company
          have been duly authorized and validly issued and are fully paid and
          non-assessable;

               (v) the execution and delivery of this Agreement and the Deposit
          Agreement by the Company and the performance of its obligations
          thereunder, the Registration Statement, the F-6 Registration
          Statement, the 8-A Registration Statement, the Prospectus, and the
          filing of the Registration Statement, the F-6 Registration Statement,
          the 8-A Registration Statement and the Prospectus have been duly
          authorized and approved by all necessary corporate action of the
          Company, and the execution and delivery of this Agreement and the
          Deposit Agreement by the Company and the performance of its
          obligations hereunder and thereunder do not violate, conflict with or
          result in a breach of any of the terms or provisions of its Memorandum
          and Articles or any law, public rule or regulation applicable to the
          Company in the Cayman Islands currently in force and do not violate,
          conflict with or result in a breach of any existing order or decree
          authority or agency or any official body in the Cayman Islands;



                                      -35-


               (vi) this Agreement and the Deposit Agreement have been duly
          executed and delivered for and on behalf of the Company and constitute
          legal, valid and binding obligations of the Company enforceable in the
          Cayman Islands in accordance with their terms except insofar as such
          enforcement thereof may be limited by applicable bankruptcy,
          insolvency, reorganization, moratorium and similar laws of general
          applicability relating to or affecting creditors' rights and to
          general equity principles;

               (vii) the Registration Statement and the F-6 Registration
          Statement has been duly executed by and on behalf of the Company;

               (viii) no authorizations, consents, orders, permissions or
          approvals are required from any governmental authorities or agencies
          or other official bodies in the Cayman Islands and no notice to or
          other filing with or action by any Cayman Islands governmental
          authority or regulatory body is required in connection with:

                    (a) the execution and delivery of this Agreement and the
               Deposit Agreement;

                    (b) the performance of any obligation under this Agreement
               and the Deposit Agreement; and

                    (c) the payment of any amount under this Agreement and the
               Deposit Agreement;

               (ix) it is not necessary to ensure the legality, validity,
          enforceability or admissibility in evidence of this Agreement or the
          Deposit Agreement that any document be filed, recorded or enrolled
          with any governmental department, agency or other authority in the
          Cayman Islands;

               (x) The statements in the Prospectus under "Dividend policy",
          "Enforceability of civil liabilities", "Management", "Description of
          share capital", "Principal and selling shareholders",
          "Capitalization", and "Taxation" and the statements in the
          Registration Statement under Item 14, insofar as such statements
          constitute summaries of the legal matters, documents or proceedings
          referred to therein, in each case to the extent, and only to the
          extent, governed by the laws of the Cayman Islands, fairly present the
          information and summarize the matters referred to therein;

               (xi) no stamp duties or other similar taxes or charges are
          payable under the laws of the Cayman Islands in respect of:

                    (a) the execution or delivery of this Agreement and the
               Deposit Agreement or the performance by any of the parties of
               their respective obligations or enforcement of this Agreement or
               the Deposit Agreement unless they are executed in or thereafter
               brought within the jurisdiction of the Cayman Islands (e.g. for
               the purposes of enforcement) in which case stamp duty of


                                      -36-


               CI$2.00 (US$2.44) for each of this Agreement and the Deposit
               Agreement will be payable; or

                    (b) the issuance and sale of the Ordinary Shares by the
               Company or the sale by Selling Shareholders of their respective
               shares pursuant to the terms of this Agreement; or

                    (c) the entering of the Depositary as the registered holder
               of the Ordinary Shares underlying the Offered ADSs; or

                    (d) the deposit with the custodian on behalf of the
               Depository of the Offered ADSs against the issuance of ADSs for
               the account of the Underwriters on the date hereof; or

                    (e) the sale and delivery outside of the Cayman Islands by
               the Underwriters of the Offered ADSs to the initial purchasers
               thereof.

               (xii) There are currently no taxes or other charges or deductions
          payable (by withholding or otherwise) to the Cayman Islands government
          or any taxing authority thereof on or by virtue of:

                    (a) the execution, delivery, performance or enforcement of
               this Agreement and the Deposit Agreement;

                    (b) any payment of any nature to be made by the Company
               under this Agreement or the Deposit Agreement;

                    (c) the issuance and sale of the Ordinary Shares by the
               Company; or

                    (d) the payment of dividends and other distributions
               declared and payable on the Ordinary Shares;

               (xiii) the Cayman Islands currently have no income, corporate or
          capital gains tax and no estate duty, inheritance tax or gift tax;

               (xiv) the choice of the laws of New York to govern this Agreement
          and the Deposit Agreement will be upheld as a valid choice of law
          under the laws of the Cayman Islands and the courts of the Cayman
          Islands would uphold such choice of law in a suit on this Agreement or
          the Deposit Agreement brought in the courts of the Cayman Islands,
          assuming it is so pleaded; an action against the Company in the Cayman
          Islands under this Agreement or the Deposit Agreement could be
          instituted in the Grand Court, which has jurisdiction over the
          Company, without first having to obtain a judgment in respect of this
          Agreement or the Deposit Agreement in a court of New York or any other
          relevant jurisdiction; in the event of any proceedings being brought
          in the Cayman Islands courts in respect of a monetary obligation
          expressed to be payable in a currency other than Cayman Islands
          dollars, a Cayman Islands court


                                      -37-


          would give judgment expressed as an order to pay such currency or its
          Cayman Islands dollar equivalent at the time of payment or enforcement
          of the judgment;

               (xv) the submission to the jurisdiction of the courts sitting in
          New York, the appointment of CT Corporation System to accept service
          of process in such jurisdiction and the waiver by the Company of any
          objection to the venue of a proceeding in a New York court, pursuant
          to this Agreement or the Deposit Agreement, are legal, valid and
          binding on the Company;

               (xvi) no approvals are currently required from any governmental
          department, agency or other authority in the Cayman Islands in order
          for the Company to pay dividends declared by the Company to the
          holders of Ordinary Shares, including the Depositary;

               (xvii) although there is no statutory enforcement in the Cayman
          Islands of judgments obtained in New York, the courts of the Cayman
          Islands will recognize and enforce a judgment of a foreign court of
          competent jurisdiction in respect of any legal suit or proceeding
          arising out of or relating to this Agreement or the Deposit Agreement
          without retrial on the merits based on the principle that a judgment
          of a competent foreign court imposes upon the judgment debtor an
          obligation to pay the sum for which judgment has been given provided
          that such judgment is final and conclusive, for a liquidated sum, not
          in respect of taxes or a fine or penalty, is not inconsistent with a
          Cayman Islands judgment in respect of the same matter, and was not
          obtained in a manner and is not of a kind the enforcement of which is
          contrary to the public policy of the Cayman Islands; a Cayman Islands
          court may stay proceedings if concurrent proceedings are being brought
          elsewhere; a foreign judgment may be final and conclusive even if
          subject to appeal; however, if appealable, a Cayman Islands court may
          stay enforcement until such appeal has been heard;

               (xviii) based solely on such counsel's inspection of the Register
          of Writs and Other Originating process in the Grand Court of the
          Cayman Islands from the date of incorporation of the Company there
          were no actions or petitions pending against the Company in the courts
          of the Cayman Islands as at close of business in the Cayman Islands on
          [_______], 2004; a search at the Companies Registry in the Cayman
          Islands would not reveal any order or resolution for the winding up of
          the Company because under Cayman Islands law the records kept by the
          Registrar of Companies are not documents of public record; the
          enquiries referred to above which such counsel has made at the Grand
          Court of the Cayman Islands have revealed no record of the
          presentation of any winding up petition in respect of the Company;
          such counsel assumes that there has been no change in this position
          since the date on which the enquiries were made;

               (xix) there is no exchange control legislation under Cayman
          Islands law and accordingly there are no exchange control regulations
          imposed under Cayman Islands law;



                                      -38-


               (xx) the Company is not entitled to any immunity under the laws
          of the Cayman Islands whether characterized as sovereign immunity or
          otherwise for any legal proceedings in the Cayman Islands to enforce
          or to collect upon this Agreement and the Deposit Agreement;

               (xxi) so far as the law of the Cayman Islands is concerned, this
          Agreement and the Deposit Agreement are in proper form under the laws
          of the Cayman Islands for the enforcement thereof against the Company,
          except that the enforcement thereof may be limited by applicable
          bankruptcy, insolvency, reorganization, moratorium and similar laws of
          general applicability relating to or affecting creditors' rights and
          to general equity principles;

               (xxii) such counsel has reviewed the register of members of the
          Company. As of the date hereof there are no entries or notations
          indicating any third party interests including any security interest
          on the register of members of the Company;

               (xxiii) the Underwriters will not be treated as resident,
          domiciled or carrying on or transacting business or subject to
          taxation in the Cayman Islands or in violation of any law thereof
          solely by reason of the negotiation, preparation or execution of this
          Agreement or the entering into of or the exercise of their rights or
          the performance of their obligations under this Agreement; and

               (xxiv) The Underwriters will not be required to be licensed,
          qualified or otherwise entitled to carry on business in the Cayman
          Islands in order to enforce their rights under, or as a consequence of
          the execution, delivery and performance of this Agreement or the
          Deposit Agreement.

          (c) The Company shall furnish to you at the time of purchase and, if
     applicable, at the additional time of purchase, an opinion of Llinks Law
     Office, PRC counsel for the Company, addressed to the Underwriters, and
     dated the time of purchase or the additional time of purchase, as the case
     may be, with reproduced copies for each of the other Underwriters, stating
     that:

               (i) KongZhong Beijing is a company duly incorporated with limited
          liability and validly existing with legal person status and in good
          standing under the laws of the PRC. KongZhong Beijing is duly
          qualified to transact business within the approved business scope
          specified in its business license. The articles of association of
          KongZhong Beijing comply with the requirements of applicable PRC laws
          and are in full force and effect. No steps have been or are being
          taken and no order or resolution has been made or passed to appoint a
          receiver, liquidator or similar officer of, or to wind up or dissolve,
          KongZhong Beijing.

               (ii) All of the registered capital of KongZhong Beijing have been
          fully paid and are 100% owned directly by the Company, and to the best
          knowledge of us after due inquiry, free and clear of all liens,
          encumbrances or claims. The liability of


                                      -39-


          the Company in respect of equity interests in KongZhong Beijing is
          limited to its investments therein.

               (iii) Beijing AirInbox is a company duly incorporated with
          limited liability and validly existing with legal person status and in
          good standing under the laws of the PRC. Beijing AirInbox is duly
          qualified to transact business within the approved business scope
          specified in its business license, except as otherwise indicated in
          such counsel's opinion. The articles of association of Beijing
          AirInbox comply with the requirements of applicable PRC laws and are
          in full force and effect. No steps have been or are being taken and no
          order or resolution has been made or passed to appoint a receiver,
          liquidator or similar officer of, or to wind up or dissolve Beijing
          AirInbox.

               (iv) All of the registered capital of Beijing AirInbox have been
          fully paid and are owned directly by Yunfan Zhou (10%), Songlin Yang
          (42%), Yang Cha (45%) and Zhen Huang (3%), and to the best knowledge
          of such counsel after due inquiry, free and clear of all liens,
          encumbrances or claims, except for the pledge and the equity interests
          option created under the Structuring Documents.

               (v) Beijing Boya Wuji is a company duly incorporated with limited
          liability and validly existing under the laws of the PRC. Beijing Boya
          Wuji is duly qualified to transact business within the approved
          business scope specified in its business license, except as otherwise
          indicated in such counsel's opinion. The articles of association of
          Beijing Boya Wuji comply with the requirements of applicable PRC laws
          and are in full force and effect. No steps have been or are being
          taken and no order or resolution has been made or passed to appoint a
          receiver, liquidator or similar officer of, or to wind up or dissolve
          Beijing Boya Wuji.

               (vi) All of the registered capital of Beijing Boya Wuji have been
          fully paid and are owned directly by Yunfan Zhou (50%) and Zhen Huang
          (50%), and to the best knowledge of such counsel after due inquiry,
          free and clear of all liens, encumbrances or claims except for the
          pledge and the equity interests option created under the Structuring
          Documents.

               (vii) All PRC governmental approvals, licenses, permits,
          consents, authorizations, clearances and qualifications ("PRC
          Approvals") required for the establishment and maintenance of the
          enterprise legal person status of each of KongZhong Beijing, Beijing
          AirInbox and Beijing Boya Wuji respectively have been duly issued and
          obtained and all such PRC Approvals are valid and in full force and
          effect, have not been revoked, withdrawn, suspended or cancelled. Each
          of KongZhong Beijing, Beijing AirInbox and Beijing Boya Wuji
          respectively has complied with all applicable registration and filing
          requirements under PRC laws for its establishment and maintenance of
          its status and existence as an enterprise legal person.



                                      -40-


               (viii) KongZhong Beijing has full power and authority and
          possesses all Approvals necessary to own, use, lease and operate its
          assets and conduct its business as presently conducted.

               (ix) Beijing AirInbox has full power and authority and possesses
          all PRC Approvals necessary to own, use, lease and operate its assets
          and conduct its business except for an inter-regional
          telecommunication value-added services license for which Beijing
          AirInbox is in the process of application with the Ministry of
          Information Industry.

               (x) Beijing Boya Wuji has been established and possesses all PRC
          Approvals necessary to own, use, lease and operate its assets and
          conduct its business except for an inter-regional telecommunication
          value-added services license for which Beijing Boya Wuji is in the
          process of application with the Ministry of Information Industry.

               (xi) Each of KongZhong Beijing, Beijing AirInbox and Beijing Boya
          Wuji (each a "PRC Entity") possesses all valid licenses in full force
          and effect or otherwise has the legal right to use, or can acquire on
          reasonable terms, all material licenses, inventions, copyrights,
          know-how, trademarks, service marks and trade names currently employed
          by them, and none of KongZhong Beijing, Beijing AirInbox and Beijing
          Boya Wuji has received any notice of infringement of or conflict with
          asserted rights of others with respect to any of the foregoing that,
          individually or in the aggregate, if the subject of an unfavorable
          decision, ruling or finding, would result in a material adverse effect
          on the its business or operations.

               (xii) Each PRC Entity has the corporate power to enter into and
          perform its obligations under each of the Structuring Documents to
          which it is a party and has taken all necessary corporate action to
          authorize the execution, delivery and performance of, and has
          authorized, executed and delivered, each of the Structuring Documents
          to which it is a party. Each of the Structuring Documents to which
          such PRC Entity is a party constitutes a valid and legally binding
          obligation of that PRC Entity in accordance with its terms, subject as
          to enforceability to bankruptcy, insolvency, reorganization, statute
          of limitations and similar laws of general applicability relating to
          or affecting creditors' rights and to general equity principles. To
          ensure the legality, validity, enforceability or admissibility in
          evidence of each of the Structuring Documents in the PRC, except as
          otherwise indicated in such counsel's opinion, it is not necessary
          that any such document be filed or recorded with any court or other
          authority in the PRC or that any stamp or similar tax be paid on or in
          respect of any of the Structuring Documents.

               (xiii) Each of the shareholders of Beijing AirInbox has executed
          and delivered each of the Structuring Documents to which he or she is
          a party. Each of the Structuring Documents to which each of the
          shareholders of Beijing AirInbox is a party constitutes a valid and
          legally binding obligation of such shareholder in accor-


                                      -41-


          dance with its terms, subject as to enforceability to bankruptcy,
          insolvency, reorganization, statute of limitations and similar laws of
          general applicability relating to or affecting creditors' rights and
          to general equity principles.

               (xiv) Each of the shareholders of Beijing Boya Wuji has executed
          and delivered each of the Structuring Documents to which he or she is
          a party, Each of the Structuring Documents to which each of the
          Shareholders of Beijing Boya Wuji is a party constitutes a valid and
          legally binding obligation of such shareholder in accordance with its
          terms, subject as to enforceability to bankruptcy, insolvency,
          reorganization, statute of limitations and similar laws of general
          applicability relating to or affecting creditors' rights and to
          general equity principles.

               (xv) To the best knowledge of such counsel, the execution and
          delivery by each PRC Entity of, and the performance by each PRC Entity
          of its obligations under, each of the Structuring Documents to which
          it is a party and the consummation by each PRC Entity of the
          transactions contemplated therein (A) will not conflict with or result
          in a breach or violation of any of the terms or provisions of, or
          constitute a default under, any existing indenture, mortgage, deed of
          trust, loan agreement or other material agreement or instrument to
          which each PRC Entity is a party or by which each PRC Entity is bound
          or to which any of the properties or assets of each PRC Entity is
          bound or to which any of the properties or assets of each PRC Entity
          is subject, except for such conflicts, breaches, violations or
          defaults which would not (I) individually or in aggregate, have a
          material adverse effect on the general affairs, management,
          shareholders' equity, results of operations or position, financial or
          otherwise, of each PRC Entity, or (II) affect the validity of, or have
          any material adverse effect on, the issue and sale of the Offered ADSs
          or the other transactions contemplated in connection with the
          Offering; (B) will not result in any violation of the provisions of
          the articles of association or business license of each PRC Entity;
          and (C) will comply with and not result in any violation of any laws
          of the PRC.

               (xvi) The execution and delivery by each of the shareholders of,
          and the performance by each of the shareholders of Beijing AirInbox of
          his or her obligations under each of the Structuring Documents to
          which each of the shareholders of Beijing AirInbox is a party and the
          consummation by each of the shareholders of Beijing AirInbox of the
          transactions contemplated therein will not result in any violation of
          any laws of the PRC.

               (xvii) The execution and delivery by each of the shareholders of,
          and the performance by each of the shareholders of Beijing Boya Wuji
          of his or her obligations under each of the Structuring Documents to
          which each of the shareholders of Beijing Boya Wuji is a party and the
          consummation by each of the shareholders of Beijing Boya Wuji of the
          transactions contemplated therein will not result in any violation of
          any laws of the PRC.



                                      -42-


               (xviii) To the best of such counsel's knowledge after due
          inquiry, there are no legal, administrative, arbitration or other
          proceedings which have challenged the legality, effectiveness or
          validity of the Structuring Documents or the transactions contemplated
          thereunder individually or taken as a whole and, no such proceedings
          are threatened or contemplated by any governmental or regulatory
          authority or any other person. To the best of such counsel's
          knowledge, none of KongZhong Beijing, Beijing AirInbox and Beijing
          Boya Wuji has received any oral or written notice of proceedings
          relating to the suspension, revocation or modification of any of its
          respective PRC Approvals.

               (xix) To the best knowledge of such counsel after due inquiry,
          each of the Registration Statement and the Prospectus describes (i)
          all material Chinese legal or governmental proceedings pending or
          threatened to which the Company, KongZhong Beijing, Beijing AirInbox
          or Beijing Boya Wuji is a party or to which any of the properties of
          the Company, KongZhong Beijing, Beijing AirInbox or Beijing Boya Wuji
          is subject and (ii) all statutes, regulation, contracts or other
          documents which are material to the Company, KongZhong Beijing,
          Beijing AirInbox or Beijing Boya Wuji.

               (xx) To the best knowledge of such counsel, KongZhong Beijing,
          Beijing AirInbox and Beijing Boya Wuji are not (A) in violation of
          their respective articles of association, business licenses and any
          other constitutional documents or (B) in material default in the
          performance or observance of any material agreement known to such
          counsel or by which any of their respective material properties may be
          bound.

               (xxi) None of KongZhong Beijing, Beijing AirInbox and Beijing
          Boya Wuji will have any material PRC tax liability as a consequence of
          the sale of the Offered ADSs hereunder that have not been disclosed in
          the Prospectus.

               (xxii) Other than as set forth in the Prospectus, all dividends
          and other distributions declared and payable in respect of the capital
          stock of KongZhong Beijing may under the current PRC laws and
          regulations be paid in Renminbi, that may be converted into foreign
          currency that may be freely transferred out of the PRC, and all such
          dividends and other distributions will not be subject to withholding
          or other taxes under PRC laws and regulations and are otherwise free
          and clear of any other tax, withholding or deduction in the PRC and
          without the necessity of obtaining any PRC Approvals.

               (xxiii) No facts came to such counsel's attention that caused
          such counsel to believe that, the statements in the Prospectus under
          "Risk Factors - Risks Relating to Our Business - PRC laws and
          regulations restrict foreign investment in China's telecommunications
          services industry, and substantial uncertainties exist with respect to
          the contractual arrangements with Beijing AirInbox and Beijing Boya
          Wuji due to uncertainties regarding the interpretation and application
          of current or future PRC laws and regulations", "Risk Factors - Risks
          Relating to Our Business - Our contrac-


                                      -43-


          tual arrangements with Beijing AirInbox and Beijing Boya Wuji may not
          be as effective in providing operational control as direct ownership
          of this businesses," "Risk Factors - Risks Relating to Our Industry -
          The laws and regulations governing the wireless value-added
          telecommunications and Internet industry in China are developing and
          subject to future changes. Substantial uncertainties exist as to the
          interpretation and implementation of those laws and regulations,"
          "Risk Factors - Risks Related to People's Republic of China,"
          "Enforceability of Civil Liabilities" and "Regulation", insofar as
          they purport to describe the provisions of PRC laws and documents
          referred to therein, at the respective time they became effective,
          contained an untrue statement of a material fact or omitted to state a
          material fact required to be stated therein or necessary to make the
          statements therein not misleading.

          (d) You shall have received at the time of purchase and, if
     applicable, at the additional time of purchase, the favorable opinion of
     Morrison & Foerster LLP, United States counsel for the Underwriters, dated
     the time of purchase or the additional time of purchase, as the case may
     be, covering such matters as the Underwriters may require, and the Company
     shall have furnished to such counsel such documents as they may reasonably
     request for the purpose of enabling them to pass upon such matters. In
     rendering such opinion, Morrison & Foerster LLP may rely as to the
     incorporation of the Company and all other matters governed by Cayman
     Islands law upon the opinion of Maple and Calder Asia, referred to above
     and all other matters governed by PRC law upon the opinion of Llinks Law
     Office referred to above.

          (e) You shall have received at the time of purchase and, if
     applicable, at the additional time of purchase, the favorable opinion of
     Haiwen & Partners, PRC counsel for the Underwriters, dated the time of
     purchase or the additional time of purchase, as the case may be, covering
     such matters as the Underwriters may reasonably request, and such counsel
     shall have received such documents and information as they may reasonably
     request to enable them to pass upon such matters.

          (f) You shall have received at the time of purchase and, if
     applicable, at the additional time of purchase, the favorable opinion of
     Patterson, Belknap, Webb & Tyler LLP, United States counsel for the
     Depositary, to the effect that:

               (i) the Deposit Agreement has been duly authorized, executed and
          delivered by the Depositary and, assuming due authorization, execution
          and delivery thereof by the Company, constitutes the valid and legally
          binding agreement of the Depositary, enforceable against the
          Depositary in accordance with its terms except to the extent that (a)
          enforcement thereof may be limited by (1) bankruptcy, insolvency
          (including, without limitation, all laws relating to fraudulent
          transfers), reorganization, moratorium or similar laws now or
          hereafter in effect relating to or affecting creditors' rights
          generally, and (2) general principles of equity (regardless of whether
          enforceability is considered in a proceeding in law or in equity), and
          (b) rights to indemnity and contribution thereunder may be limited by
          United States federal or state securities laws or public policy;



                                      -44-


               (ii) the Depositary has full power and authority and legal right
          to execute and deliver the Deposit Agreement and to perform its
          obligations thereunder;

               (iii) upon due issuance by the Depositary against delivery of the
          Ordinary Shares in respect thereof in accordance with the provisions
          of the Deposit Agreements, the ADRs will be duly and validly issued
          and will entitle the registered holders of the ADRs evidencing the
          ADSs to the rights specified in the Deposit Agreement; and

               (iv) the F-6 Registration Statement (File No. 333-116288) as
          amended has been declared effective and complies as to form in all
          material respects with the requirements of the Act; to the best of
          such counsel's knowledge, no stop order suspending the effectiveness
          of the F-6 Registration Statement or any part thereof has been issued
          and no proceedings for that purpose have been instituted or are
          pending or contemplated under the Act.

          (g) You shall have received one or more opinions, as contemplated in
     the Power of Attorney dated as of the time of purchase or such additional
     time of purchase, as the case may be, of counsel for each Selling
     Shareholder to the effect that:

               (i) the Selling Shareholder had valid and unencumbered title to
          the Ordinary Shares delivered by the Selling Shareholder to the
          Depositary in accordance with the Deposit Agreement, had full right,
          power and authority to sell, assign, transfer and deliver the Selling
          Shareholder ADSs delivered by the Selling Shareholder at such time of
          purchase hereunder and the Selling Shareholder ADSs received by the
          Depositary were unencumbered; and the several Underwriters have
          acquired valid and unencumbered title to the Selling Shareholder ADSs
          purchased by them at such time of purchase hereunder;

               (ii) no consent, approval, authorization or order of, or filing
          with, any governmental agency or body or any court is required to be
          obtained or made by the Selling Shareholder for the consummation of
          the transactions contemplated by the Custody Agreement and this
          Agreement in connection with the sale of the Selling Shareholder ADSs,
          except such as have been obtained and made under the Act and the
          Exchange Act and such as may be required under state or foreign
          securities or blue sky laws;

               (iii) the execution, delivery and performance of the Custody
          Agreement and this Agreement and the consummation of the transactions
          therein and herein contemplated will not result in a material breach
          or violation of any of the terms and provisions of, or constitute a
          default under, any statute, any rule, regulation or order of any
          governmental agency or body or any court having jurisdiction over the
          Selling Shareholder or any of his/her/its properties or any agreement
          or instrument to which the Selling Shareholder is a party or by which
          the Selling Shareholder is bound or to


                                      -45-


          which any of the properties of the Selling Shareholder is subject, or
          the charter or by-laws of any Selling Shareholder which is a
          corporation;

               (iv) the Power of Attorney and related Custody Agreement with
          respect to the Selling Shareholder has been duly authorized, executed
          and delivered by the Selling Shareholder and constitute valid and
          legally binding obligations of the Selling Shareholder enforceable in
          accordance with their terms, subject to bankruptcy, insolvency,
          fraudulent transfer, reorganization, moratorium and similar laws of
          general applicability relating to or affecting creditors' rights and
          to general equity principles; and

               (v) this Agreement has been duly authorized, executed and
          delivered under New York law by an Attorney-in-Fact on behalf of the
          Selling Shareholder.

          (h) You shall have received from Deloitte Touche Tohmatsu letters
     dated, respectively, the date of this Agreement, the time of purchase and,
     if applicable, the additional time of purchase, and addressed to the
     Underwriters (with reproduced copies for each of the Underwriters) in the
     forms heretofore approved by UBS.

          (i) No Prospectus or amendment or supplement to the Registration
     Statement, the F-6 Registration Statement or the Prospectus shall have been
     filed to which you object in writing.

          (j) If Rule 430A under the Act is used, the Prospectus shall have been
     filed with the Commission pursuant to Rule 424(b) under the Act at or
     before 5:30 P.M., New York City time, on the second full business day after
     the date of this Agreement and any registration statement pursuant to Rule
     462(b) under the Act required in connection with the offering and sale of
     the Offered ADSs shall have been filed and become effective no later than
     10:00 p.m., New York City time, on the date of this Agreement.

          (k) Prior to the time of purchase, and, if applicable, the additional
     time of purchase, (i) no stop order with respect to the effectiveness of
     the Registration Statement or F-6 Registration Statement shall have been
     issued under the Act or proceedings initiated under Section 8(d) or 8(e) of
     the Act; (ii) the Registration Statement, the F-6 Registration Statement
     and all amendments thereto shall not contain an untrue statement of a
     material fact or omit to state a material fact required to be stated
     therein or necessary to make the statements therein not misleading; and
     (iii) the Prospectus and all amendments or supplements thereto shall not
     contain an untrue statement of a material fact or omit to state a material
     fact required to be stated therein or necessary to make the statements
     therein, in the light of the circumstances under which they are made, not
     misleading.

          (l) Between the time of execution of this Agreement and the time of
     purchase or the additional time of purchase, as the case may be, no
     material adverse change or any development involving a prospective material
     adverse change in the business, properties, manage-


                                      -46-


     ment, financial condition or results of operations of the Company and the
     Subsidiaries taken as a whole shall occur or become known.

          (m) The Company will, at the time of purchase and, if applicable, at
     the additional time of purchase, deliver to you a certificate of its Chief
     Executive Officer and its Chief Financial Officer in the form attached as
     Exhibit B hereto.

          (n) You shall have received a certificate, at any time of purchase,
     from the Attorneys for each Selling Shareholder to the effect that, as of
     such time of purchase or additional time of purchase, they have not been
     informed that:

               (i) the representations and warranties made by such Selling
          Shareholder herein are not true or correct as of such time of
          purchase; or

               (ii) such Selling Shareholder has not complied with any
          obligation or satisfied any condition which is required to be
          performed or satisfied on the part of such Selling Shareholder as of
          such time of purchase.

          (o) You shall have received signed Lock-up Agreements referred to in
     Section 3(z) hereof.

          (p) The Company shall have furnished to you such other documents and
     certificates as you or your counsel may reasonably request, after
     consultation with the Company, the Selling Shareholders and the Company's
     counsel.

          (q) The Offered ADSs shall have been approved for quotation on NASDAQ,
     subject only to notice of issuance at or prior to the time of purchase or
     the additional time of purchase, as the case may be.

          (r) The Company and the Depositary shall have executed and delivered
     the Deposit Agreement, in form and substance satisfactory to the
     Underwriters, and the Deposit Agreement shall be in full force and effect.

          (s) The Depositary shall have delivered to the Company (i) a letter
     confirming the furnishing of certain information about the Depositary for
     inclusion in the Registration Statement and the F-6 Registration Statement,
     and (ii) at the time of purchase or any additional time of purchase,
     certificates satisfactory to the Underwriters evidencing the deposit with
     the Depositary of the Ordinary Shares being so deposited against issuance
     of ADRs evidencing the Offered ADSs to be delivered by the Company at such
     time of purchase or additional time of purchase, and the execution,
     countersignature (if applicable), issuance and delivery of ADRs evidencing
     such Offered ADSs pursuant to the Deposit Agreement.

          (t) At or prior to the time of purchase, the NASD shall have confirmed
     that it has not raised any objection with respect to the fairness and
     reasonableness of the underwriting terms and arrangements.



                                      -47-


          (u) The Custodian shall have delivered to you a letter stating that
     they will deliver to each Selling Shareholder a United States Treasury
     Department Form 1099 (or other applicable form or statement specified by
     the United States Treasury Department regulations in lieu thereof) on or
     before January 31 of the year following the date of this Agreement.

          (v) The Company shall have complied with the provisions of Section
     5(b) hereof with respect to the furnishing of prospectuses to the
     Underwriters.

     8.   Effective Date of Agreement; Termination. This Agreement shall become
effective (i) if Rule 430A under the Act is not used, when you shall have
received notification of the effectiveness of the Registration Statement, or
(ii) if Rule 430A under the Act is used, when the parties hereto have executed
and delivered this Agreement.

          The obligations of the several Underwriters hereunder shall be subject
to termination in the absolute discretion of UBS or any group of Underwriters
(which may include UBS) which has agreed to purchase in the aggregate at least
50% of the Firm ADSs, if (x) since the time of execution of this Agreement or
the earlier respective dates as of which information is given in the
Registration Statement and the Prospectus, there has been any material adverse
change or any development involving a prospective material adverse change in the
business, properties, management, financial condition or results of operations
of the Company and the Subsidiaries taken as a whole, which would, in UBS'
judgment or in the judgment of such group of Underwriters, make it impracticable
or inadvisable to proceed with the public offering or the delivery of the
Offered ADSs on the terms and in the manner contemplated in the Registration
Statement and the Prospectus, or (y) since of execution of this Agreement, there
shall have occurred: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange, the American Stock Exchange
or the NASDAQ; (ii) a suspension or material limitation in trading in the
Company's securities on NASDAQ; (iii) a general moratorium on commercial banking
activities declared by either federal or New York State authorities or a
material disruption in commercial banking or securities settlement or clearance
services in the United States; (iv) an outbreak or escalation of hostilities or
acts of terrorism involving the United States or a declaration by the United
States of a national emergency or war; or (v) any other calamity or crisis or
any change in financial, political or economic conditions in the United States
or elsewhere, if the effect of any such event specified in clause (iv) or (v) in
UBS' judgment or in the judgment of such group of Underwriters makes it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Offered ADSs on the terms and in the manner contemplated in the
Registration Statement and the Prospectus, or (z) since the time of execution of
this Agreement, there shall have occurred any downgrading, or any notice or
announcement shall have been given or made of (i) any intended or potential
downgrading or (ii) any watch, review or possible change that does not indicate
an affirmation or improvement in the rating accorded any securities of or
guaranteed by the Company or any Subsidiary by any "nationally recognized
statistical rating organization," as that term is defined in Rule 436(g)(2)
under the Act.

                  If UBS or any group of Underwriters elects to terminate this
Agreement as provided in this Section 8, the Company, the Selling Shareholders
and each other Underwriter shall be notified promptly in writing.



                                      -48-


             If the sale to the Underwriters of the Offered ADSs, as
contemplated by this Agreement, is not carried out by the Underwriters for any
reason permitted under this Agreement or if such sale is not carried out because
the Company or the Selling Shareholders shall be unable to comply with any of
the terms of this Agreement, the Company and the Selling Shareholders shall,
jointly and severally, reimburse the Underwriters for all out-of-pocket expenses
(including fees and disbursements of counsel) reasonably incurred by them in
connection with the offering of the Offered ADSs, and the Underwriters shall be
under no obligation or liability to the Company or the Selling Shareholders
under this Agreement (except to the extent provided in Section 10 hereof) or to
one another hereunder.

     9.    Increase in Underwriters' Commitments. Subject to Sections 7 and 8
hereof, if any Underwriter shall default in its obligation to take up and pay
for the Firm ADSs to be purchased by it hereunder (otherwise than for a failure
of a condition set forth in Section 7 hereof or a reason sufficient to justify
the termination of this Agreement under the provisions of Section 8 hereof) and
if the number of Firm ADSs which all Underwriters so defaulting shall have
agreed but failed to take up and pay for does not exceed 10% of the total number
of Firm ADSs, the non-defaulting Underwriters shall take up and pay for (in
addition to the aggregate number of Firm ADSs they are obligated to purchase
pursuant to Section 1 hereof) the number of Firm ADSs agreed to be purchased by
all such defaulting Underwriters, as hereinafter provided. Such Firm ADSs shall
be taken up and paid for by such non-defaulting Underwriters in such amount or
amounts as you may designate with the consent of each Underwriter so designated
or, in the event no such designation is made, such Firm ADSs shall be taken up
and paid for by all non-defaulting Underwriters pro rata in proportion to the
aggregate number of Firm ADSs set opposite the names of such non-defaulting
Underwriters in Schedule A.

          Without relieving any defaulting Underwriter from its obligations
hereunder, the Company agrees with the non-defaulting Underwriters that it will
not sell any Firm ADSs hereunder unless all of the Firm ADSs are purchased by
the Underwriters (or by substituted Underwriters selected by you with the
approval of the Company or selected by the Company with your approval).

          If a new Underwriter or Underwriters are substituted by the
Underwriters or by the Company for a defaulting Underwriter or Underwriters in
accordance with the foregoing provision, the Company or you shall have the right
to postpone the time of purchase for a period not exceeding five business days
in order that any necessary changes in the Registration Statement and the
Prospectus and other documents may be effected.

          The term Underwriter as used in this Agreement shall refer to and
include any Underwriter substituted under this Section 9 with like effect as if
such substituted Underwriter had originally been named in Schedule A.

          If the aggregate number of Firm ADSs which the defaulting Underwriter
or Underwriters agreed to purchase exceeds 10% of the total number of Firm ADSs
which all Underwriters agreed to purchase hereunder, and if neither the
non-defaulting Underwriters nor the Company shall make arrangements within the
five business day period stated above for the purchase of all the Firm ADSs
which the defaulting Underwriter or Underwriters agreed to purchase hereunder,
this Agreement shall terminate without further act or deed and without any
liability on the part of the Company


                                      -49-


to any non-defaulting Underwriter and without any liability on the part of any
non-defaulting Underwriter to the Company. Nothing in this paragraph, and no
action taken hereunder, shall relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.

     10.  Indemnity and Contribution.

          (a) Each of the Company, Yunfan Zhou and Nick Yang agrees to, jointly
and severally, indemnify, defend and hold harmless each Underwriter, its
partners, directors and officers, and any person who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
and the successors and assigns of all of the foregoing persons, from and against
any loss, damage, expense, liability or claim (including the reasonable cost of
investigation) which, jointly or severally, any such Underwriter or any such
person may incur under the Act, the Exchange Act, the common law or otherwise,
insofar as such loss, damage, expense, liability or claim arises out of or is
based upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement (or in the Registration Statement as
amended by any post-effective amendment thereof by the Company) or in a
Prospectus (the term Prospectus for the purpose of this Section 10 being deemed
to include any Preliminary Prospectus, the Prospectus and the Prospectus as
amended or supplemented by the Company), or arises out of or is based upon any
omission or alleged omission to state a material fact required to be stated in
either such Registration Statement or such Prospectus or necessary to make the
statements made therein not misleading, except insofar as any such loss, damage,
expense, liability or claim arises out of or is based upon any untrue statement
or alleged untrue statement of a material fact contained in and in conformity
with information concerning such Underwriter furnished in writing by or on
behalf of such Underwriter through you to the Company expressly for use in such
Registration Statement or such Prospectus or arises out of or is based upon any
omission or alleged omission to state a material fact in connection with such
information required to be stated in such Registration Statement or such
Prospectus or necessary to make such information not misleading; provided,
however, that such Underwriter shall first seek indemnity against the Company
and to the extent, and only to the extent, that the Company shall be unable to
compensate such Underwriter in full for such loss, damage, expense, liability or
claim, shall such Underwriter seek indemnity against any of the Founders;
provided further, that no Founder shall be responsible for losses, damages,
expenses, liability or claims for an amount in excess of the proceeds to be
received by such Founder (after deducting expenses) from the sale of ADSs
hereunder.

                  If any action, suit or proceeding (each, a "Proceeding") is
brought against an Underwriter or any such person in respect of which indemnity
may be sought against the Company and the Founders pursuant to the foregoing
paragraph, such Underwriter or such person shall promptly notify the Company and
the Founders in writing of the institution of such Proceeding and the Company
and the Founders shall assume the defense of such Proceeding, including the
employment of counsel reasonably satisfactory to such indemnified party and
payment of all fees and expenses; provided, however, that the omission to so
notify the Company or the Founders shall not relieve the Company and any Founder
from any liability which the Company and the Founders may have to any
Underwriter or any such person or otherwise. Such Underwriter or such person
shall have the right to employ its or their own counsel in any such case, but
the fees and expenses of such counsel shall be at the expense of such
Underwriter or of such person unless the employment of such counsel shall have
been author-


                                      -50-


ized in writing by the Company and the Founders in connection with the defense
of such Proceeding or the Company and the Founders shall not have, within a
reasonable period of time in light of the circumstances, employed counsel to
have charge of the defense of such Proceeding or such indemnified party or
parties shall have reasonably concluded that there may be defenses available to
it or them which are different from, additional to or in conflict with those
available to the Company or the Founders (in which case the Company or any
Founder, as the case may be, shall not have the right to direct the defense of
such Proceeding on behalf of the indemnified party or parties), in any of which
events such fees and expenses shall be borne by the Company and the Founders and
paid as incurred (it being understood, however, that the Company and the
Founders shall not be liable for the expenses of more than one separate counsel
(in addition to any local counsel) in any one Proceeding or series of related
Proceedings in the same jurisdiction representing the indemnified parties who
are parties to such Proceeding). Neither the Company nor any Founder shall be
liable for any settlement of any Proceeding effected without its written consent
but if settled with the written consent of the Company or any Founder, the
Company or such Founder, as the case may be, agrees to indemnify and hold
harmless any Underwriter and any such person from and against any loss or
liability by reason of such settlement. Notwithstanding the foregoing sentence,
if at any time an indemnified party shall have requested an indemnifying party
to reimburse the indemnified party for fees and expenses of counsel as
contemplated by the second sentence of this paragraph, then the indemnifying
party agrees that it shall be liable for any settlement of any Proceeding
effected without its written consent if (i) such settlement is entered into more
than 60 business days after receipt by such indemnifying party of the aforesaid
request, (ii) such indemnifying party shall not have fully reimbursed the
indemnified party in accordance with such request prior to the date of such
settlement and (iii) such indemnified party shall have given the indemnifying
party at least 30 days' prior notice of its intention to settle. No indemnifying
party shall, without the prior written consent of the indemnified party, effect
any settlement of any pending or threatened Proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such Proceeding and does not include an admission
of fault, culpability or a failure to act, by or on behalf of such indemnified
party.

                  The Company agrees to indemnify, defend and hold harmless
UBS-FinSvc and its partners, directors and officers, and any person who controls
UBS-FinSvc within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, and the successors and assigns of all of the foregoing persons,
from and against any loss, damage, expense, liability or claim (including the
reasonable cost of investigation) which, jointly or severally, UBS-FinSvc or any
such person may incur under the Act, the Exchange Act, the common law or
otherwise, insofar as such loss, damage, expense, liability or claim (1) arises
out of or is based upon (a) any of the matters referred to in clauses (i)
through (iii) of the first paragraph of this Section 9(a), or (b) any untrue
statement or alleged untrue statement of a material fact contained in any
material prepared by or with the consent of the Company for distribution to
Directed Share Participants in connection with the Directed Share Program or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; (ii) caused by the failure of any Directed Share Participant to pay
for and accept delivery of Reserved ADSs that the Directed Share Participant has
agreed to purchase; or (iii) otherwise arises out of or is based upon the
Directed Share Program, provided that the Company shall not be responsible under
this clause (iii) for any loss,


                                      -51-


damage, expense, liability or claim that is finally judicially determined to
have resulted from the gross negligence or willful misconduct of UBS-FinSvc in
conducting the Directed Share Program. The second paragraph of this Section
10(a) shall apply equally to any Proceeding brought against UBS-FinSvc or any
such person in respect of which indemnity may be sought against the Company
pursuant to the foregoing sentence; except that the Company shall be liable for
the expenses of one separate counsel (in addition to any local counsel) for
UBS-FinSvc and any such person, separate and in addition to counsel for the
Underwriters, in any such Proceeding.

          (b) Each Selling Shareholder, severally and not jointly, agrees to
indemnify, defend and hold harmless each Underwriter, its partners, directors
and officers, and any person who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, and the successors and
assigns of all of the foregoing persons, from and against any loss, damage,
expense, liability or claim (including the reasonable cost of investigation)
which, jointly or severally, any such Underwriter or any such person may incur
under the Act, the Exchange Act, the common law or otherwise, insofar as such
loss, damage, expense, liability or claim arises out of or is based upon (i) any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement (or in the Registration Statement as amended by any
post-effective amendment thereof by the Company) or in a Prospectus (the term
Prospectus for the purpose of this Section 10 being deemed to include any
Preliminary Prospectus, the Prospectus and the Prospectus as amended or
supplemented by the Company), or that arises out of or is based upon any
omission or alleged omission to state a material fact required to be stated in
either such Registration Statement or such Prospectus or necessary to make the
statements made therein not misleading, to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company or the Underwriters by such Selling Shareholder,
directly or through such Selling Shareholder's representatives, specifically for
use in the preparation thereof, or (ii) any untrue statement or alleged untrue
statement made by such Selling Shareholder in Section 4 hereof or the failure by
such Selling Shareholder to perform when and as required any agreement or
covenant contained herein; provided, however, that no Selling Shareholder shall
be responsible, either pursuant to this indemnity or as a result of any breach
of this Agreement, for losses, expenses, liability or claims arising out of or
based upon such untrue statement or omission or allegation thereof based upon
information furnished by any party other than such Selling Shareholder and, in
any event, no Selling Shareholder shall be responsible, either pursuant to this
indemnity or as a result of any breach of this Agreement, for losses, expenses,
liability or claims for an amount in excess of the proceeds to be received by
such Selling Shareholder (after deducting expenses) from the sale of ADSs
hereunder.

                  If any Proceeding is brought against an Underwriter or any
such person in respect of which indemnity may be sought against such Selling
Shareholder pursuant to the foregoing paragraph, such Underwriter or such person
shall promptly notify such Selling Shareholder in writing of the institution of
such Proceeding and such Selling Shareholder shall assume the defense of such
Proceeding, including the employment of counsel reasonably satisfactory to such
indemnified party and payment of all fees and expenses; provided, however, that
the omission to so notify the Company shall not relieve such Selling Shareholder
from any liability which such Selling Shareholder may have to any Underwriter or
any such person or otherwise. Such Underwriter or such person shall have the
right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel


                                      -52-


shall be at the expense of such Underwriter or of such person unless the
employment of such counsel shall have been authorized in writing by such Selling
Shareholder in connection with the defense of such Proceeding or such Selling
Shareholder shall not have, within a reasonable period of time in light of the
circumstances, employed counsel to have charge of the defense of such Proceeding
or such indemnified party or parties shall have reasonably concluded that there
may be defenses available to it or them which are different from, additional to
or in conflict with those available to such Selling Shareholder (in which case
such Selling Shareholder shall not have the right to direct the defense of such
Proceeding on behalf of the indemnified party or parties), in any of which
events such fees and expenses shall be borne by such Selling Shareholder and
paid as incurred (it being understood, however, that such Selling Shareholder
shall not be liable for the expenses of more than one separate counsel (in
addition to any local counsel) in any one Proceeding or series of related
Proceedings in the same jurisdiction representing the indemnified parties who
are parties to such Proceeding). Such Selling Shareholder shall not be liable
for any settlement of any Proceeding effected without its written consent but if
settled with the written consent of such Selling Shareholder, such Selling
Shareholder agrees to indemnify and hold harmless any Underwriter and any such
person from and against any loss or liability by reason of such settlement.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated by the second sentence of this
paragraph, then the indemnifying party agrees that it shall be liable for any
settlement of any Proceeding effected without its written consent if (i) such
settlement is entered into more than 60 business days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
not have fully reimbursed the indemnified party in accordance with such request
prior to the date of such settlement and (iii) such indemnified party shall have
given the indemnifying party at least 30 days' prior notice of its intention to
settle. No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened Proceeding
in respect of which any indemnified party is or could have been a party and
indemnity could have been sought hereunder by such indemnified party, unless
such settlement includes an unconditional release of such indemnified party from
all liability on claims that are the subject matter of such Proceeding and does
not include an admission of fault, culpability or a failure to act, by or on
behalf of such indemnified party.

          (c) Each Underwriter severally agrees to indemnify, defend and hold
harmless the Company, its directors and officers, each Selling Shareholder, and
any person who controls the Company within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act, and the successors and assigns of all of the
foregoing persons, from and against any loss, damage, expense, liability or
claim (including the reasonable cost of investigation) which, jointly or
severally, the Company, any Selling Shareholder or any such person may incur
under the Act, the Exchange Act, the common law or otherwise, insofar as such
loss, damage, expense, liability or claim arises out of or is based upon any
untrue statement or alleged untrue statement of a material fact contained in and
in conformity with information concerning such Underwriter furnished in writing
by or on behalf of such Underwriter through you to the Company expressly for use
in the Registration Statement (or in the Registration Statement as amended by
any post-effective amendment thereof by the Company) or in a Prospectus, or
arises out of or is based upon any omission or alleged omission to state a
material fact in connection with such information required to be stated in such
Registration Statement or such Prospectus or necessary to make such information
not misleading.



                                      -53-


                  If any Proceeding is brought against the Company, any Selling
Shareholder or any such person in respect of which indemnity may be sought
against any Underwriter pursuant to the foregoing paragraph, the Company, any
Selling Shareholder or such person shall promptly notify such Underwriter in
writing of the institution of such Proceeding and such Underwriter shall assume
the defense of such Proceeding, including the employment of counsel reasonably
satisfactory to such indemnified party and payment of all fees and expenses;
provided, however, that the omission to so notify such Underwriter shall not
relieve such Underwriter from any liability which such Underwriter may have to
the Company, such Selling Shareholder or any such person or otherwise. The
Company, any Selling Shareholder or such person shall have the right to employ
its own counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of the Company, such Selling Shareholder or such person
unless the employment of such counsel shall have been authorized in writing by
such Underwriter in connection with the defense of such Proceeding or such
Underwriter shall not have, within a reasonable period of time in light of the
circumstances, employed counsel to defend such Proceeding or such indemnified
party or parties shall have reasonably concluded that there may be defenses
available to it or them which are different from or additional to or in conflict
with those available to such Underwriter (in which case such Underwriter shall
not have the right to direct the defense of such Proceeding on behalf of the
indemnified party or parties, but such Underwriter may employ counsel and
participate in the defense thereof but the fees and expenses of such counsel
shall be at the expense of such Underwriter), in any of which events such fees
and expenses shall be borne by such Underwriter and paid as incurred (it being
understood, however, that such Underwriter shall not be liable for the expenses
of more than one separate counsel (in addition to any local counsel) in any one
Proceeding or series of related Proceedings in the same jurisdiction
representing the indemnified parties who are parties to such Proceeding). No
Underwriter shall be liable for any settlement of any such Proceeding effected
without the written consent of such Underwriter but if settled with the written
consent of such Underwriter, such Underwriter agrees to indemnify and hold
harmless the Company, any Selling Shareholder and any such person from and
against any loss or liability by reason of such settlement. Notwithstanding the
foregoing sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel as contemplated by the second sentence of this paragraph, then the
indemnifying party agrees that it shall be liable for any settlement of any
Proceeding effected without its written consent if (i) such settlement is
entered into more than 60 business days after receipt by such indemnifying party
of the aforesaid request, (ii) such indemnifying party shall not have reimbursed
the indemnified party in accordance with such request prior to the date of such
settlement and (iii) such indemnified party shall have given the indemnifying
party at least 30 days' prior notice of its intention to settle. No indemnifying
party shall, without the prior written consent of the indemnified party, effect
any settlement of any pending or threatened Proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such Proceeding.

          (d) If the indemnification provided for in this Section 10 is
unavailable to an indemnified party under subsections (a) and (b) of this
Section 10 or insufficient to hold an indemnified party harmless in respect of
any losses, damages, expenses, liabilities or claims referred to therein, then
each applicable indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, damages, expenses,
liabilities or claims (i) in such propor-


                                      -54-


tion as is appropriate to reflect the relative benefits received by the Company
on the one hand and the Underwriters on the other hand from the offering of the
Offered ADSs or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company and the Selling Shareholders on the one hand and of the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, damages, expenses, liabilities or claims, as well as
any other relevant equitable considerations. The relative benefits received by
the Company and the Selling Shareholders on the one hand and the Underwriters on
the other shall be deemed to be in the same respective proportions as the total
proceeds from the offering (net of underwriting discounts and commissions but
before deducting expenses) received by the Company and the Selling Shareholders
and the total underwriting discounts and commissions received by the
Underwriters, bear to the aggregate public offering price of the Offered ADSs.
The relative fault of the Company and the Selling Shareholders on the one hand
and of the Underwriters on the other shall be determined by reference to, among
other things, whether the untrue statement or alleged untrue statement of a
material fact or omission or alleged omission relates to information supplied by
the Company and the Selling Shareholders or by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The amount paid or payable by a party as a
result of the losses, damages, expenses, liabilities and claims referred to in
this subsection shall be deemed to include any legal or other fees or expenses
reasonably incurred by such party in connection with investigating, preparing to
defend or defending any Proceeding.

          (e) The Company, the Selling Shareholders and the Underwriters agree
that it would not be just and equitable if contribution pursuant to this Section
10 were determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation that does
not take account of the equitable considerations referred to in subsection (c)
above. Notwithstanding the provisions of this Section 10, no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Offered ADSs underwritten by such Underwriter and distributed
to the public were offered to the public exceeds the amount of any damage which
such Underwriter has otherwise been required to pay by reason of such untrue
statement or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 10 are several in proportion to their respective
underwriting commitments and not joint.

          (f) The indemnity and contribution agreements contained in this
Section 10 and the covenants, warranties and representations of the Company and
the Selling Shareholders contained in this Agreement shall remain in full force
and effect regardless of any investigation made by or on behalf of any
Underwriter, its partners, directors or officers or any person (including each
partner, officer or director of such person) who controls any Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, or by or
on behalf of the Company, its directors or officers, the Selling Shareholders or
any person who controls the Company within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act, and shall survive any termination of this
Agreement or the issuance and delivery of the Offered ADSs. The Company, each
Selling Share-


                                      -55-


holder and each Underwriter agree promptly to notify each other of the
commencement of any Proceeding against it and, in the case of the Company or
such Selling Shareholder, against any of the Company's or such Selling
Shareholder's officers or directors, as the case may be, in connection with the
issuance and sale of the Offered ADSs, or in connection with the Registration
Statement, the F-6 Registration Statement or the Prospectus.

          11. Notices. Except as otherwise herein provided, all statements,
requests, notices and agreements shall be in writing or by telegram and, if to
the Underwriters, shall be sufficient in all respects if delivered or sent to
UBS AG, 52/F, Two International Finance Centre, 8 Finance Street, Central, Hong
Kong, Attention: Syndicate Department, if to the Company, shall be sufficient in
all respects if delivered or sent to the Company at the offices of the Company
at 8/F, Tower A, Yuetan Building, No. 2 Yuetan North Street, Beijing, China,
Attention: [the Chief Executive Officer], and if to the Selling Shareholders,
shall be sufficient in all respects if delivered or sent to the Selling
Shareholders in care of [_______], [ADDRESS], Attention: [_______].

          12. Governing Law; Construction. This Agreement and any claim,
counterclaim or dispute of any kind or nature whatsoever arising out of or in
any way relating to this Agreement ("Claim"), directly or indirectly, shall be
governed by, and construed in accordance with, the laws of the State of New
York. The Section headings in this Agreement have been inserted as a matter of
convenience of reference and are not a part of this Agreement.

          13. Submission to Jurisdiction. Except as set forth below, no Claim
may be commenced, prosecuted or continued in any court other than the courts of
the State of New York located in the City and County of New York or in the
United States District Court for the Southern District of New York, which courts
shall have jurisdiction over the adjudication of such matters, and each of the
Company and each Selling Shareholder consents to the jurisdiction of such courts
and personal service with respect thereto. Each of the Company and each Selling
Shareholder hereby consents to personal jurisdiction, service and venue in any
court in which any Claim arising out of or in any way relating to this Agreement
is brought by any third party against UBS or any indemnified party. Each of UBS,
each Selling Shareholder and the Company (on its behalf and, to the extent
permitted by applicable law, on behalf of its shareholders and affiliates)
waives all right to trial by jury in any action, proceeding or counterclaim
(whether based upon contract, tort or otherwise) in any way arising out of or
relating to this Agreement. Each of the Company and each Selling Shareholder
agrees that a final judgment in any such action, proceeding or counterclaim
brought in any such court shall be conclusive and binding upon it and may be
enforced in any other courts to the jurisdiction of which it is or may be
subject, by suit upon such judgment. Each of the Company and each Selling
Shareholder hereby appoints, without power of revocation, CT Corporation System
(the "Authorized Agent") at 111 Eighth Avenue, New York, New York 10011, as its
agent to accept and acknowledge on its behalf service of any and all process
which may be served in any action, proceeding or counterclaim in any way
relating to or arising out of this Agreement.

          14. Judgment Currency. In respect of any judgment or order given or
made for any amount due hereunder that is expressed and paid in a currency (the
"judgment currency") other than United States dollars, the Company and the
Selling Shareholders, as the case may be, will indemnify each Underwriter
against any loss incurred by such Underwriter as a result of any variation as
be-


                                      -56-


tween (a) the rate of exchange at which the United States dollar amount is
converted into the judgment currency for the purpose of such judgment or order
and (b) the rate of exchange at which an Underwriter is able to purchase United
States dollars with the amount of the judgment currency actually received by
such Underwriter. The foregoing indemnity shall constitute a separate and
independent obligation of the Company and the Selling Shareholders and shall
continue in full force and effect notwithstanding any such judgment or order as
aforesaid. The term "rate of exchange" shall include any premiums and costs of
exchange payable in connection with the purchase of or conversion into United
States dollars.

          15. Parties at Interest. The Agreement herein set forth has been and
is made solely for the benefit of the Underwriters, the Company and the Selling
Shareholders and to the extent provided in Section 10 hereof the controlling
persons, partners, directors and officers referred to in such section, and their
respective successors, assigns, heirs, personal representatives and executors
and administrators. No other person, partnership, association or corporation
(including a purchaser, as such purchaser, from any of the Underwriters) shall
acquire or have any right under or by virtue of this Agreement.

          16. Counterparts. This Agreement may be signed by the parties in one
or more counterparts which together shall constitute one and the same agreement
among the parties.

          17. Successors and Assigns. This Agreement shall be binding upon the
Underwriters, the Company and the Selling Shareholders and their successors and
assigns and any successor or assign of any substantial portion of the Company's
and any of the Underwriters' respective businesses and/or assets.




                                      -57-



                  If the foregoing correctly sets forth the understanding
between the Company and the several Underwriters, please so indicate in the
space provided below for that purpose, whereupon this agreement and your
acceptance shall constitute a binding agreement between the Company and the
Underwriters, severally.

                                     Very truly yours,

                                     KONGZHONG CORPORATION


                                     By:
                                          --------------------------------------
                                           Name:
                                           Title:



                                     SELLING SHAREHOLDERS


                                     By:
                                          --------------------------------------
                                           Name:
                                           As Attorney-in-Fact acting on behalf
                                           of each of the Selling Shareholders
                                           named in Schedule B to this Agreement



Accepted and agreed to as of the date
first above written, on behalf of itself
and the other several Underwriters named
in Schedule A to this Agreement

UBS AG


By:  ______________________________
      Name:
      Title:


By:  ______________________________
      Name:
      Title:






                                   SCHEDULE A



                                                                       Number of
Underwriter                                                            Firm ADSs

UBS AG











                                                                       ---------
                                                 Total
                                                      -------------    =========



                                      -59-



                                   SCHEDULE B


                             [Selling Shareholders]




                                    EXHIBIT A


                                     Company


                                 Ordinary Shares

                       (Par Value US$0.0000005 Per Share)

                                                                          [Date]
UBS AG
As Representative of the several Underwriters

25th Floor, One Exchange Square
8 Connaught Place, Central
Hong Kong

Ladies and Gentlemen:

                  This Lock-Up Letter Agreement is being delivered to you in
connection with the proposed Underwriting Agreement (the "Underwriting
Agreement") to be entered into by KongZhong Corporation (the "Company") and you,
as Representative of the several Underwriters named therein, with respect to the
public offering (the "Offering") of American Depositary Shares (the "ADSs") each
representing 40 ordinary shares, par value US$0.0000005 per share, of the
Company (the "Ordinary Shares").

                  In order to induce you to enter into the Underwriting
Agreement, the undersigned agrees that for a period of 180 days after the date
of the final prospectus relating to the Offering the undersigned will not,
without the prior written consent of UBS, (i) sell, offer to sell, contract or
agree to sell, hypothecate, pledge, grant any option to purchase or otherwise
dispose of or agree to dispose of, directly or indirectly, or file (or
participate in the filing of) a registration statement with the Securities and
Exchange Commission (the "Commission") in respect of, or establish or increase a
put equivalent position or liquidate or decrease a call equivalent position
within the meaning of Section 16 of the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated thereunder
with respect to, any Ordinary Shares of the Company or ADSs or any securities
convertible into or exercisable or exchangeable for Ordinary Shares, or warrants
or other rights to purchase Ordinary Shares, (ii) enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of Ordinary Shares or ADSs or any securities
convertible into or exercisable or exchangeable for Ordinary Shares, or warrants
or other rights to purchase Ordinary Shares, whether any such transaction is to
be settled by delivery of Ordinary Shares or such other securities, in cash or
otherwise, or (iii) publicly announce an intention to effect any transaction
specified in clause (i) or (ii). The foregoing sentence shall not apply to (a)
the registration of or sale to the Underwriters of any ADSs pursuant to the
Offering and the Underwriting Agreement, (b) bona fide gifts, provided the
recipient thereof agrees in writing with the


                                       -2-


Underwriters to be bound by the terms of this Lock-Up Letter Agreement or (c)
dispositions to any trust for the direct or indirect benefit of the undersigned
and/or the immediate family of the undersigned, provided that such trust agrees
in writing with the Underwriters to be bound by the terms of this Lock-Up Letter
Agreement. Notwithstanding the foregoing, if (i) during the period that begins
on the date that is 15 calendar days plus three business days before the last
day of the 180-day restricted period and ends on the last day of the 180-day
restricted period, the Company issues an earnings release or material news or a
material event relating ot the Company occurs, or (ii) prior to the expiration
of the 180-day restricted period, the Company announces that it will release
earnings results during the 16-day period beginning on the last day of the
180-day restricted period, the restrictions imposed by this paragraph (o) shall
continue to apply until the expiration of the date that is 15 calendar days plus
three business days after the date on which the issuance of the earnings release
or the material news or material event occurs.

                  In addition, the undersigned hereby waives any rights the
undersigned may have to require registration of Ordinary Shares in connection
with the filing of a registration statement relating to the Offering. The
undersigned further agrees that, for a period of 180 days after the date of the
final prospectus relating to the Offering, the undersigned will not, without the
prior written consent of UBS, make any demand for, or exercise any right with
respect to, the registration of Ordinary Shares of the Company or any securities
convertible into or exercisable or exchangeable for Ordinary Shares, or warrants
or other rights to purchase Ordinary Shares.

                  If (i) the Company notifies you in writing that it does not
intend to proceed with the Offering, (ii) the registration statement filed with
the Securities and Exchange Commission with respect to the Offering is withdrawn
or (iii) for any reason the Underwriting Agreement shall be terminated prior to
the time of purchase (as defined in the Underwriting Agreement), this Lock-Up
Letter Agreement shall be terminated and the undersigned shall be released from
its obligations hereunder.

                                              Yours very truly,


                                              ----------------------------------
                                              Name:


                                       -3-



                                    EXHIBIT B

                              Officers' Certificate



1.   I have reviewed the Registration Statement, the F-6 Registration Statement
     and the Prospectus.

2.   The representations and warranties of the Company as set forth in this
     Agreement are true and correct as of the time of purchase and, if
     applicable, the additional time of purchase.

3.   The Company has performed all of its obligations under this Agreement as
     are to be performed at or before the time of purchase and at or before the
     additional time of purchase, as the case may be.

4.   The conditions set forth in paragraphs (k) and (l) of Section 7 of this
     Agreement have been met.

5.   The financial statements and other financial information included in the
     Registration Statement and the Prospectus fairly present in all material
     respects the financial condition, results of operations, and cash flows of
     the Company as of, and for, the periods presented in the Registration
     Statement.

EX-5.1

                                                                     Exhibit 5.1



                                MAPLES AND CALDER
                               CAYMAN EUROPE ASIA

To:   KongZhong Corporation
      8/F, Tower A
      Yuetan Building
      Beijing, China 100045

      Citibank, N.A.
      111 Wall Street,
      New York, New York 10043
      U.S.A.

                                                                 17th June, 2004

Dear Sirs,

KONGZHONG CORPORATION

We have acted as Cayman Islands legal advisers to KongZhong Corporation (the
"COMPANY") in connection with the Company's registration statement on Form F-1,
including all amendments or supplements thereto (the "REGISTRATION STATEMENT"),
originally filed with the Securities and Exchange Commission under the U.S.
Securities Act of 1933 on 4th June, 2004 (Registration No. 333-116172, relating
to the offering by the Company and the sale by the selling shareholders (the
"SELLING SHAREHOLDERS") of a total of 10,000,000 American Depositary Shares,
each of which represents 40 of the Company's Ordinary Shares, of par value
US$0.0000005 each (the "ORDINARY SHARES"). We are furnishing this opinion as
exhibit 5.1 to the Registration Statement.

1. DOCUMENTS REVIEWED

For the purposes of this opinion, we have reviewed only originals, copies or
final drafts of the following documents:

(a)   the certificate of incorporation of the Company dated 6th May, 2002, the
      Certificate of Incorporation on Change of Name dated 18th March, 2004, the
      amended and restated memorandum and articles of association of the Company
      as adopted on 11th October, 2002 and amended on 18th March, 2004, and the
      form of the amended and restated memorandum and articles of association of
      the Company as conditionally adopted by special resolution passed on 11th
      June, 2004;

(b)   a certificate of good standing issued by the Registrar of Companies in the
      Cayman Islands dated 16th June, 2004 (the "CERTIFICATE OF GOOD STANDING");

(c)   the minutes of a meeting of the board of Directors of the Company dated
      11th June, 2004;

    1504 One International Finance Centre, 1 Harbour View Street, Hong Kong
          Telephone: (852) 2522 9333 Facsimile: (852) 2537 2955
                       Email: hkinfo@maplesandcalder.com
                            www.maplesandcalder.com

 Resident Hong Kong Partners: Christine Chang (England and Wales), Linda Martin
           (England and Wales), Spencer Privett (England and Wales).

MAPLES AND CALDER                                                              2
CAYMAN EUROPE ASIA

(d)   the minutes of a meeting of the shareholders of the Company held on 11th
      June, 2004 and the corporate records of the Company maintained at its
      registered office in the Cayman Islands;

(e)   a certificate from a Director of the Company dated 17th June, 2004, a copy
      of which is attached hereto (the "DIRECTOR'S CERTIFICATE"); and

(f)   the Registration Statement.

2. ASSUMPTIONS

Save as aforesaid we have not been instructed to undertake and have not
undertaken any further enquiry or due diligence in relation to the transaction
the subject of this opinion. The following opinions are given only as to and
based on circumstances and matters of fact existing at the date hereof and of
which we are aware consequent upon the instructions we have received in relation
to the matter the subject of this opinion and as to the laws of the Cayman
Islands as the same are in force at the date hereof. In giving this opinion, we
have relied upon the completeness and accuracy (and assumed the continuing
completeness and accuracy as at the date hereof) of the Director's Certificate
as to matters of fact and the Certificate of Good Standing without further
verification and have relied upon the following assumptions, which we have not
independently verified:

(i)   Copy documents or drafts of documents provided to us are true and complete
      copies of, or in the final forms of, the originals.

(ii)  The genuineness of all signatures and seals.

(iii) There is no contractual or other prohibition (other than as may arise by
      virtue of the laws of the Cayman Islands) binding on the Company or on any
      other party prohibiting it from entering into and performing its
      obligations.

3. OPINION

The following opinions are given only as to matters of Cayman Islands law and we
have assumed that there is nothing under any other law that would affect or vary
the following opinions.

Based upon the foregoing and subject to the qualifications set out below and
having regard to such legal considerations as we deem relevant, we are of the
opinion that:

3.1   The Company has been duly incorporated as an exempted company with limited
      liability for an unlimited duration and is validly existing under the laws
      of the Cayman Islands.

3.2   The authorised share capital of the Company, conditional upon, and with
      effect immediately upon the closing of an underwritten public offering of
      the Ordinary Shares of the Company in the United States and the automatic
      conversion of all the Preferred Shares in issue into Ordinary Shares in
      the capital of the Company, will be US$500,000 divided into
      1,000,000,000,000 shares of par value US$0.0000005 each.

MAPLES AND CALDER                                                              3
CAYMAN EUROPE ASIA

3.3   The issue and allotment of the Ordinary Shares has been duly authorised.
      When allotted, issued and paid for as contemplated in the Registration
      Statement and registered in the register of members (shareholders), the
      Ordinary Shares will be legally issued and allotted, fully paid and
      non-assessable.

3.4   Ordinary Shares to be sold by the Selling Shareholders have been legally
      and validly issued and are fully paid and non-assessable.

Except as specifically stated herein, we make no comment with respect to any
representations and warranties which may be made by or with respect to the
Company in the Registration Statement or otherwise with respect to the
commercial terms of the transactions the subject of this opinion.

We hereby consent to the use of this opinion in, and the filing hereof, as an
exhibit to the Registration Statement and to the reference to our firm under the
headings "Risk Factors," "Enforcement of Civil Liabilities," "Legal Matters,"
"Taxation" and elsewhere in the prospectus included in the Registration
Statement. In giving such consent, we do not thereby admit that we come within
the category of persons whose consent is required under Section 7 of the U.S.
Securities Act of 1933, as amended, or the Rules and Regulations of the
Commission thereunder.

Yours faithfully,

/s/ Maples and Calder Asia
MAPLES AND CALDER ASIA

EX-8.1

                                                                     Exhibit 8.1



                      (SULLIVAN & CROMWELL LLP LETTERHEAD)


                                                                   June 17, 2004

Kongzhong Corporation,
  8/F, Tower A, Yuetan Building,
    Beijing, People's Republic of China 100045.

Ladies and Gentlemen:

     We have acted as special tax counsel to Kongzhong Corporation (the
"Company") in connection with the registration under the Securities Act of 1933,
as amended (the "Securities Act"), of $138,000,000 aggregate principal amount of
ADSs of the Company. We hereby confirm our opinion set forth under the heading
"Taxation - United States" in the Prospectus of the Company with respect to the
ADSs, which is part of the Company's Registration Statement on Form F-1 filed on
June 17, 2004.

     We hereby consent to the reference to us in the Prospectus under the
caption "Taxation - United States" and the filing of this opinion as an exhibit
to the Registration Statement. In giving such consent, we do not admit that we
are within the category of persons whose consent is required under Section 7 of
the Securities Act.

                                                  Very truly yours,

                                                  /s/ SULLIVAN & CROMWELL LLP

EX-23.1

                                                                    Exhibit 23.1




DELOITTE LOGO







To the Board of Directors of KongZhong Corporation:

We consent to the use in the Amendment No. 1 to Registration Statement of
KongZhong Corporation on Form F-1 of our audit report dated March 18, 2004,
appearing in the prospectus, which is part of this Amendment No. 1 to
Registration Statement.

We also consent to the reference made to us under the section entitled
"Experts" in this prospectus.




/s/ DELOITTE TOUCHE TOHMATSU

DELOITTE TOUCHE TOHMATSU
Certified Public Accounts
Hong Kong
June 17, 2004