Filed pursuant to rule 424(b)(4)
Registration No. 333-141860

7,700,000

American Depositary Shares

Representing 23,100,000 Ordinary Shares

Acorn International, Inc.

This is an initial public offering of American depositary shares, or ADSs, each representing three ordinary shares of Acorn International, Inc. We are offering 6,700,000 ADSs, and the selling shareholders identified in this prospectus are offering 1,000,000 ADSs. We will not receive any of the proceeds from the ADSs sold by the selling shareholders. Prior to this offering, there has been no public market for our ordinary shares or ADSs. The initial public offering price is $15.50 per ADS.

Our application to list our ADSs on the New York Stock Exchange under the symbol “ATV” has been approved.

Investing in our ADSs involves a high degree of risk. See “ Risk Factors” beginning on page 14.

	Price to Public		Underwriting Discounts and Commissions		Proceeds, Before Expenses, to Us		Proceeds, Before Expenses, to the Selling Shareholders
Per ADS	$	15.500	$	1.085	$	14.415	$	14.415
Total	$	119,350,000	$	8,354,500	$	96,580,500	$	14,415,000

The underwriters have an option to purchase up to 1,155,000 additional ADSs from us at the public offering price, less underwriting discounts and commissions, within 30 days from the date of this prospectus, to cover over-allotments of ADSs.

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.

The underwriters expect to deliver the ADSs to purchasers on or about May 8, 2007.

Merrill Lynch & Co. Deutsche Bank Securities

CIBC World Markets

The date of this prospectus is May 2, 2007.

TABLE OF CONTENTS

	Page
Prospectus Summary	1
Risk Factors	14
Special Note Regarding Forward-Looking Statements	44
Use of Proceeds	45
Capitalization	46
Dilution	47
Dividend Policy	48
Exchange Rate Information	49
Enforcement of Civil Liabilities	50
Selected Condensed Consolidated Combined Financial and Operating Data	52
Recent Developments	56
Management’s Discussion and Analysis of Financial Condition and Results of Operations	57
Our Industry	88
Our Business	93

	Page
Our Corporate Structure	112
Management	118
Principal and Selling Shareholders	130
Related Party Transactions	133
Chinese Government Regulations	136
Description of Share Capital	144
Description of American Depositary Shares	155
Shares Eligible for Future Sale	166
Taxation	168
Underwriting	173
Expenses Related to this Offering	180
Legal Matters	181
Experts	181
Where You Can Find More Information	182
Index to Consolidated Combined Financial Statements	F-1

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, the 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 the ADSs. Except as otherwise indicated, all information in this prospectus assumes no exercise of the underwriters’ over-allotment option.

We have not undertaken any efforts to qualify this offering for offers to individual investors in any jurisdiction outside the United States. Therefore, individual investors located outside the United States should not expect to be eligible to participate in this offering.

Until May 27, 2007 (the 25th day after the date of this prospectus), all dealers that buy, sell, or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This 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.

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in the ADSs discussed under “Risk Factors,” before deciding whether to buy our ADSs.

Overview

We are a leading integrated multi-platform marketing company in China with a proven track record of developing, promoting and selling consumer products and services. Our two primary sales platforms are our TV direct sales platform and nationwide distribution network. We operate the largest TV direct sales business in China in terms of revenues and TV air time purchased according to Euromonitor International (Asia) Pte Ltd., or Euromonitor. We believe we were one of the first companies in China to use TV direct sales programs, often referred to as TV infomercials, in combination with a nationwide distribution network to market and sell products and services to consumers. Our significant TV air time presence allows us to test-market, promote and sell products and services in China’s geographically dispersed and fragmented consumer market. We seek to maximize sales penetration of our products and services that have strong sales and brand development potential by distributing them through our nationwide distribution network. In 2006, we also began using our TV direct sales platform to promote and sell third-party branded products and services pursuant to joint sales arrangements and marketing services arrangements.

Using these integrated TV direct sales and nationwide distribution network platforms, we have developed several leading proprietary brands. In addition, we have expanded into other forms of direct selling, such as catalogs and outbound calls, to further strengthen our promotional efforts and generate additional revenue opportunities from our existing customer base. We believe our vertically integrated direct sales operations, which include product development, TV and other direct sales and marketing, call center operations, and order fulfillment and delivery, combined with our nationwide distribution network, allow us to effectively reach consumers and maximize sales throughout China.

A key contributing factor to the success of our TV direct sales platform is our significant TV air time presence. Since 2003, we have been the largest TV direct sales operator in China in terms of revenue according to Euromonitor. Our TV direct sales programs, which are typically five to ten minutes in length, are currently aired on four nationwide China Central Television, or CCTV, channels, 28 national satellite TV channels, four international satellite channels operating in China and eight local channels. Sales generated through our TV direct sales platform accounted for substantially all of our direct sales net revenues, which in turn comprised 45.1% and 54.7% of our net revenues in 2005 and 2006, respectively. We also purchase TV advertising time for brand promotion advertising to enhance brand awareness of our proprietary products and services. Our brand promotion advertising in connection with our electronic learning devices was recognized in 2005 when we won the EFFIE gold award issued by the China Marketing Association chartered by New York American Marketing Association.

We have three call centers in Shanghai, Beijing and Shenzhen, two of which operate 24 hours per day. Our call centers process telephone orders generated by our direct sales programs and gather real-time data to help analyze the effectiveness of our advertising spending and adjust our offerings. Each of our call centers also places outbound calls to selected customers to market our products and services. In addition, our call center sales representatives are trained to identify and act upon cross-selling opportunities while processing customer orders. As of December 31, 2006, we had 649 sales representatives and 113 customer service representatives. Our sales representatives collectively processed an average of approximately 11,800 and 12,400 incoming calls per day

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generated from our TV and other direct sales platforms in 2005 and 2006, respectively. Products sold through our TV direct sales and other direct sales platforms are delivered to our customers primarily by national express mail and local delivery companies.

Our nationwide distribution network extends across all provinces and allows us to reach over 20,000 retail outlets covering nearly all of the cities and counties in China. We typically grant our distributors the exclusive right to distribute selected products and services in their respective territories. We closely work with and support our distributors to expand their retail outlet reach, extend our product and service lifecycles and maximize our sales by promotion of our brands through our TV direct sales platform, advertising in local print media and other joint promotional efforts. Sales generated through our nationwide distribution network accounted for 54.9% and 45.3% of our net revenues in 2005 and 2006, respectively.

In selecting new products and services, we seek to identify offerings in underserved market segments with potential national appeal for which we believe our sales platforms and marketing and branding expertise can create value. We identify new products and services to be offered via our multiple sales platforms through a standardized selection process and typically source them from small and medium-sized suppliers and manufacturers in China. In 2006, we also began to identify products and services from more established third-party companies that we believe we can successfully market through our TV direct sales platform. Our TV direct sales programs allow us to promote specific products and services by highlighting their unique value to consumers as well as creating brand awareness. Our current featured offerings include electronic learning devices, consumer electronics products, cell phones and health and wellness products. We typically focus on marketing and sales of a limited number of featured product lines and services at any given time. In addition, we offer over 100 products via our catalogs.

Our net revenues have increased each year since we commenced our operations in 1998. Our net revenues increased by 79.3% from $95.0 million in 2004 to $170.3 million in 2005, and grew an additional 15.4% to $196.5 million in 2006. Our income from operations grew by 13.0% from $17.7 million in 2004 to $20.0 million in 2005. However, in 2006 our income from operations decreased by 92.0% to $1.6 million, primarily as a result of recent PRC regulatory changes that prohibit TV direct sales programs of our branded neck massager product and our slimming product, negative media coverage (some of which we believe contained false or misleading information) of our electronic learning devices, an increase in the stock-based compensation incurred that year, deferred revenue generated in connection with our stock-tracking software and expensing of offering costs.

Industry Background

The consumer market in China is large and one of the fastest growing in the world. Driving this growth are China’s economic expansion and a growing consumer base with increasing amounts of disposable income. According to Euromonitor, China’s annual retail sales for consumer products have grown between 2003 and 2005 at a compound annual growth rate, or CAGR, of approximately 10.9%. However, China’s gross domestic product, or GDP, per capita is still low compared to that of developed countries.

We believe the traditional retail market, with its significant structural deficiencies, presents substantial market opportunities for companies, such as ours, that have direct sales platforms, nationwide distribution capabilities and access to a diverse product portfolio. According to historical and projected data from Euromonitor, the TV direct sales industry in China has experienced significant growth in recent years, growing from $550 million in 2003 to $890 million in 2005, representing a CAGR of 27.2%, and it is projected to grow further to $1.4 billion in 2007 according to Euromonitor, representing a CAGR of 26.3% over this five-year period.

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Our Strengths, Strategies and Challenges

We believe our competitive strengths consist of our:

• integrated multiple sales platforms;

• leading market position;

• effective management of our significant TV media presence;

• proven product development and promotional capabilities;

• customer service expertise; and

• experienced and cohesive management team.

Notwithstanding our competitive strengths, we expect to face certain risks and uncertainties, including:

• our ability to identify, develop and introduce new products and services;

• our dependence on a small number of featured product lines for a substantial majority of our sales;

• our access to TV media time and ability to maintain profitability relative to TV media expenses;

• our ability to respond to competitive market conditions;

• the effect of negative publicity on the sale of our products and services;

• our ability to develop our product and service brands and to successfully sell products and services through our nationwide distribution network; and

• uncertainties with respect to the PRC legal and regulatory environments.

Our goal is to be the leading integrated cross-media marketer of consumer products and services in China. We intend to achieve our goal by implementing the following strategies:

• strengthen and diversify our multiple sales platforms;

• selectively expand existing and new product and service offerings;

• enhance media planning effectiveness;

• expand and consolidate our nationwide distribution network; and

• strengthen our product and service brands.

Our Corporate Structure

We commenced operations in 1998 through Beijing Acorn Trade Co., Ltd., or Beijing Acorn. In 2000, two other operating companies, Shanghai Acorn Network Co., Ltd., or Shanghai Acorn, and Shanghai Acorn Trade and Development Co., Ltd., or Shanghai Trade, were established and commenced business operations.

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Prior to January 1, 2005, our business was operated through Beijing Acorn, Shanghai Acorn and Shanghai Trade, including their subsidiaries. These three operating companies were under common management, operated on an integrated basis and were beneficially owned by the same shareholders and, with a limited exception, in the same shareholding percentages. To enable us to raise equity capital from investors outside of China, we established a holding company structure by incorporating China DRTV, Inc., or China DRTV, in the British Virgin Islands on March 4, 2004. In 2004, China DRTV formed four PRC subsidiaries and two consolidated PRC affiliated entities. Through a restructuring, we implemented an offshore holding company structure to comply with PRC laws imposing restrictions on foreign ownership in direct sales, wholesale distribution and advertising businesses. As part of the restructuring, each of the combined entities, including their subsidiaries, transferred to China DRTV’s newly created subsidiaries and consolidated affiliated entities substantially all their assets and liabilities (with limited exceptions). Commencing on January 1, 2005, our business was conducted through China DRTV and its subsidiaries and three affiliated entities. 

Our three affiliated entities, Shanghai Acorn Network Technology Development Co., Ltd., or Shanghai Network, Shanghai Acorn Advertising Broadcasting Co., Ltd., or Shanghai Advertising, and Beijing Acorn, are currently owned by two PRC citizens, Don Dongjie Yang, our president and one of our directors, and David Chenghong He, one of our executive officers. We have entered into contractual arrangements with these three affiliated entities pursuant to which our wholly owned subsidiary, Acorn Information Technology (Shanghai) Co., Ltd., or Acorn Information, provides technical support and operation and management services to these three affiliated entities. In addition, we have entered into agreements with these three affiliated entities and their shareholders, Don Dongjie Yang and David Chenghong He, providing us with the ability to effectively control each of these affiliated entities. Accordingly, we have consolidated the historical financial results of these three affiliated entities into our financial statements as variable interest entities pursuant to US GAAP. See “Our Corporate Structure.”

In anticipation of our initial public offering, we incorporated Acorn International, Inc., or Acorn International, in the Cayman Islands on December 20, 2005 as our listing vehicle. Acorn International became our ultimate holding company when it issued shares to the existing shareholders of China DRTV on March 31, 2006 in exchange for all of the shares that these shareholders held in China DRTV.

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The following diagram illustrates our current corporate structure and the place of formation and affiliation of each of our subsidiaries and the three affiliated entities as of the date of this prospectus⁽¹⁾:

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(1) For risks related to our current corporate structure, see “Risk Factors—Risks Related to the Regulation of Our Business.”

(2) For a description of the agreements that provide us with effective control over Shanghai Acorn Network Technology Development Co., Ltd., Beijing Acorn Trade Co., Ltd. and Shanghai Acorn Advertising Broadcasting Co., Ltd., including equity pledge agreements, irrevocable powers of attorney, a loan agreement, operation and management agreements and exclusive purchase agreements, see “Our Corporate Structure—Contractual Arrangements with the Consolidated Affiliated Entities and their Shareholders.”

(3) The economic benefits of Shanghai Acorn Network Technology Development Co., Ltd., Beijing Acorn Trade Co., Ltd. and Shanghai Acorn Advertising Broadcasting Co., Ltd. accrue to Acorn Information Technology (Shanghai) Co., Ltd. pursuant to certain technical service agreements. See “Our Corporate Structure—Contractual Arrangements with the Consolidated Affiliated Entities and their Shareholders.”

Corporate Information

Our principal executive offices are located at 12F, Xinyin Building, 888 Yishan Road, Shanghai 200233, the People’s Republic of China. Our telephone number at this address is (8621) 5151-8888 and our fax number is (8621) 6432-0096. Our website is www.chinadrtv.com. The information contained on our website is not part of this prospectus.

Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011.

Conventions That Apply to This Prospectus

Unless we indicate otherwise, references in this prospectus to:

• “ADSs” are to our American depositary shares, each of which represents three ordinary shares;

• “ADRs” are to American depositary receipts, which, if issued, evidence our ADSs;

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

• “China” and the “PRC” are to the People’s Republic of China, excluding, for the purposes of this prospectus only, Taiwan and the special administrative regions of Hong Kong and Macau;

• “ordinary shares” are to our ordinary shares, par value $0.01 per share;

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

• “we,” “us,” “our company” and “our” refer to Acorn International, Inc., its predecessor entities and its subsidiaries.

Unless specifically indicated otherwise or unless the context otherwise requires, all references to our ordinary shares have been adjusted to give effect to the automatic conversion of all outstanding Series A convertible redeemable preferred shares and Series A-1 convertible redeemable preferred shares to ordinary shares upon the closing of this offering.

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This prospectus contains translations of Renminbi amounts into U.S. dollars at specified rates. Unless otherwise noted, all translations from Renminbi to U.S. dollars were made at the noon buying rate in The City of New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York, or the noon buying rate, as of December 29, 2006, which was RMB7.8041 to $1.00. We make no representation that the Renminbi amounts referred to in this prospectus could have been or could be converted into U.S. dollars at any particular rate or at all. See “Risk Factors—Risks Relating to China—Because our net revenues are generated in Renminbi and our results are reported in U.S. dollars, devaluation of the Renminbi could negatively impact our results of operations.” On May 2, 2007, the noon buying rate was RMB7.7039 to $1.00.

Recent Developments

The following is an estimate of our selected preliminary unaudited financial results for the quarter ended March 31, 2007. In the first quarter of 2007, we expect to record, subject to the adjustments described below:

• total net revenues in the range of $67.7 million to $69.5 million, compared to $57.5 million in the quarter ended March 31, 2006;

• gross profit in the range of $36.0 million to $37.6 million, compared to $32.0 million in the quarter ended March 31, 2006;

• income from operations in the range of $5.8 million to $6.2 million (including approximately $1.3 million in anticipated share-based compensation expenses), compared to $4.6 million in the quarter ended March 31, 2006; and

• net income in the range of $6.8 million to $7.3 million (including approximately $1.5 million in investment gains), compared to $5.4 million in the quarter ended March 31, 2006.

See “Recent Developments” for a discussion of these preliminary results and a comparison of these results to results for the quarter ended March 31, 2006.

Our preliminary operating results for the quarter ended March 31, 2007 are subject to adjustment based upon, among other things, completion of our review and reporting processes. Actual results could differ materially. For additional information regarding the various risks and uncertainties inherent in such estimates, see “Special Note Regarding Forward-Looking Statements.” Results for the first quarter of 2007 may not be indicative of our full year results for 2007 or future quarterly periods. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus for information regarding trends and other factors that may influence our results of operations and for recent quarterly operating results.

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THE OFFERING

Price per ADS $15.50

This Offering:

ADSs Offered by Us	6,700,000 ADSs
ADSs Offered by the Selling Shareholders	1,000,000 ADSs
Total	7,700,000 ADSs

ADSs Outstanding Immediately After This Offering 7,700,000 ADSs (or 8,855,000 ADSs if the underwriters exercise the over-allotment option in full).

Ordinary Shares Outstanding Immediately After This Offering 89,671,364 ordinary shares after giving effect to the conversion of our Series A convertible redeemable preferred shares and Series A-1 convertible redeemable preferred shares, but excluding ordinary shares issuable upon the exercise of outstanding options and stock appreciation rights with respect to our ordinary shares under our 2006 Equity Incentive Plan (including prior year grants of options covered under this plan).

Over-Allotment Option We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 1,155,000 additional ADSs from us at the initial public offering price set forth on the cover page of this prospectus, less underwriting discounts and commissions, solely for the purpose of covering over-allotments.

The ADSs Each ADS represents three ordinary shares. The ADSs will be evidenced by ADRs.

The depositary will be the holder of the ordinary shares underlying the ADSs and you will have the rights of an ADR holder as provided in the deposit agreement dated May 2, 2007 among us, the depositary and holders and beneficial owners of ADSs from time to time.

You may surrender your ADSs to the depositary to withdraw the ordinary shares underlying your ADSs. The depositary will charge you a fee for such an exchange.

We may amend or terminate the deposit agreement for any reason without your consent. Any amendment which imposes or increases fees or charges or which materially prejudices any substantial existing right you have as an ADS holder will not become effective as to outstanding ADSs until 30 days after notice of the amendment is given to ADS holders. If an amendment becomes effective, you will be bound by the deposit agreement as amended if you continue to hold your ADSs.

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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.

Use of Proceeds We estimate that we will receive net proceeds of approximately $92.3 million from this offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use our net proceeds from this offering for the following purposes:

• approximately $25 million to increase our purchases of, and pre-payments for, TV advertising time;

• approximately $10 million to build product and service brands, expand sales and marketing for our distribution sales, and further strengthen our business management system and infrastructure within our nationwide distribution network;

• approximately $10 million for product and service development, including upgrades of existing products and services and development of new products and services;

• approximately $10 million to enhance and upgrade our technology and other business infrastructure and platforms, as well as our customer data mining capabilities;

• approximately $20 million to explore alternative direct sales platforms, such as dedicated TV home shopping channels, catalog sales and Internet-based direct sales; and

• the balance to fund capital expenditures, working capital and for other general corporate purposes.

We will not receive any of the proceeds from the sale of the ADSs by the selling shareholders.

Risk Factors See “Risk Factors” and other information included in this prospectus for a discussion of the risks you should carefully consider before deciding to invest in our ADSs.

Listing Our application to list our ADSs on the New York Stock Exchange has been approved. Our ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system.

New York Stock Exchange Symbol ATV

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Depositary Citibank, N.A.

Lock-up We, the selling shareholders, our directors, executive officers, other existing shareholders and Alibaba.com Corporation (which has agreed to purchase 645,160 of the ADSs offered in this offering) have agreed with the underwriters not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities for a period of 180 days after the date of this prospectus. See “Underwriting.”

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SUMMARY CONDENSED CONSOLIDATED COMBINED FINANCIAL AND OPERATING DATA

The following summary condensed consolidated combined statements of operations data for the years ended December 31, 2004, 2005 and 2006 and the summary condensed consolidated combined balance sheet data as of December 31, 2004, 2005 and 2006 have been derived from our audited consolidated combined financial statements included elsewhere in this prospectus, which have been audited by Deloitte Touche Tohmatsu CPA Ltd., an independent registered public accounting firm. You should read the summary condensed consolidated combined financial data in conjunction with those financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our audited consolidated combined financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or US GAAP. Our historical results do not necessarily indicate our results expected for any future periods.

	For the years ended December 31,
	2004			2005			2006
	(in thousands, except share, per share and per ADS data)
Summary Condensed Consolidated Combined Statements of Operations Data
Revenues:
Direct sales, net	$	52,038		$	76,828		$	107,411
Distribution sales, net		43,022			93,512			89,087
Total revenues, net		95,060			170,340			196,498
Cost of revenues:
Direct sales		16,826			26,646			32,013
Distribution sales		19,279			43,566			41,260
Total cost of revenues		36,105			70,212			73,273
Gross profit		58,955			100,128			123,225
Operating income (expenses):
Advertising expenses		(27,903	)		(55,564	)		(76,549	)
Other selling and marketing expenses(1)(2)		(7,697	)		(13,734	)		(21,023	)
General and administrative expenses(1)		(6,126	)		(12,340	)		(27,115	)
Other operating income, net		498			1,553			3,105
Income from operations		17,727			20,043			1,643
Change in fair value in warrant liability		—			(10,059	)		—
Net income(3)(4)		14,492			8,032			3,945
Deemed dividend on Series A convertible redeemable preferred shares		—			(162	)		(162	)
Income attributable to holders of ordinary shares	$	14,492		$	7,870		$	3,783
Income per share—basic ordinary shares	$	0.31		$	0.13		$	0.05
Income per share—basic preferred shares	$	—		$	0.14		$	0.06
Income per share—diluted	$	0.31		$	0.12		$	0.05
Shares used in calculating basic income per share—ordinary shares		46,809,668			45,814,725			48,979,394
Shares used in calculating basic income per share—preferred shares		—			16,770,999			20,591,970
Shares used in calculating diluted income per share		46,809,668			48,645,299			53,607,999
Dividends declared per ordinary share	$	0.17		$	0.02		$	—
Pro forma income per share on an as-converted basis, basic (unaudited)(5)							$	0.06
Pro forma income per share on an as-converted basis, diluted (unaudited)(5)							$	0.05
Shares used in calculating pro forma per share amounts on an as-converted basis, basic (unaudited)(5)								69,571,364
Shares used in calculating pro forma per share amounts on an as-converted basis, diluted (unaudited)(5)								74,199,969

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	As of December 31,
	2004			2005			2006
	(in thousands)
Summary Condensed Consolidated Combined Balance Sheet Data
Cash and cash equivalents	$	16,645		$	35,386		$	40,744
Accounts receivable, net		9,682			8,727			11,715
Inventory		1,426			5,476			7,815
Prepaid advertising expenses		4,903			20,090			25,384
Other prepaid expenses and current assets		2,965			8,503			10,667
Property and equipment, net		3,076			4,353			5,157
Goodwill		—			7,572			7,572
Total assets		39,862			100,372			118,699
Accounts payable		1,409			4,622			3,684
Accrued expenses and other current liabilities		4,371			6,199			7,125
Income taxes payable		274			705			182
Total current liabilities		13,846			12,530			15,183
Total liabilities		13,971			12,569			15,183
Total liabilities, mezzanine equity and shareholders’ equity	$	39,862		$	100,372		$	118,699
	For the years ended December 31,
	2004			2005			2006
	(in thousands, except percentages)
Selected Operating Data
Number of inbound calls generated through direct sales platforms		3,200			4,330			4,560	(6)
Conversion rate for inbound calls to product purchase order		24.3	%		22.1	%		19.2	%(6)
Total TV direct sales programs minutes		356.6			406.1			761.1
(1)    Includes share-based compensation of:
	For the years ended December 31,
	2004			2005			2006
	(in thousands)
Other selling and marketing expenses	$	—		$	(168	)	$	(741	)
General and administrative expenses	$	—		$	(2,168	)	$	(7,932	)
(2)    Includes amortization of intangible assets acquired in the July 2005 acquisition of the 49% minority interest of Shanghai HJX of:
	For the years ended December 31,
	2004			2005			2006
	(in thousands)
Other selling and marketing expenses	$	—		$	(239	)	$	(428	)
	For the years ended December 31,
(3)    Includes:	2004			2005			2006
	(in thousands)
Share-based compensation	$	—		$	(2,336	)	$	(8,673	)
Expensed offering costs		—			—			(3,166	)
Amortization of intangible assets acquired in the July 2005 acquisition of the 49% minority interest of Shanghai HJX		—			(239	)		(428	)
Change in fair value in warrant liability		—			(10,059	)		—

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The change in fair value in warrant liability resulted from our issuance on January 21, 2005 of a warrant allowing the holder to acquire 2,882,155 shares of our series A-1 convertible redeemable preferred shares upon payment of $8.0 million in cash, corresponding to a per share exercise price of $2.78. The warrant was exercised in full on December 28, 2005 and, as a result, no future charge will be recognized. The warrant was deemed a freestanding derivative liability which requires the warrant to be measured at fair value upon initial recognition and subsequent to initial recognition. Accordingly, we recognized a non-cash charge in connection with marking the warrant to fair value for periods prior to the exercise.

(4) Net income for the periods presented reflect effective tax rates which may not be representative of our long-term expected effective tax rates in light of the tax holidays and exemptions enjoyed by certain of our PRC subsidiaries and our consolidated affiliated entities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Taxation.”

(5) The pro forma income per share data gives effect to the automatic conversion of our outstanding Series A convertible redeemable preferred shares and Series A-1 convertible redeemable preferred shares into 20,591,970 ordinary shares upon closing of this offering.

	2006
	(in thousands, except share and per share data)
Income attributable to holders of ordinary share, as reported	$	3,784
Add: Deemed dividend on Series A convertible redeemable preferred shares		161
Net income, as reported	$	3,945
Pro forma net income (unaudited)	$	3,945
Pro forma income attributable to holders of ordinary shares (unaudited)	$	3,945
Shares used in calculating basic income per share:
As reported		48,979,394
Add: Series A and Series A-1 convertible redeemable shares (unaudited)		20,591,970
Pro forma on an as-converted basis (unaudited)		69,571,364
Pro forma basic income per share on an as-converted basis (unaudited):	$	0.06
Shares used in calculating diluted income per share:
As reported		53,607,999
Add: Series A and Series A-1 convertible redeemable shares (unaudited)		20,591,970
Pro forma on an as-converted basis (unaudited)		74,199,969
Pro forma diluted income per share on an as-converted basis (unaudited):	$	0.05

(6) Does not include calls generated under our marketing services arrangements that are primarily marketing in nature and are expected to result in limited direct sales revenues, such as our arrangement with China Unicom.

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RISK FACTORS

An investment in our ADSs involves significant risks. You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ADSs. Any of the following risks could have a material adverse effect on our business, financial condition and results of operations if they actually occur. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.

Risks Relating to Our Business

Our limited operating history and the early stage of development of our industry make it difficult to evaluate our business and future prospects.

We commenced operation in 1998 and began selling our products and services through our integrated multiple sales platforms on a larger scale in 2000. Our business model continues to evolve in conjunction with the evolution of China’s TV direct sales industry (including the TV home shopping industry). For example, in 2006, we began selling and marketing on our TV direct sales platform pursuant to joint sales and marketing services arrangements certain third-party branded products and services, which, to date, we have sold through our nationwide distribution network only in limited quantities. Accordingly, our current business has a limited operating history from which you can evaluate our viability and sustainability. In addition, we have experienced significant growth and profitability in recent periods. From 2004 to 2006, our net revenues and gross profit grew at compound annual growth rates, or CAGRs, of 43.8% and 44.6%, respectively, which rates may not be sustained. Moreover, the TV direct sales industry in China is still in the early stage of development and the competitive landscape and range of products and services being offered continue to evolve rapidly. You should consider our future prospects in light of risks and uncertainties experienced by early stage companies in evolving industries in China, including an evolving regulatory environment and emerging consumer preferences. These circumstances may make it difficult for you to evaluate our business and future prospects.

Our operating results fluctuate from period to period, making them difficult to predict. Our operating results for a particular period could fall below our expectations or the expectations of investors or any market analyst that may issue reports or analyses regarding our ADSs, resulting in a decrease in the price of our ADSs.

Product and service-related factors:

Our operating results are highly dependent upon, and will fluctuate, based on the following product and service-related factors:

• the mix of TV direct sales programs, including the portion thereof dedicated to products and services marketed by us pursuant to joint sales and marketing services arrangements, and brand promotion advertising;

• the mix of products and services selected by us for marketing through our TV direct sales programs and our nationwide distribution network and their average selling prices;

• the portion of any subscription or service revenue deferred or recognized in any period;

• new product or service introductions by us or our competitors;

• the availability of competing products and services and possible reductions in the sales price of our products and services over time in response to competitive offerings or in anticipation of our introduction of new or upgraded offerings;

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• seasonality with respect to certain of our products, such as our electronic learning devices. Sales for these products are typically higher around the first and third quarters corresponding with the end and beginning of school semesters in China;

• the cycles of our products and services featured in our TV direct sales programs, with such sales typically growing rapidly over the initial promotional period and then declining over time, sometimes precipitously in a short period of time. For example, our electronic wrinkle remover, for which we began full-scale sales and marketing in December 2003, accounted for over 20% of 2004 total net revenues with sales declining by over 94% in 2005 due to the unanticipated short lifecycle of this product in a very competitive environment;

• the success of our distributors in promoting and selling our products locally; and

• the potential negative impact distributor sales may have on our own direct sales efforts.

Other factors:

In addition, factors not directly relating to our products and services which could cause our operating results to fluctuate in a particular period or in comparison to a prior period include:

• any requirement to suspend or terminate a particular TV direct sales program, including in response to regulatory actions;

• negative publicity about our products and services;

• the amount and timing of operating expenses incurred by us, including inventory-related losses, bad debt expense, product returns and options grants to our employees;

• gains and losses related to our investments in marketable securities; and

• the level of advertising and other promotional efforts by us and our competitors in a particular period.

Due to these and other factors, our operating results will vary from period to period, will be difficult to predict for any given period, may be adversely affected from period to period and may not be indicative of our future performance. If our operating results for any period fall below our expectations or the expectations of investors or any market analyst that may issue reports or analyses regarding our ADSs, the price of our ADSs is likely to decrease.

Our failure to obtain the prior approval of the China Securities Regulatory Commission, or the CSRC, for this offering and the listing and trading of our ADSs on the New York Stock Exchange could have a material adverse effect on our business, operating results, reputation and trading price of our ADSs, and may also create uncertainties for this offering.

On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated a regulation that became effective on September 8, 2006. This regulation, among other things, has some provisions that purport to

require that an offshore special purpose vehicle, or SPV, formed for listing purposes and controlled directly or indirectly by PRC companies or individuals shall obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures specifying documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings. However, the application of this PRC regulation remains unclear with no consensus currently existing among the leading PRC law firms regarding the scope and applicability of the CSRC approval requirement.

Our PRC counsel, Haiwen & Partners, has advised us that because we completed our restructuring before September 8, 2006, the effective date of the new regulation, it is not necessary for us to submit the application to

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the CSRC for its approval, and the listing and trading of our ADSs on the New York Stock Exchange does not require CSRC approval.

If the CSRC or another PRC regulatory agency subsequently determines that CSRC approval was required for this offering, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from this offering into the PRC, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. The CSRC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs offered hereby. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur.

Also, if later the CSRC requires that we obtain its approval, we may be unable to obtain a waiver of the CSRC approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding this CSRC approval requirement could have a material adverse effect on the trading price of our ADSs.

Our best-selling featured product lines account for, and are expected to continue to account for, the substantial majority of our sales. Featured products sales may decline, these products may have limited product lifecycles, and we may fail to introduce new products and services to offset declines in sales of our featured products.

Our five best-selling featured products or product lines accounted for approximately 91.2%, 89.7% and 72.1% of our gross revenues in 2004, 2005 and 2006, respectively. Sales of our best-selling electronic learning devices product line, which we began selling in December 2003, accounted for approximately 26.0%, 42.8% and 31.7% of our gross revenues in 2004, 2005 and 2006, respectively. The composition of our five best-selling featured products has varied from year to year. We expect that a small number of our featured product lines will continue to account for a substantial majority of our sales.

Only approximately 13.2% of our TV direct sales customers purchased products or services through our direct sales platform more than once in 2006. Our featured products may fail to maintain or achieve sufficient consumer market popularity and sales may decline due to, among other factors, the introduction of competing products, entry of new competitors, customer dissatisfaction with the value or quality offered by our products, negative publicity or market saturation. Consequently, our future sales success depends on our ability to successfully identify, develop, introduce and distribute in a timely and cost-effective manner new and appealing products and services, including new and upgraded products and services.

Our product and service sales for a given period will depend upon, among other things, a positive customer response to our TV direct sales programs, our effective management of product inventory and the stage of our products’ lifecycles during the period. Customer response to our TV direct sales programs depends on many variables, including the appeal of the products and services being marketed, the effectiveness of the TV direct sales programs, the viability of competing products and services and the timing and frequency of airtime. Our new products and services may not receive market acceptance. In addition, from time to time, we experience delays in the supply of our products to customers due to production delays or shortages or inadequate inventory management, and we lose potential product sales as a result. Furthermore, during a product’s lifecycle, problems may arise regarding regulatory, intellectual property, product liability or other issues which may affect the continued viability of the product for sale. Although we have previously offset declining sales of a featured product line through increased sales of a new or expanded featured product line, we may be unable to do so in the future. For example, in 2006 we recorded overall net revenue growth of 15.4% mainly due to the strength of our PDA cell phone and GPS product lines, while sales of our consumer electronics products and electronic learning

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devices, which became featured products in 2001 and 2003, respectively, declined significantly in 2006 compared to 2005.

If we fail to identify and introduce additional successful products and services, including those to replace existing featured products suffering from declining sales or approaching the end of their product lifecycle, our gross revenues may not grow or may decline and our market share and value of our brand may be materially and adversely affected.

Our business depends significantly on the strength of our product and service brands and corporate reputation; our failure to develop, maintain and enhance our product and service brands and corporate reputation may materially and adversely affect the level of market recognition of, and trust in, our products and services.

In China’s fragmented, developing and increasingly competitive consumer market, product and service brands and corporate reputation have become critical to the success of our new products and services and the continued popularity of our existing products and services. Our ability to develop, maintain and enhance a given product or service’s brand image and recognition depends largely on our ability to remain a leader in the TV direct sales market industry in China. Our brand promotion efforts, particularly our brand promotion activities, may be expensive and may fail to either effectively promote our product and service brands or generate additional sales.

Our product and service brands, corporate reputation and product sales could be harmed if, for example:

• our advertisements, including our TV direct sales programs, or the advertisements of the owners of the third-party brands that we market or those of our distributors are deemed to be misleading or inaccurate;

• our products or services fail to meet customer expectations;

• we provide poor or ineffective customer service;

• our products or services contain defects or fail;

• consumers confuse our products with inferior or counterfeit products;

• consumers confuse our TV direct sales programs with those of our competitors, some of which may promote inferior products, be misleading or inaccurate, or be of poor production quality; or

• consumers find our outbound calls intrusive or annoying.

For example, in July 2006, several articles appeared in the Chinese media that, among other things, questioned the pricing and quality of our products, in particular targeting our electronic learning devices, which were our best-selling product in 2006. The negative media coverage led to a decline in sales volume and revenue for this product and several of our other products. Any failure to maintain and enhance our product or service brands or our corporate reputation, in response to negative publicity or the other matters described above, may materially and adversely affect the market recognition of, and trust in, our products and services and the levels of sales and product returns and thus significantly harm our operating results.

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Our business depends on our access to TV media time to market our products and services in China. We do not generally have long-term contracts to purchase TV media time, and any regulatory or other disruption of our access to desired TV time slots could negatively impact the effectiveness of our TV direct sales platform.

Our business is dependent on having access to media time to televise our TV direct sales programs. Substantially all our direct sales, which accounted for 54.7%, 45.1% and 54.7% of our total net revenues in 2004, 2005 and 2006, respectively, are generated through our TV direct sales platform. In addition, our nationwide distribution network is significantly dependent on our TV direct sales platform. Our distributors generally seek to distribute products and services that were or continue to be sold successfully through our TV direct sales programs.

Under PRC regulations, airtime used to broadcast retail sales programs is generally considered advertising time. PRC regulations restrict the overall daily TV advertising time and the amount of TV advertising time during certain daily time periods. Our TV direct sales programs, which are typically five to ten minutes in length, are in most cases treated by TV stations as advertising for purposes of complying with these PRC regulations. Accordingly, adverse or unanticipated regulatory changes, including any change that limits the amount of time available for TV advertising generally or its availability to us, could significantly harm our business or limit our ability to operate. Consistent with industry practice in China, our TV advertising purchase contracts are typically negotiated annually. We purchase TV advertising time directly from TV stations or TV advertising agencies that have exclusive rights to sell certain time slots for certain TV channels. Competition for attractive TV advertising time and for channels in China is intense, in part, due to the daily restrictions discussed above. Competitors for advertising time include other TV-based retail companies and companies seeking to advertise their own products and services. In addition, certain TV channels have in the past allocated, and might choose in the future to allocate, fewer time slots for TV direct sales programs. As our existing contracts expire, we may be unable to purchase or renew desired advertising time slots on desirable TV channels or at favorable price levels, if at all. Any significant decreases in our access to media time, including as result of any failure to renew or extend our existing contracts with TV stations or their advertising agencies, could negatively impact the effectiveness of our TV direct sales platform.

We expect our advertising commitments to increase in 2007. However, this increase in advertising commitments may not generate higher net revenues, thereby negatively impacting our overall profitability.

Our TV advertising time purchase contracts typically require us to make full advance payment before broadcasting our TV direct sales programs. As of December 31, 2006, we had existing contractual commitments to purchase $62.8 million of TV advertising time for direct sales programs. Accordingly, if we fail to manage our media time efficiently or effectively, such that our TV advertising efforts fail to generate sufficient return or profit potential, our results of operations and business performance may be materially and adversely affected. Also, we may be unable to use all our purchased time due to factors out of our control, such as preemption of our time by special programming events and programming overruns by our TV stations. In 2006, approximately 2% of our purchased TV advertising time was preempted by these TV stations. Although these TV stations reimburse us or provide us alternative advertising time slots in the event of preemption, this might not fully compensate us for loss of our desired time slots.

The purchase of TV advertising time is our largest operating expenditure. Since 2004, while our total TV advertising cost per minute varies per TV channel due to changes in ratings and mix in advertising time slots, our total TV advertising costs as a percentage of our net revenues has been increasing. For example, our advertising costs on our primary CCTV channels have generally increased annually from 2004 to 2006 and are expected to continue to increase. Costs on some of the satellite channels on which we air our direct sales programs have increased and are likely to continue to increase in some instances by more than 100%, as their coverage and ratings increase. In 2007, total minutes for TV direct sales programs are expected to increase by over 5.5% compared to 2006. A significant increase in the cost of media time could negatively impact our overall profitability.

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Our joint sales and marketing services arrangements constitute an increasingly important part of our business, and the termination of any of them could materially and adversely affect our business, results of operations, financial condition and prospects.

Our joint sales arrangements generate direct sales revenues and additional payment streams, some of which reduce our cost of direct sales revenues. Our marketing services arrangements generate marketing services revenues. We expect that these arrangements will constitute an increasingly important part of our business in the future. We do not maintain long-term contracts with any of the parties with whom we have arrangements, and our ability to maintain and manage relationships with each of them is subject to various uncertainties, some of which are not within our control. Third parties with whom we engage in joint sales and marketing services activities may decide to produce their own TV direct sales programs, or may decide to rely on the services of our competitors. If any of our joint sales or marketing services arrangements terminates, our business, results of operations, financial condition and prospects could be materially and adversely affected.

We rely on our nationwide distribution network for a significant portion of our revenues. Failure to maintain good distributor relations could materially disrupt our distribution business and harm our net revenues.

Our business is significantly dependent on the performance of our distributors. In 2004, 2005 and 2006, 45.3%, 54.9% and 45.3%, respectively, of our net revenues were generated through our approximately 80 distributors. Our largest distributor accounted for approximately 3.2% and 5.7% of our gross revenues in 2005 and 2006. We do not maintain long-term contracts with our distributors. Maintaining relationships with existing distributors and replacing any distributor may be difficult or time consuming. Our failure to maintain good relationships with our distributors could materially disrupt our distribution business and harm our net revenues.

We may be unable to effectively manage our nationwide distribution network. Any failure by our distributors to operate in compliance with our distribution agreements and applicable law may result in liability to us, may interrupt the effective operation of our distribution network, may harm our brands and our corporate image and may result in decreased sales.

We have limited ability to manage the activities of our distributors, who are independent from us. In addition, our distributors or the retail outlets to which they sell our products and services may violate our distribution agreements with them or the sales agreements between our distributors and the retail outlets. Such violations may include, among other things:

• failure to meet minimum sales targets for our products and services or minimum price levels for our products and services in accordance with relevant agreements;

• failure to properly promote our products and services through local marketing media, including local TV and print media, violation of our media content requirements, or failure to meet minimum required media spending levels;

• selling products and services that compete with our products and services, including product or service imitations, or selling our products and services outside their designated territory, possibly in violation of the exclusive distribution rights of other distributors;

• providing poor customer service; or

• violating PRC law in the marketing and sale of our products and services, including PRC restrictions on advertising content or product and service claims.

In particular, we recently discovered that some of the retail outlets to which our distributors sell our products and services are selling imitation products that compete with our posture correction and sleeping aid

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products. Although we continue to rigorously monitor this situation and require our distributors to abide by their contractual obligation to eliminate any such violation by the retail outlets, we may be unable to police or stop violations such as selling of imitation products or services by retail outlets.

If we determine to fine, suspend or terminate our distributors for acting in violation of our distribution agreements, or if the distributors fail to address material violations committed by any of their retail outlets, our ability to effectively sell our products and services in any given territory could be negatively impacted. In addition, these and similar actions could negatively affect our brands and our corporate image, possibly resulting in loss of customers and a decline in sales.

Some of our distributors may compete with us in certain TV direct sales markets, possibly negatively affecting our direct sales in those markets.

Several of our current distributors market and sell some of our and others’ products and services through their own TV direct sales platforms and call centers. Three of these distributors were among our five best- performing distributors in 2005 and two were among our five best-performing distributors in 2006, with aggregate revenue contribution constituting approximately 9.1% and 4.3% of our gross revenues in 2005 and 2006, respectively. Each of these distributors is a party to our standard distribution arrangement and each operated its own TV direct sales platform prior to becoming our distributor. These distributors continue to operate their own TV direct sales platforms. In addition, some of our other distributors use edited versions of our TV direct sales programs to market our products on local TV stations and conduct TV direct sales activities through their own call-in numbers. These distributors’ TV direct sales efforts may compete with and negatively affect our own TV direct sales in their respective territories.

Certain of our distributors are beneficially owned by our employees, executive officers and shareholders. It may be difficult for us to effectively evaluate the performance of these distributors or to replace any of them if they are non-performing, underperforming or non-compliant with our distribution agreements.

We have approximately 80 distributors constituting our nationwide distribution network that distribute our products and services across China. To accelerate the establishment of our distribution network, in 2000 we issued shares in our company to owners of five of these distributors as incentives when they joined our nationwide distribution network. In 2005 and 2006, the aggregate sales generated by these five distributors accounted for approximately 15.2% and 13.0% of our distribution gross revenues and 8.3% and 5.9% of our total gross revenues, respectively. In 2005 and 2006, two of these distributors were among our five best-performing distributors. None of these shareholders owns more than 1% of our company. In addition, of our distributors, 11 are owned in part, or in some cases in whole, by eight of our employees or their family members. Seven out of these eight individuals became our employees as a result of our acquisition of the remaining 49% interest of Shanghai HJX Digital Technology Co., Ltd., or Shanghai HJX, in July 2005. In 2005 and 2006, the aggregate sales generated by these 11 distributors accounted for approximately 33.3% and 26.9% of our distribution gross revenues or 18.3% and 12.2% of our total gross revenues, respectively. In 2005, two of these distributors were, and in 2006, one of these distributors was, among our five best-performing distributors. These eight employees, none of whom are executive officers, are currently responsible for various functions or operations relating to our nationwide distribution business. In addition, two distributors in 2005 and three distributors in 2006, each of which accounted for less than 1% of our distribution gross revenues in 2005 and 2006, were wholly owned by family members of our chief executive officer and another of our executive officers. We entered into the distribution agreements with these related distributors on an arm’s-length basis and the terms in the distribution agreements with these distributors are the same as those with our independent distributors. However, these economic interests held by our shareholders, executive officers and employees in our distributors may make it difficult for us to effectively evaluate the performance of such distributors or fine, suspend or terminate a non-performing, under-performing or non-compliant distributor without harming our relationship with those shareholders, executive officers and employees.

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Our failure to adequately manage our growth and expansion could negatively impact our ability to effectively operate our business, accurately report our financial results as a public company and attract and train our employees and management, which could hamper our business strategy and result in deterioration in our operating results.

Our operations have grown rapidly, particularly in recent years. We grew from 128 employees in 2000, to 1,768 employees as of December 31, 2006. In particular, in July 2005 we added approximately 240 employees following our acquisition of the 49% minority interest of our previously majority-owned subsidiary, Shanghai HJX. This subsidiary was responsible for manufacturing and marketing our electronic learning devices product line. Our recent growth has resulted, and future growth could continue to result, in substantial demands being placed on our operational and administrative systems, our financial and management controls and resources, our management and our employee training capabilities. Any failure in these areas could significantly harm our ability to effectively operate our business, accurately report our financial results as a public company and attract and train our employees and management, which could hamper our business strategy and result in deterioration in our operating results.

We depend on our senior management team, key personnel and skilled and experienced employees in all aspects of our business, and our business and operations may be severely disrupted and our performance negatively affected if we lose their services.

Our future success significantly depends upon the continuing service of our senior management team, including James Yujun Hu, our CEO, Don Dongjie Yang, our president, Guoying Du, our vice president responsible for managing our nationwide distribution network, Ella Man Lin, our vice president responsible for product development and supplier and human resources management, David Chenghong He, our vice president responsible for management of our financial, logistics and payment systems, Kevin Guohui Hu, our vice president responsible for media purchasing, planning and management and Gordon Xiaogang Wang, our vice president and our chief financial officer. If one or more members of our senior management team or other key employees are unable or unwilling to continue in their present position, we may not be able to replace them easily or at all, our business could be severely disrupted, and our financial condition and results of operations could be materially and adversely affected. We do not maintain key-man life insurance for any of our senior management.

To maintain our competitive position and expand our operations, we must attract, train and retain skilled and experienced employees in numerous areas, including product development, media procurement and call center operations. The monthly average turnover rate for our three call centers in 2005 ranged from 2.6% to 9.7% and in 2006 ranged from 3.3% to 7.6%, reflecting both voluntary terminations and termination of employees failing to meet our performance standards. Any inability to attract and retain a significant number of skilled and experienced employees in our call centers or other critical areas could seriously disrupt our business and operations and negatively affect our financial performance.

In fulfilling sales through our direct sales platforms, we face customer acceptance, delivery, payment and collection risks that could adversely impact our direct sales net revenues and overall operating results. We are in particular dependent on China Express Mail Service Corporation, or EMS, to make our product deliveries and from time to time we have been required to write off certain accounts receivable from EMS.

We rely significantly on EMS, the largest national express mail service operated by the China Post Office, and to a lesser extent, local delivery companies, to deliver products sold through our direct sales platforms. EMS and local delivery companies made deliveries of products representing 64.2% and 29.2% of our direct sales gross revenues in 2004, 59.4% and 37.7% of our direct sales gross revenues in 2005 and 62.9% and 34.1% of our direct sales gross revenues in 2006, respectively. Due to the current lack of other viable payment alternatives, almost all of the products that we sell through our direct sales platforms are delivered and paid for by customers on a cash on delivery, or COD, basis. We rely on EMS and local delivery companies to remit customer payment collections to

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us. Of the total attempted product deliveries by EMS and local delivery companies on a COD basis, approximately 81% and 77% were successful in 2005 and 2006, respectively. Reasons for delivery failure primarily include customer refusal to accept a product upon delivery or failure to successfully locate the delivery address. We believe that our successful delivery rates declined in 2006 mainly because of higher average selling prices for our products and services, which led to a higher number of customer refusals. Although we continue to explore alternative payment methods, we expect to continue to be dependent on COD customer payments for the foreseeable future.

EMS typically requires 50 days to remit to us the COD payments received from our customers. Of our total accounts receivable balance as of December 31, 2005 and 2006, $5.9 million, or 67.3%, and $7.8 million, or 66.3%, respectively, was due from EMS. In addition, from time to time, we have been required to write off certain EMS accounts receivable due to a difference between EMS’s collections according to our records and cash amounts actually received by EMS according to their records. The total amount of EMS-related accounts receivable written off in 2006 was approximately $0.3 million. We may be required to write off similar or higher amounts in the future.

We do not maintain a long-term contract with EMS. Although we are striving to shift more of our deliveries to local delivery companies, we expect to remain dependent on EMS for the foreseeable future. Failure or inability to renew our contract with EMS could disrupt our business and operations and negatively affect our financial performance.

We expect competition in China’s consumer market to intensify. If we do not compete successfully against new and existing competitors, we may lose our market share, and our profitability may be adversely affected.

Competition from current or future competitors could cause our products and services to lose market acceptance or require us to significantly reduce our prices or increase our promotional activities to maintain and attract customers. Many of our current or future competitors may have longer operating histories, better brand recognition and consumer trust, strong media management capabilities, better media and supplier relationships, a larger technical staff and sales force and/or greater financial, technical or marketing resources than we do. Because of our integrated vertical business model, we face competition from the following companies operating in our value chain:

• Other TV direct sales companies operating in China with generally similar business models to ours, including Pacific Media, China SevenStar and Smile TV (Chi Ma Ao);

• TV home shopping companies that operate on one or two TV channels in a single province such as Oriental CJ Home Shopping, GS Chongqing Home Shopping and GD Hyundai Home Shopping, as well as TVSN, which operates on several TV channels;

• Numerous domestic and international sellers of consumer branded products that sell their products in China. For example, our Ozing electronic learning devices compete with electronic learning devices under BBK, e100, Noah and other brands, and our cell phone products compete with similar products sold by local and international cell phone manufacturers;

• Traditional retailers and distributors, as well as direct marketers such as Avon, operating in China which currently or in the future may offer competing products or services, including products or services under their own brand, or may otherwise offer or seek to offer small and medium manufacturers and suppliers distribution capabilities throughout China; and

• Other Internet and e-commerce companies in China that offer consumer products online via an Internet platform, including eBay’s China site, Alibaba’s Tao Bao, and Dang Dang.

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In addition, large multi-national home shopping companies such as QVC may enter the China market directly or indirectly. Entry by these players becomes more likely if existing PRC restrictions on content, number of advertising hours per day and foreign ownership of TV stations are relaxed.

We also compete with companies that make imitations of our products at substantially lower prices, such as our oxygen generating products, that may be sold in department stores, pharmacies and general merchandise stores.

We may be unable to successfully compete against new or existing direct or indirect competitors which could cause us to lose our market share and adversely affect our profitability.

We may not realize the anticipated benefits of our potential future joint ventures, acquisitions or investments or be able to integrate any acquired employees, businesses, products or services, which in turn may negatively affect their performance and respective contributions to our results of operations.

As a means of acquiring managerial expertise and additional complementary distribution network infrastructure, since 2003, we have entered into seven joint ventures with other entities for our products and services, including our electronic learning device product line. In connection with these ventures, we also acquired services of certain management personnel, including Guoying Du, one of our executive officers who is currently in charge of our nationwide distribution network. In these arrangements, we have typically received at least majority control and exclusive rights to distribute a product through the joint ventures in exchange for our agreement to market and sell the product through our multiple sales platforms, a minority equity stake and cash consideration. In the case of the joint venture responsible for the manufacturing and sale of our electronic learning devices (initially majority-owned), we were able to acquire all the remaining minority interest in July 2005. We may continue to enter into similar joint ventures or make other acquisitions or investments to, among other things, acquire managerial expertise or additional complementary distribution network infrastructure or to secure exclusive product distribution rights for the products to be sold through our multiple sales platforms. Risks related to our existing and future joint ventures, acquisitions and investments include, as applicable:

• our ability to enter into, exit or acquire additional interests in our joint ventures or other acquisitions or investments may be restricted by or subject to various approvals under PRC law or may not otherwise be possible, may result in a possible dilutive issuance of our securities or may require us to borrow money to fund those activities;

• we may disagree with our joint venture partner(s) or other investors on how the venture or invested business should be managed and/or operated;

• to the degree we wish to do so, we may be unable to integrate and retain acquired employees or management personnel; incorporate acquired products, services or capabilities into our business; integrate and support pre-existing manufacturing or distribution arrangements; consolidate duplicate facilities and functions; or combine aspects of our accounting processes, order processing and support functions; and

• the joint venture or investment could suffer losses and we could lose our total investment, which would have a negative effect on our operating results.

Any of these events could distract our management’s attention and result in our not obtaining the anticipated benefits of our joint ventures, acquisitions or investments and, in turn, negatively affect the performance of such joint ventures, acquisitions and investments and their respective contributions to our results of operations.

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Interruption or failure of our telephone system and management information systems could impair our ability to effectively sell and deliver our products and services or result in a loss or corruption of data, which could damage our reputation and negatively impact our results of operations.

45.1% and 54.7% of our total net revenues in 2005 and 2006, respectively, were generated through our direct sales platforms, with orders processed by our call centers. Our call centers rely heavily on our telephone and management information systems, or MIS, to receive customer calls at our call centers, process customer purchases, arrange product delivery and assess the effectiveness of advertising placements and consumer acceptance of our products and services, among other things. As our business evolves and our MIS requirements change, we may need to modify, upgrade and replace our systems. We work closely with third-party vendors to provide telephone and MIS tailored to our specific needs. We are and will continue to be substantially reliant on these third-party vendors for the provision of maintenance, modifications, upgrades and replacements to our systems. If these third-party vendors can no longer provide these services, it may be difficult, time consuming and costly to replace them. Any such modification, upgrading or replacement of our systems may be costly and could create disturbances or interruptions to our operations. Similarly, undetected errors or inadequacies in our telephone and MIS may be difficult or expensive to timely correct and could result in substantial service interruptions.

From time to time, our computer systems experience short periods of power outage. Any telephone or MIS failure (including as a result of natural disaster or power outage), particularly during peak or critical periods, could inhibit our ability to receive calls and complete orders or evaluate the effectiveness of our promotions or consumer acceptance of our products and services or otherwise operate our business. These events could, in turn, impair our ability to effectively sell and deliver our products and services or the loss or corruption of customer, supplier and distributor data, which could damage our reputation and negatively impact our results of operations.

We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our product brand, reputation and competitive position. In addition, we may have to enforce our intellectual property rights through litigation. Such litigation may result in substantial costs and diversion of resources and management attention.

We rely on a combination of patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods to protect our intellectual property rights. In particular, we rely on the trademark law in China to protect our product brands. We currently maintain approximately 30 trademark registrations in China. The legal regime in China for the protection of intellectual property rights is still at a relatively early stage of development. Despite many laws and regulations promulgated and other efforts made by China over the years to enhance its regulation and protection of intellectual property rights, private parties may not enjoy intellectual property rights in China to the same extent as they would in many western countries, including the United States, and enforcement of such laws and regulations in China has not achieved the levels reached in those countries. The steps we have taken may be inadequate to prevent the misappropriation of our intellectual property. Separately, we are in the process of applying for registration or transfer of approximately 188 trademarks in China, including trademarks for two of our best-selling product lines in 2006. We may not be able to enforce our proprietary rights in connection with these trademarks before such registrations or transfers are approved by the relevant authorities and it is possible that such registrations or transfers may not be approved at all. In addition, manufacturers or suppliers in China may imitate our products, copy our various brands and infringe our intellectual property rights. We have recently discovered unauthorized products in the marketplace that are counterfeit reproductions of our products sold by the retailers within our nationwide distribution network and by third parties in retail stores and on websites. The counterfeit products that we found include our posture correction products, one of our five best-selling products in 2006, and our oxygen generating devices.

It is difficult and expensive to police and enforce against infringement of intellectual property rights in China. Imitation or counterfeiting of our products or other infringement of our intellectual property rights, including our trademarks, could diminish the value of our various brands, harm our reputation and competitive

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position or otherwise adversely affect our net revenues. We may have to enforce our intellectual property rights through litigation. Such litigation may result in substantial costs and diversion of resources and management attention.

We have in the past been, and in the future may again be, subject to intellectual property rights infringement claims by third parties, which could be time-consuming and costly to defend or litigate, divert our attention and resources, or require us to enter into licensing agreements. These licenses may not be available on commercially reasonable terms, or at all.

We have in the past been, and in the future may again be, the subject of claims for infringement, invalidity, or indemnification relating to other parties’ proprietary rights. For example, in December 2005 we were sued by a company that alleged that we had infringed their copyrights by allowing purchasers of our electronic learning devices to download from our website materials that it claimed were derived from its English textbooks and tapes without its consent. We subsequently settled the claim for approximately $5,000. These claims, with or without merit, could be time-consuming and costly to defend or litigate, divert our attention and resources, or require us to enter into licensing agreements. Such licenses may not be available on commercially reasonable terms, or at all.

The re-institution of litigation against us may have a negative effect on our oxygen generating device business operations and negatively affect our overall financial performance.

On April 19, 2006, Beijing Huashi Industrial Company brought a lawsuit against us in Beijing Xicheng District People’s Court, alleging that transfers of trademarks as well as fixed and moveable assets in connection with our acquisition of our oxygen generating devices business from its subsidiary in 2000 violated PRC laws that require a valuation and approval of transferred state-owned assets to be undertaken, and such transfers should, as a consequence, be voided. We were recently informed that the plaintiff had revoked its claim. However, it is still possible that the same or a similar lawsuit may be filed against us in the future. If this happens, our management’s attention may be distracted and the outcome of the litigation may have a negative effect on our oxygen generating device business operations and negatively affect our overall financial performance.

We have limited general business insurance coverage and we may be subject to losses that might not be covered by our existing insurance policies, which may result in our incurring substantial costs and the diversion of resources.

Insurance companies in China offer limited business insurance products and do not, to our knowledge, offer business liability insurance. While business interruption insurance is available to a limited extent in China, we have determined that the risks of disruption, cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to subscribe for such insurance. As a result, except for all-risks insurance on finished goods inventory stored in our central warehouses, we do not have any business liability, disruption or litigation insurance coverage for our operations in China. Any business disruption or litigation may result in our incurring substantial costs and the diversion of resources.

We do not carry product liability insurance coverage, and our sale of our and other parties’ products could subject us to product liability claims and potential safety-related regulatory actions. These events could damage our brand and reputation and the marketability of the products that we sell, divert our management’s attention and result in lower net revenues and increased costs.

The manufacture and sale of our products, in particular, our posture correction and neck massager product lines in our health and wellness product category, and our sale of other parties’ products could each expose us to product liability claims for personal injuries. Also, if these products are deemed by the PRC authorities to fail to conform to product quality and personal safety requirements in China, we could be subject to PRC regulatory

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action. Violation of PRC product quality and safety requirements by our or others’ products sold by us may subject us to confiscation of related earnings, penalties, an order to cease sales of the violating products or to cease operations pending rectification. If the offense is determined to be serious, our business license to manufacture or sell these and other products could be suspended. We currently do not carry any product liability insurance coverage. Any product liability claim or governmental regulatory action could be costly and time-consuming to defend. If successful, product liability claims may require us to pay substantial damages. Also, a material design, manufacturing or quality failure in our and other parties’ products sold by us, other safety issues or heightened regulatory scrutiny could each warrant a product recall by us and result in increased product liability claims. Furthermore, customers may not use the products sold by us in accordance with our product usage instructions, possibly resulting in customer injury. All of these events could materially harm our brand and reputation and marketability of our products, divert our management’s attention and result in lower net revenues and increased costs.

Any disruption of our or our manufacturing service providers’ manufacturing operations could negatively affect the availability of our products and our net revenues derived therefrom.

We manufactured almost half of the products we sell in terms of cost of revenues in 2006, with the balance provided by third-party suppliers and manufacturers in China. We purchase the materials we need to manufacture our products, including our best-selling electronic learning devices product line, from outside suppliers in China. In 2005, our largest supplier, which supplies LCD display screens for our electronic learning devices product line, accounted for approximately 36.9% of our total cost of revenues in 2005. Our largest supplier in 2006, which supplies PDA cell phones, accounted for approximately 14.9% of our total cost of revenues in 2006. We typically purchase all production materials, including critical components such as flash memory, chipsets and LCD display screens for our electronic learning devices, on a purchase order basis and do not have long-term contracts with our suppliers.

If we fail to develop or maintain our relationships with our suppliers, we may be unable to manufacture our products, and we could be prevented from supplying our products to our customers in the required quantities. Problems of this kind could cause us to experience loss of market share and result in decreased net revenues. The failure of a supplier to supply materials and components that meet our quality, quantity and cost requirements in a timely manner could impair our ability to manufacture our products or increase our costs, particularly if we are unable to obtain these materials and components from alternative sources on a timely basis or on commercially reasonable terms.

For the products manufactured by us, among other risks, we may:

• have too much or too little production capacity;

• be unable to obtain raw materials on a timely basis or at commercially reasonable prices, which could adversely affect the pricing and availability of our products;

• experience quality control problems;

• accumulate obsolete inventory;

• fail to timely meet demand for our products; and

• experience delays in manufacturing operations due to understaffing during the peak seasons and holidays.

Currently, products manufactured by third parties for us primarily include our consumer electronics products and our neck massager product. In 2005 and 2006, we had two suppliers, respectively, for our consumer electronics products, electronic learning devices and PDA cell phones, each accounting for more than 10% of our

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cost of revenues in these periods. We typically purchase these products on a purchase order basis and do not have long-term contracts with these suppliers. Some of our products are supplied by third-party manufacturers based on designs or technical requirements provided by us. These manufacturers may fail to produce products that conform to our requirements. In addition, for products manufactured or supplied by third-party manufacturers, we indirectly face many of the risks described above and other risks. For example, our third party manufacturers may not continue to supply products to us of the quality and/or in the quantities we require. It may also be difficult or expensive for us to replace a third-party manufacturer.

Our leases of land and manufacturing facilities in Beijing and Shanghai may not be in full compliance with PRC laws and regulations and we may be required to relocate our facilities, which may disrupt our manufacturing operations and result in decreased net revenues.

Our manufacturing facility for our oxygen generating products is built on a plot of land we leased from Beijing Tongzhou District Lucheng Town Chadao Village for a term of 30 years. This land is collectively owned by rural residents of the village. The relevant PRC law may be interpreted to disallow industrial use of the land or leasing of the land to parties other than the local rural residents or their collective economic organizations. If the PRC land authority determines that our use of the land violates PRC law, we may be ordered to restore the land to its original state and relocate to another site, to demolish the buildings established on the land by us without compensation. In addition, our manufacturing facilities for our posture correction product line and engine lubricant products as well as one of our central warehouses that we lease from Shanghai Huamin Economic Development Co., Ltd. are built on collectively owned land which is not technically permitted to be leased to commercial enterprises like us under relevant PRC laws. The PRC land authority also has the power to order the lessor to terminate the lease with us. If our lease is terminated, we would be required to relocate our facilities. Although we believe that the relocation cost, if any, would not be significant, such a relocation could disrupt our manufacturing operations and result in lower net revenues.

We may require additional capital, which may not be available on commercially reasonable terms, or at all. Capital raised through the sale of equity securities may result in dilution to our shareholders. Failure to obtain such additional capital could have an adverse impact on our business strategies and growth prospects.

We believe that our current cash and cash equivalents and cash flow from operations will be sufficient to meet our anticipated cash needs for the next 12 months. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments, joint ventures or acquisitions we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. Financing may be unavailable in amounts or on terms acceptable to us, or at all, which could have an adverse impact on our business strategies and growth prospects.

We may not be able to achieve and maintain an effective system of internal control over financial reporting, a failure which may prevent us from accurately reporting our financial results or detecting and preventing fraud.

We will be subject to reporting obligations under the U.S. securities laws. Beginning with our annual report on Form 20-F for the fiscal year ending December 31, 2008, we will be required to prepare a management report on our internal control over financial reporting containing our management’s assessment of the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm must attest to and report on our management’s assessment of the effectiveness of our internal control over financial reporting. Our management may conclude that our internal controls over our financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our

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independent registered public accounting firm may still decline to attest to our management’s assessment or may issue a report that is qualified if it is not satisfied with our controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future. Prior to this offering, we have been a young, private company with limited accounting personnel and other resources with which to address our internal controls and procedures. As a result, when our independent auditors audited our consolidated combined financial statements for the three years ended December 31, 2006 in connection with this offering, they identified a number of control deficiencies in our internal control procedures which, in the judgment of our independent auditors, could adversely affect our ability to record, process, summarize and report financial data consistent with the assertions of our management in the financial statements. Specifically, the control deficiencies identified by our independent auditors consist of: (i) an inadequate number of accounting personnel with knowledge of SEC and US GAAP reporting requirements; (ii) the lack of formal procedures relating to our procurement of supplies, including our procurement of computers and other office equipment; (iii) inadequate monitoring procedures relating to TV advertising time that we purchase from certain local TV channels; and (iv) inadequate internal control procedures relating to our investments in marketable securities. We are in the process of addressing these identified deficiencies, including hiring additional, more experienced accounting and legal personnel. If we fail to timely achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal control over financial reporting at a reasonable assurance level. Moreover, effective internal control over financial reporting is necessary for us to produce reliable financial reports and is important to help detect and prevent fraud. As a result, our failure to achieve and maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our ADSs.

Risks Related to Our Industry

Our businesses and growth prospects are dependent upon the expected growth in China’s consumer retail markets, including, in particular, the TV direct sales market. Any future slowdown or decline in China’s consumer retail markets, including the TV direct sales market, could adversely affect our business, financial condition and results of operations.

All of our net revenues are generated by sales of consumer products and services in China. The success of our business depends on the continued growth of China’s consumer retail markets, particularly the TV direct sales market. The consumer retail markets in China are characterized by rapidly changing trends and continually evolving consumer preferences and purchasing patterns and power. China’s TV direct sales market is expected to grow in line with expected growth in consumer disposable income and the economy in China generally. Various parties have projected substantial future growth in the Chinese economy and Chinese retail consumer markets. Projected growth rates for the Chinese economy and China’s consumer retail markets, including those described in this prospectus under “Our Industry,” may not be realized. Any slowdown or decline in China’s consumer retail markets, including particularly China’s TV direct sales industry, would have a direct adverse impact on us and could adversely affect our business, financial condition and results of operations.

If infomercials and the products and services promoted on infomercials are not accepted by TV viewers in China, our ability to generate revenues and sustain profitability could be materially and adversely affected.

In 2005 and 2006, we derived 45.1% and 54.7%, respectively, of our total net revenues from our direct sales platforms. We expect that in the future a substantial portion of our future revenues and profits will continue to be dependent upon the receptivity of Chinese TV viewers to infomercials such as our TV direct sales programs and the products and services showcased therein. Many Chinese TV viewers are not accustomed to purchasing products or services directly from TV. As a result, TV viewers in China may be both more likely to mistrust infomercials as a commercial medium and less likely to purchase products or services from TV direct marketers

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such as us. If we are unable in the future to increase receptivity for our TV direct sales programs and the products and services showcased therein, our ability to generate revenue and sustain profitability could be materially and adversely affected.

Risks Related to the Regulation of Our Business

PRC regulations relating to our industry are evolving. Any adverse or unanticipated regulatory changes, particularly those regarding the regulation of our direct sales business, could significantly harm our business or limit our ability to operate.

We and our distributors are subject to various laws regulating our advertising, including the content of our TV direct sales programs, and any violation of these laws by us or our distributors could result in fines and penalties, harm our product or service brands and result in reduced net revenues.

PRC advertising laws and regulations require advertisers and advertising operators to ensure that the content of the advertising they prepare, publish or broadcast is fair and accurate, is not misleading and is in full compliance with applicable laws. Specifically, we, as an advertiser or advertising operator, and our distributors, as advertisers, are each required to independently review and verify the content of our respective advertising for content compliance before displaying the advertising through TV sales programs, print media, radio or Internet portals. Moreover, the PRC Unfair Competition Law prohibits us and our distributors from conveying misleading, false or inaccurate information with respect to quality, function, use, or other features of products or services, through advertising. Violation of these laws or regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of the advertising, orders to publish an advertisement correcting the misleading information and criminal liabilities. In circumstances involving serious violations, the PRC government may suspend or revoke a violator’s business license.

For advertising related to certain types of our products, such as those products constituting medical devices, pharmaceuticals and health related products, we and our distributors must also file the advertising content with China’s State Administration for Food and Drug, or SAFD, or other competent authorities, and obtain required permits and approvals for the advertising content from the SAFD or other competent authorities, in each case, before publication or broadcasting of the advertising. We endeavor to comply, and encourage our distributors to comply, with such requirements. However, we and our distributors may fail to comply with these and other laws. For example, the SAFD issued a circular on October 31, 2005 announcing that advertising placed in several local newspapers by us and one of our distributors for our sleeping aid product and oxygen generating devices violated the relevant laws by including unapproved content. These violations relating to our sleeping aid product advertising were considered serious violations by China’s SAFD. The local SAFDs have ordered such advertising to be discontinued. Our and our distributors’ past and future violations could seriously harm our corporate image, product or service brands and operating results.

Moreover, government actions and civil claims may be filed against us for misleading or inaccurate advertising, fraud, defamation, subversion, negligence, copyright or trademark infringement or other violations due to the nature and content of our TV direct sales programs or other advertising produced by us or our distributors. We have been fined by the relevant authorities for certain advertising that was considered misleading or false by the authorities, including our advertising for our electronic learning device products. Historically, such fines have not been significant and related investigations into our advertising practices did not consume significant amounts of our management resources. In some cases, we were required to accept product returns. Separately we sell a software program that tracks market performance of specified stocks listed on China’s domestic stock exchanges and provides technical analysis to aid investment decisions. Due to the nature of this program, consumers could allege that our packaging or TV direct sales programs and other direct sales advertising contain misleading or false recommendations or fail to adequately warn consumers of the risks related to their use of the software in tracking and subsequently trading securities. Damages, including potential trading losses, sought by consumers could be substantial. We may have to expend significant resources in the

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future in defending against such actions and these actions may damage our reputation, result in reduced net revenues, negatively affect our results of operations, even result in our business licenses being suspended or revoked and in criminal liability for us and our officers and directors.

Governmental actions to regulate TV and radio-based direct sales programs of medical devices and diet and slimming products will adversely impact sales of our branded neck massager product line and some of our other products and may adversely impact our future overall operating results.

In July 2006, the State Administration for Radio, Film and Television, or SARFT, and the State Administration for Industry and Commerce issued a circular temporarily prohibiting the broadcast of TV- and radio-based direct sales programs regarding pharmaceutical products, diet and slimming products, medical devices, breast enhancement products and height increasing products on and after August 1, 2006, pending adoption of new rules governing those direct sales activities. Consequently, until the new rules are adopted, we will be unable to broadcast TV- and radio-based direct sales programs for some of our products, primarily including our branded neck massager product and our slimming product. These products were two of our ten best-selling products in terms of gross revenues in 2006. During this period, our branded neck massager product generated gross revenues of $24.4 million, thereby becoming our third best-selling product in terms of gross revenues. Our slimming product generated $5.6 million in gross revenues in 2006. It is unclear when the new rules governing those direct sales activities will be issued. For at least the near-term, our direct and distribution sales of these restricted products will be adversely impacted. The overall impact on our future operating results depends on, among other things, our success in promoting the products covered by the circular through other media channels; the degree to which distribution sales of our restricted products are impacted by the ban on TV direct sales programs; our ability to offset these decreased sales with sales of non-restricted products and services using our committed TV advertising time and the related sales price and margins of those non-restricted products and services; and the nature of, and restrictions imposed by, the future rules when adopted.

If the PRC government deems that the sales of our stock-tracking software program constitute the provision of securities investment advisory services, our sales of that product may be discontinued.

In January 2006, we began full-scale marketing of our technical analysis software program for individual investors as one of our featured products. This software program can also track market performance of specified stocks listed on China’s domestic stock exchanges to aid individual investors in making investment decisions. In late May 2006, we received a written notice from the Shanghai branch of the China Securities Regulatory Commission, or the CSRC, demanding that we temporarily withdraw the media advertisement of this software program pending its investigation. The written notice also stated (i) that the CSRC branches in other cities have received complaints claiming that we, through direct TV marketing, were selling a software program that provides online trading recommendations and investment forecasts to investors, and (ii) that we may have violated PRC regulations because we do not have a license for provision of securities investment advisory services.

Securities regulations in China require entities that provide securities investment advisory services to the public to obtain a securities investment advisory business license from the CSRC. However, the definition of securities investment advisory services under the PRC regulations is vague and subject to interpretation. We have no intention of providing securities investment advisory services and do not believe that our sale of this software program constitutes the provision of securities investment advisory services covered by the relevant regulations as our software program is designed to provide technical analysis. Nevertheless, we have been advised by our special PRC counsel that was engaged specifically to advise us regarding this matter that there is only a small likelihood that the CSRC Shanghai branch will deem our sale of software programs as the provision of securities investment advisory services. However, if we are deemed to be providing securities investment advisory services to individual investors, we may have violated the PRC regulations. Beginning in May 2006, we discontinued most TV advertisements for this software program. We are in communication with the CSRC Shanghai branch

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and are seeking its clearance to resume normal advertisements for this program. If the CSRC Shanghai branch or the CSRC at any time in the future takes the view that we have been engaging in the business of providing securities investment advisory services, we may be required to discontinue selling the software program and the CSRC may confiscate all our revenues generated from the sale of such software program and impose a fine against us up to an amount equivalent to the revenues from these sales.

If the PRC government takes the view that the agreements that establish the structure for operating our TV and other direct sales, wholesale distribution and advertising businesses in China do not comply with PRC governmental restrictions on foreign investment in these areas, we could be subject to severe penalties.

Our direct sales and wholesale distribution businesses are considered commercial trading under PRC law and are regulated by the PRC Ministry of Commerce, or MOFCOM, and the State Administration of Industry and Commerce, or the SAIC. Foreign investment in commercial trading was in the past, and continues to be to a certain extent, highly regulated, with restrictions on foreign ownership, business locations and required capital and experience thresholds. To address these restrictions, two affiliated Chinese entities, Shanghai Network and Beijing Acorn, hold the licenses required to operate our direct sales and wholesale distribution businesses. In 2004, MOFCOM issued the Administrative Measures on Foreign Investment in the Commercial Sector, eliminating or significantly reducing these restrictions effective as of December 11, 2004. Subsequent to the issuance of the Administrative Measures on Foreign Investment in the Commercial Sector, we must still obtain MOFCOM’s approval for conducting our direct sales and wholesale distribution businesses. Until we obtain MOFCOM’s approvals to operate our direct sales and wholesale distribution businesses, we must continue to rely on these affiliated entities to sell our products to the customers.

Operation of our business requires that our affiliated advertising company, when desirable, enter into TV advertising time purchase agreements with TV channels for the benefit of and use by our group companies, which is considered provision of advertising services. Historically, PRC regulations limited foreign ownership of companies providing advertising services. Although this restriction was lifted in 2005, PRC regulations require that any foreign entity investing in the advertising services industry have at least two years of direct operational experience in the advertising industry outside of China. We currently do not directly operate an advertising business outside of China and cannot qualify under PRC regulations to directly set up a wholly owned subsidiary to conduct our advertising business. Instead, we rely on Shanghai Advertising, our affiliated Chinese entity, to operate our advertising network, by, among other things, entering into TV advertising time purchase agreements with TV channels. We are currently exploring the possibility of acquiring the legal ownership of Shanghai Advertising after the completion of this offering, subject to applicable PRC laws and regulations.

Our three affiliated Chinese entities mentioned immediately above are currently owned by two PRC citizens, Don Dongjie Yang, our president and one of our directors, and David Chenghong He, one of our executive officers. We have entered into contractual arrangements with these affiliated entities pursuant to which our wholly owned subsidiary, Acorn Information, provides technical support and operation and management services to these affiliated entities. In addition, we have entered into agreements with these affiliated entities and Don Yang and David Chenghong He, as their shareholders, providing us substantial ability to control each of these affiliated entities. For detailed descriptions of these contractual arrangements, see “Our Corporate Structure.”

If we, Acorn Information, or any of our affiliated entities are found to be in violation of any existing or future PRC laws or regulations or fail to obtain or maintain any of the required licenses, permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with these violations, including, among others:

• revoking the business and operating licenses of Acorn Information and our affiliated entities;

• discontinuing or restricting the operations of Acorn Information and our affiliated entities;

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• imposing conditions or requirements with which we, Acorn Information or our affiliated entities may be unable to comply;

• requiring us or Acorn Information or our affiliated entities to restructure the relevant ownership structure or operations; or

• restricting or prohibiting our use of the proceeds of this offering to finance our business and operations in China.

The contractual arrangements with our three affiliated Chinese entities and their shareholders, Don Dongjie Yang and David Chenghong He, which relate to critical aspects of our operations, may not be as effective in providing operational control as direct ownership. In addition, these arrangements may be difficult and costly to enforce under PRC law.

We rely on contractual arrangements with our three affiliated entities in China, collectively owned 100% by Don Dongjie Yang, our president and one of our directors, and David Chenghong He, one of our executive officers, to operate our business. For a description of these contractual arrangements, see “Our Corporate Structure.” These contractual arrangements may not be as effective as direct ownership in providing us control over our affiliated entities. Direct ownership would allow us, for example, to directly exercise our rights as a shareholder to effect changes in the board of each affiliated entity, which, in turn, could effect changes, subject to any applicable fiduciary obligations, at the management level. However, under the current contractual arrangements, as a legal matter, if any affiliated entity or Don Dongjie Yang or David Chenghong He fails to perform its or his respective obligations under these contractual arrangements, we may have to incur substantial costs and expend significant resources to enforce those arrangements, and rely on legal remedies under PRC law. These remedies may include seeking specific performance or injunctive relief, and claiming damages, any of which may not be effective. For example, if either Don Dongjie Yang or David Chenghong He refuses to transfer his equity interest in any affiliated entity to us or our designee when we exercise the purchase option pursuant to these contractual arrangements, or if either Don Dongjie Yang or David Chenghong He otherwise acts in bad faith toward us, we may have to take legal action to compel him to fulfill his contractual obligations. In addition, as each of our three affiliated entities is jointly owned and effectively managed by Don Dongjie Yang and David Chenghong He, it may be difficult for us to change our corporate structure or to bring claims against any affiliated entity or Don Dongjie Yang or David Chenghong He if any of them fails to perform its or his obligations under the related contracts or does not cooperate with any such actions by us.

All of these contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In the event we are unable to enforce these contractual arrangements, which relate to critical aspects of our operations, we may be unable to exert effective control over our operating entities, and our ability to conduct our business may be negatively affected.

Regulations relating to offshore investment activities by PRC residents may increase the administrative burden we face and create regulatory uncertainties that could restrict our overseas and cross-border investment activity, and a failure by our shareholders who are PRC residents to make any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits and could expose us and our PRC resident shareholders to liability under PRC law.

A regulation was promulgated by the PRC State Administration of Foreign Exchange, or SAFE, in October 2005 that requires registration with the local SAFE in connection with direct or indirect offshore investment by PRC residents. The regulation applies to our shareholders who are PRC residents and also applies to our prior and future offshore acquisitions.

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The SAFE regulation retroactively requires registration by March 31, 2006 of direct or indirect investments previously made by PRC residents in offshore companies. If a PRC shareholder with a direct or indirect stake in an offshore parent company fails to make the required SAFE registration, the PRC subsidiaries of such offshore parent company may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries. Further, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for violation of the relevant rules relating to transfers of foreign exchange.

We have already notified our shareholders, and the shareholders of the offshore entities in our corporate group, who are PRC residents to urge them to make the necessary applications and filings, as required under this regulation. However, as a result of the newness of the regulation and uncertainty concerning the reconciliation of the new regulation with other approval requirements, it remains unclear how the regulation, and any future legislation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. We understand that the relevant shareholders have registered their offshore investments in us with Shanghai SAFE and are in the process of registering with Beijing SAFE and Zhuhai SAFE. We are committed to complying, and to ensuring that our shareholders who are subject to the regulation comply, with the relevant rules. However, we cannot assure you that all of our shareholders who are PRC residents will comply with our request to make or obtain any applicable registrations or approvals required by the regulation or other related legislation. The failure or inability of our PRC resident shareholders to receive any required approvals or make any required registrations may subject us to fines and legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, as a result of which our acquisition strategy and business operations and our ability to distribute profits to you could be materially and adversely affected.

Our corporate structure may limit our ability to receive dividends from, and transfer funds to, our PRC subsidiaries, which could restrict our ability to act in response to changing market conditions and reallocate funds from one affiliated PRC entity to another in a timely manner.

We are a Cayman Islands holding company and substantially all of our operations are conducted through our 11 PRC subsidiaries and three Chinese affiliated entities. We rely on dividends and other distributions from our PRC subsidiaries to provide us with our cash flow and allow us to pay dividends on the shares underlying our ADSs and meet our other obligations. Current regulations in China permit our PRC subsidiaries to pay dividends to us only out of their accumulated distributable profits, if any, determined in accordance with their articles of association and PRC accounting standards and regulations. The ability of these subsidiaries to make dividends and other payments to us may be restricted by factors that include changes in applicable foreign exchange and other laws and regulations. In particular, under PRC law, these operating subsidiaries may only pay dividends after 10% of their net profit has been set aside as reserve funds, unless such reserves have reached at least 50% of their respective registered capital. Such cash reserve may not be distributed as cash dividends. In addition, if any of our 11 PRC operating subsidiaries incur debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. Moreover, the profit available for distribution from our Chinese operating subsidiaries is determined in accordance with generally accepted accounting principles in China. This calculation may differ from one performed in accordance with US GAAP. As a result, we may not have sufficient distributions from our PRC subsidiaries to enable necessary profit distributions to us or any distributions to our shareholders in the future, which calculation would be based upon our financial statements prepared under US GAAP.

Distributions by our PRC subsidiaries to us other than as dividends may be subject to governmental approval and taxation. Any transfer of funds from our company to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, is subject to registration or approval of Chinese governmental authorities, including the relevant administration of foreign exchange and/or the relevant examining and approval authority. In addition, it is not permitted under Chinese law for our PRC subsidiaries to directly lend money to each other. Therefore, it is difficult to change our capital expenditure plans once the relevant funds have been

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remitted from our company to our PRC subsidiaries. These limitations on the free flow of funds between us and our PRC subsidiaries could restrict our ability to act in response to changing market conditions and reallocate funds from one Chinese subsidiary to another in a timely manner.

Risks Relating to China

Our operations may be adversely affected by changes in China’s economic, political and social conditions.

All of our business operations are conducted in China and all of our revenues are derived from our marketing and sales of consumer products and services in China. Accordingly, our results of operations, financial condition, and future prospects are subject to a significant degree to economic, political and social conditions in China. The PRC economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past three decades, 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 operation may be adversely affected by changes in tax regulations applicable to us. Since early 2004, the PRC government has implemented certain measures to control the pace of economic growth. Such measures may cause a decrease in the level of economic activity in China, including a decline in individual spending activities, which in turn could adversely affect our results of operational and financial condition.

In particular, our business is primarily dependent upon the economy and the business environment in China. Our growth strategy is based upon the assumption that demand in China for our products and services, will continue to grow with the Chinese economy. However, the growth of the Chinese economy has been uneven across geographic regions and economic sectors. Several years ago the Chinese economy also experienced deflation, which may reoccur in the foreseeable future. We cannot assure you that the Chinese economy will continue to grow, that if there is growth, such growth will be steady and uniform, or that if there is a slowdown, such slowdown will not have a negative effect on our business.

The discontinuation of any of the preferential tax treatments and government subsidies available to us in the PRC could materially and adversely affect our results of operations and financial condition.

Under PRC laws and regulations, currently, three of our operating subsidiaries in Shanghai, Shanghai An- Nai-Chi Automobile Maintenance Products Co., Ltd., Acorn International Electronic Technology (Shanghai) Co., Ltd. and Shanghai HJX enjoy preferential tax benefits afforded to foreign-invested manufacturing enterprises incorporated in China’s coastal economic open zones and are thus entitled to a two-year exemption from enterprise income tax beginning from the year when they generate profits, a 13.5% enterprise income tax rate for another three years and a 27% income tax rate thereafter. Likewise, our wholly owned subsidiary, Beijing Acorn Youngleda Oxygen Generating Co., Ltd., as a foreign-invested enterprise in Beijing, is entitled to a two-year exemption from enterprise income tax starting from 2005, a 12% enterprise income tax rate for 2007 to 2009, a 25.5% enterprise income tax rate for 2010 to 2014 and a 27% tax rate thereafter. Furthermore, Shanghai Network is entitled to an income tax exemption in 2005, 2006 and 2007 and will be subject to a 33% income tax rate thereafter. Separately, Shanghai Advertising was entitled to a two-year exemption from enterprise income tax in 2005 and 2006 and will enjoy a preferential income tax rate of 15% thereafter in accordance with local government policies adopted by Pudong, Shanghai. In addition, Acorn Information and Shanghai Yimeng Software Technology Co., Ltd., or Shanghai Yimeng, have been entitled to a two-year enterprise income tax exemption starting in 2005 and 2006, respectively, a 7.5% enterprise income tax rate for the following three years and a 15% enterprise income tax rate thereafter under Pudong local government policies. The local tax authorities of Pudong do not have express authority to issue such local rules or adopt such local policies. If these

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local rules and policies are deemed in violation of national laws and regulations, they may be abolished or altered. Recently, another subsidiary, Shanghai Acorn Enterprise Management Consulting Co., Ltd. was approved to receive an enterprise income tax exemption for two years starting on January 1, 2007.

Currently, the definition of a manufacturing enterprise under PRC law is vague and is subject to discretionary interpretation and enforcement by the PRC authorities. If PRC law were to phase out preferential tax benefits as indicated above, if we were to be deemed not qualified in the past or no longer qualified as a manufacturing enterprise in the future, or if the tax preferential treatments enjoyed by us in accordance with local government rules or policies were deemed in violation of national laws and regulations and were abolished or altered as a result, we would be subject to the standard statutory tax rate, which currently is 33%, and we could be required to repay the income tax for the previous three years at the applicable non-preferential tax rate. Without our preferential tax holidays and concessions, in 2006 we would have had to pay approximately $21.0 million of additional PRC taxes due primarily to restrictions on our deduction of advertising expenses (one of our largest operating expenditures). Under current PRC law, in calculating taxable income we may only make an advertising expense deduction of up to 2% of our net revenues. Additionally, we received certain government subsidies for certain taxes paid by us. These subsidies were granted by local government agencies and may be deemed inappropriate by the central government. We cannot assure you that we will be able to continue to receive such subsidies. Loss of these preferential tax treatments and subsidies could have material and adverse effects on our results of operations and financial condition.

On March 16, 2007, the National People’s Congress of China enacted a new tax law, under which foreign-invested enterprises and domestic companies will be subject to enterprise income tax at a uniform rate of 25%. The new tax law will become effective on January 1, 2008. There will be a transition period, during which enterprises may continue to enjoy existing preferential tax treatment or in which their tax rates may be gradually adjusted to 25%. Following the effectiveness of the new tax law, some of our PRC subsidiaries and affiliated entities, including Shanghai Advertising, Acorn Information and Shanghai Yimeng, may no longer be able to enjoy the preferential tax rates presently offered to them. As the law was newly issued and no implementing rules have been promulgated to date, we are still evaluating its impact on us.

The contractual arrangements entered into among Acorn Information, each of our consolidated affiliated entities and their shareholders may be subject to audit or challenge by the PRC tax authorities; a finding that Acorn Information or our consolidated affiliated entities owe additional taxes could substantially reduce our net earnings and the value of your investment.

Under PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among Acorn Information, each of our consolidated affiliated entities and their shareholders do not represent arm’s-length prices and adjust any of their income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in, for PRC tax purposes, a reduction of expense deductions recorded by Acorn Information or our consolidated affiliated entities or an increase in taxable income, all of which could in turn increase our tax liabilities. In addition, the PRC tax authorities may impose late payment fees and other penalties on Acorn Information or consolidated affiliated entities for under-paid taxes.

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

The PRC legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various

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forms of foreign investment in China. Nine of our 11 PRC operating subsidiaries are foreign invested enterprises incorporated in China. They are subject to laws and regulations applicable to foreign investment in China in general and laws and regulations applicable to foreign-invested enterprises in particular. However, these laws, regulations and legal requirements change frequently, and their interpretation and enforcement involve uncertainties. For example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. In addition, such uncertainties, including the inability to enforce our contracts, could materially and adversely affect our business and operations. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some time after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. Furthermore, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in the PRC legal system, particularly with regard to the media, advertising and retail industries, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us, and our foreign investors, including you.

Restrictions on the convertibility of Renminbi into foreign currency may limit our ability to make dividends or other payments in U.S. dollars or fund possible business activities outside China.

All of our net revenues are currently generated in Renminbi. Any future restrictions on currency exchanges may limit our ability to use net revenues generated in Renminbi to make dividends or other payments in U.S. dollars or fund possible business activities outside China. Although the PRC government introduced regulations in 1996 to allow greater convertibility of Renminbi for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents. In addition, remittance of foreign currencies abroad and conversion of Renminbi for capital account items, including direct investment and loans, is subject to government approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot assure you the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of Renminbi, especially with respect to foreign exchange transactions.

Because our revenues are generated in Renminbi and our results are reported in U.S. dollars, devaluation of the Renminbi could negatively impact our results of operations.

The value of Renminbi is subject to changes in China’s governmental policies and to international economic and political developments. Since January 1, 1994, the PRC government has used a unitary managed floating rate system. Under this system, the People’s Bank of China, or PBOC, publishes a daily base exchange rate with reference primarily to the supply and demand of Renminbi against the U.S. dollar and other foreign currencies in the market during the previous day. Authorized banks and financial institutions are allowed to quote buy and sell rates for Renminbi within a specified bank around the central bank’s daily exchange rate. On July 21, 2005, PBOC announced an adjustment of the exchange rate of the U.S. dollar to Renminbi from 1:8.27 to 1:8.11 and modified the system by which the exchange rates are determined. This modification has resulted in an approximate 7.4% appreciation of the Renminbi against the U.S. dollar from July 21, 2005 to May 2, 2007. While the international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further reevaluation and a significant fluctuation of the exchange rate of Renminbi against the U.S. dollar, including possible devaluations. As all of our net revenues are recorded in Renminbi, such a potential future devaluation of Renminbi against the U.S. dollar could negatively impact our results of operations.

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As we rely entirely on dividends paid to us by our PRC operating subsidiaries, and since our net revenues are generated in Renminbi while our results are reported in U.S. dollars, any significant devaluation of Renminbi would have a material adverse effect on our net revenues and financial condition, and the value of, and any dividends payable on, our ADSs in foreign currency terms.

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us, our management or the experts named in the prospectus.

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

Any future outbreak of avian flu, or severe acute respiratory syndrome in China, or similar adverse public health developments, may severely disrupt our business and operations and reduce the market for our products and services.

Adverse public health epidemics or pandemics could disrupt businesses and national economies in China. For example, 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. During May and June of 2003, many businesses in China were closed by the PRC government to prevent transmission of SARS. The World Health Organization has announced that there is a high likelihood of an outbreak of avian flu, with the potential to be as disruptive if not more disruptive than SARS. Any recurrence of the SARS outbreak, an avian flu outbreak, or development of a similar health hazard in China, may deter people from congregating in public places, with severely disruptive effects on consumer spending. In addition, health or other government regulation may require temporary closure of our offices and operations. Lastly, such outbreak may cause the sickness or death of our key management and employees. Any of such occurrences would adversely affect our business and results of operations.

Risks Relating to Our ADSs and This Offering

An active trading market for our ordinary shares or our ADSs may not develop and the trading price for our ADSs may fluctuate significantly.

Prior to this offering, there has been no public market for our ADSs or our ordinary shares underlying the ADSs. 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. Our application to list our ADSs on the New York Stock Exchange has been approved. A liquid public market for our ADSs may not develop. The initial public offering price for our ADSs was determined by negotiation between us and the underwriters based upon several factors. The price at which the ADSs are traded after this offering may decline below the initial public offering price, meaning you may experience a decrease in the value of your ADSs regardless of our operating performance or prospects. In the past, following periods of volatility in the market price of a company’s securities, shareholders have often instituted securities class action litigation against that company. If we were involved in a class action suit, it could divert the attention of senior management, and, if adversely determined, could have a material adverse effect on our results of operations.

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Future sales or perceived sales of ADSs or ordinary shares by existing shareholders could cause our ADS price to decline.

If our existing shareholders sell, indicate an intention to sell, or are perceived to intend to sell, substantial amounts of our ordinary shares in the public market after the 180-day contractual lock-up period, and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our ordinary shares could decline below the initial public offering price. Upon closing of this offering, we will have 89,671,364 outstanding ordinary shares. Of these shares, only ADSs sold in this offering (other than those ADSs sold as part of this offering to Alibaba.com Corporation) will be freely tradable, without restriction, in the public market. Merrill Lynch, Pierce, Fenner & Smith Incorporated and Deutsche Bank Securities Inc., on behalf of the underwriters, may, in their sole discretion, permit our officers, directors, employees and current shareholders to sell shares prior to the expiration of the lock-up agreements. After the lock-up agreements pertaining to this offering expire (180 days or more from the date of this prospectus), all of our outstanding shares will be eligible for sale in the public market, but they will be subject to volume limitations under Rule 144 under the U.S. Securities Act of 1933, as amended, or the Securities Act. In addition, the 18,173,682 ordinary shares subject to outstanding options and stock appreciation rights under our 2006 Equity Incentive Plan will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements, the lock-up agreements and Rules 144 and 701 under the Securities Act. If these additional shares are sold, or if it is perceived that they will be sold in the public market, the trading price of our ordinary shares could decline.

You will experience immediate and substantial dilution in the net tangible book value of the shares you purchase in this offering.

The initial public offering price of our ADSs is substantially higher than the book value per share of the outstanding ordinary shares after this offering. Therefore, based on the initial public offering price of $15.50 per ADS, if you purchase our ADSs in this offering, you will suffer immediate and substantial dilution of approximately $9.11 per ADS. If outstanding options or stock appreciation rights with respect to our ordinary shares are exercised, you will experience additional dilution. See “Dilution” for more information.

We may become a passive foreign investment company, or PFIC, which could result in adverse U.S. tax consequences to U.S. holders.

Depending upon the value of our shares and ADSs and the nature of our assets and income over time, we could be classified as a PFIC by the United States Internal Revenue Service, or IRS, for U.S. federal income tax purposes. Based on assumptions as to our projections of the value of our outstanding stock during the year and our use of the proceeds of the initial public offering of our ADSs or shares and of the other cash that we will hold and generate in the ordinary course of our business throughout taxable year 2007, we do not expect to be a PFIC for the taxable year 2007. However, there can be no assurance that we will not be a PFIC for the taxable year 2007 and/or later taxable years, as PFIC status is tested each year and depends on our assets and income in such year. Our PFIC status for the current taxable year 2007 will not be determinable until the close of the taxable year ending December 31, 2007.

We will be classified as a PFIC in any taxable year if either: (1) the average percentage value of our gross assets during the taxable year that produce passive income or are held for the production of passive income is at least 50% of the value of our total gross assets or (2) 75% or more of our gross income for the taxable year is passive income. In particular, in determining the average percentage value of our gross assets, the aggregate value of our assets will generally be deemed to be equal to our market capitalization (determined by the sum of the aggregate value of our outstanding equity) plus our liabilities. Additionally, our goodwill (determined by the sum of our market capitalization plus liabilities, less the value of known assets) should be treated as a non- passive asset. Therefore, a drop in the market price of our ADSs and ordinary shares and associated decrease in the value of our goodwill would cause a reduction in the value of our non-passive assets for purposes of the asset test. Accordingly, we would likely become a PFIC if our market capitalization were to decrease significantly while we hold substantial cash and cash equivalents.

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If we were classified as a PFIC in any taxable year in which you hold our ADSs or shares and you are a U.S. Holder, you would generally be taxed at higher ordinary income rates, rather than lower capital gain rates, if you dispose of ADSs or shares for a gain in a later year, even if we are not a PFIC in that year. In addition, a portion of the tax imposed on your gain would be increased by an interest charge. Moreover, if we were classified as a PFIC in any taxable year, you would not be able to benefit from any preferential tax rate with respect to any dividend distribution that you may receive from us in that year or in the following year. Finally, you would also be subject to special U.S. tax reporting requirements. We cannot assure you that we will not be a PFIC for 2007 or any future taxable year. For more information on the U.S. tax consequences to you that would result from our classification as a PFIC, please see “Taxation—United States Federal Income Taxation—U.S. Holders—Passive Foreign Investment Company.”

You may lose some or all of the value of a distribution by the depositary if the depositary cannot convert RMB into U.S. dollars on a reasonable basis at the time of such distribution for regulatory or other reasons.

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent.

The depositary will convert any cash dividend or other cash distribution we pay on the ordinary shares into U.S. dollars, if it can do so on a practicable basis and can transfer the U.S. dollars to the United States. If that is not possible or if any approval from any government is needed and cannot be obtained, the depositary is allowed to distribute RMB only to those ADS holders to whom it is possible to do so. It will hold RMB it cannot convert for the account of the ADS holders who have not been paid. However, it will not invest RMB and it will not be liable for interest. In addition, if the exchange rates fluctuate during a time when the depositary cannot convert RMB at the time of such distribution for regulatory or other reasons, the ADS holders who have not been paid may lose some or all of the value of the distribution.

The sale, deposit, cancellation and transfer of the ADSs issued after an exercise of rights may be restricted under applicable U.S. securities laws.

If we offer holders of our ordinary shares any rights to subscribe for additional shares or any other rights, the depositary may make these rights available to you if it is lawful and reasonably practicable. However, the depositary may allow rights that are not distributed or sold to lapse. In that case, you will receive no value for them. In addition, U.S. securities laws may restrict the sale, deposit, cancellation and transfer of the ADSs issued after exercise of rights. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to holders of ADSs, or are registered under the provisions of the Securities Act. We can give no assurance that we can establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, you may be unable to participate in our rights offerings and may experience dilution of your holdings as a result.

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 performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States may affect the volatility in the price of and trading volumes for our ADSs. Recently, a number of PRC companies have listed their securities, or are in the process of preparing for listing their securities, on U.S. stock markets. Some of these companies have experienced significant volatility, including significant price declines in connection with their

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initial public offerings. The trading performances of these PRC companies’ securities at the time of or after their offerings may affect the overall investor sentiment towards PRC companies listed in the United States and consequently may impact the trading performance of our ADSs. These broad market and industry factors may significantly affect the market price and volatility of our ADSs, regardless of our actual operating performance.

In addition to market and industry factors, the price and trading volume of our ADSs may be highly volatile for specific business reasons. Factors such as variations in our financial results, announcements of new business initiatives by us or by our competitors, recruitment or departure of key personnel, distributors and suppliers, changes in the estimates of our financial results or changes in the recommendations of any securities analysts electing to follow our securities or the securities of our competitors could cause the market price for our ADSs to change substantially. Any of these factors may result in large and sudden changes in the trading volume and price for our ADSs.

Recent volatility in global capital markets could lead to substantial losses to investors.

On February 27, 2007, the Shanghai Stock Exchange’s Composite Index dropped by 8.84%. This was immediately followed by drops in certain international stock exchange benchmarks, including, among others, the Dow Jones Industrial Average Index in the United States, the Hang Seng Index in Hong Kong and the Nikkei 225 Stock Average in Japan. The trading prices for our ADSs may be materially and adversely affected by the performance in and fluctuations of such benchmarks. Additionally, volatility in global capital markets may affect overall investor sentiment towards our ADSs, which could also negatively affect the trading prices for our ADSs.

Anti-takeover provisions in our charter documents may discourage a third party from acquiring us, which could limit our shareholders’ opportunities to sell their shares at a premium.

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

For example, our board of directors will have the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix the powers and rights of these shares, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares. Preferred shares could thus be issued quickly with terms calculated to delay or prevent a change in control or make removal of management more difficult. In addition, if our board of directors issues preferred shares, the market price of our ordinary shares may fall and the voting and other rights of the holders of our ordinary shares may be adversely affected.

Our articles of association provide for a staggered board, which means that our directors, excluding our chief executive officer, are divided into three classes, with one-third of our board, excluding our chief executive officer, standing for election every year. Our chief executive officer will at all times serve as a director, and shall have the right to remain a director, so long as he remains our chief executive officer. This means that, with our staggered board, at least two annual shareholders’ meetings, instead of one, are generally required in order to effect a change in a majority of our directors. Our staggered board can discourage proxy contests for the election of our directors and purchases of substantial blocks of our shares by making it more difficult for a potential acquirer to take control of our board in a relatively short period of time.

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We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law, you may have less protection of your shareholder rights than you would under U.S. law.

Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Cayman Islands Companies Law and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands.

The Cayman Islands courts are unlikely:

• to recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or

• to entertain original actions brought against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the Cayman Islands will generally recognize as a valid judgment, a final and conclusive judgment in personam obtained in the federal or state courts in the United States under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) and would give a judgment based thereon provided that (i) such courts had proper jurisdiction over the parties subject to such judgment; (ii) such courts did not contravene the rules of natural justice of the Cayman Islands; (iii) such judgment was not obtained by fraud; (iv) the enforcement of the judgment would not be contrary to the public policy of the Cayman Islands; (v) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the Cayman Islands; and (vi) there is due compliance with the correct procedures under the laws of the Cayman Islands. You should also read “Description of Share Capital—Differences in Corporate Law” for some of the differences between the corporate and securities laws in the Cayman Islands and the United States.

You will have limited ability to bring an action against us or against our directors and officers, or to enforce a judgment against us or them, because we are incorporated in the Cayman Islands, because we conduct a majority of our operations in China and because the majority of our directors and officers reside outside the U.S.

We are incorporated in the Cayman Islands, and conduct substantially all of our operations in China through our subsidiaries established in China. Most of our directors and officers reside outside the United States and substantially all of the assets of those persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the Cayman Islands or in China in the event that you believe that your rights have been infringed under the applicable securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”

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Unlike many jurisdictions in the United States, Cayman Islands law does not specifically provide for shareholder appraisal rights on a merger or consolidation of a company. This may make it more difficult for you to assess the value of any consideration you may receive in a merger or consolidation or to require that the offeror give you additional consideration if you believe the consideration offered is insufficient.

Shareholders of Cayman Islands exempted companies such as ourselves have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a U.S. company.

Your ability to protect your rights as shareholders through the U.S. federal courts may be limited because we are incorporated under Cayman Islands law.

Cayman Islands companies may not have standing to initiate a derivative action in a federal court of the United States. As a result, your ability to protect your interests if you are harmed in a manner that would otherwise enable you to sue in a United States federal court may be limited.

We have not determined a specific use for a portion of the net proceeds from this offering and we may use these proceeds in ways with which you may not agree.

We have not determined a specific use for a portion of the net proceeds of this offering. Our management will have considerable discretion in the application of these proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our profitability or increase our ADS price. The net proceeds from this offering may also be placed in investments that do not produce income or that lose value.

The voting rights of holders of ADSs are limited in several significant ways by the terms of the deposit agreement.

Holders of our ADSs may only exercise their voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Upon receipt of voting instructions from a holder of ADSs in the manner set forth in the deposit agreement, the depositary will endeavor to vote the underlying ordinary shares in accordance with these instructions. Under our amended and restated memorandum and articles of association and Cayman Islands law, the minimum notice period required for convening a general meeting is ten days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your ordinary shares to allow you to cast your vote with respect to any specific matter at the meeting. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ordinary shares are not voted as you requested.

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The depositary of our ADSs will, except in limited circumstances, grant to us a discretionary proxy to vote the ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, which could adversely affect your interests and the ability of our shareholders as a group to influence the management of our company.

Under the deposit agreement for the ADSs, the depositary will give us a discretionary proxy to vote our ordinary shares underlying your ADSs at shareholders’ meetings if you do not vote, unless:

• we have failed to timely provide the depositary with our notice of meeting and related voting materials;

• we have instructed the depositary that we do not wish a discretionary proxy to be given;

• we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;

• a matter to be voted on at the meeting would have a material adverse impact on shareholders; or

• voting at the meeting is made on a show of hands.

The effect of this discretionary proxy is that you cannot prevent our ordinary shares underlying your ADSs from being voted, absent the situations described above, and it may make it more difficult for shareholders to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.

You may not receive distributions on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you.

The depositary of our ADSs has agreed to pay you the cash dividends or other distributions it or the custodian for our ADSs receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of our ordinary shares your ADSs represent. However, the depositary is not responsible if it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval or registration is required for such distribution. We have no obligation to take any other action to permit the distribution of our ADSs, ordinary shares, rights or anything else to holders of our ADSs. This means that you may not receive the distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may have a material and adverse effect on the value of your ADSs.

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

Your ADSs, represented by American depositary receipts, are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary thinks it is necessary or advisable to do so in connection with the performance of its duty under the deposit agreement, including due to any requirement of law or any government or governmental body, or under any provision of the deposit agreement.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts are forward-looking statements based on our current expectations, assumptions, estimates and projections about us and our industry. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Our Business.” These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions. The forward-looking statements included in this prospectus relate to, among others:

• our goals and strategies;

• expected trends in our joint sales and marketing services arrangements, and in our margins and certain costs or expenses items as a percentage of our net revenues;

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

• our ability to introduce successful new products and services and attract new customers;

• the expected growth in the retail market, for the consumer products and services, urban population levels, consumer spending, average income levels and the TV direct sales market in China;

• competition in the TV direct sales market and retail market in China for our consumer products and services; and

• PRC governmental policies and regulations relating to our businesses.

This prospectus also contains data relating to the retail industry for consumer products and the TV direct sales industry in China that includes projections based on a number of assumptions. The retail industry may not grow at the rates projected by market data, or at all. The failure of these markets to grow at the projected rates may have a material adverse effect on our business and the market price of our ADSs. In particular, the relatively new and rapidly changing nature of the TV direct sales market and rapidly changing consumer products market in China, and the uniqueness of our business model, subjects any projections or estimates relating to the growth prospects or future conditions of our sector to significant uncertainties. Furthermore, if any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately $92.3 million after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.

We anticipate using the net proceeds of this offering for the following purposes:

• approximately $25 million to increase our purchases of, and pre-payments for, TV advertising time;

• approximately $10 million to build product and service brands, expand sales and marketing for our distribution sales, and further strengthen our business management systems and infrastructure within our nationwide distribution network;

• approximately $10 million for product and service development, including upgrades of existing products and services and development of new products and services;

• approximately $10 million to enhance and upgrade our technology and other business infrastructure and platforms, as well as our customer data mining capabilities;

• approximately $20 million to explore and strengthen alternative direct sales platforms, such as dedicated TV home shopping channels, catalog sales and Internet-based direct sales; and

• the balance to fund capital expenditures, working capital and for other general corporate purposes.

In addition, the purposes of this offering also include the retention of employees by providing them with equity incentives and the creation of a public market for our ordinary shares represented by the ADSs for the benefit of our shareholders. We do not currently have any agreements or understandings to make any material acquisitions of, or investments in, other businesses.

The foregoing represents our current intentions with respect of the use and allocation of the net proceeds of this offering based upon our present plans and business conditions, but our management will have significant flexibility and discretion in applying the net proceeds of the offering. The occurrence of unforeseen events or changed business conditions may result in application of the proceeds of this offering in a manner other than as described in this prospectus.

To the extent that the net proceeds we receive from this offering are not immediately applied for the above purposes, we intend to invest our net proceeds in short-term, interest bearing, debt instruments or bank deposits. These investments may have a material adverse effect on the U.S. federal income tax consequences of your investment in our ADSs. It is possible that we may become a passive foreign investment company for U.S. federal income tax purposes, which could result in negative tax consequences for you. These consequences are described in more detail in “Risk Factors—Risks Relating to Our ADSs and This Offering—We may become a passive foreign investment company, or PFIC, which could result in adverse U.S. tax consequences to U.S. holders” and “Taxation—United States Federal Income Taxation—Passive Foreign Investment Company.”

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CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2006 presented on:

• an actual basis; and

• a pro forma basis, to give effect to (1) the automatic conversion of all of our outstanding Series A convertible redeemable preferred shares and Series A-1 convertible redeemable preferred shares into 20,591,970 ordinary shares upon closing of this offering, (2) the repayment of $9.3 million of subscription receivable from five of our shareholders using the sale proceeds of their shares as part of this offering, and (3) the issuance and sale of the ordinary shares in the form of ADSs offered hereby at an initial public offering price of $15.50 per ADS, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and assuming no exercise of the underwriters’ over-allotment option.

You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated combined financial statements and related notes included elsewhere in this prospectus.

	As of December 31, 2006
	Actual			Pro forma
	(in thousands, except share data)
Mezzanine equity:
Series A convertible redeemable preferred shares, $0.01 par value; 25,000,000 shares authorized and 17,709,815 shares issued and outstanding (actual) and nil shares issued and outstanding (pro forma) (liquidation value $35,000,000)	$	31,996		$	—
Series A-1 convertible redeemable preferred shares, $0.01 par value; 25,000,000 shares authorized and 2,882,155 shares issued and outstanding (actual) and nil shares issued and outstanding (pro forma) (liquidation value $8,000,000)		18,866			—
Shareholders’ equity:
Ordinary shares, $0.01 par value; 100,000,000 shares authorized, 48,979,394 shares issued and outstanding and 89,671,364 shares issued and outstanding on a pro forma basis(1)		490			897
Additional paid-in capital		35,902			178,699
Subscription receivable		(9,289	)		—
Retained earnings		21,085			21,085
Accumulated other comprehensive income		3,029			3,029
Total shareholders’ equity		51,217			203,710
Total mezzanine equity and shareholders’ equity	$	102,079		$	203,710

(1) The number of ordinary shares outstanding as of December 31, 2006 does not include (i) 9,053,026 ordinary shares subject to options outstanding as of December 31, 2006 and (ii) stock appreciation rights with respect to 9,120,656 ordinary shares that were granted under our 2006 Equity Incentive Plan.

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DILUTION

Our net tangible book value as of December 31, 2006 was approximately $89.4 million, or $1.83 per ordinary share outstanding at that date. Net tangible book value per ordinary share is determined by dividing our net tangible book value by the number of outstanding ordinary shares. Our net tangible book value is determined by subtracting the value of our acquired net intangible assets, goodwill, total liabilities and minority interests from our total assets. Dilution is determined by subtracting net tangible book value per ordinary share from the initial public offering price per ordinary share.

Without taking into account any other changes in such net tangible book value after December 31, 2006, other than to give effect to (i) the conversion of all of our Series A convertible redeemable preferred shares and Series A-1 convertible redeemable preferred shares into ordinary shares that will occur upon the consummation of this offering, (ii) the repayment of $9.3 million of subscription receivable from five of our shareholders using the proceeds from the sale of their shares as part of this offering, and (iii) our sale of the 6,700,000 ADSs offered in this offering at the initial public offering price of $15.50 per ADS, with estimated net proceeds of $92.3 million after deducting underwriting discounts and commissions and estimated offering expenses, our pro forma net tangible book value as of December 31, 2006 would have been $191.0 million, $2.13 per outstanding ordinary share, including ordinary shares underlying our outstanding ADSs, and $6.39 per ADS. This represents an immediate increase in pro forma net tangible book value of $0.30 per ordinary share, or $0.91 per ADS, to existing shareholders and an immediate dilution in pro forma net tangible book value of $3.04 per ordinary share, or $9.11 per ADS, to new investors in this offering. The following table illustrates such per ordinary share dilution:

Initial public offering price per ADS	$	15.50
Net tangible book value per ordinary share as of December 31, 2006	$	1.83
Increase in net tangible book value per ordinary share attributable to price paid by new investors	$	0.30
Pro forma net tangible book value per ordinary share after the offering	$	2.13
Dilution in net tangible book value per ordinary share to new investors in the offering	$	3.04
Dilution in net tangible book value per ADS to new investors in the offering	$	9.11

The pro forma information discussed above is illustrative only.

The following table summarizes on a pro forma basis the differences as of December 31, 2006 between the shareholders at our most recent fiscal year end and the new investors with respect to the number of ordinary shares purchased from us, the total consideration paid and the average price per ordinary share paid. The total ordinary shares do not include ADSs issuable if any of the options and SARs with respect to our ordinary shares outstanding as of December 31, 2006 are exercised. The information in the following table is illustrative only.

	Ordinary shares purchased			Total consideration				Average price per ordinary share equivalent		Average price per ADS equivalent
	Number	Percent		Amount		Percent
Existing shareholders	69,571,364	77.6	%	$	87,253,382	45.7	%		$1.25	$	3.76
New investors	20,100,000	22.4	%	$	103,850,000	54.3	%	$	5.17	$	15.50
Total	89,671,364	100.0%		$	191,103,382	100.0%		$	2.13	$	6.39

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DIVIDEND POLICY

We have no present plan to pay any dividends on our ordinary shares in the foreseeable future. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business. In 2004, we declared dividends to our shareholders in the amount of $8.0 million and paid $2.5 million in 2004 with the remaining amount paid in 2005. On January 1, 2005, we declared and paid dividends of $1.1 million to our shareholders.

Our board of directors has complete discretion on whether to pay dividends, subject to the approval of our shareholders. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

Current regulations in China permit our PRC subsidiaries to pay dividends to us only out of their respective accumulated distributable profits, if any, determined in accordance with their articles of association and PRC accounting standards and regulations. The ability of these subsidiaries to make dividends and other payments to us may be restricted by factors that include changes in applicable foreign exchange laws and other laws and regulations. In particular, under Chinese law, these operating subsidiaries may only pay dividends after 10% of their net profit has been set aside as reserve funds, unless such reserves have reached at least 50% of their respective registered capital. Such cash reserve may not be distributed as cash dividends. In addition, if any of our 11 PRC operating subsidiaries incur debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us.

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EXCHANGE RATE INFORMATION

Our business is primarily conducted in China and all of our net revenues and expenses are denominated in Renminbi. However, periodic reports made to shareholders will be expressed in U.S. dollars using the then current exchange rates. This prospectus contains translations of Renminbi amounts into U.S. dollars at specific rates solely for the convenience of the reader. The conversion of Renminbi into U.S. dollars in this prospectus is based on the noon buying rate in the City of New York for cable transfers of Renminbi as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this prospectus were made at a rate of RMB7.8041 to $1.00, the noon buying rate in effect as of December 29, 2006. The noon buying rate as of May 2, 2007 was RMB7.7039 to $1.00. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. The Chinese government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. The exchange rate from the U.S. dollar to Renminbi has fluctuated between a range of $1.00 to RMB8.2800 and $1.00 to RMB7.7039 between January 1, 1998 and May 2, 2007.

The following table sets forth information concerning exchange rates between Renminbi and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this prospectus or will use in the preparation of our periodic reports or any other information to be provided to you. The source of these rates is the Federal Reserve Bank of New York.

	Noon Buying Rate
Period	Period End	Average(1)	Low	High
	(RMB per $1.00)
2001	8.2766	8.2771	8.2709	8.2786
2002	8.2800	8.2770	8.2700	8.2800
2003	8.2767	8.2772	8.2765	8.2800
2004	8.2765	8.2768	8.2764	8.2774
2005	8.0702	8.1940	8.0702	8.2765
2006	7.8041	7.9723	7.8041	8.0702
October	7.8785	7.9018	7.8728	7.9168
November	7.8340	7.8622	7.8303	7.8750
December	7.8041	7.8219	7.8041	7.8350
2007
January	7.7714	7.7876	7.7705	7.8127
February	7.7410	7.7502	7.7410	7.7632
March	7.7232	7.7369	7.7232	7.7454
April	7.7090	7.7247	7.7090	7.7345
May (period through May 2, 2007)	7.7039	7.7052	7.7039	7.7065

Source: Federal Reserve Bank of New York

(1) Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.

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ENFORCEMENT OF CIVIL LIABILITIES

We are registered under the laws of the Cayman Islands as an exempted company with limited liability. We are registered 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 foreign 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.

Substantially all of our assets are located in China. In addition, substantially all of our directors and officers and our PRC legal counsel, Haiwen & Partners, are nationals or residents of jurisdictions other than the United States and all or a substantial portion of their 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 these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States. It may also be difficult for you to enforce in United States courts judgments obtained in United States courts based on the civil liability provisions of the United States federal securities laws against us, our officers and directors and Haiwen & Partners.

We have appointed CT Corporation System 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 in 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.

Conyers Dill & Pearman, our counsel as to Cayman Islands law, and Haiwen & Partners, our counsel as to PRC law, have advised us that there is uncertainty as to whether the courts of the Cayman Islands or the PRC would, respectively, (1) recognize or enforce judgments of United States courts obtained against us or our directors or officers or Haiwen & Partners predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States, or (2) entertain original actions brought in the Cayman Islands or the PRC against us or our directors or officers or Haiwen & Partners predicated upon the securities laws of the United States or any state in the United States.

Conyers Dill & Pearman have informed us that the uncertainty with regard to Cayman Islands law relates to whether a judgment obtained from the United States courts under civil liability provisions of the securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. The courts of the Cayman Islands will not recognize or enforce such judgments against a Cayman company, and because such a determination has not yet been made by a court of the Cayman Islands, it is uncertain whether such civil liability judgments from United States courts would be enforceable in the Cayman Islands. Conyers Dill & Pearman has further advised us that a final and conclusive judgment in the federal or state courts of the United States under which a sum of money is payable, other than a sum payable in respect of taxes, fines, penalties or similar charges, may be subject to enforcement proceedings as a debt in the courts of the Cayman Islands under the common law doctrine of obligation.

Haiwen & Partners has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedure Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedure Law based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. Haiwen & Partners has advised us further that under PRC law, a foreign judgment, which does not otherwise violate basic legal principles, state sovereignty, safety or social public interest, may be recognized and enforced by a PRC court, based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. As there currently exists no treaty or other form of reciprocity between China and the United States governing the

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recognition of judgments, including those predicated upon the liability provisions of the United States federal securities laws, there is uncertainty whether and on what basis a PRC court would enforce judgments rendered by United States courts.

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SELECTED CONDENSED CONSOLIDATED COMBINED FINANCIAL AND OPERATING DATA

The following selected condensed consolidated combined statements of operations data for the years ended December 31, 2003, 2004, 2005 and 2006 and the selected condensed consolidated combined balance sheet data as of December 31, 2003, 2004, 2005 and 2006 have been derived from our audited consolidated combined financial statements, which have been audited by Deloitte Touche Tohmatsu CPA Ltd., an independent registered public accounting firm. The report of Deloitte Touche Tohmatsu CPA Ltd. as of and for the years ended December 31, 2004, 2005 and 2006 is included elsewhere in this prospectus. Our selected condensed consolidated combined statement of operations data for the year ended December 31, 2002 and our condensed consolidated combined balance sheet data as of December 31, 2002 have been derived from our unaudited consolidated combined financial statements, which are not included in this prospectus. We have prepared the unaudited consolidated combined information for 2002 on the same basis as the audited consolidated combined financial statements. The unaudited financial information includes all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of the financial position and operating results for the period presented.

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	For the years ended December 31,
	2002			2003			2004			2005			2006
	(in thousands, except share, per share and per ADS data)
Condensed Consolidated Combined Statements of Operations Data
Revenues(1):
Direct sales, net	$	—		$	45,567		$	52,038		$	76,828		$	107,411
Distribution sales, net		—			23,957			43,022			93,512			89,087
Total revenues, net		27,146			69,524			95,060			170,340			196,498
Cost of revenues(1):
Direct sales		—			22,008			16,826			26,646			32,013
Distribution sales		—			11,499			19,279			43,566			41,260
Total cost of revenues		9,133			33,507			36,105			70,212			73,273
Gross profit		18,013			36,017			58,955			100,128			123,225
Operating income (expenses):
Advertising expenses		(6,239	)		(14,877	)		(27,903	)		(55,564	)		(76,549	)
Other selling and marketing expenses(2)(3)		(3,937	)		(6,239	)		(7,697	)		(13,734	)		(21,023	)
General and administrative expenses(2)		(2,028	)		(4,429	)		(6,126	)		(12,340	)		(27,115	)
Other operating income, net		—			370			498			1,553			3,105
Total operating income (expenses)		(12,204	)		(25,175	)		(41,228	)		(80,085	)		(121,582	)
Income from operations		5,809			10,842			17,727			20,043			1,643
Other income (expenses):
Interest expenses		(3	)		(7	)		(41	)		(14	)		(14	)
Other income (expenses), net		82			101			(9	)		588			2,181
Change in fair value in warrant liability		—			—			—			(10,059	)		—
Other income (expenses)		79			94			(50	)		(9,485	)		2,167
Income tax expenses (benefits):
Current		173			417			571			831			233
Deferred		—			—			—			(61	)		(161	)
Tax refund		—			—			—			—			(768	)
Total income tax expenses (benefits)		173			417			571			770			(696	)
Minority interest		—			(162	)		(2,614	)		(1,756	)		(561	)
Net income(4)(5)		5,715			10,357			14,492			8,032			3,945
Deemed dividend on Series A convertible redeemable preferred shares		—			—			—			(162	)		(162	)
Income attributable to holders of ordinary shares	$	5,715		$	10,357		$	14,492		$	7,870		$	3,783
Income per share—basic ordinary shares	$	0.12		$	0.22		$	0.31		$	0.13		$	0.05
Income per share—basic preferred shares	$	—		$	—		$	—		$	0.14		$	0.06
Income per share—diluted	$	0.12		$	0.22		$	0.31		$	0.12		$	0.05
Shares used in calculating basic income per share—ordinary shares		46,809,668			46,809,668			46,809,668			45,814,725			48,979,394
Shares used in calculating basic income per share—preferred shares		—			—			—			16,770,999			20,591,970
Shares used in calculating diluted income per share		46,809,668			46,809,668			46,809,668			48,645,299			53,607,999
Dividends declared per ordinary share	$	0.02		$	0.09		$	0.17		$	0.02		$	—
Pro forma income per share on an as-converted basis, basic (unaudited)(6)													$	0.06
Pro forma income per share on an as-converted basis, diluted (unaudited)(6)													$	0.05
Shares used in calculating pro forma per share amounts on an as-converted basic, basic (unaudited)(6)														69,571,364
Shares used in calculating pro forma per share amounts on an as-converted basis, diluted (unaudited)(6)														74,199,969

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	As of December 31,
	2002		2003		2004		2005		2006
	(in thousands, except share data)
Condensed Consolidated Combined Balance Sheet Data
Cash and cash equivalents	$	4,200	$	10,508	$	16,645	$	35,386	$	40,744
Prepaid advertising expenses(7)		—		1,825		4,903		20,090		25,384
Total assets		10,784		22,823		39,862		100,372		118,699
Deferred revenue		—		—		—		—		4,193
Total liabilities		3,000		6,392		13,971		12,569		15,183
Series A convertible redeemable preferred shares		—		—		—		31,834		31,996
Series A-1 convertible redeemable preferred shares		—		—		—		18,866		18,866
Total liabilities, mezzanine equity and shareholders’ equity	$	10,784	$	22,823	$	39,862	$	100,372	$	118,699

	For the years ended December 31,
	2004		2005		2006
	(in thousands, except percentages)
Selected Operating Data
Number of inbound calls generated through direct sales platforms	3,200		4,330		4,560	(8)
Conversion rate for inbound calls to product purchase orders	24.3	%	22.1	%	19.2	%(8)
Total TV direct sales program minutes	356.6		406.1		761.1

(1) During 2002, we did not separately track direct sales and distribution sales revenues or direct sales and distribution sales cost of revenues.

(2) Includes share-based compensation of:

	For the years ended December 31,
	2002		2003		2004		2005			2006
	(in thousands)
Other selling and marketing expenses	$	—	$	—	$	—	$	(168	)	$	(741	)
General and administrative expenses		$  —		$(957)		$  —	$	(2,168	)	$	(7,932	)

(3) Includes amortization of intangible assets acquired in the July 2005 of acquisition of the 49% minority interest of Shanghai HJX of:

	For the years ended December 31,
	2002		2003		2004		2005			2006
	(in thousands)
Other selling and marketing expenses	$	—	$	—	$	—	$	(239	)	$(428	)

(4) Includes:

	For the years ended December 31,
	2002		2003			2004		2005			2006
	(in thousands)
Share-based compensation	$	—	$	(957	)	$	—	$	(2,336	)	$	(8,673	)
Expensed offering costs		—		—					—			(3,166	)
Amortization of intangible assets acquired in the July 2005 acquisition of the 49% minority interest of Shanghai HJX		—		—			—		(239	)		(428	)
Change in fair value in warrant liability		—		—			—		(10,059	)		—

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The change in fair value in warrant liability resulted from our issuance on January 21, 2005 of a warrant allowing the holder to acquire 2,882,155 shares of our series A-1 convertible redeemable preferred shares upon payment of $8.0 million in cash, corresponding to a per share exercise price of $2.78. The warrant was exercised in full on December 28, 2005 and, as a result, no future charge will be recognized. The warrant was deemed a freestanding derivative liability which requires the warrant to be measured at fair value upon initial recognition and subsequent to initial recognition. Accordingly, we recognized a non-cash charge in connection with marking the warrant to fair value for periods prior to the exercise.

(5) Net income for the periods presented reflect effective tax rates, which may not be representative of our long-term expected effective tax rates in light of the tax holidays and exemptions enjoyed by certain of our PRC subsidiaries and our consolidated affiliated entities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Taxation.”

(6) The pro forma income per share data gives effect to the automatic conversion of our outstanding Series A convertible redeemable preferred shares and Series A-1 convertible redeemable preferred shares into 20,591,970 ordinary shares upon closing of this offering.

	2006
	(in thousands, except share and per share data)
Income attributable to holders of ordinary share, as reported	$	3,784
Add: Deemed dividend on Series A convertible redeemable preferred shares		161
Net income, as reported	$	3,945
Pro forma net income (unaudited)	$	3,945
Pro forma income attributable to holders of ordinary shares (unaudited)	$	3,945
Shares used in calculating basic income per share:
As reported		48,979,394
Add: Series A and Series A-1 convertible redeemable shares (unaudited)		20,591,970
Pro forma on an as-converted basis (unaudited)		69,571,364
Pro forma basic income per share on an as-converted basis (unaudited):	$	0.06
Shares used in calculating diluted income per share:
As reported		53,607,999
Add: Series A and Series A-1 convertible redeemable shares (unaudited)		20,591,970
Pro forma on an as-converted basis (unaudited)		74,199,969
Pro forma diluted income per share on an as-converted basis (unaudited):	$	0.05

(7) During 2002, we did not separately track prepaid advertising expenses.

(8) Does not include calls generated under our marketing services arrangements that are primarily marketing in nature and are expected to result in limited direct sales revenues, such as our arrangement with China Unicom.

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RECENT DEVELOPMENTS

The following is an estimate of our selected preliminary unaudited financial results for the quarter ended March 31, 2007. In the first quarter of 2007, we expect to record, subject to the adjustments described below:

• total net revenues in the range of $67.7 million to $69.5 million, compared to $57.5 million in the quarter ended March 31, 2006;

• gross profit in the range of $36.0 million to $37.6 million, compared to $32.0 million in the quarter ended March 31, 2006;

• income from operations in the range of $5.8 million to $6.2 million (including approximately $1.3 million in anticipated share-based compensation expenses), compared to $4.6 million in the quarter ended March 31, 2006; and

• net income in the range of $6.8 million to $7.3 million (including approximately $1.5 million in investment gains), compared to $5.4 million in the quarter ended March 31, 2006.

Estimated total net revenues for the quarter ended March 31, 2007 are the highest in company history, reflecting record direct sales in the quarter offset by a significant decline in distribution sales compared to the first quarter of 2006. For the first quarter of 2007, direct sales net revenues are estimated to be in the range of $45.8 million to $46.8 million, compared to $22.2 million in the quarter ended March 31, 2006. Distribution net revenues are estimated to be in the range of $21.9 million to $22.3 million compared to $35.3 million in the first quarter of 2006.

Growth in estimated direct sales net revenues reflects primarily sales of mobile handsets, which we first began selling through our TV direct sales platform in April 2006. Mobile handsets are estimated to account for approximately 65% of our estimated direct sales net revenues for the quarter. Estimated direct sales net revenues for the first quarter of 2007 also include approximately $6.2 million in marketing services revenues. We first began generating marketing services revenues in late 2006.

Our lower estimated distribution net revenues and the moderation of our overall gross profits, as a percentage of total net revenues, reflects regulatory and other events occurring in 2006 which continued to impact sales in 2007, including the prohibition on TV advertising for some of our previously high margin products. Lower distribution net revenues also reflect the maturity of our electronic learning devices products. Our electronic learning devices are expected to account for approximately 76% of our estimated distribution net revenues.

Estimated income from operations for the quarter ended March 31, 2007 reflects operating expenses generally in line with operating expenses in recent quarters, including the considerably higher share-based compensation expenses we have recorded in recent quarters.

Our preliminary operating results for the quarter ended March 31, 2007 are subject to adjustment based upon, among other things, completion of our review and reporting processes. Actual results could differ materially. For additional information regarding the various risks and uncertainties inherent in such estimates, see “Special Note Regarding Forward-Looking Statements.” Results for the first quarter of 2007 may not be indicative of our full year results for 2007 or future quarterly periods. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus for information regarding trends and other factors that may influence our results of operations and for recent quarterly operating results.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Condensed Consolidated Combined Financial and Operating Data” and our consolidated combined financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview and Executive Summary

We are a leading integrated multi-platform marketing company in China with a proven track record of developing and selling branded consumer products and services. Our two operating segments are our TV direct sales platform and nationwide distribution network. We operate the largest TV direct sales business in China in terms of revenues and TV air time purchased according to Euromonitor. Through our TV direct sales platform, we market both our own proprietary products and services as well as third-party products and services. Our nationwide distribution network extends across all provinces and allows us to reach over 20,000 retail outlets, covering nearly all cities and counties in China. We typically grant our distributors the exclusive right to distribute selected products and services within their respective territories.

We believe our nationally televised TV direct sales programs allow us to build strong product and service brand awareness among China’s consumers and generate significant demand for the products and services that we market within a short period of time. Our nationwide distribution network, coupled with local marketing efforts, helps further enhance the awareness of and demand for marketed products and services, thereby broadening our customer reach and enhancing our product and service penetration on a nationwide basis.

Supporting our direct sales platforms are our call centers, located in Beijing, Shanghai and Shenzhen. Our call centers were staffed by 649 sales representatives and 113 customer service personnel as of December 31, 2006. Our Beijing and Shanghai call centers operate 24 hours a day. In 2005 and 2006, our call centers processed on average approximately 11,800 and 12,400 incoming calls per day generated from our TV and other direct sales platforms, respectively.

Our net revenues, which include direct sales net revenues and distribution net revenues, have increased in each of the last three years, growing from $95.0 million in 2004 to $170.3 million in 2005 and to $196.5 million in 2006. Direct sales net revenues include both net proceeds from products sold through our TV direct sales programs and, beginning in 2006, marketing services revenues. Direct sales net revenues have grown in each of the last three years from $52.0 million in 2004 to $76.8 million in 2005 and to $107.4 million in 2006. Our distribution net revenues are derived from sales of products and services to our distributors. Distribution net revenues grew from $43.0 million in 2004 to $93.5 million in 2005 and declined to $89.1 million in 2006.

During 2006, we entered into two new types of arrangements—joint sales arrangements and marketing services arrangements.

Under a joint sales arrangement, we generate TV direct product and services sales revenues. In addition, as consideration for the marketing support provided by our TV direct sales programs, we receive additional payments from our joint sales partners based on sales of featured products or services through their own distribution channels. These additional payments are classified as reductions to cost of direct sales revenues via reductions in the purchase price of the products purchased by us from our joint sales partners, similar to vendor rebates. As an example of a joint sales arrangement, in April 2006, we entered into an arrangement with a cell phone manufacturer to be the exclusive TV direct sales platform through which it markets some of its PDA cell

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phones. In addition to generating TV direct product sales revenues for us, the joint sales partner agreed to pay to us an amount based on the number of units sold by it through its own distribution network. These additional payments have been recorded as reductions to cost of direct sales revenues.

Under a marketing services arrangement, we provide a marketing plan, related TV advertising time and call center support to our customers. As an example, we developed a multi-phase TV direct sales marketing plan for China Unicom, the second largest mobile communications company in China, to promote China Unicom’s CDMA services and CDMA cell phones from China Unicom’s partners through our TV direct sales platform. Under this marketing services arrangement, we received a fixed fee, which has been included in direct sales net revenues.

In 2006, our joint sales arrangements generated $27.8 million in gross direct product revenues (mostly HTW branded PDA cell phones) and $7.3 million in other payments based on sales of featured products or services by our joint sales partners through their own distribution channels, which reduced our cost of direct sales revenues. In 2006, our marketing services arrangements generated $6.7 million in marketing services revenues.

Net revenue and operating income in any period are largely driven by our sales platforms and product and service mix, advertising expenses and events occurring in the period. The increases in our total net revenues in 2004 and 2005 were driven in large part by direct and distribution sales of our electronic learning devices and other proprietary product lines, such as our Zehom sleeping aid/neck massager and posture correction product lines. In 2006, our sales increase reflects, in particular, $27.8 million of direct sales of third-party cell phones and our success in the first half of 2006 in marketing our proprietary Zehom branded neck massager.

Despite the increase in 2006 net revenues, we only had operating income of $1.6 million in 2006. In particular, in the second half of 2006 net revenues and operating income were adversely impacted by PRC regulatory changes (still in effect) prohibiting TV and radio direct sales programs of certain products, including our branded neck massager and our slimming product. These products were two of our best-selling and highest margin products in the first half of 2006. Similarly, in the second half of 2006, negative media coverage of our products (some of which we believe contained false or misleading information), in particular of our electronic learning devices, had an adverse impact on our 2006 net revenues and operating income. Total gross revenues from sales of our electronic learning devices decreased by $10.6 million in 2006. Gross revenues from sales of our neck massager product line dropped from $18.9 million in the first half of 2006 to $5.5 million in the second half of 2006. Operating income in 2006 also reflects stock-based compensation charges of $8.7 million compared to $2.3 million in 2005 and a $3.2 million charge related to offering costs.

Our product and service revenues are driven significantly by our spending on advertising, particularly our TV direct sales programs. Our total advertising expenses increased by 99.3% from $27.9 million in 2004 to $55.6 million in 2005 and by an additional 37.6% to $76.5 million in 2006. The largest component of our total advertising expenses, constituting over 80% of total advertising expenses in each of 2005 and 2006, is purchased TV advertising time. Purchased TV advertising expenses increased by 137.0% from $19.2 million in 2004 to $45.5 million in 2005 and an additional 51.6% to $69.0 million in 2006.

We use purchased TV advertising time to broadcast both TV direct sales programs and brand promotion advertising. Advertising expenses for TV channels on which we run almost exclusively TV direct sales programs accounted for $17.4 million, or 90.4%, $29.9 million, or 65.8%, and $53.3 million, or 77.2%, of the total expenses incurred in purchasing TV advertising time in 2004, 2005 and 2006, respectively. TV advertising time dedicated to TV direct sales programs increased from over 350,000 minutes in 2004 and over 400,000 minutes in 2005 to over 760,000 minutes in 2006 (approximately 244 hours per week). This increase reflects our purchase of advertising time on TV channels on which we had not previously advertised and our purchase, in bulk, of lower-cost, late night advertising time for use in product and service development and testing activities.

TV brand promotion advertising expenses accounted for $1.8 million, or 9.6%, $15.6 million, or 34.2%, and $15.7 million, or 22.8%, of the total expenses incurred in purchasing TV advertising time in 2004, 2005 and

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2006, respectively. Our TV brand promotion advertising in recent periods had primarily supported our electronic learning devices product line and our posture correction and neck massager/sleeping aid product lines, but PRC regulatory changes in the second half of 2006 prevented us from running TV direct sales programs for our neck massager product line.

The number of TV channels on which we broadcast TV direct sales programs increased from 41 in 2004 to 52 in 2006. In 2006, we broadcast brand promotion advertising on 18 TV channels, including six channels on which we did not broadcast TV direct sales programs. We recently began consolidating our TV advertising time and currently broadcast our TV direct sales programs on 44 TV channels.

We expect to increase our commitments to purchase TV advertising time in 2007 by approximately 49.9% to $85.6 million. Actual TV advertising commitments could, however, vary significantly. We may purchase additional broadcasting time throughout the year. Also, we may be unable to use all of our purchased time due to various factors, many of which are out of our control, such as preemption of our purchased time by special programming events, programming overruns by TV stations and changes in available advertising minutes provided by TV stations. In addition, the accounting for advertising time will vary based on the structure of our joint sales and marketing services arrangements. For example, TV advertising expenses paid by us may be reflected as either a cost of direct sales revenues (e.g., marketing services arrangements that involve limited or no direct sales with marketing customers paying a fixed fee, such as our arrangement with China Unicom) or as advertising expenses (e.g. joint sales arrangements, such as our arrangement with HTW). Also, certain payments received by us under our joint sales arrangements may be a specific reimbursement of incurred advertising expenses and therefore, recorded as a reduction to our advertising cost.

In addition to TV brand promotion advertising, we also promote our brands through print and other media, primarily newspaper advertising. Our total advertising expenses for 2005 and 2006 included an aggregate of $6.9 million and $6.3 million, respectively, for non-TV brand promotion advertising, which primarily was used to support our neck massager/sleeping aid, electronic learning devices and oxygen generating devices product lines.

We also reimburse certain of our distributors for a portion of their local TV, print media and other advertising-related expenses in support of the products that they distribute for us. Our total advertising expenses in 2005 and 2006 included $3.1 million and $1.0 million, respectively, of these distributor reimbursements, primarily related to our oxygen generating devices and neck massager/sleeping aid products and posture correction products.

The number of inbound calls generated through our direct sales platforms received by our call centers has increased steadily with inbound calls totaling approximately 3.2 million, 4.3 million and 4.5 million, respectively, in 2004, 2005 and 2006. The conversion rate for inbound calls, which is the percentage of inbound calls that result in product or service purchase orders, was 24.3%, 22.1% and 19.2% for those same periods. In calculating our conversion rate and inbound calls, we exclude calls generated under our marketing services arrangements, such as our arrangement with China Unicom. A critical factor impacting our conversion rate is the average selling price of our products and services. As our average selling prices have increased, we have experienced downward pressure on our conversion rates. We seek to counterbalance this pressure with improved sales training and performance-related personnel management.

We intend to focus in the near term on successfully developing and marketing products and services offering high margins and recurring revenue streams and on developing our joint sales and marketing services arrangements. To do so, we will continue to utilize our product and service development and marketing strengths, our national TV media presence and media management expertise to offer selected products throughout China through our integrated sales platforms. Our longer term goal is to be the leading integrated cross-media marketer of consumer products and services in China. Related challenges include the evolving nature of the TV direct sales industry and our business model, which are in the early stages of development, and a continuously evolving competitive landscape. To address these challenges, among other things, we regularly evaluate developments and the competitive landscape in the consumer retail market in China (including the TV direct sales market both in

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China as well as worldwide). In turn, as appropriate, we adjust our product and service offerings, sales and marketing efforts and business strategy. We undertake these adjustments in connection with constant evaluation of our media allocation for each product and service to maximize return on our media purchase expenditures. For example, we track and analyze data generated through our call center operations. Using this data, we adjust on a weekly basis the products and services we promote on TV, the frequency and time slots of our TV direct sales programs, as well as the TV channels on which we broadcast our programs.

Revenues and Cost of Revenues

Revenues

	For the years ended December 31,
	2004				2005				2006
	Amount		% of total revenues, net		Amount		% of total revenues, net		Amount		% of total revenues, net
	(in thousands, except percentages)
Revenues:
Direct sales, net	$	52,038	54.7	%	$	76,828	45.1	%	$	107,411	54.7	%
Distribution sales, net		43,022	45.3			93,512	54.9			89,087	45.3
Total revenues, net		95,060	100.0			170,340	100.0			196,498	100.0

Our net revenues consist of direct sales net revenues and distribution net revenues. Direct sales net revenues represent product and services sales through our TV direct sales programs and other direct sales platforms and, beginning in 2006, marketing services revenues. Other direct sales primarily include sales of products and services marketed through our catalogs and sales realized through our outbound calls. To date, substantially all of our direct sales net revenues have been generated from our TV direct sales platform. As we continue to develop other forms of direct selling, such as our catalog sales, which commenced in February 2005, and our outbound calls sales, which commenced in the fourth quarter of 2004, we expect our non-TV direct sales net revenues to increase. In 2006, marketing services revenues totaled $6.7 million.

Distribution net revenues represent product and service sales to the distributors constituting our nationwide distribution network. We sell products and services to our distributors at a discount to the retail price for the same product or service when sold by us through our TV direct sales programs. The percentage of our total net revenues generated through our nationwide distribution network increased from 45.3% in 2004 to 54.9% in 2005 and decreased to 45.3% in 2006. The percentage of our total net revenues attributable to direct sales and distribution revenues will vary from period to period based on, among other things, the amount of our TV advertising time dedicated to our or third-party products and services, joint sales and marketing services arrangements and sales generated by us through our TV direct sales programs and our nationwide distribution network.

Our total net revenues are presented net of certain adjustments including sales and business taxes incurred primarily by our three PRC affiliated entities, cash rebates on distribution sales, costs of cash coupon discounts and membership points on direct sales. Sales and business taxes incurred primarily by our three PRC affiliated entities totaled approximately $0.2 million in each of 2004 and 2005 and $0.7 million in 2006. Our marketing services revenues, which we started generating in 2006, are subject to higher taxes and surcharges than our other sources of revenues, resulting in the $0.5 million increase in sales and business taxes in 2006.

Historically, we conducted distribution promotional sales activities primarily through the use of cash rebates. Beginning in 2005, we introduced our customer loyalty program for direct sales which includes coupon discounts and membership points. We net the cost of these promotional activities against revenue at the time revenue is recorded.

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Direct sales net revenues for 2004, 2005 and 2006 have been adjusted based on actual product return experience. In future interim periods, as we report revenues, we will estimate the amount of sales returns based on the historical trend of product returns, current economic trends including market acceptance of new and existing products and other delivery and return information available from EMS and local delivery companies.

To accelerate the establishment of our distribution network, in 2000 we issued shares in our company to owners of five distributors as incentives to join our nationwide distribution network. In 2005 and 2006, the aggregate sales generated by these five distributors accounted for approximately 15.2% and 13.0% of our distribution gross revenues and 8.3% and 5.9% of our total gross revenues, respectively. In 2005 and 2006, two of these distributors were among our five best-performing distributors. None of these shareholders owns more than 1% of our company. In addition, of our distributors, 11 are owned in part, or in some cases in whole, by eight of our employees or their family members. Seven out of these eight individuals became our employees as a result of our acquisition of the remaining 49% interest of Shanghai HJX in July 2005. In 2005 and 2006, the aggregate sales generated by these 11 distributors accounted for approximately 33.3% and 26.9% of our distribution gross revenues or 18.3% and 12.2% of our total gross revenues. In 2005, two of these distributors were, and in 2006 one of the distributors was, among our five best-performing distributors. In addition, two distributors in 2005 and three distributors in 2006, each of which accounted for less than 1% of our distribution gross revenues in 2005 and 2006, are wholly owned by family members of our chief executive officer and another of our executive officers.

We generally focus on marketing and selling four or five featured product lines at any one time through our TV direct sales platform and a limited number of products and services through our nationwide distribution network. Consequently, we have been, and expect to continue to be, dependent on a limited number of featured product lines to generate a large percentage of our net revenues. Currently, our featured products are offered in the following categories or under the following brands:

• electronic learning devices featuring our proprietary Ozing brand, which accounted for 42.8% and 31.7% of our total gross revenues in 2005 and 2006, respectively, with retail prices ranging from RMB798 to RMB1,180 per unit in 2005 and ranging from RMB698 to RMB1,298 per unit (or approximately $89 to $166 per unit) in 2006;

• consumer electronics products featuring Net E-cam, Aptek Net E-cam and Soloky brand names, which accounted for 20.8% and 6.9% of our total gross revenues in 2005 and 2006, respectively, with retail prices ranging from RMB1,680 to RMB2,380 per unit in 2005 and ranging from RMB1,280 to RMB3,980 per unit (or approximately $164 to $510 per unit) in 2006;

• cell phones featuring the HTW, CECT and Gionee brand names and China Unicom’s CDMA service and CDMA cell phones from China Unicom’s partners. We began introducing cell phones in April 2006, and they are sold by us only through our TV direct sales platform, accounted for 14.1% of our total gross revenues in 2006 with retail prices ranging from RMB2,980 to RMB7,580 per unit (or approximately $382 to $971) in 2006; and

• health and wellness products featuring our proprietary Babaka, Zehom and Youngleda brand names, which accounted for 23.9% and 23.6% of our total gross revenues in 2005 and 2006, respectively, with retail prices in 2005 and 2006 ranging from RMB288 to RMB2,080 per unit (or approximately $37 to $267 per unit).

Our three best-selling product lines accounted for an aggregate of 65.3%, 78.0% and 57.2% of our total gross revenues in 2004, 2005 and 2006, respectively.

We select products and services sold through our TV direct sales programs, which we believe offer sufficient profit potential and can be built into a national brand for sale through our nationwide distribution network. Consequently, we do not actively market all of our featured product lines through our nationwide

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distribution network. For example, in 2005 we did not actively market and sell our exercise machine through our nationwide distribution network.

We offer over 100 products and services through our multiple sales platforms, approximately 40% of which are marketed and sold primarily through our TV direct sales programs, nationwide distribution network or both. Our featured product categories (currently electronic learning devices, consumer electronics, cell phones and health and wellness products) include over 35 products. In addition to the four product categories we presently feature, we sell other products and services, including autocare, beauty and household products, primarily through our catalogs, outbound calls and cross-selling. We periodically develop and introduce related new and upgraded products and services under the same product or service brand.

Our ability to maintain or grow our revenue depends on our ability to successfully identify, develop, introduce and distribute in a timely and cost-effective manner new and appealing product and service offerings, including new and upgraded products and services. We employ a systematic identification and development process. After a potential featured product or service has been identified and tested, we evaluate a number of key benchmarks, particularly estimated profitability relative to our media expenses, in determining whether to conduct full-scale sales and marketing.

We seek to diversify our product and service offerings by adding products and services that offer recurring revenue opportunities. For example, in January 2006 we began full-scale marketing of a software program that tracks market performance of specified stocks listed on China’s domestic stock exchanges and provides technical analysis to aid investment decisions. The use of this product requires the payment of an annual subscription fee at the beginning of the subscription period. The initial subscription fee is RMB3,380 (approximately $433) as of December 31, 2006 with the annual renewal fee costing RMB720 (approximately $92). Revenues from both initial and renewal fees are deferred and recognized ratably over the twelve-month subscription period.

In late May 2006, the Shanghai branch of the China Securities Regulatory Commission, or CSRC, sent us a notice requiring we suspend advertisements of our stock-tracking software program as it believed we did not have the required permit to provide securities investment advisory services. Although we do not believe that our sale of this software program involves the provision of securities investment advisory services, beginning in May 2006, we discontinued most TV advertisements for this program. We are in communication with the CSRC Shanghai branch and are seeking its clearance to resume normal advertisements for this program. During the six months ended June 30, 2006, we recognized $1.2 million in related subscription revenue and our deferred revenue balance was $4.2 million at period end. For the full year, we recognized $4.7 million in related subscription revenue and our deferred revenue balance was $4.2 million as of December 31, 2006.

In July 2006, the State Administration for Radio, Film and Television, or SARFT, and the State Administration for Industry and Commerce, or SAIC, issued a circular temporarily prohibiting the broadcast of TV- and radio-based direct sales programs regarding pharmaceutical products, diet and slimming products, medical devices, breast enhancement products and height increasing products on and after August 1, 2006, pending adoption of new rules governing those direct sales activities. Consequently, we were unable to and, until the new rules are adopted, we will be unable to broadcast TV- and radio-based direct sales programs for some of our products, primarily including our neck massager product and our slimming product. These products were two of our high margin products and, during the six months ended June 30, 2006, our neck massager was our second best-selling product in terms of gross revenues and our best selling product in terms of direct sales gross revenues. Our slimming product was our fourth best-selling product in terms of direct sales gross revenues in the first half of 2006. It is unclear when the new rules governing those direct sales activities will be issued. We believe stricter regulation is beneficial for our industry and business in the long term since it will enhance the overall reputation of the TV direct sales industry by more closely regulating promoted products and marketing practices. However, at least in the near term, our direct and distribution sales of the products covered by the circular have been, and we expect will continue to be, adversely impacted as a result of this prohibition. In September 2006, we stopped marketing our slimming product. In the second half of 2006 distribution sales of our neck massager products decreased by 68.3% to $2.6 million from $8.2 million in the first half of 2006, largely

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due to a lack of TV direct sales program marketing support. The overall impact on our future operating results depends on, among other things, our success in promoting the products covered by the circular through other media channels; the degree to which distribution sales of our restricted products continue to be impacted by the ban on TV direct sales programs; our ability to offset these decreased sales with sales of non-restricted products (including newly developed products) using our committed TV advertising time and the related sales price and margins of those non-restricted products; and the nature of, and restrictions imposed by, the future rules when adopted.

During the second half of 2006 several articles appeared in the Chinese media that, among other things, questioned the pricing and quality of our products, in particular targeting our electronic learning devices. Some of these articles we believe contained false or misleading information regarding our products and market practices. We took marketing and other efforts to protect our product brands and to correct or respond to these articles and related customer concerns and these activities appear to have stopped. However, this negative media coverage had, and may continue to have, an adverse effect on our direct and distribution sales of our electronic learning devices and other products or services.

In any period, a number of factors, including the following, will impact our net revenues and the portion thereof generated by our direct sales and distribution platforms:

• the mix of TV direct sales programs and brand promotion advertising and the portion of our TV direct marketing programs dedicated to joint sales and marketing services arrangements;

• the mix of products and services marketed through our TV direct sales programs and our nationwide distribution network and their average selling prices;

• the portion of any subscription or service revenue deferred or recognized in any period;

• new product and service introductions by us or our competitors;

• the availability of competing products and services and possible reductions in the sales price of our products and services over time in response to competitive offerings or in anticipation of our introduction of new or upgraded offerings;

• seasonality with respect to certain of our products, such as our electronic learning devices. Sales for these products are typically higher around the first and third quarters corresponding with the end and beginning of school semesters in China;

• the cycles of successful products and services featured in our TV direct sales programs, with such sales typically growing rapidly over an initial promotional period and then declining over time, sometimes precipitously in a short period of time (for example, our electronic wrinkle remover, for which full-scale sales and marketing began in December 2003, accounted for over 20% of 2004 total gross revenues with sales declining by over 94% in 2005 due to the unanticipated short lifecycle of that product);

• the success of our distributors in promoting and selling our products locally; and

• the potential negative impact distributor sales may have on our own direct sales efforts.

For a detailed discussion of the factors that may cause our net revenues to fluctuate, see “Risk Factors—Risks Relating to Our Business—Our operating results fluctuate from period to period, making our results difficult to predict and our operating results for a particular period therefore could fall below our expectations or the expectations of market analysts or investors, thereby resulting in a decrease in the price of our ADSs.”

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Cost of Revenues

Cost of revenues in respect of direct product and service sales represents our direct costs to manufacture, purchase or develop products or services sold by us to consumers or our distributors. For a particular product or service, the related cost of revenues is the same regardless of whether sold by us directly to consumers or to our distributors. The most significant factor in determining cost of revenues as a percentage of revenue in any period is our product or service mix for the period. For example, our collectible products (stamps and coins) currently have a higher per unit cost of revenues than our other products.

Cost of revenues in respect of direct product and service sales does not include advertising or other selling and marketing expenditures. These expenditures are incurred for the benefit of each of our sales and distribution platforms and, as such, are treated as operating expenses and not as a cost of revenues. As described below under “Critical Accounting Policies,” however, certain payments received under our joint sales arrangements may reduce our cost of revenues or advertising expenses. In evaluating the performance of our sales and distribution platforms, you should consider our advertising and other selling and marketing expenses and income from operations.

For marketing services arrangements, the related cost of revenues reflects the cost of the TV advertising time used to run the related TV direct sales programs.

If we defer revenues in a period, our operating margins will be initially adversely impacted as we recognize the cost of revenues in full in the period, and will be favorably impacted in later periods as we recognize deferred revenue without the offsetting cost of revenues.

Operating Income (Expenses)

Our operating income (expenses) consist of advertising expenses, other selling and marketing expenses, general and administrative expenses and other operating income, net.

Advertising Expenses

Advertising expenses consist primarily of the expenses of purchasing our advertising media, mostly the expense of TV advertising time and, to a significantly lesser extent, non-TV media, primarily print media. Advertising expenses also include payments to reimburse certain of our distributors for a portion of their local TV, print media and other advertising-related expenses in support of our products and services distributed by them. To date, we have not deferred any advertising expenses, and all such advertising expenses have been recognized as incurred. If we defer revenues in a period, our operating margins will be initially adversely impacted as we recognize the TV direct sales program advertising expense in full in the period it is incurred and will in a later period be favorably impacted as we recognize deferred revenue without the offsetting advertising expense.

We use our purchased TV advertising time to broadcast TV direct sales programs and brand promotion advertising. Unless the cost of TV advertising time is treated as a cost of direct sales revenues under a marketing services arrangement, advertising expenses include the cost of the TV advertising time used to broadcast all TV direct sales programs. Although we did not receive any of these payments prior to 2007, payments received from our joint sales partners to reimburse a portion of the related TV advertising cost are expected to be recorded as a reduction to our TV advertising expense. Our TV direct sales programs are typically five to ten minutes in length, focus on the features and benefits of the products and services being marketed and encourage consumers to call our call centers to purchase those products and services. Our brand promotion advertisements are typically five to 60 seconds long and, rather than focusing on product or service features or benefits, are designed to increase general brand awareness for the marketed products or services. We also use non-TV media, primarily newspaper advertising, for brand promotion purposes. To date, our TV brand promotion advertisements have featured primarily our electronic learning devices product line and, to a lesser extent, our posture correction and neck

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massager/sleeping aid product lines. During 2005 and 2006, our TV brand promotion advertisements were broadcasted on six and 18 channels, respectively, including CCTV 1, which has the largest national viewership in China and is our primary TV channel for brand promotion advertising.

We typically enter into TV advertising time purchase agreements for our TV direct sales programs in advance prior to the beginning of each year, with such agreements generally having a term of one year. We typically prepay for a large portion of our TV advertising time for our TV direct sales programs. We believe our ability to prepay for our advertising expenses has been a competitive advantage. As of December 31, 2005 and 2006, we had a prepaid advertising balance of $20.1 million and $25.4 million, respectively. We enter into our advertising agreements typically near the end of each year and consequently our prepaid balance is usually highest at year-end.

Our advertising cost per minute (based on aggregate expenditures and ignoring the impact of payments made under our joint sales and marketing services arrangements) varies depending on the channel, with certain CCTV channels, which generally have a broader reach, being more expensive. Our total increases in advertising expenses reflect the purchase of more expensive broadcast time, an increase in total minutes purchased and an increase in price per minute. Our average per minute advertising cost for TV direct sales programs in 2004, 2005 and 2006 was approximately $49, $74 and $70, respectively. Our average per minute cost for our TV direct sales programs will vary primarily based on the channels we broadcast our TV direct sales programs and the associated time slots. In addition, average per minute charges can vary significantly by channel, with some channels increasing their rates annually. In particular, we have experienced more significant rate increases on some of our national satellite channels, compared to our other channels, as their reach and ratings have increased. In 2006, our top five TV channels in terms of amount of TV direct sales program advertising expenditures accounted for approximately 32.1% of our total TV direct sales program advertising expenditures and approximately 18.6% of our total TV direct sales program advertising minutes. In contrast, in 2006, our top five TV channels by total TV direct sales program advertising minutes accounted for approximately 44.8% of our total TV direct sales program advertising minutes and 18.3% of our total TV direct sales program advertising expenditures.

Other Selling and Marketing Expenses

Other selling and marketing expenses consist primarily of costs related to product delivery, salary and benefits for our call centers and sales and marketing personnel and the production of our TV direct sales programs and other advertising. Also included in other selling and marketing expenses are amortization charges related to intangible assets acquired in our July 2005 acquisition of the 49% minority interest in Shanghai HJX. See note 3 to our consolidated combined financial statements.

We rely significantly on EMS, and to a lesser extent, local delivery companies, to deliver our products sold by us to consumers and to collect related payments in connection with products delivered on the basis of a cash on delivery, or COD, payment method. During 2004, 2005 and 2006, EMS delivered approximately 51.7%, 53.3% and 56.7%, respectively, of the orders placed through our direct sales platforms. We are responsible for the delivery and handling fee regardless whether the delivery is successful.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation and benefits for general management and finance and administrative personnel costs, depreciation and amortization with respect to equipment used for general corporate purposes, professional fees, lease and other expenses for general corporate purposes and allowances for doubtful accounts, including charges related to the write-offs of certain accounts receivable for EMS.

The total amount of EMS-related accounts receivable written off in 2006 was approximately $0.3 million. General and administrative expenses in 2006 also include offering related costs totaling $3.2 million that were expensed in 2006.

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We expect our general and administrative expenses to increase as our business expands in future periods and as we incur increased costs related to complying with our reporting obligations under the U.S. securities laws as a public company. These increased costs will include those related to our obligations under Section 404 of the Sarbanes-Oxley Act of 2002, requiring that, beginning with our annual report on Form 20-F for 2008, we include our management’s report on internal control over financial reporting and an attestation by our independent registered public accounting firm as to our management’s assessment of the effectiveness of our internal control over financial reporting.

Other Operating Income, Net

Other operating income, net consists primarily of government subsidies and commission income. We receive government subsidies from local government agencies for certain taxes paid by us, including value-added, business and income taxes.

Warrant Liability

A warrant issued on January 21, 2005 allowed the holder to acquire 2,882,155 shares of our Series A-1 convertible redeemable preferred stock upon payment of $8.0 million in cash, corresponding to a per share exercise price of $2.78. The warrant was exercised in full on December 28, 2005 and, as a result, there were no related charges after that date. The warrant was deemed a freestanding derivative liability which required the warrant to be measured at fair value upon initial recognition and subsequent to initial recognition. Accordingly, we recognized a non-cash charge in connection with marking the warrant to fair value for periods prior to the exercise in 2005. As of the date of this prospectus, we have no freestanding derivative liabilities.

Minority Interest

Minority interests consist of the 49% outside ownership interests in our majority-owned subsidiaries. In July 2005, we acquired the 49% minority interest in Shanghai HJX, the subsidiary responsible for production, marketing and sale of our electronic learning devices. In 2004, 2005 and 2006, our minority interest totaled $2.6 million, $1.8 million and $0.6 million, respectively, with the amounts in 2004 and 2005 reflecting primarily net income generated by Shanghai HJX prior to our acquisition of the remaining 49% minority interest in July 2005. We may form other majority-owned subsidiaries in the future to secure managerial expertise, acquire complementary and additional distribution networks, or secure product or service distribution rights.

Critical Accounting Policies

We prepare our financial statements in conformity with US GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of net revenues and expenses during the financial reporting period. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our financial statements as their application places the most significant demands on our management’s judgment.

Share-based Compensation and Warrant Liability Charges

Through 2005, we accounted for our stock option plans using the intrinsic value method under APB 25. Effective the beginning of 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123-R,

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“Share-Based Payment,” and elected to adopt the modified prospective application method. SFAS No. 123-R requires us to use a fair-value based method to account for stock-based compensation. Accordingly, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employees’ requisite service period. Our option plans are described more fully in Note 12 to our consolidated combined financial statements.

In 2005, we recorded a charge of approximately $10.1 million for the change in fair value in warrant liability in connection with warrants to acquire shares of our Series A-1 convertible redeemable preferred stock.

Determining the value of our share-based compensation expense in future periods requires the input of highly subjective assumptions, including expected life of the share-based payment awards, estimated forfeitures and the price volatility of the underlying shares. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our share-based compensation expense could be materially different in the future. In addition, we estimate our expected forfeiture rate and recognize expense only for those shares expected to vest. These estimations are based on past employee retention rates and our expectations of future retention rates. We will prospectively revise our forfeiture rates based on actual history. Our compensation expense may change based on changes to our actual forfeitures.

Revenue Recognition

We recognize net revenue for sales through our direct sales platforms upon delivery of the products to, and acceptance by, our customers. These revenues are recognized net of sales tax incurred primarily by our three PRC affiliated companies. We rely significantly on EMS and local delivery companies to deliver products sold through our direct sales platforms. It generally takes one to seven days for a product to be delivered by EMS and local delivery companies, with these companies regularly reporting to us product delivery status. Of the total attempted product deliveries in 2005 and 2006, approximately 19% and 23% were unsuccessful due to customers’ refusal to accept a product upon delivery or failure to successfully locate the delivery address. Generally, the higher a product’s sales price and the longer the amount of time between ordering and delivery, the more likely a customer may refuse product delivery. For unsuccessful deliveries EMS and local delivery companies are required to return the undelivered products to us. It generally takes EMS two to three weeks, and local delivery companies seven days, to return the undelivered products to us.

Direct sales revenues for 2004, 2005 and 2006 have been adjusted based on actual product return experience. In future periods, as we report our revenues for interim periods, we may be required to estimate the amount of sales returns based on the historical trend of product returns, current economic trends, including market acceptance of new and existing products, and other delivery and return information available from EMS and local delivery companies. Beginning in 2005, we introduced our customer loyalty program for direct sales which includes coupon discounts and membership points. We net the cost of these promotional activities against revenue at the time revenue is recorded. We use historical trend experience to accrue costs associated with cash coupon discounts and membership points.

We recognize net revenues for products sold through our nationwide distribution network when products are delivered to and accepted by our distributors. The distributor agreements do not provide discounts, chargebacks, price protection and stock rotation rights. However, there were certain distributor agreements that provided performance-based cash rebates which were insignificant in 2004, 2005 and 2006.

Included in direct sales net revenues are marketing services revenues derived from arrangements where the related marketing customer pays a fixed fee in exchange for our marketing services.

In 2006, we generated revenue from annual initial subscription fees from subscribers for our stock-tracking software, which includes access to our software CD containing data analysis tools and services. Upon receipt by

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us or one of our distributors of the upfront cash payments from the subscriber, we will activate the subscriber’s account and provide the subscriber with an access code. This will commence the one-year subscription period and the full payment will be deferred and recognized ratably over the one-year subscription period. After the initial subscription period, users can subscribe for additional one-year renewal periods. Because the data services are essential to the functionality of the software analysis tools, we recognize revenue ratably over the one-year subscription period. For 2006, we recognized $4.7 million in related subscription revenue and at December 31, 2006 our deferred revenue balance was $4.2 million.

Pursuant to joint sales arrangements, we generate direct sales revenues from the sale of a featured product or service through our TV direct sales programs. Our joint sales partner also sells the featured product or service through its own distribution channels. In exchange for the sales support provided by our TV direct sales programs, we also receive additional payments based on sales through our sales partners’ own distribution channels. These payments are recorded as a reduction to cost of direct sales revenues via a reduction in the purchase price of the products purchased by us from our sales partners, similar to a vendor rebate.

Payments received from our joint sales partners to reimburse a portion of the related TV advertising expense are recorded as a reduction to our TV advertising expense. We did not receive any of these payments prior to 2007.

Under our marketing services arrangements, we provide a TV direct sales marketing plan, the related TV advertising time and call center support in exchange for a fixed fee, which is included in our direct sales net revenues. Our marketing services arrangements are predominately marketing in nature and are expected to generate limited or no TV direct product sales revenues.

Corporate Structure

We commenced operations in 1998. In January 2005, we effected a restructuring to implement a holding company structure. Our operations in China are conducted under our holding company, China DRTV, a British Virgin Islands, or BVI, company, through its subsidiaries and consolidated affiliated entities. In anticipation of our initial public offering, we incorporated Acorn International in the Cayman Islands as a listing vehicle on December 20, 2005. Acorn International became our ultimate holding company when it issued shares to the existing shareholders of China DRTV on March 31, 2006 in exchange for all of the shares that these shareholders held in China DRTV.

Due to PRC regulatory restrictions on the operation of commercial trading businesses, including our direct sales and wholesale distribution businesses and certain advertising activities, the licenses to operate our direct sales and wholesale distribution businesses and provide advertising services are held by our three affiliated entities. These affiliated entities, Beijing Acorn, Shanghai Network, and Shanghai Advertising, are each 75%-owned by Don Dongjie Yang, our president and one of our directors, and 25%-owned by David Chenghong He, one of our executive officers. See “Our Corporate Structure—Our Corporate Structure and Contractual Arrangements.”

Taxation

We are incorporated in the Cayman Islands and China DRTV is a BVI company. We are not subject to taxes in those jurisdictions. Our other subsidiaries and affiliated companies are PRC companies. In addition to usual statutory taxes, our subsidiaries and affiliated companies are subject to a 17% value added tax, or VAT, on sales in accordance with relevant PRC tax laws. VAT taxes payable are accounted for through the balance sheet and do not have an income statement effect. The usual statutory income tax rate applicable to PRC companies is 33%. Prior to a restructuring effected on January 1, 2005 to implement an offshore holding company structure, our business was operated through three PRC operating companies and their subsidiaries. The restructuring essentially involved the transfer of substantially all the operating assets of our business to newly formed subsidiaries and affiliated companies of China DRTV (with limited exceptions). See “Our Corporate Structure.”

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Net income for 2004 and 2005 benefited significantly from effective income tax rates of 3% and 7%, respectively. In 2006, we had a tax benefit from income tax refunds. For 2004, prior to our restructuring, our operating companies and subsidiaries benefited from favorable tax arrangements provided by the local tax bureau responsible for overseeing the assessment of taxes related to our operations. For 2005 and onwards, several of our subsidiaries and affiliated companies benefit from the following special tax rates or incentives:

• Shanghai An-Nai-Chi Automobile Maintenance Products Co., Ltd. or Shanghai An-Nai-Chi, began operation in 2005 and has accumulated tax losses at the end of 2006. Acorn International Electronic Technology (Shanghai) Co., Ltd., or Acorn Electronic, and Shanghai HJX, as foreign-invested manufacturing enterprises are entitled to a two-year income tax exemption starting from the year when they first generate profit (which for Acorn Electronic and Shanghai HJX was 2005), a 13.5% enterprise income tax rate for the following three years and a 27% tax rate thereafter. These subsidiaries are responsible for manufacturing our engine lubricant, our posture correction product line and our electronic learning devices product line, respectively;

• Beijing Acorn Youngleda Oxygen Generating Co., Ltd, as a recognized foreign-invested manufacturing enterprise, is entitled to a two-year income tax exemption starting from the year when it first generates profit (2005), a 12% enterprise income tax rate for 2007 to 2009, a 25.5% enterprise income tax rate for 2010 to 2014 and a 27% tax rate thereafter. The subsidiary is responsible for manufacturing our oxygen generating devices product line;

• Acorn Information, which holds many of the assets used in our call center operations and provides technical services to our affiliated companies, is entitled to a two-year enterprise income tax exemption for the year it first generates profit (2005), a 7.5% enterprise income tax rate for the following three years and a 15% enterprise income tax rate thereafter in accordance with local government policies;

• Shanghai Advertising is entitled to an income tax exemption in 2005 and 2006, with a 15% income tax rate thereafter in accordance with local government policies;

• Shanghai Network is entitled to an income tax exemption in 2005, 2006 and 2007 and will be subject to a 33% income tax rate thereafter;

• Shanghai Yimeng Software Technology Co., Ltd., or Shanghai Yimeng, started operation in December 2005. Shanghai Yimeng is entitled to a two-year enterprise income tax exemption starting from the year when it first generates profit (2006), a 7.5% enterprise income tax rate for the following three years and a 15% enterprise income tax rate thereafter in accordance with local government policies; and

• Shanghai Acorn Enterprise Management Consulting Co., Ltd. is entitled to a two-year enterprise income tax exemption from January 1, 2007 to December 31, 2008.

The definition of “manufacturing enterprise” under PRC law is vague and is subject to discretionary interpretation and enforcement by the PRC authorities. If the tax incentives indicated above were eliminated or determined not to be available to us or the local government rules were deemed in violation of national laws and regulations, as applicable, current period net income would be reduced, and we may be required to pay additional taxes in respect of prior periods or be subject to the standard statutory income tax rate, which currently is 33%.

On March 16, 2007, the National People’s Congress of China enacted a new PRC Enterprise Income Tax Law, under which foreign-invested enterprises and domestic companies will be subject to enterprise income tax at a uniform rate of 25%. The new law will become effective on January 1, 2008. While we have not undertaken a detailed analysis of the potential impact of the new Enterprise Income Tax Law on us, it could significantly shorten the period in which we enjoy our preferential tax rates and/or incentives, or eliminate those preferential

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tax rates and/or incentives altogether. The new Enterprise Income Tax Law could adversely affect our financial condition and results of operations. See “Risk Factors—Risks Related to Doing Business in China—The discontinuation of any of the preferential tax treatments and government subsidies available to us in the PRC could materially and adversely affect our results of operations and financial condition.”

Impact of Recent Currency Exchange Rate Increase

We use the U.S. dollar as the reporting currency for our financial statements. Our operations are conducted through our PRC operating companies and affiliated companies. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar and, as a result, the Renminbi has appreciated by approximately 7.4% from RMB8.2765:$1 on July 21, 2005 to RMB7.7039:$1 on May 2, 2007. In converting our RMB income statement amounts into U.S. dollars we used the following RMB/$ exchange rates: 8.2765 for 2004, 8.1828 for 2005, and 7.9591 for 2006, corresponding to the average exchange rates for the periods. Our U.S. dollar denominated operating results in 2005 and 2006 have benefited, and our financial results for the balance of 2007 are likely to benefit, as a result of appreciation of the RMB against the U.S. dollar.

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Results of Operations

The following table sets forth our condensed consolidated combined statements of operations by amount and as a percentage of our total net revenues for 2004, 2005 and 2006:

	For the years ended December 31,
	2004					2005					2006
	Amount			% of total revenues, net		Amount			% of total revenues, net		Amount			% of total revenues, net
	(in thousands, except percentages)
Revenues:
Direct sales, net	$	52,038		54.7	%	$	76,828		45.1	%	$	107,411		54.7	%
Distribution sales, net		43,022		45.3			93,512		54.9			89,087		45.3
Total revenues, net		95,060		100.0			170,340		100.0			196,498		100.0
Cost of revenues:
Direct sales		16,826		(17.7	)		26,646		(15.6	)		32,013		(16.3	)
Distribution sales		19,279		(20.3	)		43,566		(25.6	)		41,260		(21.0	)
Total cost of revenues		36,105		(38.0	)		70,212		(41.2	)		73,273		(37.3	)
Gross profit		58,955		62.0			100,128		58.8			123,225		62.7
Operating income (expenses):
Advertising expenses		(27,903	)	(29.4	)		(55,564	)	(32.6	)		(76,549	)	(39.0	)
Other selling and marketing expenses(1)(2)		(7,697	)	(8.1	)		(13,734	)	(8.1	)		(21,023	)	(10.7	)
General and administrative expenses(1)		(6,126	)	(6.4	)		(12,340	)	(7.2	)		(27,115	)	(13.8	)
Other operating income, net		498		0.5			1,553		0.9			3,105		1.6
Total operating income (expenses)		(41,288	)	(43.4	)		(80,085	)	(47.0	)		(121,582	)	(61.9	)
Income from operations		17,727		18.6			20,043		11.8			1,643		0.8
Interest expenses		(41	)	—			(14	)	—			(14	)	—
Other income (expenses), net		(9	)	—			588		0.3			2,181		1.1
Change in fair value in warrant liability		—		—			(10,059	)	(5.9	)		—		—
Income tax benefits (expenses)		(571	)	(0.6	)		(770	)	(0.5	)		696		0.4
Minority interest		(2,614	)	(2.8	)		(1,756	)	(1.0	)		(561	)	(0.3	)
Net income		14,492		15.2			8,032		4.7			3,945		2.0
Deemed dividend on Series A convertible redeemable preferred shares		—		—			(162	)	(0.1	)		(162	)	(0.1	)
Income attributable to holders of ordinary shares	$	14,492		15.2	%	$	7,870		4.6	%	$	3,783		1.9	%

(1) Includes share-based compensation of:

Other selling and marketing expenses	$	—	—	%	$	(168	)	(0.1	)%	$	(741	)	(0.4	)%
General and administrative expenses	$	—	—	%	$	(2,168	)	(1.3	)%	$	(7,932	)	(4.0	)%

(2) Includes amortization of intangible assets acquired in the July 2005 of acquisition of the 49% minority interest of Shanghai HJX of:

Other selling and marketing expenses $ — — % $ (239 ) (0.1 )% $ (428 ) (0.2 )%

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The following table sets forth our three best-selling product lines on a gross revenues basis and as a percentage of total gross revenues for the indicated periods, together with a reconciliation to our net revenues for all products:

		For the years ended December 31,
		2004						2005						2006
Product	Brand	Revenues			%		Rank	Revenues			%		Rank	Revenues			%		Rank
		(in thousands, except percentages and ranks)
Electronic learning device	Ozing	$	24,758		26.0	%	1	$	73,028		42.8	%	1		$62,464		31.7	%	1
Electronic wrinkle remover	SCO		19,551		20.5	%	2
Consumer electronics	Soloky, Aptek Net E-cam & Net E-cam		17,903		18.8	%	3		35,453		20.8	%	2
Posture correction product	Babaka								24,622		14.4	%	3
PDA cell phones	HTW														26,050		13.2	%	2
Neck massager	Zehom														24,354		12.3	%	3
Total top three			62,212		65.3	%			133,103		78.0	%			112,868		57.2	%
Other products and marketing services revenues			33,006		34.7	%			37,474		22.0	%			84,343		42.8	%
Total gross revenues			95,218		100.0	%			170,577		100.0	%			197,211		100.0	%
Total adjustments			(158	)					(237	)					(713	)
Total revenues, net		$	95,060					$	170,340					$	196,498

In evaluating the success of our overall sales and marketing efforts, we consider aggregate total sales through our integrated direct sales and nationwide distribution platforms, as well as the various payments generated by our joint sales and marketing services arrangements. For example, distribution sales of our electronic learning device product line benefit significantly from our TV direct sales programs and our TV brand promotion advertising. Some products, such as our consumer electronics products, are sold primarily or exclusively through our direct sales platforms. Our PDA cell phones are not sold through our nationwide distribution network.

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The following table sets forth our three best-selling product lines for our direct sales platforms and distribution network by gross revenues and as a percentage of applicable total direct gross revenues and total distribution gross revenues for the indicated periods, together with a reconciliation to net direct sales revenues and net distribution sales revenues:

		For the years ended December 31,
Product	Brand	2004						2005						2006
		Revenues			%		Rank	Revenues			%		Rank	Revenues			%		Rank
		(in thousands, except percentages and ranks)
Direct Sales:
Consumer electronics(1)	Soloky & Aptek Net E-cam	$	15,535		29.8	%	1	$	32,284		41.9	%	1	$	11,959		11.1	%	3
Neck massager/sleeping aid(2)	Zehom		11,587		22.2	%	2								13,579		12.6	%	2
Electronic learning device	Ozing		10,475		20.1	%	3		11,061		14.4	%	2
Posture correction product	Babaka								10,139		13.2	%	3
PDA cell phones	HTW														26,050		24.1	%	1
Direct sales—total top three			37,597		72.1	%			53,484		69.5	%			51,588		47.8	%
Other direct products and marketing services revenues			14,502		27.9	%			23,493		30.5	%			56,455		52.2	%
Total direct gross revenues			52,099		100.0	%			76,977		100.0	%			108,043		100.0	%
Total adjustments			(61	)					(149	)					(632	)
Direct sales, net		$	52,038					$	76,828					$	107,411
Distribution Sales:
Electronic learning device	Ozing	$	14,283		33.1	%	1	$	61,967		66.2	%	1	$	53,541		60.0	%	1
Electronic wrinkle remover	SCO		10,709		24.8	%	2
Oxygen generating device	Youngleda		6,280		14.6	%	3		5,683		6.1	%	3
Posture correction product	Babaka								14,483		15.4	%	2		11,768		13.2	%	2
Neck massager/sleeping aid(2)	Zehom														10,775		12.1	%	3
Distribution sales—total top three			31,272		72.5	%			82,133		87.7	%			76,084		85.3	%
Other distribution products			11,847		27.5	%			11,467		12.3	%			13,084		14.7	%
Total distribution gross revenues			43,119		100.0	%			93,600		100.0	%			89,168		100	%
Total adjustments			(97	)					(88	)					(81	)
Distribution sales, net		$	43,022					$	93,512					$	89,087

(1) This does not include the sales of our GPS products, which were introduced under our Soloky brand in 2006.

(2) Prior to the third quarter of 2005, we offered a sleeping aid product under our Zehom brand as our featured product. In the third quarter of 2005, we introduced a new product, a neck massager, which is currently the featured product under our Zehom brand.

Comparison of Years Ended December 31, 2006, December 31, 2005 and December 31, 2004

Revenues

2006 Compared to 2005.  In 2006, total net revenues increased by $26.2 million, or 15.4%, to $196.5 million from $170.3 million in 2005. This increase reflects primarily increased sales from a few new products and our neck massager products offset by sales declines in continuing featured products, such as our consumer electronics, electronic learning devices and our posture correction product lines.

The $26.2 million increase in total net revenues in 2006 reflects primarily sales from products newly featured in 2006, with sales of cell phones and GPS products generating $37.7 million in gross revenues; a $14.7

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million increase in neck massager/sleeping aid product line sales, which benefited from the introduction of our neck massager product in the third quarter of 2005; offset by a $21.8 million, $10.6 million and $8.9 million decline in sales of our consumer electronics, electronic learning device and posture correction product lines, respectively. In the second half of 2006, sales of our health and beauty products were adversely impacted by a prohibition on TV direct sales of certain products, such as our neck massager product and slimming product. Sales of some of our continuing products, particularly our electronic learning devices, were adversely impacted by negative publicity. Included in the increase in total net revenues was approximately $6.7 million in marketing services revenues. During 2006, we had subscription sales related to our stock-tracking software totaling $8.9 million, of which we recognized $4.7 million in gross revenue and deferred $4.2 million to later periods.

Direct sales net revenues in 2006 increased by $30.6 million, or 39.8%, to $107.4 million from $76.8 million in 2005. Direct sales benefited from a 5.3% increase in the number of inbound calls to our call centers in 2005 to approximately 4.5 million in 2006, offset by a reduction of our conversion rate to 19.2% in 2006 from 22.1% in 2005. From a product mix perspective, the $30.6 million total increase in direct sales net revenues in 2006 was primarily due to products newly featured in the period (with our newly introduced cell phones and GPS offerings collectively generating $36.1 million in gross direct sales in 2006). Direct sales from our consumer electronics products decreased by $20.3 million to $12.0 million as we emphasized sales of our higher profit cell phones. Direct sales of our electronic learning devices product line decreased by $2.1 million, or 19.3%, to $8.9 million. This decrease reflects both a decline in sales prices (mostly in the third quarter) and an approximate 11.5% decrease in unit sales compared to 2005. The unit sales decline was, in part, due to the increase in retail prices related to a temporary flash memory shortage in the first half of 2006 and negative product publicity in the second half of 2006. Beginning in 2006, direct sales net revenues reflect marketing services revenues totaling $6.7 million.

Distribution net revenues in 2006 decreased by $4.4 million, or 4.7%, from $93.5 million to $89.1 million in 2005. The total decrease reflects an $8.4 million, or 13.6%, decrease in sales of our electronic learning devices based on a 26.6% decline in unit sales offset by an increase in prices charged to our distributors. Unit sales declined due to the increase in price related to the temporary flash memory in the first half of 2006 and negative product publicity in the second half of 2006. The total decrease also reflects a $2.7 million sales decrease in our posture correction product line. Offsetting the total decrease is a $6.0 million, or 127.3%, increase in distribution sales of our neck massager product line. Distribution sales for our neck massager and posture correction product lines were particularly strong in the first half of 2006. However, in the second half of 2006, distribution sales of our neck massager product line were negatively impacted by a lack of promotional support that resulted from government restrictions on TV direct sales programs for these products. Similarly, during the same period, distribution sales of our neck massager, electronic learning devices and posture correction products were all hurt by negative product publicity.

2005 Compared to 2004.  In 2005, total net revenues increased by $75.3 million, or 79.3%, to $170.3 million from $95.0 million in 2004. These increases were primarily driven by increased sales from a few of our featured products, such as our electronic learning devices and posture correction product lines; a significant increase in advertising and promotion activities; and increased distribution sales resulting from synergies between our multiple sales and distribution platforms.

The $75.3 million increase in total net revenues in 2005 reflects primarily a $48.3 million increase in sales from electronic learning devices product line; $24.6 million sales from our new posture correction product line; and a $17.6 million increase in sales from consumer electronics product line. Offsetting these increases were declines in overall sales from some of our previously featured products that we ceased promoting through our TV direct sales programs. In particular, between 2004 and 2005, we experienced a $18.4 million, or 94.1%, decline in 2005 sales from our electronic wrinkle remover product line and a $7.6 million, or 44.1%, decline in sales from our sleeping aid product line.

Direct sales net revenues in 2005 increased by $24.8 million, or 47.7%, to $76.8 million from $52.0 million in 2004. Direct sales benefited from a 34.4% increase in the number of inbound calls to our call centers to

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approximately 4.3 million, offset by a reduction of our conversion rate to 22.1% in 2005 from 24.3% in 2004. From a product mix perspective, the $24.8 million increase in direct sales net revenues in 2005 was primarily due to the increase in sales from our consumer electronics product line; our successful reintroduction of our posture correction product line for which the rights were acquired in late 2004; and our exercise machine, which we began selling in 2005 with total 2005 direct sales gross revenues of $32.3 million, $10.1 million, and $9.3 million, respectively. Sales from consumer electronics products increased in 2005 primarily due to the addition of our Soloky branded consumer electronics product line in the third quarter of 2005. Offsetting the direct sales increases in 2005 was a $8.2 million, or 92.8%, decline in sales from our electronic wrinkle remover product line and a $6.6 million, or 57.3%, decline in sales from our sleeping aid product line from 2004. Direct sales from our electronic learning device product line in 2005 increased by $0.6 million to $11.1 million. This modest increase reflects for the year a slight increase in unit sales volumes offset by a decline in average selling prices, slower sales of our older product offerings and the impact of distribution sales on our direct sales efforts.

Distribution net revenues in 2005 increased by $50.5 million, or 117.4%, to $93.5 million from $43.0 million in 2004. The total increase reflected a $47.7 million, or 333.8%, increase in electronic learning device distribution sales on an almost quadrupling of unit sales and an increase in the price charged to our distributors for our upgraded products. In addition to benefiting from increased TV brand promotion advertising in 2005, distribution sales from our electronic learning devices product line also benefited from an expansion of our distributors’ retail reach and the replacement of some underperforming distributors. The total increase also included $14.5 million sales from our new posture correction product line. Our related distribution efforts benefited significantly from our existing electronic learning devices distribution network, as many of our electronic learning devices distributors were used to distribute our posture correction product line. Offsetting these increases was a $10.2 million, or 95.3%, decline in 2005 distribution sales from our electronic wrinkle remover product line, as well as decline in sales from some of our other featured products after we stopped promoting those products through our TV direct sales programs.

Cost of Revenues

Our cost of revenues are primarily dependent upon the mix of products and units sold during the relevant period.

2006 Compared to 2005.  In 2006, total cost of revenues increased by $3.1 million, or 4.4%, to $73.3 million from $70.2 million in 2005. As a percent of total net revenues, cost of revenues decreased to 37.3% in 2006 compared to 41.2% in 2005. Our electronic learning devices and consumer electronics products have higher per unit cost of revenues compared to many of our other products. The overall increase in cost of revenues in 2006 reflects an increase in related unit costs for our electronic learning devices due to a temporary shortage of flash memory in the first half of 2006 and product mix-related changes. Direct sales cost of revenues in 2006 increased by $5.4 million, or 20.3%, to $32.0 million from $26.6 million in 2005. This increase reflects primarily the introduction of our PDA cell phones and, to some extent, an increase in unit sales of our neck massager/sleeping aid product and cost of revenues related to our marketing services arrangements. Offsetting the increase in direct sales cost of revenues in 2006 is a significant decrease in unit sales of our electronic learning devices product line and sales of our consumer electronics product line. Distribution cost of revenues in 2006 decreased by $2.3 million, or 5.3%, to $41.3 million from $43.6 million in 2005, reflecting primarily the decrease in unit sales of our electronic learning devices offset by an increase in the unit costs due to the temporary shortage of flash memory and increased unit sales of our neck massager/sleeping aid.

2005 Compared to 2004.  In 2005, total cost of revenues increased by $34.1 million, or 94.5%, to $70.2 million from $36.1 million in 2004. As a percent of total net revenues, cost of revenues increased to 41.2% in 2005 from 38.0% in 2004, reflecting primarily increased sales from electronic learning devices and consumer electronics product lines offset by the significant decline in sales from our electronic wrinkle remover product line. Our electronic learning devices, consumer electronics and electronic wrinkle remover product lines have higher per unit cost of revenues compared to our other products. Direct sales cost of revenues in 2005 increased

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by $9.8 million, or 58.3%, to $26.6 million from $16.8 million in 2004, with the increase reflecting primarily an increase in unit sales of our consumer electronics product line. Distribution cost of revenues in 2005 increased by $24.3 million, or 125.9%, to $43.6 million from $19.3 million in 2004, reflecting primarily the almost quadrupling of electronic learning device unit sales.

Gross Profit and Gross Margin

The following table sets forth gross profits and gross margins (being gross profit divided by the related net revenues) for our direct sales and distribution sales platforms:

	For the years ended December 31,
	2004				2005				2006
	Gross profit		Gross margin		Gross profit		Gross margin		Gross profit		Gross margin
	(in thousands, except percentages)
Direct sales, net	$	35,212	67.7	%	$	50,182	65.3	%	$	75,398	70.2	%
Distribution sales, net	$	23,743	55.2	%	$	49,946	53.4	%	$	47,827	53.7	%
Total	$	58,955	62.0	%	$	100,128	58.8	%	$	123,225	62.7	%

Changes in our gross margins from period to period are driven by changes in the products and services that we sell and the platforms through which we sell them.

We are generally able to maintain stable margins for our individual product lines. Although we discount the prices of individual products as competition enters the market over time, this discounting is typically done in conjunction with our introduction of an upgraded or replacement product with improved features and functions and similar or better pricing. If we are unable to maintain satisfactory gross profits relative to our media expenses, we replace or cease marketing such product.

In addition to product and service mix-related variations, the difference between the sales price charged by us to our TV direct sales customers and what we charge our distributors for the same product or service accounts for a large portion of the difference in gross margins on direct sales and on distribution sales.

2006 Compared to 2005.  In 2006, gross profits increased by $23.1 million, or 23.1%, to $123.2 million from $100.1 million in 2005, reflecting a $25.2 million increase in direct sales gross profits and a $2.1 million decrease in distribution gross profits. Our three best-selling product lines in 2006, our electronic learning devices, PDA cell phones and neck massager/sleeping aid product lines, collectively accounted for approximately 53.6% of our gross profit for the same period. Our overall gross margin in 2006 increased to 62.7% from 58.8% in 2005. This gross margin increase reflects the favorable impact of $7.3 million in payments received under our joint sales arrangements based on sales of featured products or services by our joint sales partners through their own distribution channels which reduced our cost of direct sales revenues.

In 2006, gross profits from direct sales increased by $25.2 million, or 50.2%, to $75.4 million from $50.2 million in 2005. This increase reflects additional gross profits contributed by newly featured products in the period and our neck massager sleeping/aid product line, marketing services revenues and other payments reducing cost of direct sales revenues generated from our joint sales arrangements. Offsetting this increase was a significant decline in gross profits generated through direct sales of our consumer electronics product line. Although our consumer electronics product line has an overall lower gross margin than our other products, sales of these higher-priced products were historically attractive given our ability to generate significant gross profits through our TV direct sales programs in excess of the media and promotional-related expenses. Gross margin on direct sales in 2006 increased to 70.2% from 65.3% in 2005 primarily due to the $7.3 million in payments received which reduced cost of direct sales revenues generated under our joint sales arrangements. Offsetting this increase in gross margin was generally lower margins on our various product lines, including our Zehom neck massager/sleeping aid, electronic learning devices and posture correction product lines. Lower margins on our

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Zehom product line in 2006 reflected increased sales during 2006 of our neck massager products, which had a lower gross margin than the sleeping aid product sold for most of 2005. The decrease in our electronic learning device gross margin was due to increased costs as a result of a temporary shortage of flash memory in the first half of 2006.

In 2006, gross profits from distribution sales decreased by $2.1 million, or 4.2%, to $47.8 million from $49.9 million in 2005. This decrease primarily reflects additional gross profits contributed by increased sales from our neck massager/sleeping aid product line offset by a decline in gross profits contributed by our electronic learning devices and posture correction product lines. In 2005 and 2006, our electronic learning devices product line accounted for 61.6% and 55.6%, our posture correction product line accounted for 19.9% and 16.7% and our neck massager/sleeping aid product line accounted for 5.8% and 14.3%, respectively, of our total gross profits from distribution sales. Gross margin on distribution sales remained relatively stable at 53.4% in 2005 and 53.7% in 2006.

2005 Compared to 2004.  In 2005, gross profits increased by $41.2 million, or 69.9%, to $100.1 million from $58.9 million in 2004, reflecting a $15.0 million increase and a $26.2 million increase in direct and distribution gross profits. Our three best-selling product lines in 2005, electronic learning devices, consumer electronics and posture correction product lines, accounted for approximately 73.2% of our gross profit for the year. Our overall gross margin in 2005 decreased to 58.8% from 62.0% in 2004 primarily due to an increase in sales through our nationwide distribution network which have lower related gross margins and a reduction in gross margin in both of our TV direct sales platform and nationwide distribution network. As a percentage of total net revenues, sales through our nationwide distribution network were 45.3% and 54.9% in 2004 and 2005. The decrease in our gross margin also reflects a significant increase in unit sales of our lower margin consumer electronics product line compared to 2004 levels.

Gross profits from direct sales increased by $15.0 million, or 42.6%, to $50.2 million in 2005 from $35.2 million in 2004. This increase reflects additional gross profits contributed by our posture correction and consumer electronics product line, offset by a decline in gross profits from our other featured products resulting from decreased sales of those products. Gross margin on direct sales in 2005 decreased to 65.3% from 67.7% in 2004 due to the significant increase in sales from our lower margin consumer electronics product line compared to 2004 levels, offset by higher gross margins on our other featured products.

Gross profits from distribution sales increased by $26.2 million, or 110.5%, to $49.9 million in 2005 from $23.7 million in 2004. This increase primarily reflects additional gross profits contributed by increased sales from our electronic learning devices product line and new sales of our posture correction product line. In 2005, our electronic learning devices product line accounted for approximately 61.6% of our total distribution gross profits. Offsetting these increases was a decline in gross profits from our other featured product lines, particularly our electronic wrinkle remover product line on reduced sales of these product lines. Gross margin on distribution sales in 2005 decreased to 53.4% from 55.2% from in 2004, reflecting greater sales of our electronic learning devices product line, which have a gross margin slightly below our overall 2005 gross margin.

Operating Income (Expenses)

Our operating income (expenses) consist of advertising expenses, other selling and marketing expenses, general and administrative expenses and other operating income, net. In 2006, our total operating income (expenses) increased by $41.5 million, or 51.8%, to $121.6 million from $80.1 million in 2005 (including a $6.4 million increase in stock-based compensation). Of the total increase, $20.9 million was attributable to increased advertising costs; $7.3 million was attributable to increased other selling and marketing expenses; $14.8 million reflected an increase in general and administrative expenses; and $1.5 million was attributable to increased other operating income, net.

In 2005, our operating income (expenses) increased by $38.9 million, or 94.4%, to $80.1 million from $41.2 million in 2004. Of the total increase, $27.7 million was attributable to increased advertising costs; $6.2 million

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reflected an increase in general and administrative expenses; and $1.0 million was attributable to increased other operating income, net and the balance was represented by increased other selling and marketing expenses. In 2005, general and administrative expenses also include share-based compensation charges of $2.3 million.

Advertising Expenses

2006 Compared to 2005.  In 2006, advertising expenses increased by $20.9 million, or 37.6%, to $76.5 million from $55.6 million in 2005. Advertising expenses as a percentage of total net revenues increased to 39.0% in 2006 from 32.6% in 2005.

In 2006, advertising expenses related to purchased TV advertising time increased by $23.5 million, or 51.6%, to $69.0 million in 2006 from $45.5 million in 2005. This increase in purchased TV advertising expenses reflected our decision in 2005 to significantly increase 2006 spending levels on both TV direct sales programs and TV brand promotion advertising. In 2006, advertising expenses on TV channels on which we almost exclusively broadcast TV direct sales programs increased by $23.4 million, or 78.3%, to $53.3 million from $29.9 million in 2005. Brand promotion TV advertising expenses in 2006 increased by $0.1 million, or 0.6%, to $15.7 million from $15.6 million in 2005.

Offsetting the overall increase in advertising expenses in 2006 was a $0.6 million, or 8.7%, decrease in non-TV brand promotion advertising, primarily newspaper advertising, to $6.3 million in 2006 from $6.9 million in 2005. These expenditures were primarily in support of distribution sales of our oxygen generating devices, our neck massager/sleeping aid product line and our electronic learning devices product line.

Offsetting the overall increase in advertising expenses in 2006 was a decrease in advertising-related reimbursements paid to our distributors from $3.1 million in 2005 to $1.0 million in 2006. These distributor reimbursements related primarily to our oxygen generating devices, neck massager/sleeping aid and posture correction product lines.

2005 Compared to 2004.    In 2005, advertising expenses increased by $27.7 million, or 99.3%, to $55.6 million from $27.9 million in 2004. Advertising expenses as a percentage of total net revenues increased to 32.6% in 2005 from 29.4% in 2004.

Of the $27.7 million increase in 2005 advertising expenses, $26.3 million reflects a 137.0% increase in the advertising expenses related to purchased TV advertising time to $45.5 million in 2005 from $19.2 million in 2004. This increase in 2005 purchased TV advertising expenses reflected our decision in 2004 to significantly increase 2005 spending levels on both TV direct sales programs and TV brand promotion advertising. In 2005, advertising expenses on TV channels on which we run almost exclusively TV direct sales programs increased by $12.5 million, or 71.8%, to $29.9 million from $17.4 million in 2004. Brand promotion TV advertising expenses in 2005 increased by $13.8 million, or 766.7%, to $15.6 million from $1.8 million in 2004. Almost all of this increase was spent on promoting our electronic learning device product brand with a limited portion spent on promoting our posture correction product brand.

The total increase in advertising expenses also includes a $2.5 million, or 56.8%, increase in non-TV brand promotion advertising, primarily newspaper advertising, to $6.9 million in 2005 from $4.4 million in 2004. These expenditures were primarily in support of distribution sales of our electronic learning device product, our oxygen generating devices and our sleeping aid product lines.

Offsetting the other increases in advertising expenses in 2005 was a small decrease in advertising-related reimbursements paid to our distributors from $3.8 million in 2004 to $3.1 million in 2005. These distributor reimbursements related primarily to our oxygen generating devices and sleeping aid product lines.

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Other Selling and Marketing Expenses

2006 Compared to 2005.  Our other selling and marketing expenses increased by $7.3 million, or 53.3%, to $21.0 million in 2006 from $13.7 million in 2005. Of the total increase, approximately $2.4 million related to increased salaries and benefits primarily due to growth of our call center operations and a company-wide salary increase; $2.0 million was attributable to increased marketing and promotion expenses mainly related to the promotion of distribution sales; $1.2 million was attributable to the copyright expenses primarily related to printed materials sold with our electronic learning devices; $0.6 million was attributable to share-based compensation; and $0.4 million was attributable to increased telephone expenses associated with our call centers. As a percentage of total net revenues, other selling and marketing expenses increased to 10.7% in 2006 from 8.1% in 2005.

2005 Compared to 2004.  Our other selling and marketing expenses increased by $6.0 million, or 77.9%, to $13.7 million in 2005 from $7.7 million 2004. Of the total increase, approximately $2.3 million related to increased product delivery expenses corresponding with increased product sales and increased aggregate weight of our total deliveries attributable to our exercise machine in 2005; $1.3 million relates to increased salaries and benefits primarily due to growth of our call center operations; $1.0 million relates to increased TV sales and brand promotion program production expenditures attributable in significant part to a continued increase in the number, and quality, of our TV direct sales programs; and $0.2 million relates to the amortization of intangibles acquired in the July 2005 acquisition of the 49% minority interest in Shanghai HJX. As a percentage of total net revenues, other selling and marketing expenses was 8.1% in 2005, which was the same as it had been in 2004.

General and Administrative Expenses

2006 Compared to 2005.  Our general and administrative expenses increased by $14.8 million, or 120.3%, to $27.1 million in 2006 from $12.3 million in 2005. Of the total increase, $5.8 million was attributable to share-based compensation charges; $3.2 million was attributable to offering related costs expensed in 2006; $2.4 million was attributable to increased salaries and benefits primarily due to the overall increase in our headcount and a company-wide salary increase; and a $0.9 million supplier prepayment write-off related to our decision to stop marketing our slimming product. As a percentage of total net revenues, general and administrative expenses increased to 13.8% in 2006 from 7.2% in 2005.

2005 Compared to 2004.  Our general and administrative expenses increased by $6.2 million, or 101.6%, to $12.3 million in 2005 from $6.1 million in 2004. Of the total increase, $2.6 million was attributable to increased salaries and benefits reflecting a $1.2 million company-wide employee bonus accrued at the end of 2005, $2.2 million was attributable to a share-based compensation charge and $0.4 million was attributable to an increase in compensation paid to our executive officers and an overall increase in our headcount. As a percentage of total net revenues, general and administrative expenses increased to 7.2% in 2005 from 6.4% in 2004.

Other Operating Income, Net

Other operating income, net was $0.5 million, $1.6 million and $3.1 million in 2004, 2005 and 2006, respectively. A majority of other operating income, net in 2005 and 2006 relates to our receipt of subsidies from local government agencies for certain taxes paid, including value-added, business and income taxes. We may not be able to enjoy such government subsidies in the future. See “Risk Factors—The discontinuation of any of the preferential tax treatments and government subsidies available to us in the PRC could materially and adversely affect our results of operations and financial condition.” Other operating income, net also includes miscellaneous commission income.

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Income from Operations

2006 Compared to 2005.  In 2006, income from operations decreased by $18.4 million to $1.6 million from $20.0 million in 2005. In 2006, we deferred $4.2 million in subscription revenue related to our stock-tracking software product and expensed in full in the period the related cost of revenues and TV advertising expenses; we recognized $0.9 million in charges related to a supplier prepayment write-off in connection with our decision to stop marketing our slimming product; and we recognized $8.7 million in share-based compensation charges compared to $2.3 million in 2005. As a percentage of total net revenues, income from operations declined to 0.8% from 11.8%. The decline as a percentage of total net revenues also reflected a 37.6% increase in advertising costs with only a 15.4% increase in total net revenues and 23.1% increase in gross profits.

2005 Compared to 2004.  In 2005, income from operations increased by $2.3 million, or 13.0%, to $20.0 million from $17.7 million in 2004. However, as a percentage of total net revenues income from operations declined to 11.8% from 18.6%. The decline as a percentage of total net revenues reflects primarily a 99.3% increase in advertising costs with only a 79.3% increase in total net revenue and 69.9% increase in gross profits. Operating income in 2005 also reflects a share-based compensation charge of $2.3 million.

Other Income (Expenses), Net

Other income (expenses), net was $(0.1) million, $0.6 million and $2.2 million in 2004, 2005 and 2006. In 2006, other income (expenses) includes $0.9 million in marketable securities gain and $0.8 million in interest income.

Income Taxes

In 2006, we had a net tax benefit of $0.7 million compared to a tax expense of $0.8 million and $0.6 million in 2005 and 2004. Because of various special tax rates and incentives in China, our taxes have been relatively low. Our effective income tax rates for 2004, 2005 and 2006 were 3%, 7% and (18%), respectively. If these tax incentives were eliminated or determined not to be available to us, we would be required to pay significantly higher taxes.

Minority Interest

Minority interest in 2006 decreased to $0.6 million, from $1.8 million in 2005 and $2.6 million in 2004, reflecting our acquisition in July 2005 of the remaining 49% minority interest in Shanghai HJX. Minority interest for each of 2004 and 2005 relates primarily to the previous minority interest in Shanghai HJX.

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Quarterly Financial Information

The following table sets forth selected results of operations data by amount and as a percentage of revenues, each derived from our unaudited consolidated combined financial statements for the three-month periods ended on the dates indicated. You should read the following table in conjunction with the audited consolidated combined financial information and related notes contained elsewhere in this prospectus. We have prepared the unaudited consolidated combined financial information on the same basis as our audited consolidated combined financial statements. The unaudited financial information includes all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the quarters presented.

	For the three months ended
	March 31, 2006					June 30, 2006					September 30, 2006					December 31, 2006
	Amount			% of total revenues, net		Amount			% of total revenues, net		Amount			% of total revenues, net		Amount			% of total revenues, net
	(in thousands, except percentages)
Revenues:
Direct sales, net	$	22,228		38.6	%	$	27,495		68.5	%	$	28,474		47.2	%	$	29,214		75.8	%
Distribution sales, net		35,304		61.4			12,660		31.5			31,811		52.8			9,312		24.2
Total revenues, net		57,532		100.0			40,155		100.0			60,285		100.0			38,526		100.0
Cost of revenues:
Direct sales		7,974		(13.9	)		7,885		(19.6	)		7,323		(12.2	)		8,831		(22.9	)
Distribution sales		17,559		(30.5	)		5,543		(13.8	)		13,872		(23.0	)		4,286		(11.1	)
Total cost of revenues		25,533		(44.4	)		13,428		(33.4	)		21,195		(35.2	)		13,117		(34.0	)
Gross profit		31,999		55.6			26,727		66.6			39,090		64.8			25,409		66.0
Operating income (expenses):
Advertising expenses		(20,295	)	(35.3	)		(16,285	)	(40.6	)		(24,866	)	(41.2	)		(15,103	)	(39.2	)
Other selling and marketing expenses(1)(2)		(4,519	)	(7.8	)		(4,941	)	(12.3	)		(5,826	)	(9.7	)		(5,737	)	(14.9	)
General and administrative expenses(1)(3)		(3,468	)	(6.0	)		(6,454	)	(16.1	)		(8,613	)	(14.3	)		(8,580	)	(22.3	)
Other operating income, net		860		1.5			598		1.5			811		1.3			836		2.2
Total operating income (expenses)		(27,422	)	(47.6	)		(27,082	)	(67.5	)		(38,494	)	(63.9	)		(28,584	)	(74.2	)
Income (loss) from operations		4,577		8.0			(355	)	(0.9	)		596		0.9			(3,175	)	(8.2	)
Change in fair value in warrant liability		—		—			—		—			—		—			—		—
Minority interest		(1	)	—			64		0.2			(149	)	(0.2	)		(475	)	(1.2	)
Net income (loss)		5,378		9.4			135		0.3			675		1.1			(2,243	)	(5.8	)
Deemed dividend on Series A convertible redeemable preferred shares		(40	)	(0.1	)		(41	)	(0.1	)		(41	)	(0.1	)		(40	)	(0.1	)
Income (loss) attributable to holders of ordinary shares	$	5,338		9.3	%	$	94		0.2	%	$	634		1.0	%