TAOMEE HOLDINGS LIMITED
(Exact name of Registrant as specified in its charter)

16/F, Building No. A-2, No. 1528 Gumei Road, Xuhui District
Shanghai 200233, People's Republic of China
(Address of principal executive offices)

Paul Keung, Chief Financial Officer
Tel: (86-21) 6128-0056
E-mail: paulkeung@taomee.com
Facsimile number: +86 21 3367 4012
16/F, Building No. A-2, No. 1528 Gumei Road, Xuhui District
Shanghai 200233, People's Republic of China
(86-21) 6128-0056
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report:

757,684,760 ordinary shares of par value US$0.00002 per share, as of December 31, 2013.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes ý No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. o Yes ý No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. o Item 17 o Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ý No

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. o Yes o No

In this annual report, unless otherwise indicated, references in this annual report to:

References to share information and per share data reflect the 50-for-1 share split effected on February 14, 2011, in which every ordinary share and Series A preferred share was subdivided into 50 ordinary shares and 50 Series A preferred shares, respectively, and the par value of the shares was changed from US$0.001 per share to US$0.00002 per share for each ordinary share and Series A preferred share.

This annual report contains translations of certain Renminbi amounts into U.S. dollars at specified rates. For amounts not recorded in our consolidated financial statements included elsewhere in this annual report, unless otherwise stated, all translation of financial data from Renminbi into U.S. dollars has been made at RMB 6.0537 to US$1.00, the noon buying rate in effect on December 31, 2013 as set forth in the H.10 Statistical Release of the Federal Reserve Board. We make no representation that the Renminbi or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. See "Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Fluctuation in the value of the RMB may have a material adverse effect on the value of your investment." On April 4, 2014, the noon buying rate was RMB6.2118 to US$1.00.

This annual report on Form 20-F includes our audited consolidated statements of operations for the fiscal years ended December 31, 2011, 2012 and 2013, and consolidated balance sheet data as of December 31, 2012 and 2013.

We completed the initial public offering of 7,187,500 ADSs, each representing 20 ordinary shares of par value US$0.00002 per share, on June 10, 2011. On June 8, 2011, we listed our ADSs on the New York Stock Exchange, or NYSE, under the ticker symbol "TAOM".

The following selected consolidated statements of operations data for the years ended December 31, 2011, 2012 and 2013 and the selected consolidated balance sheet data as of December 31, 2012 and 2013 have been derived from our audited consolidated financial statements, which are included elsewhere in this annual report. Our selected consolidated combined balance sheet data as of December 31, 2009, 2010 and 2011, and selected consolidated combined statements of operations data for the year ended December 31, 2009 and 2010 have been derived from our audited consolidated combined financial statements that are not included in this annual report.

	For Years Ended December 31,

	2009			2010			2011			2012			2013
	(US$ in thousands, except share and per share data)
Consolidated and Combined Statements of Operations Data:
Net revenues:
Online business		6,877			33,683			40,331			32,169			35,330
Offline business		189			2,290			5,066			8,039			13,024


Total net revenues		7,066			35,973			45,397			40,208			48,354
Cost of services(1):
Online business		(1,913	)		(5,166	)		(6,035	)		(6,950	)		(7,644	)
Offline business		(90	)		(686	)		(1,653	)		(3,048	)		(5,621	)


Gross profit		5,063			30,122			37,709			30,210			35,089


Operating income (expenses):
Product development expenses(1)		(1,444	)		(4,649	)		(10,304	)		(12,318	)		(13,886	)
Sales and marketing expenses(1)		(893	)		(1,570	)		(6,255	)		(9,966	)		(9,446	)
General and administrative expenses(1)		(1,161	)		(5,729	)		(7,965	)		(10,078	)		(13,095	)
Impairment loss on acquired intangible assets		—			—			—			—			(1,046	)
Other operating income		—			278			1,734			5,512			5,708


Total operating expenses		(3,498	)		(11,670	)		(22,790	)		(26,850	)		(31,765	)


Income from operations		1,565			18,452			14,919			3,360			3,324
Interest income		7			240			1,410			2,647			2,932
Other income (expenses), net		(10	)		(115	)		667			859			771
Impairment loss on investment in an equity investee		—			—			—			—			(370	)


Income before income taxes and share of profit in equity method investments		1,562			18,577			16,996			6,866			6,657


Income tax (expense)/benefit:
Current		(22	)		(7	)		(2,539	)		1,279			(789	)
Deferred		(271	)		2,511			812			(424	)		(630	)


Total income tax (expense)/benefit		(293	)		2,504			(1,727	)		855			(1,419	)


Net income before share of profit in equity method investments		1,269			21,081			15,269			7,721			5,238
Share of profit in equity method investments		49			494			4,224			1,140			207


Net income		1,318			21,574			19,493			8,861			5,445

	For Years Ended December 31,

	2009			2010			2011			2012			2013
	(US$ in thousands, except share and per share data)
Net income (loss) attributable to non-controlling interest		—			—			—			(1	)		4


Net income attributable to Taomee Holdings Limited		1,318			21,574			19,493			8,862			5,441
Deemed dividend on Series A convertible redeemable preferred shares		(210	)		(469	)		(200	)		—			—


Net income attributable to holders of ordinary shares		1,108			21,105			19,293			8,862			5,441




Earnings per ordinary share:
Basic	$	0.0020		$	0.0367		$	0.0292		$	0.0121		$	0.0074
Diluted	$	0.0020		$	0.0360		$	0.0278		$	0.0118		$	0.0073
Weighted average number of ordinary shares used in calculating earnings per share:
Basic		467,123,300			450,000,000			606,648,098			731,303,362			733,333,891
Diluted		467,123,300			458,482,370			640,377,175			753,533,499			746,532,112

	As of December 31,

	2009		2010		2011			2012			2013
	(US$ in thousands)
Consolidated and Combined Balance Sheets Data:
Cash and cash equivalents		10,835		43,087		120,679			118,571			114,251
Accounts receivable, net		800		438		1,423			2,371			2,388
Total current assets		12,338		47,684		127,066			126,967			129,543
Total assets		13,461		53,032		134,454			139,758			151,189
Total current liabilities		7,063		34,297		31,303			26,007			29,260
Advances from customers		3,497		8,684		10,223			8,142			6,961
Deferred revenue		1,904		10,783		12,913			12,062			12,341
Dividends payable		—		8,950		—			—			—
Mezzanine equity:
Series A convertible redeemable preferred shares		5,159		5,628		—			—			—
Ordinary shares		9		9		15			15			15
Treasury stock		—		—		(563	)		(747	)		(1,199	)
Additional paid-in capital		988		1,158		70,782			72,437			73,757
Retained earnings		153		11,258		30,551			39,413			44,854
Noncontrolling interests		—		—		—			78			159
Total equity		1,239		13,107		103,151			113,751			121,929
Total liabilities, mezzanine equity and equity		13,461		53,032		134,454			139,758			151,189

Our business is primarily conducted in China and substantially all of our revenues are denominated in RMB. This annual report contains translations of RMB amounts into U.S. dollars at specified rates solely for the convenience of the reader. The exchange rate refers to the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board. Unless otherwise noted, all translations from RMB to U.S. dollars were made at a rate of RMB6.0537 to US$1.00, the noon buying rate set forth as of December 31, 2013. No representation is made that the RMB amounts referred to in this annual report could have been or could be converted into U.S. dollars at any particular rate or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On April 4, 2014, the exchange rate was RMB6.2118 to US$1.00.

The following table sets forth information concerning exchange rates between the RMB 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 annual report or will use in the preparation of our periodic reports or any other information to be provided to you.

	Noon Buying Rate

Period	Period End		Average(1)		Low		High
	(RMB per US$1.00)
2009		6.8259		6.8295		6.8470		6.8176
2010		6.6000		6.7603		6.8330		6.6000
2011		6.2939		6.4475		6.6017		6.2939
2012		6.2301		6.3088		6.3879		6.2221
2013		6.0537		6.1412		6.2438		6.0537
2013
October		6.0943		6.1032		6.1209		6.0815
November		6.0922		6.0929		6.0993		6.0903
December		6.0537		6.0738		6.0927		6.0537
2014
January		6.0590		6.0509		6.0600		6.0402
February		6.1448		6.0816		6.1448		6.0591
March		6.2164		6.1729		6.2273		6.1183
April (through April 4, 2014)		6.2118		6.2085		6.2118		6.2054

Our limited relevant operating history makes it difficult to evaluate our business and prospects. We may experience net losses or earnings declines in the future and we may not sustain our historical revenue growth rate or profitability.

We commercially launched our first virtual world, Mole's World, in September 2008. Our limited operating history may not be able to provide a meaningful basis for you to evaluate our business. It is also difficult to evaluate our prospective business, because we may not have sufficient experience to address the risks frequently encountered by early stage companies operating in a new and rapidly evolving industry, which may adversely affect our business and results of operations. These risks may include our potential failure to:

Our net revenues amounted to US$45.4 million in 2011, decreased to US$40.2 million in 2012 and increased to US$48.4 million in 2013. We may not be able to achieve or sustain our revenue growth in future periods and we cannot assure you that we will not incur net losses in the future due to a number of factors, including, among others, economic factors out of our control, competition in the children's entertainment industry in China, in which market share can be quickly acquired or lost, the greater difficulty of growing at sustained rates from a larger net revenue base, and adjustment to our strategic decision in response to changing circumstances that emphasize long-term influence over short-term growth. We also expect that our total operating expenses will increase in absolute amount as we further grow our business. We incur substantial costs and expenses to develop, market and operate a virtual world and may not collect revenues in connection with the virtual world for some time after its commercial launch or at all. We may not succeed in our expansion in the offline business. Any failure or delay in generating revenues could result in material operating losses and harm our financial condition. Accordingly, you should not rely on the results of any prior period as an indication of our future operating performance.

As we currently depend on a limited number of virtual worlds for substantially all of our revenues, if any of these virtual worlds incur any adverse developments or if we are unable to develop, purchase or license additional virtual worlds that are attractive to users and result in overall revenue growth, our business, financial condition and results of operations may be materially and adversely affected.

Our virtual worlds, Seer Series, Gong Fu Pai and Flower Fairy, contributed to the majority of our revenues in 2013. We anticipate that these and other existing virtual worlds of ours will continue to account for a substantial portion of our revenues in the near term. Accordingly, any of the following could materially and adversely affect our business, financial condition and results of operations:

We entered into revenue sharing agreements with third-party game developers, and primarily collect payments from game players in connection with the sale of in-game currencies and remit certain agreed-upon percentages of the proceeds to the game developers and record revenue net of remittances. Purchases of in-game currency are not refundable after they have been sold unless there is unused in-game currency at the time a game is discontinued. Typically, a game will be discontinued when the monthly revenue generated by a game is insignificant. We make our effort to help the game players eliminate their loss before a game is discontinued to avoid paying cash refunds to game players or game developers as a result of discontinuation of a game, or for any other reason. However, we cannot guarantee that we will not be required to pay such cash refunds in the future, which may have adverse effect on our revenues.

In addition, in order to achieve our long-term profitability and financial and operational success, we must continually develop, purchase or license new virtual worlds that are attractive to users. Although we currently have new virtual worlds in development, they may not be released on time, may not be profitable or popular among children in China.

The success of our internally developed virtual worlds will require additional investment prior to commercial launch. Furthermore, our ability to purchase or license successful virtual worlds will depend on their availability on acceptable terms, including price, our ability to compete effectively against other potential purchasers or licensees to attract the developers of these virtual worlds, and our ability to obtain government approvals required for the purchase or licensing and operation of these virtual worlds.

The virtual worlds that we develop, purchase or license may not be attractive to users, may be viewed by the regulatory authorities as not complying with content restrictions, may not be launched as scheduled or may not compete effectively with our competitors' products. For example, we incurred impairment of intangible assets of US$1.0 million in 2013, related to the write-off of the remaining term of two underperforming games, Wizard 101, a game for which we obtained a three-year exclusive license in 2011 and commercially launched in the third quarter of 2012, and Speed Hunter, a game for which we obtained a five-year exclusive license right in 2012 and commercially launched in the third quarter of 2013. If we are not able to successfully develop, purchase or license virtual worlds appealing to users, our future profitability and growth prospects could decline.

We may not be able to maintain our revenues and profitability as we operate in a competitive industry and compete against many companies.

We believe that there are a number of competing developers and operators in China providing online and offline entertainment to children. Given the relatively low capital requirements and entry barriers, we expect more companies to enter the children's entertainment industry in China. For example, our competitors could introduce a wide range of virtual worlds targeting children to the China market in a relatively short period of time. We believe our principal competitors in online children's entertainment in China include Tencent Holdings Limited, or Tencent, the developer of Roco Kingdom and Guangzhou Baitian Information Technology Ltd., the developer of Aola Star and Aobi Island. Potential competitors also include major Internet portal operators, other domestic and foreign virtual

world developers and operators, media companies focused on children's entertainment and alliances between our existing and new competitors. Some of our competitors, especially major foreign and China-based publicly listed media and virtual world operators, have significantly greater financial and marketing resources and name recognition than we have. We also face competition on the mobile front with respect to mobile applications, as there are an increasing number of Internet companies in China tapping into the mobile market with applications and services targeting children. We also face these and other competitors in our offline business, including Guangdong Alpha Animation and Culture Co., Ltd, a company listed in Shenzhen Stock Exchange which primarily engages in toy and animation industry (Ticker: 002292). Our competitors may adopt loss-leading pricing or other tactics or business models, and if these prove to be more attractive to children on a temporary or permanent basis, our users may switch to our competitors' services and products at our expense. We cannot assure you that we will be able to compete successfully against any new or existing competitors, or maintain our user base and number of active paying accounts when competitors launch promotional campaigns targeting our user base, which could have a material adverse effect on our revenues and profitability.

We face risks and uncertainties regarding the growth of the online entertainment industry for children and market acceptance of our online products and services.

The online entertainment industry for children in China, from which we currently derive most of our revenues, is a relatively new and evolving industry and concept. The growth of the online entertainment industry for children and the level of demand and market acceptance of our virtual worlds and other online products and services are subject to a high degree of uncertainty. Our future operating results will depend on numerous factors, some of which are beyond our control. These factors include:

If we fail to anticipate and effectively manage these risks and uncertainties, our market share may decrease, our business, financial condition and results of operations may be materially and adversely affected.

Our digital entertainment products and services including new virtual worlds and mobile applications may attract our users away from our established virtual worlds, and enhancements and updates to our established virtual worlds may result in certain users deciding not to participate in them, which could materially and adversely affect our business, results of operations and financial condition.

Our digital entertainment products and service including new virtual worlds and mobile applications may attract our users away from our established virtual worlds, particularly with respect to virtual worlds with similar story lines. Although we intend to target different types of users with new virtual worlds and therefore minimize users of our existing virtual worlds migrating to later launched

virtual worlds, such movement may nevertheless occur and may lead to fewer active users, reduced network effect and lower spending on subscriptions and virtual items.

In addition, in order to retain our existing users and to attract new users, we periodically introduce new features and make changes to our established virtual worlds based on feedback gathered from our users. However, these changes may result in some of our existing users deciding not to participate in our virtual worlds, either temporarily or permanently. Our users may not respond well to enhancements to our virtual worlds or policy changes in our online entertainment community, which could materially and adversely affect our business, results of operations and financial condition.

We have no control over our distributors or licensees except through agreements we entered into with them. Our brands and reputation could be harmed and our results of operations could suffer if our distributors or licensees fail to comply with our agreements with them.

We rely on our distributors to distribute our prepaid cards, through which our users pay subscription fees and purchase online virtual items. We also rely on our licensees to manufacture and distribute products, including interactive toys, of our licensed franchises. We have limited ability to manage the activities of our distributors and licensees, who are independent from us, except through the enforcement of agreements with them. If a significant number of our distributors or licensees fail to comply with our agreements with them, such as distribution targets, brand and service promotion arrangements, quality control standards, or protocols on approving the presentation or portrayal of our franchises, our brands and reputation could be harmed and our results of operations could suffer as a result.

We may not be successful in effectively promoting our brand or enhancing our brand recognition, and any negative publicity, regardless of its veracity, may harm our brand.

Promoting the "Taomee" brand and enhancing its recognition as a family-friendly brand dedicated to children's entertainment is an integral part of our growth strategy. There is no assurance that we will be able to effectively promote or develop our brand and if we fail to do so, our growth may be adversely affected. In addition, negative publicity or disputes regarding our brand, products and services, company or management could materially and adversely affect public perception of our brand and the virtual worlds and other products and services we offer. Any negative publicity in relation to our services or products, regardless of its veracity, could harm our brand image among children and their parents and, in turn, result in decreases in the number of users and average net revenues per paying account from the operation of our online business. Any impact on our ability to effectively promote our brand and any significant damage to the public perception of the "Taomee" brand or our virtual worlds could materially and adversely affect our prospects and results of operations.

Unauthorized use of our intellectual property by our distributors, licensees or third parties, and the expenses incurred in protecting our intellectual property rights, may harm our brands and reputation and adversely affect our business.

We regard our copyrights, trademarks and other intellectual property as important to our success. Unauthorized use of our intellectual properties may harm our brands and reputation and adversely affect our business.

We have historically relied on a combination of trademark and copyright law, trade secret protection, restrictions on disclosure and other agreements that restrict the use of our intellectual properties to protect our intellectual property rights. Although our contracts with distributors and licensees prohibit the unauthorized use of our franchises, brands and other intellectual property rights, we cannot assure you that they will always comply with these terms. Although we presently enter into confidentiality agreements with most of our employees, we cannot assure you that these confidentiality

agreements will not be breached, that we will have adequate remedies for any breach, or that our proprietary technology, know-how or other intellectual property will not otherwise become known to, or be independently developed by, third parties.

As of December 31, 2013, we had received approval for 351 and 7 trademark registrations in China and Taiwan, respectively, and are in the process of applying for registration of an additional 46 trademarks in China. In addition, we have obtained 69 copyright registrations for software we developed, 4 copyright registrations for Mole's World and Seer animation series and 392 copyright registrations for artworks owned by us. We also registered 39 domain names, including www.61.com, our primary operation website. While we actively take steps to protect our proprietary rights, such steps may not be adequate to prevent the infringement or misappropriation of our intellectual property. In addition, we cannot assure you that any of the above trademark applications will ultimately proceed to registration or will result in registration with adequate scope for our business. Some of our pending applications or registrations may be successfully challenged or invalidated by others. If our trademark applications are not successful, we may have to use different marks for affected products or services, or seek to enter into arrangements with any third parties who may have prior registrations, applications or rights, which might not be available on commercially reasonable terms, if at all.

Implementation of intellectual property laws in China has historically been lacking, primarily because of ambiguities in the laws and difficulties in enforcement. Accordingly, intellectual property right protection in China may not be as effective as in the United States or other countries. Policing unauthorized use of our proprietary technology, trademarks and other intellectual property is difficult and expensive, and litigation may be necessary in the future to enforce our intellectual property rights. Future litigation could result in substantial costs and diversion of our resources, and could disrupt our business, as well as have a material adverse effect on our financial condition and results of operations.

We rely on our nationwide prepaid card distribution network, merchandise licensees, interactive toy distributors and film distributors for a significant portion of our net revenues. If we fail to effectively manage our distributor and licensee relationships or our distributors and licensees fail to adhere to our agreements with them, our results of operations could suffer as a result.

We rely on a number of provincial and regional distributors to sell our prepaid cards. Online payment systems in China are still in a relatively early stage of development and are not as widely acceptable to users in China as compared to the United States. Also, compared to adult online users, children have fewer means to make payment through online payment channels. As a result, although we make our prepaid cards available for purchase online using an online payment system, our business is dependent on the performance of our regional distributors. In 2011, 2012 and 2013, 80.3%, 73.9% and 71.9%, respectively, of our net sales proceeds collected were from the sales of prepaid cards to our distributors, respectively. Our largest distributor accounted for 10.3%, 9.8% and 7.4% of our net sales proceeds generated from prepaid card sales in 2011, 2012 and 2013, respectively. Although we typically enter into semi-annual contracts with and provide performance based incentives to our distributors, our distribution agreements are not exclusive and do not prohibit our distributors from selling our competitors' game cards. Maintaining relationships with a significant number of distributors may be difficult and time-consuming. If we fail to maintain good relationships with, or to effectively manage, our distributors, if these new distributors may not strictly adhere to our agreements with them or provide targeted distribution in locations frequented by target users, or if the distributors promote our competitors' service and products at our expense, our results of operations could suffer as a result.

We also rely on our licensees and distributors to distribute our merchandises and interactive toys. We sell a vast majority of our products in China through our licensees and distributors, who in turn sell our products to consumers through retail stores directly operated by them or by their sub-distributors. Our distributors are not contractually obligated to work with us on an exclusive basis. In addition, some of our distributors may sell products that compete with our products. Our dependence on distributors

increases their bargaining power with us and the need for us to maintain good relationships with them. To the extent that any material distributor ceases to cooperate with us for any reason and we are not able to find a suitable replacement in a timely manner, we may lose significant business. In addition, we may have to offer volume-based discounts or more favorable credit terms to our distributors in the future, which may lower our operating profit. As we rely to a large extent on our distributors for the sale of our products, our future growth will also depend on the performance of our distributors and their ability to expand their business and sales networks. There is no assurance that we will be able to renew our distribution agreements or renew such agreements on terms that are favorable to us. In addition, there is no assurance that one or more of our major distributors will not breach their distribution agreements or fail to comply with their obligations thereunder. In such event or events, our results of operations may be materially and adversely affected.

We also rely on our film distributors to release our featured films. Film distributors act as intermediaries between film producers and movie theater operators. As a result, the releases of our films depend on maintaining relationships with these film distributors. There can be no assurance that we will be able to maintain these relationships and that film distributors will continue to enter into arrangements with us on favorable terms or at all. In addition, any deterioration in our relationships with the film distributors could require us to enter into arrangements with alternative film distributors. If alternative film distributors do not provide us with comparable services at favorable terms or at all, we may not be able to release our films, which in turn could materially and adversely affect our business, financial condition and results of operations. In addition, if any film distributor breaches the contracts with us and fails to pay us the film box office sharing, our results of operations may be materially and adversely affected.

Unauthorized character enhancements, other hacking or cheating activities, and undetected programming errors or defects in our virtual worlds could harm our online business and reputation and materially and adversely affect our results of operations.

With the increase in the number of virtual world users in China, virtual world operators have increasingly encountered problems arising from the use of unauthorized character enhancements, theft of user account passwords and other hacking or cheating activities. We have from time to time detected a number of users who have gained an unfair advantage by installing hacking or cheating tools to facilitate character progression. In response to these activities, we have installed detection mechanisms in our virtual worlds to identify various hacking and cheating activities, and have expanded our technical team dedicated to detecting unauthorized character enhancements and resolving other hacking issues.

In addition, our virtual worlds may contain undetected programming errors or other defects. Continued occurrences of unauthorized character enhancements, other hacking or cheating activities, and undetected errors or defects in our virtual worlds may negatively impact the image of our virtual worlds and users' perception of their reliability, decrease the number of users, reduce the users' interest in purchasing virtual items, shorten the life span of the virtual worlds and adversely affect our results of operations. A constant recurrence of these activities may require us to shift our management's and personnel's attention from research and development and other operations to focus instead primarily on anti-hacking programs and activities, which could hurt our ability to develop and launch new virtual worlds and could materially and adversely affect our business, financial condition and results of operations.

If we fail to successfully execute our growth strategies, including our current expansion into film and merchandise sales, our future results of operations and growth prospects may be materially and adversely affected.

As part of our growth strategy, we have expanded from the online business to the offline business, such as film, interactive toys and other licensed products. Expansion into these or other new businesses or adoption of other new business models present operating and marketing challenges that are different from those that we encounter in our online business. We face competition from existing players within these markets who may have more experience and resources. We may need to satisfy different regulatory requirements and obtain additional licenses or permits from relevant regulatory authorities. If we cannot successfully address these new challenges and compete effectively in these markets or under these business models, we may not be able to operate these offline businesses, attract a sufficiently large number of audience or customers, or recover costs incurred for developing and marketing these products or services, and our future results of operations and growth strategies could be materially and adversely affected as a result. Pursuing these and other growth strategies in our offline business may also require us to expand our operations through internal development efforts and through partnerships, joint ventures, investments and acquisitions. If we are unable to successfully implement our growth strategies, our revenue and profitability may not grow as we expect, and our competitiveness may be materially and adversely affected.

We may undertake acquisitions, investments, joint ventures or other strategic alliances, which could have a material adverse effect on our ability to manage our business. In addition, such undertakings may not be successful.

Our strategy includes plans to grow both organically and through acquisitions, joint ventures or other strategic alliances. Joint ventures and strategic alliances may expose us to new operational, regulatory and market risks, as well as risks associated with additional capital requirements. We may not be able to identify suitable future acquisition candidates or alliance partners. Even if we identify suitable candidates or partners, we may be unable to complete an acquisition or alliance on terms commercially acceptable to us. If we fail to identify appropriate candidates or partners, or complete desired acquisitions, we may not be able to implement our strategies effectively or efficiently.

In addition, our ability to successfully integrate acquired companies may be adversely affected by a number of factors. These factors include diversion of management's attention, difficulties in retaining personnel of the acquired companies, unanticipated legal liabilities, and tax and accounting issues in association with the acquisition and business combination. If we fail to integrate acquired companies efficiently, our earnings, revenues growth and business could be negatively affected.

Furthermore, the acquired companies may not perform to our expectations for various reasons, including legislative or regulatory changes that affect the acquired companies' operations, and the loss of personnel. If we are not able to realize the benefits envisioned for such acquisitions, our business and results of operations could be materially and adversely affected. For example, in 2013, we made an impairment of US$0.4 in our investment in Chuangyou, due to Chuangyou's deteriorating financial position and performance.

We may not be able to obtain the land use rights and building ownership right in Songjiang, Shanghai in a timely manner and we may not successfully recover our prepayment thereunder, which may have a material adverse effect on our results of operations and financial condition.

2013, we entered into a letter of intent with respect to our intention to purchase a building with an aggregated construction area of approximately 4,860 square meters in Songjiang District, Shanghai for a total consideration of RMB46.6 million (US$7.7 million). A prepayment of RMB14.0 million (US$2.3 million) was paid as of December 31, 2013. Pursuant to the agreements we have entered into with the parties thereto, we will be fully refunded of the prepayments of RMB18.4 million (US$3.0 million) if we fail to obtain the land use rights and the building.

Our execution of a definite land use rights and building purchase agreement and payment of the remaining consideration are contingent upon relevant PRC government authorities' approval. If we fail to obtain the land use rights and the building, we rely on the government credit for the refund of our prepayment. We believe the risk of the government to breach its covenants is remote, however, if we have difficulty recovering the balance of the deposits we have paid, we may be obliged to record provisions for impairment loss for all or part of our prepayments, which could have a material adverse effect on our results of operations and financial condition.

Our growth to date has placed, and our anticipated further expansion will continue to place, a strain on our management, systems and resources. To accommodate our growth pursuant to our strategies, we implemented and maintained and will continue to accommodate a variety of new and upgraded operational and financial systems, procedures and controls, as well as our accounting and other internal management systems, all of which require substantial management efforts. We also will need to continue to expand, train, manage and motivate our workforce, and manage our relationships with our users, our distributors and third-party product and service providers. All of these endeavors will require substantial management effort and skill and the incurrence of additional expenditures. We cannot assure you that we will be able to efficiently or effectively implement our growth strategies and manage the growth of our operations, and any failure to do so may limit our future growth and hamper our business strategy.

Our failure to anticipate or successfully implement new technologies could render our game engines, development platforms or virtual worlds unattractive or obsolete, and reduce our revenues and market share.

Our proprietary engines for powering our virtual worlds, online games, and mobile applications, our flexible and secure software framework and anti-cheating expertise are critical to our success. Our industry is subject to rapid technological changes. We need to anticipate the emergence of new technologies and assess their market acceptance. We also need to invest significant resources, including financial resources, in research and development to keep pace with technological advances in order to make our development capabilities and our virtual worlds competitive in the market. However, development activities are inherently uncertain, and we might encounter practical difficulties in commercializing our development results. Our significant expenditures on research and development may not generate corresponding benefits. Given the fast pace with which virtual world technology has been and will continue to be developed, we may not be able to timely upgrade our engines or the software framework for our virtual world development in an efficient and cost-effective manner, or at all. New technologies in virtual world programming or operations could render our technologies, our existing virtual worlds or the virtual worlds that we are developing or expect to develop in the future obsolete or unattractive, thereby limiting our ability to recover related product development costs, purchase costs and/or licensing fees, which could result in a decline in our revenues and market share.

We may be subject to intellectual property infringement claims, which could be time-consuming and costly to defend and may result in diversion of our financial and management resources and our inability to continue providing some of our existing virtual worlds.

We cannot assure you that our franchise characters, our plots, or other content posted on our websites or made available through our video site or our partners' site, has not infringed or will not infringe upon patents, valid copyrights or other intellectual property rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business within the relevant statute of limitation. If we are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property, be forced to pay fines and damages, and we may incur licensing fees or be forced to develop alternatives. In addition, we may incur substantial expenses and diversion of our financial and management resources in defending against these third-party infringement claims, regardless of their merit. Successful infringement or other intellectual property rights claims against us may result in substantial monetary liabilities, which may disrupt our operations and materially adversely affect our business, results of operations and prospects.

Some of our employees were previously employed at other companies, including our current and potential competitors. We also intend to hire additional personnel to expand our development team and technical support team. To the extent these employees are involved in the development of content or technology similar to ours at their former employers, we may become subject to claims that such employees or we may have appropriated proprietary information or intellectual properties of the former employers of our employees. If we fail to successfully defend such claims against us, our results of operations could be materially and adversely affected.

We could be liable for our users' privacy being compromised, which may have a material adverse effect on our reputation and business.

Although we seek to provide a safe playing environment for our users by implementing a sophisticated security mechanism, our virtual worlds are subject to infiltrating behaviors from child predators and others who hack the accounts of our users to gain progression advantages, access these users' accounts, or for other purposes. Despite our efforts to employ security features to filter offensive content and monitor users' interactions, there is no guarantee that we can successfully keep our users free from predatory behavior, offensive contact or other acts that violate the privacy of our users. A significant number of failures to prevent our users' exposure to such infiltration would severely harm our reputation and business.

We could be liable for breaches of security of our website and third-party payment systems, which may have a material adverse effect on our reputation and business.

In 2011, 2012 and 2013, 19.7%, 26.1% and 28.1%, respectively, of our net sales proceeds collected were generated from sales of our virtual currency through third-party payment systems. In such transactions, secure transmission of confidential information, such as users' debit and credit card numbers and expiration dates, personal information and billing addresses, over public networks, including our official website, is essential for maintaining user confidence. We currently provide password protection for all of our users' accounts. In addition, we are developing new tools to better ensure the security of our users' accounts in the future. While we have not experienced any material breach of our security to date, we still must prevent future breaches and current security measures may be inadequate. In addition, we expect that an increasing number of our sales will be conducted over the Internet as a result of the expanded user base and the growing use of online payment systems. We also expect that associated online crime will likely increase accordingly. We must therefore be prepared to increase our security measures and efforts so that our users have confidence in the reliability of the online payment systems that we use. We do not have control over the security measures of our third-

party payment operators, and their security measures may not be adequate at present or may not be adequate with the expected increased usage of online payment systems. We could be exposed to litigation and possible liability if we fail to safeguard confidential user information, which could harm our reputation and our ability to attract users and may have a material adverse effect on our business.

The successful operation of our online business depends on the performance and reliability of the Internet infrastructure and fixed telecommunications networks in China.

Our online business depends on the performance and reliability of the Internet infrastructure in China. Almost all access to the Internet is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology, or the MIIT. In addition, the national networks in China are connected to the Internet through international gateways controlled by the PRC government. These international gateways are the only channels through which a domestic user can connect to the Internet. Although the PRC government has pledged to improve the Internet infrastructure in China as part of its stimulus packaged introduced in the first quarter of 2009, a more sophisticated Internet infrastructure may not be developed in China. We or the users of our virtual worlds may not have access to alternative networks in the event of disruptions, failures or other problems with China's Internet infrastructure.

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

Any failure to maintain the satisfactory performance, reliability, security and availability of our network infrastructure may cause significant harm to our reputation and our ability to attract and maintain users. All of the servers operating our virtual worlds, all of the servers handling log-in, billing and data back-up matters for us, and all of our backup servers are hosted by third-party service providers, and are maintained by our internal personnel. Major risks involved in such network infrastructure include any break-downs or system failures resulting in a sustained shutdown of all or a material portion of our servers, including failures that may be attributable to sustained power shutdowns, or efforts to gain unauthorized access to our systems causing loss or corruption of data or malfunctions of software or hardware.

In the past, our server network has experienced unexpected outages for several hours and occasional slower performance in a number of locations in China as a result of failures by third-party service providers. Our network systems are also vulnerable to damage from fire, flood, power loss, telecommunications failures, computer viruses, hacking and similar events. Any network interruption, virus or other inadequacy that causes interruptions in the availability of our virtual worlds or deterioration in the quality of access to our virtual worlds could reduce our users' satisfaction and ultimately harm our business and results of operations.

We face risks associated with the licensing of our virtual worlds overseas, and if we are unable to effectively manage these risks, they could impair our ability to expand our business internationally.

In order to expand into overseas markets, we have licensed our virtual worlds, including Mole's World, Seer, Seer II, Flower Fairy, Gong Fu Pai and Reverse World to overseas operators. As of the date of this annual report, our virtual worlds are licensed in countries and regions including Korea, Japan, Hong Kong, Taiwan and Macau. We may license our existing and new products in other countries and regions in the future. The offering of our products in the international markets could expose us to a number of risks, including:

If we are unable to effectively manage such risks, they could impair our ability to expand our business internationally. We have ceased our cooperation with some of the third-party operators because the operation results did not meet our expectation.

Our business depends substantially on the continuing efforts of our management and other key personnel. If we lose their services, we could incur significant costs in finding suitable replacements and our business may be severely disrupted.

Our future success heavily depends upon the continued services of our management and other key personnel. In particular, we rely on the expertise and experience of Mr. Benson Haibing Wang, our chief executive officer, and Mr. Roc Yunpeng Cheng, our president. In 2013 and 2014, certain of our executive officers resigned from their positions. For example, Mr. Crow Zhen Wei stepped down from his position as our chief technology officer for personal reasons, although he remained as a member of our board of directors and also served as an honorary outside counsel. At present time, we do not plan to find a replacement of chief technology officer. In addition, Mr. Paul Keung, our chief financial officer, will be gradually handing over his responsibility in the near term to a new incoming chief financial officer. Mr. Paul Keung will remain his position as our chief financial officer during the transition period including the filing of this annual report on Form 20-F for the year ended December 31, 2013. Although we believe that these changes of our management team did not materially affect our business operations, if one or more of our senior management or key personnel are unable or unwilling to continue in their present positions in the future, we may not be able to replace them easily or at all, and our business may be severely disrupted, our financial condition and results of operations may be materially and adversely affected, and we may incur additional expenses to recruit, train and retain key personnel.

If any of our management or key personnel joins a competitor or forms a competing company, we may lose users, distributors, know-how and key professionals and staff members. Each of our executive officers has entered into employment agreements and confidentiality agreements and the majority of them have entered into non-competition agreements with us. However, if any dispute arises between our officers and us, the non-competition provisions contained in their non-competition agreements may not be enforceable, especially in China, where most of these executive officers and key employees reside, on the ground that we have not provided adequate compensation to these executive officers for their non-competition obligations, which is required under the relevant PRC regulations.

We may not be successful in attracting and retaining qualified personnel and our business and results of operations could be negatively impacted.

We will need to hire and retain additional qualified employees to support our existing operations and planned expansion. Our ability to anticipate and effectively respond to changing user needs

depends in part on our ability to attract and retain experienced personnel for our online and offline businesses in technology, graphic design, operation and other functions. The effective operation of our information technology system, call center, logistics and other back office functions also depends in part on our professional employees. Since our industry is characterized by high demand and intense competition for talent, we may need to offer higher compensation and other benefits in order to retain key personnel in the future. We cannot assure you that we will be able to attract or retain the qualified key personnel that we will need to achieve our business objectives. In addition, as our business has grown rapidly, our ability to train and integrate new employees into our operations may not meet the increasing demands of our business.

Our principal shareholders have substantial influence over our company and their interests may not be aligned with the interests of our other holders of our ordinary shares and ADSs.

As of December 31, 2013, our founders, Mr. Jason Liqing Zeng, Mr. Benson Haibing Wang, Mr. Crow Zhen Wei and Mr. Roc Yunpeng Cheng, who beneficially own our shares through a number of holding entities, and the Qiming Funds together hold 69.3% of our outstanding share capital. Accordingly, our founders and the Qiming Funds have substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election and change of directors and other significant corporate actions. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ADSs. Alternatively, these principal shareholders may cause a merger, consolidation or change of control transaction even if it is opposed by our other shareholders.

Our operating results fluctuate from period to period, making them difficult to predict and may not be indicative of future performance.

Our operating results from period to period are highly dependent upon, and will fluctuate as a result of a variety of factors, including:

Additionally, because most of our operating expenses are expected to remain stable in absolute amount in the future, our net income during any given quarter may be adversely affected by any decrease in revenue due to the seasonality effect.

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 we fail to establish or maintain an effective system of internal controls over financial reporting, we may be unable to accurately report our financial results or prevent fraud, and investor confidence and the market price of our shares may, therefore, be adversely impacted.

As a U.S. public company, we are subject to reporting obligations under the U.S. securities laws. 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. We are required to prepare a management report on our internal controls over financial reporting containing our management's assessment of the effectiveness of our internal controls over financial reporting. In addition, depending on our market capitalization, our independent registered public accounting firm may be required to attest to and report on our management's assessment of the effectiveness of our internal controls over financial reporting. Our management may conclude that our internal controls over our financial reporting are not effective. Moreover, even if our management concludes that our internal controls over financial reporting are effective, our 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.

Prior to our initial public offering, we had been a private company with a short operating history and limited numbers of accounting personnel and other resources with which to address our internal controls and procedures. In connection with the audit of our consolidated and combined financial statements for 2011, 2012 and 2013, we and our auditors, an independent registered public accounting firm, identified certain significant deficiencies and deficiencies in our internal control over financial reporting as defined in the standards established by the U.S. Public Company Accounting Oversight Board, or PCAOB. In connection with our management's assessment of the effectiveness of our internal controls over financial reporting as of December 31, 2013, we have not noted any material weakness, as defined in the standards established by the PCAOB, in our internal controls over financial reporting.

We will continue to implement measures to remedy any deficiencies to meet the deadline imposed by Section 404 of the Sarbanes-Oxley Act. 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 controls over financial reporting in the future. Moreover, effective internal controls over financial reporting are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal controls 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 market price of our ordinary shares. Furthermore, we anticipate that we will incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act.

The audit report included in this annual report are prepared by auditors who are not inspected by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection

Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the US Securities and Exchange Commission, as auditors of companies that are traded publicly in the United States and a firm registered with the US Public Company Accounting Oversight Board (United States), or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditors are located in the Peoples' Republic of China, a

jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB.

Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms' audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor's audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor's audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

We may be unable to secure additional funding in the future or to obtain such funding on favorable terms.

We believe that our current cash and cash equivalents and the anticipated 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 to finance our continued growth or other future developments, including any investments or acquisitions we may decide to pursue. The amount and timing of such additional financing needs will vary principally depending on the timing of new product launches, investments and/or acquisitions, and the amount of cash flow from our operations. If our resources are insufficient to satisfy our cash requirements, we may seek to issue additional equity or debt securities or obtain a credit facility. The issuance of additional equity securities or securities convertible into our ordinary shares 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. Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties. Financing may not be available in amounts or on terms acceptable to us, if at all, especially if there is a recession or other events causing volatilities in the capital markets worldwide.

We have limited insurance coverage which could expose us to significant costs and business disruption.

Other than insurance for some of the vehicles used in our business, we have not purchased any insurance to cover our assets, property and business. If we were to incur substantial losses or liabilities due to fire, explosions, floods, a wide range of other natural disasters or accidents or business interruption, our results of operations could be materially and adversely affected.

If the PRC government determines that the contractual arrangements that establish the structure for operating our business do not comply with applicable PRC laws and regulations, we could be subject to severe penalties.

We are a Cayman Islands company and, as such, we are classified as a foreign enterprise under Chinese laws, and our PRC subsidiary, Shanghai Shengran Information Technology Co., Ltd., or Shanghai Shengran, is a foreign-invested enterprise. Various regulations in China currently restrict or prevent foreign-invested entities from holding certain licenses required to operate online virtual worlds, including Internet content provision, Internet culture operation and Internet publishing licenses. In light of these restrictions, we rely on our VIE, Shanghai Taomee, to hold and maintain the licenses necessary to operate our virtual worlds in China. We do not have any equity interest in Shanghai Taomee but receive its economic benefits through various contractual arrangements and certain corporate governance and shareholder rights arrangements. In addition, we have entered into agreements with Shanghai Taomee and its shareholders which provide us with a substantial ability to control Shanghai Taomee. For a description of these contractual arrangements with Shanghai Taomee,

see "Item 4. Information on the Company—C. Organizational Structure—Contractual Arrangements with Shanghai Taomee and its Shareholders."

The Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business, or the MII Circular, issued by the MII, in July 2006, reiterated the regulations on foreign investment in telecommunications businesses, which require foreign investors to set up foreign-invested enterprises and obtain a business operating license for Internet content provision to conduct any value-added telecommunications business in China. Under the MII Circular, a domestic company that holds an Internet content provision license is prohibited from leasing, transferring or selling the license to foreign investors in any form, and from providing any assistance, including providing resources, sites or facilities, to foreign investors that conduct value-added telecommunications business illegally in China. Furthermore, the relevant trademarks and domain names that are used in the value-added telecommunications business must be owned by the local Internet content provision license holder. The MII Circular further requires each Internet content provision license holder to have the necessary facilities for its approved business operations and to maintain such facilities in the regions covered by its license. In addition, all value-added telecommunications service providers are required to maintain network and information security in accordance with the standards set forth under relevant PRC regulations. Due to a lack of interpretative materials from the regulator, it is unclear what impact the MII Circular will have on us or the other Chinese Internet companies that have adopted the same or similar corporate and contractual structures as ours.

In the opinion of Allbright Law Offices, our PRC counsel, (i) the ownership structure and the business and operation model of Shanghai Shengran and Shanghai Taomee are not in violation of any provisions of applicable PRC laws and regulations, and (ii) each contract under Shanghai Shengran's contractual arrangements with Shanghai Taomee and its shareholders is valid and legally binding. However, there are uncertainties regarding the interpretation and application of PRC laws and regulations, including the MII Circular. Accordingly, we cannot assure you that the PRC regulatory authorities will ultimately take a view that is consistent with the opinion of our PRC counsel.

If we are found to be in violation of any existing or future PRC laws or regulations, including the MII Circular, or fail to obtain or maintain any of the required permits or approvals, the relevant regulatory authorities would have broad discretion in dealing with such violation, including levying fines, confiscating our income, revoking Shanghai Shengran or Shanghai Taomee's business or operating licenses, requiring us to restructure the relevant ownership structure or operations, and requiring us to discontinue or restrict our transaction with our VIEs, VIEs' subsidiaries or PRC subsidiaries, limit our business expansion in China by contractual arrangements, or restrict or prohibit our use of proceeds to finance our business and operation China. If any of these actions results in our inability to direct the activities of VIEs or VIEs' subsidiaries that affect their economic performance, and/or our failure to receive the economic benefits from VIEs and VIEs' subsidiaries, we may not be able to consolidate the operating results of our VIEs and VIEs' subsidiaries into our consolidated financial statements in accordance with U.S. GAAP. However, we do not believe that such actions would result in the liquidation or dissolution of our company or our wholly owned subsidiaries.

If the PRC government determines that our ownership structure does not comply with the restrictions contained in the GAPP Notice, we could be subject to severe penalties.

Our virtual worlds are deemed online games by relevant PRC government authorities and we are subject to relevant PRC regulations on operators of online games. On September 28, 2009, the General Administration of Press and Publication, or the GAPP, together with the National Copyright Administration, and National Office of Combating Pornography and Illegal Publications jointly issued a Notice on Further Strengthening of the Administration of Pre-examination and Approval of Online Game and the Examination and Approval of Imported Online Game, or the GAPP Notice. The GAPP

Notice provides, among other things, that foreign investors are not permitted to invest in online game operating businesses in China via wholly-owned, equity joint venture or cooperative joint venture investments, and expressly prohibits foreign investors from gaining control over or participating in domestic online game operators through indirect ways such as establishing other joint venture companies, or contractual or technical arrangements. We are not aware of any online game companies adopting the same or similar contractual arrangements as ours having been penalized or ordered to be terminated since the GAPP Notice first became effective. As advised by our PRC counsel, Allbright Law Offices, there is uncertainty with respect to the implementation of the GAPP Notice; however, the GAPP is unlikely to directly affect our control over our PRC subsidiary, VIEs and VIEs' subsidiaries without joint actions with other authorities including the Ministry of Culture, based on the GAPP Notice, since (i) according to the relevant provisions of the Regulation on the Main Functions, Internal Organization and Staffing of the GAPP issued by the General Office of the State Council on July 11, 2008, or the Regulation on Three Provisions, the GAPP is authorized to approve the publication of online games before their launch on the Internet, while the Ministry of Culture is authorized to administer and regulate the overall online game industry; (ii) a circular on the interpretation of the Regulations on Three Provisions, which was issued by the office of the Central Organization Establishment Commission on September 7, 2009, provides that once an online game is launched on the Internet, it will only be regulated by the Ministry of Culture, and that if an online game is launched on the Internet without prior approval of the GAPP, the Ministry of Culture, instead of the GAPP, is the direct authority to investigate the game; and (iii) the original set of our contractual agreements with our significant VIE took effect in June 2009, which was prior to the effective date of the GAPP Notice. There are, however, uncertainties regarding the interpretation and application of the GAPP Notice. Accordingly, we cannot assure you that the GAPP will not ultimately take a view that is contrary to the opinion of our PRC legal counsel. In the event that we, our PRC subsidiary or VIEs are found to be in violation of the GAPP Notice to operate our online virtual worlds, the GAPP in conjunction with the relevant regulatory authorities would have the power to investigate and deal with such violations, including in the most serious cases where relevant licenses and registrations would be suspended or revoked.

Our contractual arrangements with Shanghai Taomee and its shareholders may not be as effective in providing control over Shanghai Taomee as direct ownership of this company.

We conduct our business in China through Shanghai Taomee. Our contractual arrangements with Shanghai Taomee and its shareholders provide us with effective control over Shanghai Taomee. See "Item 4. Information on the Company—Organizational Structure—Contractual Arrangements with Shanghai Taomee and its Shareholders." As a result of these contractual arrangements, we are considered to be the primary beneficiary of Shanghai Taomee and accordingly, we consolidate the results of operations, assets and liabilities of Shanghai Taomee in our financial statements.

Although we have been advised by Allbright Law Offices, our PRC legal counsel, that each contract under these contractual arrangements is valid and legally binding, these contractual arrangements may not be as effective in providing us with control over Shanghai Taomee as direct ownership of this company. If Shanghai Taomee or its shareholders fail to perform their respective obligations under these contractual arrangements, we may have to incur substantial costs and resources to enforce such arrangements, and rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you that it will be effective. See "—Risks Related to Our Corporate Structure—Our ability to enforce the Equity Interest Pledge Agreements between us and the shareholders of Shanghai Taomee may be subject to limitations based on PRC laws and regulations".

These contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in

accordance with PRC law 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, which may make it difficult to exert effective control over our VIEs and VIEs' subsidiaries, and our ability to conduct our business may be negatively affected and we may not be able to consolidate the financial results of our VIEs and VIEs' subsidiaries into our consolidated financial statements in accordance with U.S. GAAP. See "—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could have a material adverse effect on us."

The shareholders of Shanghai Taomee may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

Shanghai Taomee is jointly owned by Mr. Jason Liqing Zeng, our chairman, Mr. Benson Haibing Wang, our co-founder, director and chief executive officer, Mr. Crow Zhen Wei, our co-founder and director, Mr. Roc Yunpeng Cheng, our co-founder, director and president, Mr. Bin Wang and Mr. Yuliang Feng. In addition, except for Mr. Bin Wang and Mr. Yuliang Feng, the above other individuals are also directors or executive officers of Shanghai Taomee. The PRC Company Law provides that a director or member of management owes a fiduciary duty to the company he directs or manages. The abovementioned individuals, except for Mr. Bin Wang and Mr. Yuliang Feng, must therefore act in good faith and in the best interests of Shanghai Taomee and must not use their respective positions for personal gain. These laws do not require them to consider our best interests when making decisions as a director or member of management of Shanghai Taomee.

Conflicts of interests between these individuals' role as shareholders or directors of Shanghai Taomee and their duties to our company may arise. We cannot assure you that when conflicts of interest arise, these individuals will act in the best interests of our company or that conflicts of interest will be resolved in our favor. In addition, these individuals may breach or cause Shanghai Taomee to breach or refuse to renew the existing contractual arrangements that allow us to effectively control Shanghai Taomee, and receive economic benefits from it. Currently, we do not have arrangements to address potential conflicts of interest between these individuals and our company and a conflict could result in these individuals as officers of our company violating fiduciary duties to us. We believe these individuals will not act contrary to any of the contractual arrangements, and the option agreements entered into by each of these individuals with our company entitled us to remove the shareholders as beneficial shareholders of the VIEs should any of them act in a way that is detrimental to our company. We rely on these individuals as our directors and executive officers to fulfill their fiduciary duties and abide by laws of the PRC and Cayman Islands and act in the best interest of our company. However, if we cannot resolve any conflicts of interest or disputes between us and any of the shareholders of Shanghai Taomee, we would have to rely on legal proceedings, which could result in disruption to our business, and there would be uncertainty as to the outcome of any such legal proceedings.

Our ability to enforce the Equity Interest Pledge Agreements between us and the shareholders of Shanghai Taomee may be subject to limitations based on PRC laws and regulations.

Pursuant to the Equity Interest Pledge Agreements with the shareholders of Shanghai Taomee, such shareholders agreed to pledge their equity interests in Shanghai Taomee to secure their performance under the relevant contractual arrangements. The equity pledges of Shanghai Taomee under these Equity Interest Pledge Agreements have been registered with the local branch of State Administration for Industry and Commerce pursuant to the new PRC Property Rights Law. According to the PRC Property Rights Law and PRC Guarantee Law, the pledgee and the pledgor are prohibited from making an agreement prior to the expiration of the debt performance period to transfer the ownership of the pledged equity to the pledgee when the obligor fails to pay the debt due. However,

under the PRC Property Rights Law, when an obligor fails to pay its debt when due, the pledgee may choose to either conclude an agreement with the pledgor to obtain the pledged equity or seek payments from the proceeds of the auction or sell-off of the pledged equity. If Shanghai Taomee or its respective shareholders fail to perform their obligations secured by the pledges under the equity pledge agreements, one remedy in the event of default under the agreements is to require the pledgor to sell the equity interests of Shanghai Taomee in an auction or private sale and remit the proceeds to our wholly owned subsidiary in China, net of related taxes and expenses. Such an auction or private sale may not result in our receipt of the full value of the equity interests in Shanghai Taomee. We consider it very unlikely that the public auction process would be undertaken since, in an event of default, our preferred approach is to ask Shanghai Shengran, our PRC wholly owned subsidiary and a party to the Option Agreements, to replace or designate another PRC person or entity to replace the existing shareholders of Shanghai Taomee pursuant to the direct transfer option we have under the Option Agreement.

In addition, in the registration forms of the local branch of State Administration for Industry and Commerce for the pledges over the equity interests under the Equity Interest Pledge Agreements, the amount of registered equity interests in Shanghai Taomee pledged to us was stated as RMB10,000,000, which represents 100% of the registered capital of Shanghai Taomee. The Equity Interest Pledge Agreements with the shareholders of Shanghai Taomee provide that the pledged equity interest shall constitute continuing security for any and all of the indebtedness, obligations and liabilities under all of the contractual arrangements. In case of a breach of the contractual arrangement, Shanghai Shengran, as the pledgee, can require the shareholders of Shanghai Taomee to sell the pledged equity interest in a private sale or auction in order to realize Shanghai Shengran's right to the pledged equity interest in Shanghai Taomee. However, if the proceeds obtained by the shareholders of Shanghai Taomee from the foregoing realization process are insufficient to cover the full amount payable to Shanghai Shengran, the uncovered part will be determined as unsecured debt and will rank pari passu with other unsecured debt of the shareholders of Shanghai Taomee. We do not have agreements that pledge the assets of Shanghai Taomee for the benefit of us.

Contractual arrangements we have entered into may be subject to scrutiny by the PRC tax authorities, and a finding that we or our affiliated entities owe additional taxes could reduce our net income and the value of your investment.

As required by applicable PRC laws and regulations, arrangements and transactions among related parties need to be periodically filed with local tax authorities and may be subject to audit or challenge by the PRC tax authorities. We could face adverse tax consequences if the PRC tax authorities determine that the contractual arrangements between Shanghai Shengran and Shanghai Taomee do not represent pricing at arm's length and adjust Shanghai Taomee's income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction, for PRC tax purposes, of expense deductions recorded by Shanghai Taomee, which could in turn increase its tax liabilities. In addition, the PRC tax authorities may impose late payment fees and other penalties on our affiliated entities for underpaid taxes. Our net income may be adversely affected if our affiliated entities' tax liabilities increase or if they are found to be subject to late payment fees or other penalties.

Changes in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect our business.

Substantially all of our business operations are conducted in China. Accordingly, our business, results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. While China's economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy, and may slow down in the future. Any prolonged slowdown in the Chinese economy, in particular the information technology industry, could have a negative impact on our business, operating results and financial condition in a number of ways. For example, our users may decrease spending on our products, while we may have difficulty expanding our user base fast enough, or at all, to offset the impact of decreased spending by our existing users.

Although the Chinese economy is no longer a planned economy, the PRC government continues to exercise significant control over China's economic growth through direct allocation of resources, monetary and tax policies, and a host of other government policies such as those that encourage or restrict investment in certain industries by foreign investors, control the exchange between RMB and foreign currencies, and regulate the growth of the general or specific market. These government involvements have been instrumental in China's significant growth in the past 30 years. If the PRC government's current or future policies fail to help the Chinese economy achieve further growth or otherwise negatively affect our business, our growth rate or strategy, our results of operations could be adversely affected as a result.

Uncertainties in PRC government policies and regulations regarding virtual worlds and online games and children's Internet use in China may adversely affect our business.

In April 2007, the GAPP, the MII, the Ministry of Education, the Ministry of Public Security, and other relevant government authorities jointly issued a circular concerning the mandatory implementation of an addiction prevention program in virtual worlds and online games, which aims to protect the physical and psychological health of minors. This circular requires all virtual worlds to incorporate an addiction prevention program and an identity verification system, both of which limit the amount of time that a minor or other user may continuously spend participating in a virtual world or playing an online game. Failure to do so may subject us to certain penalties, such as suspension of Internet publishing operation and relevant Internet-access services or revocation of relevant licenses.

On June 3, 2010, the Ministry of Culture, or the MOC, adopted the Provisional Administration Measures of Online Games, or the Online Games Administration Measures, which became effective as of August 1, 2010. The MOC also issued a notice regarding the implementation of the Online Games Administration Measures. We are required to establish the identity verification systems within three months of the effectiveness of the Online Games Administration Measures for online games and virtual worlds which started operation after August 1, 2010, and within six months for those which started operation prior to August 1, 2010. Failing to do so may subject us to an order from relevant authorities to rectify and a fine up to RMB20,000 (approximately US$3,304).

However, since the users of our virtual worlds are principally minors, the implementation of an identity verification system has practical difficulties, mainly because most minors do not have PRC identity cards. We understand that the purpose of identity verification system required under the abovementioned circular issued in 2007 is to facilitate addiction prevention; hence, we have implemented addiction prevention programs for all users of our virtual worlds. We have established the identity verification system in all of our virtual worlds and are currently using it as one of the ways for registration. We plan to use the identity verification system as the only option for registration once required by relevant authorities.

In addition, a notice jointly issued by several central governmental agencies in February 2007 increased the punishment for Internet cafés admitting minors. As Internet cafés provide means for children to access the Internet especially in smaller cities, this restriction may adversely affect our plan for growth in these cities. Further strengthening of these regulations, or enactment by the PRC government of any additional laws to further tighten its administration over the Internet, online games, and, in particular, the Internet use and access to online games and virtual worlds by children, may result in less time spent by users or fewer users, which may materially and adversely affect our business results and prospects for future growth.

The laws and regulations governing virtual worlds and online games in China are developing and are subject to future changes. If we or the third-party publishers we work with fail to obtain or maintain all applicable permits and approvals, our business and operations would be materially and adversely affected.

The online game industry in China is heavily regulated by the PRC government. Various regulatory authorities of the PRC central government, such as the State Council, the MIIT, the GAPP, the Ministry of Culture and the Ministry of Public Security, have the authority to issue and implement regulations governing various aspects of the online game industries.

We are required to obtain applicable permits or approvals from different regulatory authorities in order to operate our virtual worlds. An Internet content provider, or ICP, such as Shanghai Taomee, must obtain an ICP license in order to engage in any commercial ICP operations in China. Online game operators must also obtain a license from the Ministry of Culture and an Internet publishing license from the GAPP in order to distribute games through the Internet. We hold the Internet culture operation license issued by the Ministry of Culture and the Internet publishing license issued by GAPP. Prior to obtaining the Internet publishing license from GAPP, we worked with third party publishers to publish Mole's World, Seer, Flower Fairy, Magic Haqi and Gong Fu Pai. We have obtained 19 approvals from the GAPP in total, covering the Internet publications of all the virtual worlds which are developed by us and have been commercially launched, including the above-mentioned five franchises of Mole's World, Seer, Magic Haqi, Flower Fairy and Gong Fu Pai. If we cannot obtain the GAPP approval for our virtual worlds to be launched in future or fail to maintain any of our permits or approvals, we may be subject to various penalties, including fines and the discontinuation or restriction of our operations. Any such disruption in our business operations would materially and adversely affect our business, financial condition and results of operations.

As virtual worlds and online game industry is at an early stage of development in China, new laws and regulations may be adopted from time to time to require additional licenses and permits other than those we currently have. As a result, uncertainties exist regarding the interpretation and implementation of current and future PRC laws and regulations applicable to virtual worlds. We cannot assure you that we will be able to timely obtain required licenses or any other new license required in the future, or at all. We cannot assure you that we will not be found in violation of any current or future PRC laws and regulations.

The laws and regulations governing virtual worlds and online games in China are developing and are subject to future changes. If we, as the developer of our mobile games, are required to obtain applicable permits and licenses before their release online, or if we are required to obtain approval for the release of our e-books on mobile platforms, it may materially and adversely affect our business results and future growth.

According to the Regulation on Three Provisions, the term of online games refers to all the online game works provided to the public through the Internet (including wired Internet and wireless network) for online user interaction or download, which includes but is not limited to MMORPG, web games, casual games, PC game downloading, games with net connection function, online counter strike game platforms and online mobile games. In addition, the distribution of online games to the public

through the Internet for online user interaction or download is deemed as publication of such online games and is subject to the approval of the GAPP before such online games are distributed online.

To further build our franchises and animated characters, we expanded into mobile platforms and have developed diversified mobile games and applications. Since the release of our first mobile game, Mole's World iOS version in October 2011, we have further expanded our mobile game portfolio, including multiple games based on Seer franchise and Mole's World franchise. All of our mobile games can be downloaded onto iPhones and iPads through Apple's App Store, and some games can also be downloaded onto Android based mobile devices. We may charge a fee for download or provide free download of our mobile products, depending on the nature of our different types of products and relevant distribution strategies; while we may have an in-application purchase system for virtual items. Currently, there is no official or public interpretation on the distinction between the terms of online games and mobile games, and we understand that the term of online mobile games are covered by the definition of "online games" under the Regulation on Three Provisions, and we have obtained the approvals from the GAPP covering all of our online games, including Mole's World and Seer. However, it still remains uncertain whether we need to obtain approvals for our online mobile games before we distribute such mobile games online. Furthermore, even under the assumption that our mobile games are subject to separate approvals before they are released online, it is still unclear whether we, as the developer of our games, or the third-party operators who manage and operate the platform where our mobile games are offered to the public for download, are required to apply for the approval from GAPP before such online mobile games are distributed online.

As of December 31, 2013, we have released over ten e-books which featured the Mole's World franchise and Seer animation application on Apple's iOS platform. According to the Opinions of GAPP on the Development of E-Books Industry, which was promulgated by GAPP on October 9, 2010 and took effective on the same day, enterprises engaging in e-book industries are subject to approvals and administration from relevant governmental authorities. In addition, enterprises engaging in the creation, editing and publication of e-books or in the operation of platform where the e-book resources are delivered to users are deemed as e-book publishers and are subject to approvals for the publication of e-books. Since there is no official or public interpretation on the definition of e-book publication, we are not certain whether our release of e-books on mobile platforms will be deemed as publication and therefore be subject to the approval of GAPP.

If relevant governmental authorities retroactively determine that we should obtain separate approvals for our online mobile games before we distribute them online, or that we should apply for approval for the release of our e-books on mobile platforms, we may be subject to penalties or an order to withdraw our mobile games and/or e-books from the Internet, which may adversely affect our business results and prospects for future growth.

The laws and regulations governing animation televisions and films in China are developing and are subject to future changes. If we or the third-parties we work with fail to obtain or maintain all applicable permits and approvals, our business and operations would be materially and adversely affected.

The film and animation industry of PRC is regulated mainly by the State Administration of Radio, Film and Television, or SARFT. The administration of the foregoing industry is mainly focused on the production and broadcasting of a film and animation television series.

According to the Regulations on the Administration of Movies promulgated by the State Council of PRC on December 25, 2001 which took effective as of February 1, 2002, the film production entity is required to either obtain a Film Production License for engaging in film production activities or a One-Time Film Production License for each single film to be produced. In addition, upon the completion of the film making, the film production entity is required to submit the film to the local

branch of SARFT for examination. SARFT will issue a License of Public Screening for each film that passes such examination, allowing the broadcast of such film to the public.

On July 19, 2004, SARFT promulgated the Administration Rules on the Production and Operation of Broadcasting Television Programs, pursuant to which an entity that plans to produce and operate television and broadcast programs in China is required to obtain the License for Producing and Operating Television and Broadcast Programs. On July 11, 2006, SARFT issued Provisional Regulations on Filing and Publicity of Domestic Television Animations, stipulating that registrations for domestic television animations must be filed with, and be publicly displayed by, SARFT prior to their production. On February 14, 2008, SARFT promulgated the Notice of the State Administration of Radio, Film and Television on Strengthening the Administration of the Broadcasting of Domestic Animation Series and on May 14, 2010, SARFT further promulgated Regulations on Content of Television Series, which stated that for each domestic television animation completed, the animation production entity is required to obtain the Domestic Animation Publication License prior to the broadcast of such domestic television animation to the public.

We cooperate with third parties with the requisite qualifications and licenses in the production and distribution of the animation series and film based on our Mole's World franchise and the film based on our Seer franchise. Shanghai Taomee Animation Co., Ltd. has obtained (i) the license for the production and broadcasting of radio and television program, and the license for the broadcasting of Seer I, Seer II, Mole's World III and Flower Fairy animation series, (ii) one-time film production license and distribution license for the third film based on our Seer franchise, and (iii) one-time film production license for the third film based on our Mole's World franchise. If we fail to renew the Broadcasting and Television Program Production License obtained by us or if we or the third parties we worked with cannot obtain the license from SARFT for any of our future animation television series or films, the business of animation and film production will be adversely affected. Any such disruption in our business operations would materially and adversely affect our business, financial condition and results of operations.

The laws and regulations governing broadcasting audio/video programs through the Internet in China are developing and are subject to future changes. If we or the third-parties we work with fail to obtain or maintain all applicable permits and approvals, our business and operations would be materially and adversely affected.

On July 6, 2004, the SARFT promulgated the Rules for the Administration of Broadcasting of Audio/Video Programs through the Internet and Other Information Networks, or the Audio/Video Broadcasting Rules. The Audio/Video Broadcasting Rules apply to the opening, broadcasting, integration, transmission or download of audio/video programs via the Internet and other information networks. Anyone who wishes to engage in Internet broadcasting activities must first obtain an audio/video program transmission license, with a term of two years, issued by the SARFT and operate pursuant to the scope as provided in such license. Foreign-invested enterprises are not allowed to engage in the above business.

On December 20, 2007, the SARFT and the MIIT jointly issued the Rules for the Administration of Internet Audio and Video Program Services, commonly known as Document 56, which came into effect as of January 31, 2008. Document 56 reiterates the requirement set forth in the Audio/Video Broadcasting Rules that online audio/video service provider must obtain a license from the SARFT. Furthermore, Document 56 requires all online audio/video service providers to be either wholly state-owned or state-controlled. According to relevant official answers to press questions published on the SARFT's website dated February 3, 2008, officials from the SARFT and the MIIT clarified that online audio/video service providers that already had been operating lawfully prior to the issuance of Document 56 may re-register and continue to operate without becoming state-owned or controlled,

provided that such providers have not engaged in any unlawful activities. This exemption will not be granted to online audio/video service providers established after Document 56 was issued.

In January 2012, in cooperation with a number of China's leading online video websites who have obtained the audio/video program transmission licenses, we launched v.61.com, a website that offers animation series based on our franchises, such as Seer and Mole's World, as well as other content from these websites. In November 2012, we jointly developed with Turner Broadcasting System Asia Pacific (the parent company of Cartoon Network) ben10.61.com, a dedicated Chinese online zone for Ben 10 fans featuring videos, online games, wallpaper downloads, e-comics and character profiles. If the governmental authorities determine that our website v.61.com and ben10.61.com falls within Document 56, we may not be able to obtain the audio/video program transmission license as required, and we may become subject to penalties, fines or an order to suspend our website v.61.com and ben10.61.com.

Regulation and censorship of information disseminated over the Internet in China may adversely affect our business, and we may be liable for information displayed on, retrieved from, or linked to our Internet websites.

The PRC government has adopted certain regulations governing Internet access and the distribution of news and other information over the Internet. Under these regulations, Internet content providers and Internet publishers are prohibited from posting or displaying over the Internet content that, among other things, violates PRC laws and regulations, impairs the national dignity of China, or is obscene, superstitious, fraudulent or defamatory. Failure to comply with these requirements could result in the revocation of ICP and other required licenses and the closure of the concerned websites. The website operator may also be held liable for such prohibited information displayed on, retrieved from or linked to such website.

In addition, the MIIT has published regulations that subject website operators to potential liability for content included on their websites and the actions of users and others using their websites, including liability for violations of PRC laws prohibiting the dissemination of content deemed to be socially destabilizing. The Ministry of Public Security has the authority to order any local Internet service provider, or ISP, to block any Internet website maintained outside China at its sole discretion. Periodically, the Ministry of Public Security has stopped the dissemination over the Internet of information which it believes to be socially destabilizing. The State Secrecy Bureau, which is directly responsible for the protection of State secrets of the PRC government, is authorized to block any website it deems to be leaking state secrets or failing to meet the relevant regulations relating to the protection of state secrets in the dissemination of online information.

As these regulations are subject to interpretation by the relevant authorities, it may not be possible for us to determine in all cases the type of content that could result in liability for us as a website operator. In addition, we may not be able to control or restrict the content of other Internet content providers linked to or accessible through our websites, or content generated or placed on our websites by our users, despite our attempt to monitor such content. To the extent that regulatory authorities find any portion of our content objectionable, they may require us to limit or eliminate the dissemination of such information or otherwise curtail the nature of such content on our websites, which may reduce our user traffic and have a material adverse effect on our financial condition and results of operations. In addition, we may be subject to significant penalties for violations of those regulations arising from information displayed on, retrieved from or linked to our websites, including a suspension or shutdown of our operations.

There are currently no laws or regulations in the PRC governing property rights of virtual assets and therefore it is not clear what liabilities, if any, we may have relating to the loss of virtual assets by our users.

Users of our virtual worlds acquire and accumulate some virtual assets, such as performance-enhancing items, clothing, accessories and other in-game items. Such virtual assets can be highly valued

by users. In practice, virtual assets can be lost for various reasons, such as data loss caused by delay of network service by a network crash, or by hacking activities. There are currently no PRC laws and regulations governing property rights of virtual assets. As a result, it is unclear who the legal owner of virtual assets is and whether the ownership of virtual assets is protected by law. In addition, it is unclear under PRC law whether an operator of virtual worlds such as us would have any liability (whether in contract, tort or otherwise) for loss of such virtual assets by users. Based on several judgments regarding the liabilities of online game operators for loss of virtual assets by users, the courts have generally required the online game operators to provide well-developed security systems to protect such virtual assets owned by users. In the event of a loss of virtual assets, we may be sued by users and may be held liable for damages.

Restrictions on virtual currency may adversely affect our game operations revenues.

Our virtual world operations revenues are collected through the sale of our prepaid cards. The Notice on the Reinforcement of the Administration of Online Games issued by the Ministry of Culture and other governmental authorities on February 15, 2007, directs the People's Bank of China to strengthen the administration of virtual currency in online games to avoid any adverse impact on the PRC economy and financial system. This notice also applies to virtual worlds we operate. This notice provides that the total amount of virtual currency issued by online game operators and the amount purchased by individual users should be strictly limited, with a strict and clear division between virtual transactions and real transactions carried out by way of electronic commerce. This notice also provides that virtual currency should only be used to purchase in-game items. On June 4, 2009, Ministry of Culture and Ministry of Commerce jointly issued Notice on the Reinforcement of the Administration of Virtual Currency in Online Games, which defines what virtual currency is and requires that entities obtain the approval from the Ministry of Culture before issuing virtual currency and engaging in transactions using virtual currency in connection with online games. We have obtained the approval from the Ministry of Culture for the issuing of our virtual currency. These restrictions on virtual currency may result in lower sales of our prepaid cards, and could have an adverse effect on our revenues from online business.

Our business benefits from certain government tax incentives. Expiration, reduction or discontinuation of, or changes to, these incentives will increase our tax burden and reduce our net income.

Shanghai Taomee, as a "software enterprise," enjoyed a full exemption from enterprise income tax, or EIT, in 2009 and 2010 and a 50% reduction in the EIT rate from 2011 to 2013. The reduced applicable EIT rate of Shanghai Taomee was 12.5% from 2011 to 2013. Shanghai Taomee's tax holiday period was approved by relevant tax authorities in May 2010. In addition, an enterprise may benefit from a preferential tax rate of 15% under the EIT Law if it qualifies as a "High and New Technology Enterprise", or HNTE. In 2010, Shanghai Taomee obtained "High and New Technology Enterprise" qualification, or HNTE qualification, which is effective for a period of three years and could be renewed thereafter. In 2013, Shanghai Taomee applied for the renewal and received a new HNTE qualification. Currently Shanghai Taomee has not applied to the relevant tax authority for preferential tax treatment as a HNTE.

Shanghai Shengran, which was established in 2009 and qualified as a "software enterprise" in 2010 and was informed in April 2011 that the full EIT exemption would apply retroactively in 2009 and 2010, and 50% reduction in EIT rate will apply from 2011 to 2013. In May 2012, Shanghai Shengran received a written approval from local tax authorities, according to which Shanghai Shengran was entitled to the full EIT exemption for 2010 and 2011, and 50% reduction in EIT rate, i.e. EIT rate of 12.5%, from 2012 to 2014, which resulted in an adjustment of US$2.1 million as a one-time tax benefit in 2012.

According to the Notice of the Ministry of Finance and Other Departments regarding Several Opinions on Facilitating the Development of China's Animation Industry forwarded by the General Office of the State Council on April 25, 2006, an animation enterprise as recognized by the relevant department of the State Council which independently develops or produces animation products can apply for certain tax preferential treatment as applied to the software enterprises. Shanghai Animation was recognized as an "animation enterprise" in November 2013. Shanghai Animation is in the process of obtaining a written approval from relevant tax authorities for the two-year EIT exemption and a three-year 50% EIT rate reduction.

If Shanghai Taomee, Shanghai Shengran or Shanghai Animation fail to maintain their respective qualification as a "software enterprise" or as an "animation enterprise" or as a "HNTE", the effective EIT rate will increase, which could adversely affect our results of operations. In addition, various local governments in China have provided discretionary preferential tax treatments to us. However, these local governments may decide to reduce or eliminate these preferential tax treatments at any time. Furthermore, these local implementations of tax laws may be found to violate national laws or regulations and we may be subject to retroactive imposition of higher taxes as a result. Any expiration, reduction or discontinuation of, or changes to, these tax incentives will increase our tax burden and reduce our net income and thus have a material adverse effect on our operating results.

Further roll-out of the PRC government's plan to replace business tax with value-added tax, or VAT, may subject us to higher tax rate, which could adversely affect our results of operations.

Pursuant to the PRC Provisional Regulations on Business Tax, taxpayers providing taxable services falling under the category of service industry in China are required to pay a business tax at a normal tax rate of 5% of their revenues. In November 2011, the Ministry of Finance and the State Administration of Taxation promulgated the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax, or Circular 111, pursuant to which, from January 1, 2012, VAT has replaced business tax in the transport and shipping industry and some of the modern service industries in Shanghai. In July 2012, the Ministry of Finance and the State Administration of Taxation promulgated the Circular concerning Implementing the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax for Transport and Shipping Industry and Certain Modern Service Industries in Eight Provinces and Municipalities (including Beijing), or Circular 71, which expanded the pilot regions to other eight provinces and municipalities including Beijing, Tianjin, and Shenzhen. In May 2013, the Ministry of Finance and the State Administration of Taxation promulgated the Circular concerning Implementing the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax for Transport and Shipping Industry and Certain Modern Service Industries across the Country, or Circular 37, which expanded the pilot regions to the whole nation and Circular 111 and Circular 71 were annulled accordingly. In December 2013, the Ministry of Finance and the State Administration of Taxation promulgated the Circular on Expanding the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax to Railway Transport and Postal Service, or Circular 106, pursuant to which, from January 1, 2014, VAT would replace business tax in the transport and shipping industry, postal service and some of the modern service industries in PRC and Circular 37 was annulled accordingly. Under Circular 106, a VAT rate of 6% applies to certain modern service industries. Most of our consolidated affiliated entities are located in these pilot regions, and the revenues recognized from part of our businesses operated by Shanghai Shengran, Shanghai Taomee and Shanghai Animation are subject to VAT at a rate of 6% for certain other services such as advertisement, merchandise licensing and box office revenue sharing and 17% for software sales, while other part of our business are still subject to PRC business tax at a statutory tax rate of 5%. If this plan is extended to apply to other part of our business, we may be subject to VAT rate which is higher than the business tax rate, which could harm our financial condition and results of operations.

We principally rely on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiary to make payments to us, or the tax implications of making payments to us, could have a material adverse effect on our ability to conduct our business.

We are a holding company, and we rely principally on dividends and other distributions on equity from our subsidiary in China for our cash requirements, including the funds necessary to service any debt we may incur. Current PRC regulations permit our PRC subsidiary to pay dividends to us only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, our subsidiary in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. These reserves are not distributable as cash dividends. The registered capital of Shanghai Shengran is US$2.5 million. As of the date of this annual report, Shanghai Shengran has made allocations to its statutory reserve fund in compliance with the applicable PRC laws and regulations. Furthermore, if our subsidiary in China incurs 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. Most of our assets are held by, and substantially all of our earnings and cash flows are attributable to, our PRC subsidiary. If earnings from our PRC subsidiary were to decline, our earnings and cash flow would be materially and adversely affected. Our cash flows are principally derived from dividends paid to us by our PRC subsidiary. As a result, our ability to distribute dividends largely depends on earnings from our PRC subsidiary and its ability to pay dividends out of its earnings. Our PRC subsidiary does not have a history of paying dividends. We cannot assure you that our PRC subsidiary will generate sufficient earnings and cash flows in the near future to pay dividends or otherwise distribute sufficient funds to enable us to meet our obligations, pay interest and expenses or declare dividends.

In addition, under the PRC Enterprise Income Tax Law and the Implementing Rules, both of which became effective on January 1, 2008, dividends generated from the business of our PRC subsidiary after January 1, 2008 and payable to us may be subject to a 10% withholding tax if the PRC tax authorities determine that we are a non-resident enterprise, unless there is an applicable tax treaty with China that provides for a different withholding arrangement and we are deemed to be entitled to such favorable treatment.

We may be classified as a "resident enterprise" for PRC enterprise income tax purposes, which could result in our global income becoming subject to 25% PRC enterprise income tax.

In April 2009, the State Administration of Taxation released a circular that sets out the standards and procedures for recognizing the location of the "effective management" of an enterprise registered outside of the PRC and funded by Chinese enterprises as controlling investors, or a Chinese Funded Enterprise. Under the circular, a Chinese Funded Enterprise is considered a resident enterprise if all of the following applies: (i) a Chinese Funded Enterprise's major management department and personnel who are responsible for carrying out daily operations are located in the PRC; (ii) the department or the personnel who have the right to decide or approve the Chinese Funded Enterprise's financial and human resource matters are located in the PRC; (iii) the major assets, account book, company seal and meeting minutes of the Chinese Funded Enterprise are located or stored in the PRC; and (iv) the directors or management personnel holding no less than 50% voting rights of the Chinese Funded Enterprise habitually reside in the PRC. The circular explicitly provides that the above standards apply to the enterprises which are registered outside the PRC and funded by Chinese enterprises as

controlling investors, and therefore such standards may be cited for reference only and may not be directly adopted when considering whether our "effective management" is in the PRC or not. Accordingly, it is still uncertain whether we may be considered a resident enterprise under the PRC EIT Law. If we are considered a resident enterprise and earn income other than dividends from our PRC subsidiary, we will be subject to a 25% PRC income tax on our global income and such 25% PRC EIT on our global income could significantly increase our tax burden and materially and adversely affect our cash flow and profitability.

If we are classified as a "resident enterprise" for PRC enterprise income tax purposes, you may be subject to PRC withholding tax on dividends from us and to PRC income tax on gain realized on the transfer of our ADSs or ordinary shares.

Under the PRC Enterprise Income Tax Law and related implementation regulations, PRC EIT withholding tax at the rate of 10% is applicable to dividends payable to investors that are "non-resident enterprises," which do not have an establishment or place of business in the PRC, or which have such establishment or place of business if the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends have their sources within the PRC. In addition, any gain realized on the transfer of ADSs or shares by such investors is subject to 10% PRC income tax if such gain is regarded as income derived from sources within the PRC unless a treaty otherwise provides. If we are considered a PRC "resident enterprise," it is unclear whether dividends we pay with respect to our ordinary shares or ADSs, or the gain you may realize from the transfer of our ordinary shares or ADSs, would be treated as income derived from sources within the PRC and be subject to PRC tax. If we are required under the PRC EIT Law to withhold PRC income tax on dividends payable to our non-PRC investors that are "non-resident enterprises," or if you are required to pay PRC income tax on the transfer of our ordinary shares or ADSs, the value of your investment in our ordinary shares or ADSs may be materially and adversely affected.

Uncertainties with respect to the PRC legal system could have a material adverse effect on us.

We conduct our business primarily through our subsidiary and affiliated entities in China. Our operations in China are governed by PRC laws and regulations. The PRC legal system is based on statutes. Prior court decisions may be cited for reference but have limited precedential value.

Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, 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.

Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.

Substantially all of our cash inflows and outflows are denominated in Renminbi. We may convert a portion of our revenues into other currencies to meet our foreign currency obligations such as payment of dividends declared in respect of our ordinary shares. Under China's existing foreign exchange regulations, our PRC subsidiary is able to make payments of current accounts, such as dividends to its offshore holding companies, in foreign currencies, without prior approval from SAFE, by complying with certain procedural requirements. However, we cannot assure you that the PRC authorities will not take further measures in the future to restrict access to foreign currencies for current account

transactions. We may also have different views with the PRC authorities with respect to certain foreign exchange transactions. These and other uncertainties with respect to currency exchange controls may have a material adverse impact on our operations and financial condition.

Governmental control of currency conversion may affect the value of your investment.

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under our current corporate structure, our income is primarily derived from dividend payments from our PRC subsidiary. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiary to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy its foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

We may be subject to penalties, including restriction on our ability to inject capital into our PRC subsidiary and our PRC subsidiary's ability to distribute profits to us, if our PRC resident shareholders or beneficial owners fail to comply with relevant PRC foreign exchange rules.

SAFE issued a public notice in October 2005 requiring PRC residents to register with the local SAFE branch before establishing or controlling any company outside of China for the purpose of capital financing with assets or equities of PRC companies, referred to in the notice as an "offshore special purpose vehicle." PRC residents that are shareholders and/or beneficial owners of offshore special purpose companies established before November 1, 2005 were required to register with the local SAFE branch before March 31, 2006. In addition, any PRC resident that is a shareholder of an offshore special purpose vehicle is required to amend its SAFE registration with respect to that offshore special purpose company in connection with any increase or decrease of capital, transfer of shares, merger, division, equity investment or creation of any security interest over any assets located in China or other material changes in share capital. In May 2007, SAFE issued relevant guidance to its local branches with respect to the operational process for SAFE registration, which standardized more specific and stringent supervision on the registration relating to the SAFE notice.

All our individual shareholders who are subject to Circular 75 have completed registration with SAFE with regard to the establishment of our company or their shareholding in our company as required under Circular 75, and they have also filed application for change of registration to reflect our company's investment activities and later share subdivision. We are committed to compliance with Circular 75 and have taken steps to ensure that our shareholders and beneficial owners who are subject to Circular 75 also comply with the relevant rules. However, we cannot provide any assurance that all of our shareholders and beneficial owners who are PRC residents will comply with our request to make, obtain or update any applicable registrations or comply with other requirements required by the SAFE notice or other related rules. In case of any non-compliance on any of our PRC resident shareholders or beneficial owners, our PRC subsidiary and such shareholders and beneficial owners may be subject to fines and other legal sanctions, including restriction on our ability to contribute additional capital into our PRC subsidiary and our PRC subsidiary's ability to distribute dividends to our offshore holding companies, which will adversely affect our business.

All employee participants in our share incentive plans who are domestic individuals may be required to register with SAFE. We may also face regulatory uncertainties that could restrict our ability to adopt additional option plans for our directors and employees under PRC law.

In December 2006, the People's Bank of China promulgated the Administrative Measures for Individual Foreign Exchange, which set forth the respective requirements for foreign exchange transactions by PRC individuals under either current account or the capital account. In January 2007, SAFE issued the Implementation Rules of the Administrative Measures for Individual Foreign Exchange, which, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen's participation in the employee stock ownership plans or stock option plans of an overseas publicly-listed company. On February 15, 2012, SAFE promulgated the Notice regarding Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Option Plan of Overseas-Listing Companies, or the Stock Option Rule, which substitutes the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed Companies promulgated by SAFE on March 28, 2007. Under the Stock Option Rule, the domestic individuals as defined under the Foreign Exchange Administration Regulations who are granted stock options or other incentive alternatives by an overseas publicly listed company are required, through a PRC agent or PRC subsidiary of such overseas publicly listed company, to register with SAFE and complete certain other procedures.

We and our relevant employees participating in our stock incentive plan are subject to the Stock Option Rule. Failure to comply with the Stock Option Rule and other relevant rules will subject us or our relevant employees participating in our stock incentive plan to fines and other legal or administrative sanctions and impose restrictions on our execution of option plans, including the grant of options under such plans to our employees, which could adversely affect our business operations. As the laws and regulations of PRC in relation to domestic individual's participation in the stock option plan of overseas companies are developing, we may also face regulatory uncertainties that could restrict our ability to adopt additional option plans for our directors and employees under PRC law.

Fluctuation in the value of the RMB may have a material adverse effect on the value of your investment.

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy resulted in an over 20% appreciation of the RMB against the U.S. dollar over the following three years. For almost two years after reaching a high against the U.S. dollar in July 2008, however, the Renminbi traded within a narrow band against the U.S. dollar. As a consequence, the Renminbi fluctuated sharply since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. In June 2010, the PRC government announced that it would increase RMB exchange rate flexibility. However, it remains unclear how this flexibility might be implemented. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in greater fluctuation of the RMB against the U.S. dollar. Substantially all of our revenues and costs are denominated in RMB, and a significant portion of our financial assets are also denominated in RMB. We principally rely on dividends and other distributions paid to us by our subsidiary in China. Any significant revaluation of the RMB may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. Any fluctuations of the exchange rate between the RMB and the U.S. dollar could also result in foreign currency translation losses for financial reporting purposes.

The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with our initial public offering under a PRC regulation. The regulation also establishes more complex procedures for acquisitions conducted by foreign investors that could make it more difficult for us to grow through acquisitions.

On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State Assets Supervision and Administration Commission, or SASAC, the State Administration for Taxation, the State Administration for Industry and Commerce, the CSRC, and SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rule, which became effective on September 8, 2006 and was amended by the Ministry of Commerce on June 22, 2009. The regulations require offshore special purpose vehicles that are controlled by PRC companies or residents and that have been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies or assets to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange. On September 21, 2006, the CSRC published a notice on its website specifying the documents and materials that special purpose vehicles are required to submit when seeking CSRC approval for their listings outside of China. The interpretation and application of the above regulations remain unclear, and the initial public offering which we completed in June , 2011 may require approval from the CSRC, and if it does, it is uncertain how long it will take us to obtain the approval. If CSRC approval is required for the initial public offering, our failure in obtaining or delay in obtaining the CSRC approval for the initial public offering would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies, which could include fines and penalties on our operations in China, restrictions or limitations on our ability to pay dividends outside of China, and other forms of sanctions that may materially and adversely affect our business, results of operations and financial condition.

Our PRC counsel, Allbright Law Offices, has advised us that, based on their understanding of the current PRC laws, regulations and rules and the procedures announced on September 21, 2006, we will not be required to submit an application to the CSRC for the approval of the listing and trading of our ADSs on the New York Stock Exchange, because we do not constitute a special purpose vehicle, as defined by the New M&A Rules, which is required to obtain approval from the CSRC for overseas listing, and no public record is found indicating that any of the issuers having similar onshore corporate structures and already listed on an off-shore stock exchange has been required by the CSRC to procure the approval of the CSRC prior to its listing.

The new regulations also established additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, or that the approval from the Ministry of Commerce be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. We may grow our business in part by acquiring other companies operating in our industry. Complying with the requirements of the new regulations to complete such transactions could be time-consuming, and any required approval processes, including approval from Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

We face risks of health epidemics and other disasters, which could severely disrupt our business operations.

Our business could be materially and adversely affected by the outbreak of swine influenza, avian influenza, severe acute respiratory syndrome, or SARS, or another epidemic. In March 2013, a new virus subtype H7N9, commonly known as "bird flu" or "avian flu," was discovered in eastern China and has already sickened and killed some people. Any adverse public health developments in China could

require the temporary closure of our offices. Such closures could severely disrupt our business operations and adversely affect our results of operations.

Our operations are vulnerable to interruption and damage from man-made or natural disasters, including wars, acts of terrorism, earthquakes, fire, floods, environmental accidents, power loss, communications failures and similar events, all of which may disrupt our business. If any significant man-made or natural disaster were to occur in the future, our ability to operate our business could be seriously impaired.

The enforcement of labor contract law and increase in labor costs in the PRC may adversely affect our business and our profitability.

China adopted a labor contract law effective on January 1, 2008, which was amended by the Standing Committee of the National People's Congress on December 28, 2012, and its implementation rules effective on September 18, 2008, respectively. The labor contract law and its implementation rules impose more stringent requirements on employers with regard to, among others, minimum wages, severance payment upon permitted termination of the employment by an employer and non-fixed term employment contracts, time limits for probation period as well as the duration and the times that an employee can be placed on a fixed term employment contract. Due to the lack of clarity with respect to their implementation and potential penalties and fines, it is uncertain how they will impact our current employment policies and practices. Our employment policies and practices may violate the labor contract law or its implementation rules and we may be subject to related penalties, fines or legal fees. Compliance with the labor contract law and its implementation rules may increase our operating expenses, in particular our personnel expenses, as the continued success of our business depends significantly on our ability to attract and retain qualified personnel. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the labor contract law and its implementation rules may also limit our ability to effect those changes in a manner that we believe to be cost-effective or desirable, which could adversely affect our business and results of operations.

Proceedings instituted by the SEC against five PRC-based accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.

In late 2012, the SEC commenced administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese affiliates of the "big four" accounting firms, (including our auditors) and also against Dahua (the former BDO affiliate in China). The Rule 102(e) proceedings initiated by the SEC relate to these firms' inability to produce documents, including audit work papers, in response to the request of the SEC pursuant to Section 106 of the Sarbanes-Oxley Act of 2002, as the auditors located in the PRC are not in a position lawfully to produce documents directly to the SEC because of restrictions under PRC law and specific directives issued by the China Securities Regulatory Commission. The issues raised by the proceedings are not specific to our auditors or to us, but affect equally all audit firms based in China and all China-based businesses with securities listed in the United States.

In January 2014, the administrative judge reached an Initial Decision that the "big four" accounting firms should be barred from practicing before the Commission for six months. However, it is currently impossible to determine the ultimate outcome of this matter as the accounting firms have filed a petition for review of the Initial Decision and pending that review the effect of the Initial Decision is suspended. The SEC Commissioners will review the Initial Decision, determine whether there has been any violation and, if so, determine the appropriate remedy to be placed on these audit firms. Once such an order was made, the accounting firms would have a further right to appeal to the

US Federal courts, and the effect of the order might be further stayed pending the outcome of that appeal.

Depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, including possible delisting. Moreover, any negative news about the proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our ADSs may be adversely affected.

The market price for our ADSs has fluctuated since we first listed our ADSs. Since our ADSs became listed on the NYSE on June 10, 2011, trading price of our ADSs have ranged from US$3.15 to US$17.90 per ADS, and the last reported trading price on April 10, 2014 was US$5.80 per ADS.

The market price for our ADSs may be highly volatile and subject to wide fluctuations in response to factors within and outside our control including, but not limited to, the following:

In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of any particular companies. These market fluctuations may also have a material adverse effect on the market price of our ADSs.

Substantial future sales or the perception of sales of our ADSs or ordinary shares in the public market could cause the price of our ADSs to decline.

Additional sales of our ADSs or ordinary shares, including ADSs or ordinary shares issuable upon the exercise of our outstanding stock options, in the public market, or the perception that these sales could occur, could cause the market price of our ADSs to decline. If our shareholders sell substantial amounts of our ADSs, including those issued upon the exercise of outstanding options, in the public market, the market price of our ADSs could fall. Such sales also might make it more difficult for us to

sell equity or equity-related securities in the future at a time and price that we deem appropriate. If any existing shareholder or shareholders sell a substantial amount of ordinary shares, the prevailing market price for our ADSs could be adversely affected.

In addition, we may issue additional ordinary shares or ADSs. If we pay for our future acquisitions in whole or in part with additionally issued ordinary shares or ADSs, your ownership interests in our company would be diluted and this, in turn, could have a material adverse effect on the price of our ADSs.

You may not have the same voting rights as the holders of our ordinary shares and must act through the depositary to exercise your rights.

As an ADS holder, you may only exercise voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary will vote the underlying ordinary shares in accordance with these instructions. Otherwise, you will not be able to exercise your right to vote unless you withdraw the ordinary shares underlying your ADSs.

Pursuant to our third amended and restated memorandum and articles of association, we may convene a shareholders' meeting upon ten calendar days' notice. When a shareholder's meeting is convened, you may not receive sufficient advance notice to withdraw the ordinary shares underlying your ADSs to allow you to vote with respect to any specific matter. If we give timely notice, the depositary will notify you of the upcoming vote and arrange to deliver our voting materials to you. We cannot assure you that you will receive the voting materials in time to instruct the depositary to vote the ordinary shares underlying your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote and there may be nothing you can do if the ordinary shares underlying your ADSs are not voted as you requested.

You may not be able to participate in rights offerings and may experience dilution of your holdings as a result.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement for the ADSs, the depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are registered under the Securities Act, or the distribution of them to ADS holders is exempted from registration under the Securities Act with respect to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to rely on an exemption from registration under the Securities Act to distribute such rights and securities. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so due to any requirement of law or of any government or governmental body.

You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited because we are incorporated under Cayman Islands law, conduct substantially all of our operations in China and the majority of our directors and officers reside outside the United States.

We are incorporated in the Cayman Islands and substantially all of our assets are located outside of the United States. We conduct substantially all of our current operations in China through our subsidiary and affiliated entities in China. The majority of our officers and directors reside outside the United States and a substantial portion of the assets of those persons are located outside of the United States. As a result, it may be difficult for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the 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. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state, and it is uncertain whether such Cayman Islands or PRC courts would be competent to hear original actions brought in the Cayman Islands or the PRC against us or such persons predicated upon the securities laws of the United States or any state.

Our corporate affairs are governed by our memorandum and articles of association, as amended from time to time, and by the Companies Law (2013 Revision) and the common law of the Cayman Islands. The rights of shareholders to take legal action against our directors and us, 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 precedents in some jurisdictions in the United States. In particular, because the Cayman Islands law has no legislation specifically dedicated to the rights of investors in securities, and thus no statutorily defined private causes of action to investors in securities such as those found under the Securities Act or the Securities Exchange Act of 1934 in the United States, it provides significantly less protection to investors. In addition, shareholders of Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States.

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than would shareholders of a corporation organized in a jurisdiction in the United States.

Our articles of association contain anti-takeover provisions that could discourage a third party from acquiring us, which could limit our shareholders' opportunity to sell their shares, including ordinary shares represented by our ADSs, at a premium.

Our third amended and restated articles of association contain provisions to limit the ability of others to acquire control of our company 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 our company in a tender offer or similar transaction. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to determine their designations, powers, preferences, privileges and other rights, including dividend rights, voting rights, conversion rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change

in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.

We believe we may be a passive foreign investment company for U.S. federal income tax purposes, which could result in adverse U.S. federal income tax consequences to U.S. Holders of our ADSs or ordinary shares.

Based on the market price of our ADSs and composition of our income and assets, we believe we were a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our taxable year ended December 31, 2013. A non-U.S. corporation will be a PFIC for any taxable year if either (i) at least 75% of its gross income for such year is passive income or (ii) at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income. Because the value of our assets for purposes of the PFIC test may be determined, in part, by reference to the market price of our ADSs or ordinary shares, our PFIC status will depend in large part on the market price of the ADSs or ordinary shares, which may fluctuate significantly. Because we believe we were a PFIC for our taxable year ended December 31, 2013, certain adverse U.S. federal income tax consequences could apply to U.S. Holders (as defined in "Item 10. Additional Information—E. Taxation—United States Federal Income Taxation") of our ADSs or ordinary shares with respect to any "excess distribution" received from us and any gain from a sale or other disposition of our ADSs or ordinary shares. See "Item 10. Additional Information—E. Taxation—United States Federal Income Taxation—Passive Foreign Investment Company."

We have incurred increased costs as a result of being a public company, and we cannot predict or estimate the amount of additional future costs we may incur or the timing of such costs.

As a public company, we have incurred a significantly higher level of legal, accounting and other expenses than we did as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the New York Stock Exchange, have required changes in the corporate governance practices of public companies. These rules and regulations have increased our legal, accounting and financial compliance costs and made some of our corporate activities more time-consuming and costly.

After we became a public company, we have established additional board committees and adopted and implemented additional policies regarding internal controls over financial reporting and disclosure controls and procedures. In particular, compliance with Section 404 of the Sarbanes-Oxley Act, which requires public companies to include a report of management on the effectiveness of their internal control over financial reporting, has increased our costs. In addition, we have incurred costs associated with public company reporting requirements, such as the requirements to file an annual report and other reports with the SEC. We expect these rules and regulations to increase our legal and financial compliance costs going forward, but we cannot predict or estimate the additional costs or the timing of initially additional costs we may incur.

Our legal and commercial name is Taomee Holdings Limited. We commenced operations of our business of children's online entertainment in October 2007 through Shanghai Taomee, a limited liability company established in China. Shanghai Taomee holds our licenses required for the above business under PRC laws and is in charge of the operation of our websites for our virtual worlds. To enable us to raise capital from international investors, our holding company, Taomee Holdings Limited, was incorporated under the laws of the Cayman Islands in September 2008.

In November 2008, we incorporated Taomee Holdings (HK) Limited, or Taomee HK, our wholly-owned subsidiary in Hong Kong. In June 2009, Taomee HK established its wholly-owned subsidiary, Shanghai Shengran, in China. We operate our virtual worlds through our VIE, Shanghai Taomee. In June 2009, through Shanghai Shengran, we entered into certain contractual arrangements with Shanghai Taomee and its shareholders through which we gained effective control over the operations of Shanghai Taomee.

On June 10, 2011, our ADSs began trading on the New York Stock Exchange under the ticker symbol "TAOM." We issued and sold a total of 7,187,500 ADSs, representing 143,750,000 ordinary shares, at an initial offering price of US$9.00 per ADS.

On July 13, 2011, the underwriters of our initial public offering exercised their over-allotment option to purchase an additional 525,224 ADS from us at the initial public offering price of US$9.00 per ADS, less the underwriting discount. With this exercise, we issued and sold a total of 7,712,724 ADSs, representing 154,254,480 ordinary shares.

On November 28, 2011, we announced a share repurchase plan to repurchase up to US$10 million worth of outstanding American Depositary Shares ("ADSs") (each ADS represents twenty ordinary shares of the Company) over a 12-month period. On September 28, 2012 and November 26, 2013, respectively, we extended the share repurchase plan for another 12 months from November 23, 2012 to November 23, 2013, and from November 24, 2013 to November 23, 2014, respectively. On March 28, 2014, we announced a share repurchase plan to repurchase up to US$10 million worth of outstanding ADSs over a 12-month period. As of December 31, 2013, we had repurchased an aggregated of 1,064,177 ADSs, representing 21,283,540 ordinary shares on the open market for total cash consideration of US$4.4 million.

In the first quarter of 2012, Shanghai Taomee entered into an investment agreement of US$0.1 million with Guangzhou Chuangyou Information Technology Co., Ltd., or Chuangyou, a company principally engaged in the design and development of online games in China, to acquire 6.0% of Chuangyou's equity interest and a contingent call option to further subscribe 13.16% newly issued equity interest for US$0.6 million. In September 2012, Shanghai Taomee exercised the call option and completed the further acquisition in January 2013, resulted in 19.16% equity interest in Chuangyou. In December 2013, Chuangyou entered into an agreement to issue new shares for RMB2.5 million (approximately US$0.4 million) to a new investor. The Company's equity share in Chuangyou will be diluted to 9.58% upon the closing of the transaction Chuangyou is a related party of us, as one of Chuangyou's investors is our director and principle shareholder.

On June 1, 2012, we incorporated Guangdong Taomee Animation Technology Co., Ltd., or Guangdong Taomee, under the laws of PRC, which primarily focuses on the design and distribution of toys, trading cards as well as other products. Shanghai Taomee and an individual shareholder, Mr. Jinjun Zhao, are registered as the shareholders of Guangdong Taomee, holding 80% and 20% of the equity interest in Guangdong Taomee, respectively. Notwithstanding the foregoing, among the equity interest in Guangdong Taomee currently registered under the name of Mr. Jinjun Zhao 15% of the equity interest in Guangdong Taome is nominally held by Mr. Jinjun Zhao and is subject to a vesting schedule as provided under the Subscription Agreement entered into between Shanghai Taomee and Mr. Jinjun Zhao on June 1, 2012, where one third of the foregoing 15% equity interest will be allocated to Mr. Jinjun Zhao annually upon the anniversary of each one year period for his employment in Guangdong Taomee. As a result, as of December 31, 2013, one third out of the 15% equity interest in Guangdong Taomee nominally held by Mr. Jinjun Zhao, i.e. 5% equity interest in Guangdong Taomee, has been allocated to Mr. Jinjun Zhao, and therefore Mr. Jinjun Zhao actually held 10% equity interest in Guangdong Taomee and our equity interest in Guangdong Taomee was 90%.

In September 2012, we obtained a minor equity interest in Gamespedia Holdings Limited, or Gamespedia, a Cayman Island company which operates its mini game portal website through its wholly owned subsidiaries and VIEs in China, with total consideration of US$6.2 million.

In October 2012, we incorporated Shanghai Xinsheng Information Technology Co., Ltd., or Shanghai Xinsheng, a PRC company wholly owned by Shanghai Shengran which focuses on software development.

In February 2013, we acquired a minority equity interest in Voozclub Co., Ltd., or Voozclub, a Korea-based character and animation studio with an established presence in global brand licensing, online games, publishing and theme parks for a cash consideration of US$1.4 million.

In March 2013, Shanghai Taomee entered into an agreement to set up Shanghai Taoyue Information Technology Co., Ltd. or Taoyue, a new online game development company, with five third-party individuals, of which Shanghai Taomee held a 40% equity interest for a cash consideration of RMB2.0 million (approximately US$0.3 million). In January 2014, Shanghai Taomee agreed to transfer such 40% equity interests in Taoyue to an existing investor of Taoyue for a cash consideration of RMB2.0 million (approximately US$0.3 million).

In May, October and November 2013, we incorporated Shanghai Taomee Wireless Technology Co., Ltd., Shanghai Taomee Software Development Co., Ltd. and Shanghai Taomee Property Service Co., Ltd., respectively, all of which are PRC subsidiaries of Shanghai Shengran. The three companies are incorporated for the purchase of land use rights and building in Songjiang, Shanghai.

In September 2013, we entered into an investment agreement to acquire minority stake of a Beijing-based pre-school education service provider for a consideration of US$2.0 million.

In September 2013, we entered into an investment agreement with two third-parties to establish a joint venture, Jiangxi Haomi Network Technology Co., Ltd., or Jiangxi Haomi, a company which develops family entertainment and education application on mobile and multi-screen platforms in China. We paid a consideration of RMB12.9 million (approximately US$2.1 million) for 43.0% equity interests in Jiangxi Haomi.

In December 2013, we acquired a minority stake of a New York City company that develops mobile applications, animation and products for pre-school children for a cash consideration of US$150,003.

In January 2014, we entered into an agreement with Shanghai Weiju Network Technology Co., Ltd ("Shanghai Weiju"), a Hi-tech toy design and R&D company to subscribe for 25% of Shanghai Weiju's newly issued ordinary shares for cash consideration of RMB3.0 million (approximately US$0.5 million).

Our principal executive offices are located at 16/F, Building No. A-2, No. 1528 Gumei Road, Xuhui District, Shanghai 200233, People's Republic of China. Our telephone number at this address is (86-21) 6128-0056 and our fax number is (86-21) 3367-4012. Our registered office in the Cayman Islands is at the offices of Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.

Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our corporate information website is located at www.taomee.com. The information contained on our corporate information website is not part of this annual report. Our agent for service of process in the United States is CT Corporation System located at 111 Eighth Avenue, New York, NY 10011.

We are one of the leading children's entertainment and media companies in China. We attribute our market position to our content development and cross-media platform capabilities that leverage our innovative culture, experience in the children's entertainment market in China, and knowledge of virtual worlds and online entertainment to create enduring and iconic characters, images and story lines that attract a loyal following among children of the targeted age groups. Our success in developing branded entertainment experiences across online and mobile platforms has translated into growing demand for our franchises offline. By investing and building a cross-media platform that expands to mobile and offline, we reduced our dependency on content distribution through online virtual worlds and web games, which we believe could enhance our brand awareness and extend franchise life cycle. We are committed to delivering exceptional entertainment to children and families and leveraging our cross-media platform and child-centric culture.

We have a proven track record in creating branded franchises popular with children and their families through our cross-media platforms comprised of virtual worlds, print media, film, television, live events, online video streaming sites, mobile applications, and social networking sites. As a confirmation of our positive and significant influence on children, we were awarded in 2012 by China's Ministry of Culture the "National Culture Industries Demonstration Base," a specially designated business classification which the central government grants to Chinese cultural and media-related enterprises with leading influence in this filed.

Established in 2007 in Shanghai as the first children's entertainment company in China, we launched our first online product Mole's World in September 2008, which became a leading popular brand among children and families. With encouraging participation and feedback from users, we successfully launched several online virtual worlds and other entertainment products in the following years, including our major franchises of Seer, Flower Fairy and Gong Fu Pai. To further strengthen our leading market position, we established our publishing and licensing businesses in 2010, and expanded into merchandise licensing, film and cartoon animation. As of December 31, 2013, we had launched five films featuring Mole's World and Seer. To further promote our brand we have produced approximately 250 episodes of cartoon animation broadcasted over more than 130 TV channels throughout mainland China and Taiwan. In October 2011, we also expanded into mobile front by releasing the mobile version of Mole's World, which is our first mobile game. Since then, we have released additional mobile games and applications, and our accumulated mobile downloads on Apple iOS and Android platforms had increased to over 25.5 million as of December 31, 2013.

Our success is partly due to our efforts to reinforce parental trust by creating a safe and enjoyable entertainment environment with wholesome, age-appropriate content and standard-setting security safeguards. We set corporate social responsibility standards and nurture a corporate culture that embraces family values and encourages education and learning. We believe we were the first children's entertainment company in China to launch a separate online monitoring portal, "Taomee MaMa," which we believe increases online safety for children through parental engagement.

We have achieved substantial growth since we launched our first virtual world, Mole's World, in September 2008. Our net revenues amounted to US$45.4 million in 2011, US$40.2 million in 2012 and US$48.4 million in 2013. For 2011, 2012 and 2013, 88.8%, 80.0% and 73.1% of our net revenues, respectively, were generated primarily from subscription fees that allow users to access premium features, sales of virtual items, mobile games, online video platform, as well as other online services, and the remaining 11.2%, 20.0% and 26.9% of our net revenues, respectively, were generated primarily from royalties, license fees, film box office sharing, and sales of interactive toys from our offline business. Our gross profit amounted to US$37.7 million in 2011, US$30.2 million in 2012 and US$35.1 million in 2013. Our net income was US$19.5 million in 2011, US$8.9 million in 2012 and US$5.4 million in 2013.

We have created and developed branded entertainment franchises, including our major franchises of Mole's World, Seer, Flower Fairy and Gong Fu Pai. In addition, we have also obtained from Voozclub Co., Ltd., or Voozclub, a character development company incorporated in Korea, the exclusive license to operate the franchise of Canimals in Mainland China and additional three franchises for our future pipeline. Our brands and franchises have expanded into various online and offline platforms including the virtual worlds, video streaming site, mobile applications, social networking, merchandising and interactive toys.

Introduced in September 2008, Mole's World is our first and one of our most popular franchises. This franchise features a community of cuddly red-nosed moles living in a variety of settings and landscapes, and who collaborate and interact in many social activities that promote wholesome family values, friendships, and happiness.

We have launched virtual worlds including Mole's World and Mole Hero based on this franchise, and also introduced mobile games such as Mole Kart and Mole's Baby. In 2012, our Moles' World series of casual mobile games attracted a diversified audience and broadened our user base to young adults aged 18 to 30. We plan to launch other virtual worlds and mobile games based on this franchise in the future.

Certain animated characters of our Mole's World franchise, including Princess Momo, Uncle Bodhi, and Professor Kevin, have become highly popular among children in China. We license these characters to publishers, makers of consumer products in areas such as clothing, toys and food and beverages. In 2011 and 2012, we further introduced the franchise to television and film. The movie Mole's World II received the "Monkey King Award" for best writing in 2012. During the China Animation Committee's Annual Meeting. Mole's World animation series was ranked the sixth most beloved domestic cartoon animation in 2012 by the China Animation Association. Our expansion of Mole's World franchise to TV animation has enabled us to expand the fan and audience base to preschool children, and many new fans today are introduced through TV, film and books rather than online games.

Introduced in September 2009, Seer is one of our most popular franchises. The Seer franchise primarily appeals to boys between six and 14 with a theme of space exploration and adventure. Virtual worlds and games in the Seer franchise offer a sci-fi adventure experience which fosters children's interest in science and environmental protection. For example, in the Seer virtual world, users travel through various different planets in search for new energy sources and often have to form teams with other users to defend against attacks launched by space pirates who seek to monopolize energy reserves in outer space.

We believe the Seer virtual world encourages strong teamwork and high levels of interaction among users. The Seer virtual world integrates mini-challenges that encourage children to explore, discover and learn about physics, chemistry and mathematics. Our users often interact with classmates, parents and teachers to solve challenges.

In November 2011, we launched a sequel virtual world Seer II, which becomes a popular virtual world among children and a major revenue contributor as part of our Seer franchise. In June 2013, we launched the mobile game Seer: Universal Force on Apple's iOS platform in conjunction with related film and offline products. We plan to launch other virtual worlds and mobile games based on this franchise in the future.

Certain animated characters of our Seer franchise, including Mechanic Xixi, Captain Roger and Elf Rey, have become highly popular among children in China and we license these characters to publishers, as well as makers of consumer products, such as clothing, toys and food and beverages. In 2011, 2012 and 2013, we launched films and an animated television series based on this franchise. In 2013, we launched Seer III: Universal Force franchise, the first time in our history that we launched a franchise storyline simultaneously across film, online web and mobile games, as well as consumer products, interactive toys, books and trading cards.

The Seer franchise has received several awards, including being ranked the second most beloved domestic cartoon animation in 2012 by the China Animation Association, and the Golden Dragon Award for "Best Animated Feature Film" in 2011 for the Movie, Seer: The Search for the Sacred Phoenix.

We introduced Flower Fairy, our first franchise appealing to younger girls from five to 10, in June 2010. In the Flower Fairy virtual world, each user chooses from a variety of fairy attributes and flower worlds to create a dream-like fairytale storyline. The user's fairy is in charge of tending her own garden, cultivating various flowers and plants, and decorating her homes. The storyline promotes artistic expression, happiness, creativity, responsibility and cooperation. Certain animated characters, including Princess Wisdom and Princess Benevolence, have become highly popular among children in China. We have integrated many of the aforementioned attributes that promote healthy development of children into the franchise. In February 2014, we introduced an animated television series based on this franchise to further promote our products.

We believe that TV animation series could extend the life cycle of the online game, expand the audience's fan base, and support additional monetization opportunities.

We introduced Gong Fu Pai in September 2010 as our first martial art-themed franchise, and a franchise appealing to users slightly older than our existing franchises at the time. The Gong Fu Pai virtual world allows users to learn, explore and discover by interacting with other characters. Players select and adopt a character, including Monkey Paipai, Rabbit Yier, Panda Big Bamboo and Dragon Aotian. By attending a martial arts academy, they learn wholesome values and skills to embark in a series of fantasy adventures. The Gong Fu Pai franchise currently appeals to boys primarily between the ages eight and 15.

In 2012, we have obtained from Voozclub the exclusive license to operate the franchise of Canimals in Mainland China. Voozclub, incorporated in Korea, is a character development and animation studio that produces merchandise concepts and style guides, digital applications and animation, and also licenses the content and characters to global partners. The characters produced by Voozclub differ from our own set of characters, therefore they further help strengthen and diversify our platform franchises. Canimals includes the alien animal characters of Ato, Nia, Fizzy, Mimi, Pow, Toki, Leon, Uly and Oz, and is a franchise appealing to tweener and teenagers, primarily girls between the ages nine and 18. We have also launched Canimals mobile applications and animations produced by Voozclub. Furthermore, our licensing relationship with Voozclub provides us with the right to operate additional three franchises developed by Voozclub for our future pipeline.

We provide a diverse portfolio of services and products through two business segments: online business, and offline business.

The online business includes developing and operating online virtual worlds, other online entertainment services as well as mobile applications. Our online business achieved significant scale through the strength of our robust technology platform and targeted distribution network. Our reliable and flexible proprietary technology platform, coupled with our experienced research and development team, allows us to quickly expand our user base, enhance the online experience of our users and shorten development cycles. Our platform is supported by a national distribution network spanning 118,200 retail outlets that are primarily located near schools or other places frequented by target users in over 2,200 towns and cities across China as of December 31, 2013.

Since our inception in 2007, we have successfully launched over ten virtual worlds featuring our core franchises including Mole's World, Seer series, Flower Fairy and Gong Fu Pai for children between the age of five and 15. In our virtual worlds, all of which are all accessible through our online community, www.61.com, children adopt avatars and participate in interactive games and activities set in fantasy landscape with evolving story lines. We have also licensed several third-party games hosted on our servers and have links on our website to third-party hosted games. We believe our virtual worlds have a market overseas as well, and we have licensed the content to partners throughout Asia. Our current international expansion strategy is to leverage our content and technology platform by establishing brand recognition and an active online community through virtual worlds, online games, and mobile applications. Depending on geography, market and other factors, we also intend to strengthen our brand presence and monetization of our franchises overseas through offline channels, including films, TV animation, live events, and merchandise licensing.

We believe all our virtual worlds provide a safe and educational entertainment experience for children. We have adopted a number of safety measures to protect our young users and reassure their parents by providing them with a certain level of family supervision through our uniquely designed monitoring system, Taomee MaMa, for example, is a website dedicated to parents and caregivers to assist in the finding, reviewing, sharing and monitoring of children's entertainment websites, applications and products targeting the parenting community. See "—Online security features." Our virtual worlds also encourage the development of positive morals and values in children by rewarding acts of diligence, social responsibility and teamwork. From time to time, we design virtual worlds that focus on fostering children's interest in science and the environment through interactive playing with our NPCs and other users.

The premium features of our virtual worlds are only available to users who pay for a 30-day subscription. These users enjoy additional capabilities and special privileges, such as having a higher upper limit for the total number of friends that the users can have and access to exclusive online parties.

In addition to generating revenues through subscriptions, we also have an item-based revenue stream. Our virtual world currency, the Mibi, can purchase coveted items such as special edition clothing, accessories, and upgrades, which cannot be redeemed by virtual rewards from the in-community experience. For instance, with the Mibi, a user can upgrade his or her standard virtual home into a two-story home or a castle, and furnish the virtual homes with chandeliers, drum sets, televisions, aquariums and other unique and exclusive items.

To further build our franchises and animated characters, we expanded into mobile platforms and have launched a diversified product and applications portfolio offering over 20 mobile games and applications. Since the release of our first mobile game, Mole's World iOS version in October 2011, we have further expanded our mobile game portfolio, including multiple games based on Seer franchise and Mole's World franchise. Our mobile applications include the mobile version of Taomee MaMa launched in March 2012, over ten e-books released as of December 31, 2013 which feature the Mole's World franchise, and Seer and Mole's World animation application on Apple's iOS platform. Many of these products have been ranked the "most downloaded" applications on several application platforms in mainland China, Hong Kong and Taiwan.

All of our mobile games and applications can be downloaded onto iPhones and iPads through Apple's App Store, and some games can also be downloaded onto Android-based mobile devices. We may charge a fee for download or provide free download of our mobile products, depending on the nature of our different types of products and relevant distribution strategies; while we may have an in-application purchase system for virtual items. As of December 31, 2013, the number of downloads for the mobile applications operated by the Company has reached approximately 25.5 million on Apple iOS and Android platforms collectively.

We remain focused on further developing and expanding our mobile game and applications offerings as we see more users interacting with our characters and franchises from mobile devices. In November, 2013, we reorganized our wireless division and launched a new studio named "Glove Game" to develop mobile games. Our "Glove Game" brand and studio will focus on developing mainstream mobile games, and no longer focuses solely on developing applications to build and market our brands.

In January 2012, in cooperation with a number of China's leading online video websites that have obtained the audio/video program transmission licenses, we launched v.61.com, a website that offers animation series based on our franchises, such as Seer and Mole's World, as well as other content from these websites. In 2013, our monthly average page views exceeded 200 million. By the end of 2013, we had over 130,000 cartoon animation series available online.

In November 2012, we jointly developed with Turner Broadcasting System Asia Pacific (the parent company of Cartoon Network) ben10.61.com, a dedicated Chinese online zone for Ben 10 fans featuring videos, online games, wallpaper downloads, e-comics and character profiles.

We have established a system of stringent protection mechanisms which employ a number of different approaches to improve child safety and facilitate parental supervision. Our security features include powerful content and language filters, restrictions on advertisements and access time, as well as a separate parental community and monitoring site, "Taomee MaMa." We believe these measures reinforce parental trust, promote the healthy use of our virtual worlds in moderation at a young age, and protect children from inappropriate content online.

Recognizing the importance of protecting children's privacy online, we take extensive measures to safeguard our users' identities. Our weekly newsletters and user notifications remind users not to share personal information online. We encourage children to use a series of pre-designed phrases to communicate with others within our fantasy world. While we allow online chatting to foster our user communication, we also have powerful content and language filters to prevent the sharing of telephone numbers or other personal information and screen out language that may be inappropriate for children.

Chats are also monitored by our staff moderators to prevent the use of abusive language and other inappropriate behavior, and we impose bans of varying length on users who are found to have engaged in inappropriate behavior. We encourage users to report potential offenses to us in an online "neighborhood watch" program.

In addition, we aim to create a healthy online environment suitable for children playing our self-developed virtual worlds and games. There is daily server downtime between the hours of 00:00 and 06:00 in Mainland China to encourage children to form healthy Internet usage habits. For every 45 minutes of continued access, children receive a visual reminder and after two hours of continued access, users will experience a decrease in the rate of virtual reward accumulation. These measures encourage our users to develop moderate and sustainable usage habits.

We launched our website for parents and caregivers, "Taomee MaMa," in January 2010, as a monitoring and communications channel for parents and guardians. We put in place a sophisticated monitoring system, through which email addresses and cell phones registered by parents and guardians are tied to their children's user accounts to closely track children's time spent in our virtual worlds. Parents can also send inquiries and suggestions to our staff and communicate with other parents on Taomee MaMa's discussion board.

Through cooperation with the Children and Internet Laboratory at Fudan University's Media Research Center, we developed the first set of guidelines in China for families that want to understand the influence of Internet use on children. The guidelines address concerns over safety, security and educational value of Internet usage for children in China.

To access our interactive virtual worlds, a user must register an account by setting up a unique account number. Once registered, the user may access all of the interactive virtual worlds in our online entertainment community with their unique account number. Once the user accesses his or her account, the user may view information on Mibi account balance, payment history and recharge the Mibi account.

We offer the basic functions of our virtual worlds to users for free, and we charge a RMB10 (US$1.7) 30-day subscription fee per virtual world for accessing premium features in each of our virtual worlds. Premium features significantly enhance user experience by providing users with more in-community credit and virtual items. Our virtual items include props, clothing, home decor and accessories. We have generally maintained stable pricing for subscriptions to premium features of our virtual world and in-community items since their launch.

Users conduct all of the transactions on the www.61.com interactive community with our own virtual currency, the Mibi. Users may recharge their Mibi accounts through prepaid cards or other third-party payment channels.

Users can purchase our prepaid cards through various distribution channels. Each of our prepaid cards contains a unique access code and password that enables users to recharge their Mibi account. Our prepaid cards are offered in denominations of RMB10 (US$1.7) , RMB30 (US$5.0) and RMB50(US$8.3), to provide flexibility to users. Our physical prepaid cards will expire on the expiration date printed thereon, which is generally two years after the date of card production. We offer both physical cards and cards in virtual form which are sold online through a third-party vendor.

We sell our physical prepaid cards through a network of third-party distributors. We typically collect payment from our distributors upon delivery of our prepaid cards. We sell the prepaid cards to our distributors at a pre-negotiated discount on the face value of the cards. Our distribution agreements also contain pre-set sales targets and offer a volume rebate to distributors if they achieve certain pre-set sales targets. The rebate is provided to these distributors in the form of free prepaid cards. The pre-negotiated discount rate is generally more favorable to wholesale distributors with higher sales volume. Our distribution agreements generally have a term between half a year and one year, which can be renewed through the agreement of both parties. We require our distributors to distribute prepaid cards in designated geographical areas. We also require that each distributor work closely with our marketing team and support its activities. As of December 31, 2013, these distributors resell the cards to sub-distributors who, in turn, distribute the cards to over 118,200 retail outlets, such as newsstands and convenience stores, in over 2,200 towns and cities across China, many of which are strategically located near schools and other places frequented by target users.

Our virtual prepaid cards are sold via third-party online distributors and via SMS through telecom operators. We also offer the distributors of our virtual cards a pre-negotiated discount on the face value of the cards and a volume rebate.

Users may purchase the Mibi at the www.61.com payment center, where they can directly charge their account. We also accept online payment from a variety of payment channels popular in China, such as debit cards, Shanda game cards, China Mobile recharge cards and Alipay, among others. We pay a processing fee to banks and other third-party payment channels in connection with such payments.

Our offline business focuses on merchandise licensing, publishing, design and distribution of interactive toys, as well as the development of media and entertainment products, such as films, and self-branded TV shows.

Due to the growing popularity of the Taomee brand and our many franchises, we began licensing characters and images to third parties in 2009, and have achieved significant growth since then. We believe there is significant demand to license our content, but we seek to enter into licensing arrangements selectively in order to ensure the quality and integrity of our brands and franchises when they are associated with third-party content, products and services. Therefore, we have only licensed our characters and images to companies that are leaders in their respective sectors, such as traditional print, film, television media, manufacturing and select retailers of consumer merchandise such as toys, apparel, beverages and electronic devices. While we currently leverage our franchises developed for virtual worlds for our offline franchising, our goal is to develop original content for our offline business as well. Our coverage in offline business aims not only to diversify our revenues but also to raise our brand profile and extend our corporate reach as a leading children's entertainment and media company in China.

We develop and popularize children's books and magazines featuring our franchises and characters in conjunction with third-party publishers. We typically license our franchises to publishers and earn royalties from these licenses.

We license our franchises to leading brands in China, such as "Bright Dairy" and "China Citic Bank" and other consumer goods makers in categories such as apparel, toys, accessories, stationery, consumer electronics, and food and beverages. As of December 31, 2013, we licensed our franchises to

companies operating in major consumer product categories including apparel, accessories, toys, stationery, consumer electronics, food, beverage, books, theme parks, live shows, and carnivals. Our license fees are usually based on a fixed percentage of the wholesale or retail selling price of the products with a guaranteed minimum payment for a given year. Terms of our license agreements are generally between one to two years.

We have invested in the development of animated film and television content in China due to the growing popularity of our franchise and characters. Our investments include the development of animation films based on our Mole's World franchise and Seer franchise. In addition, we have set up a dedicated team that focuses on content development for film, which work with experienced producers of films and televisions series.

We have co-produced and invested in five featured films, based on our "Mole's World" and "Seer" franchises. Our two animated movies based on our franchises, Seer: The Search for the Sacred Phoenix and Legend of the Moles—The Frozen Horror, were released in theaters across China in July and August 2011 respectively. As a follow up to those successful movies, we launched two sequels nationwide; Seer II and Mole's World II, on June 28, 2012 and July 5, 2012, respectively. In June 2013, we further launched the third sequel movie of Seer franchise, Seer III: Universal Force, in conjunction with online web and mobile games, as well as consumer products, interactive toys, books and trading cards. The movie has been watched by over 2.1 million audiences according to the public information provided by EntGroup.cn. In November 2013, we released the film on several China's leading online video and internet TV platforms, including Best TV, Tencent Video, iQiyi and Youku Tudou.

To further promote our franchise and brand, we have also co-produced and invested in animation series of approximately 250 episodes combined based on our "Mole's World", "Seer" and "Flower Fairy" franchises, which have been broadcasted on over 130 channels including China Central Television, major satellite channels, China's leading cartoon networks and our website v.61.com.

On February 1, 2013, we launched a new self-branded children's television show called Taomee Dream School on major cartoon channels and TV stations across China. The television show, which also can be seen at http://dream.61.com/, serves as the designated television platform for premiering our original animation content.

We also procure and sell interactive toys featuring our franchise. In the second quarter of 2012, we established Guangdong Taomee Animation Technology Co., Ltd. or Guangdong Taomee, a company incorporated in Guangzhou, Guangdong, China which primarily focuses on the design and distribution of toys, trading cards as well as other products.

Our products may also offer unique promotional and interactive features that allow our customers to explore and interactive with our online platform. As we continue to gain experience in our offline business, we are always seeking new offline business and marketing opportunities to expand our portfolio and to attract users to our online community.

As our franchises are our valuable assets, we focus on the protection of these franchises through careful selection of leading and reputable merchandising partners and other licensees, and through enforcing the implementation, primarily through contract terms and through our course of dealings and active monitoring mechanisms, of procedures on the branding of our franchise assets. These include stringent production quality measures, standards on the portrayal or presentation of our franchises in different media formats and in merchandises, and strict pre-approval processes. For films and television productions, we control the development of each story line, including the shooting scripts; for books, we have approval rights on the plot lines and character presentations; for merchandise, our approval is often required during the development of prototypes and packaging and, under most circumstances, we also have the right to conduct onsite inspections and to request modifications of displays.

Leveraging the extensive user base of our online entertainment community, we also employ in-community market surveys to analyze user demand and preferences before licensing our franchises for specific commercial productions of our licensed franchises, which we believe improves the success of the products that bear our franchise assets.

We plan to release more virtual worlds every year, and to increase our product development capabilities into more interactive online entertainment platforms including mobile games in order to expand our audience and to satisfy our users as they mature and grow older. We will continue to release more mobile games for both iOS and Android platforms. In our offline business, we will continue to invest in films, animation series, books, and TV programming including the release of our third movie based on the Mole's World franchise and the fourth film based on the Seer franchise in the summer of 2014. We also plan to design and develop interactive toys and merchandise that may integrate features that interact with our online platform.

Our quarterly results of operations may be affected by seasonal trends caused by user behavior and demand for our online and offline offerings. We expect our net revenues from online business to be higher during winter and summer vacations when there are more active users and children have more online playtime during these non-school days, which usually falls in the first and third quarters of each calendar year. Decreases in our net revenues from online business, if any, as a result of seasonality may be most visible from the third quarter to the fourth quarter of each year, as the fourth quarter has less than half of the non-school days compared to the third quarter. Moreover, the sequential decline from the first to the second quarters accentuated because Chinese New Year, a period when children have increased pocket money, typically falls in the first quarter. These seasonality trends generally manifest themselves more clearly with respect to more mature virtual worlds and less clearly during periods of high growth that accompany the introductory stages of a highly popular virtual world.

Seasonality of our offline business is affected by the different consumption patterns influencing different media formats or product categories for our licensed franchises and the mix of media formats and product categories. For instance, sales of certain toys and stationery sold near primary schools may decrease during winter and summer vacations, while sales of clothing may increase during such periods. In addition, our business may also be affected by the timing of new launches of content and product, such as the release of a film or TV animation series.

As a leading children's entertainment and media company, we face competition from both online and offline players who seek to develop brands and franchises through the licensing or creation of

content for children. Currently, our offline competitors are primarily companies that produce, license, or distribute entertainment content and merchandise to similar target groups in China. Meanwhile, the children's online entertainment industry in China is characterized by relatively low capital requirements and barriers to entry. There are a number of existing competitors in the children's online entertainment industry and we expect more entrants to offer a range of virtual worlds and digital contents targeting children in China in a relatively short period of time. We believe our principal competitors in online children's entertainment in China include Tencent Holdings Limited, or Tencent, the developer of Roco Kingdom and Guangzhou Baitian Information Technology Ltd., the developer of Aola Star and Aobi Island. Potential competitors also include major Internet portal operators, other domestic and foreign virtual world developers and operators, media companies focused on children's entertainment and alliances between our existing and new competitors. We also face competition on the mobile front with respect to mobile applications, as there are an increasing number of Internet companies in China tapping into the mobile market with applications and services targeting children. We also face these and other competitors in our offline business, including Guangdong Alpha Animation and Culture Co., Ltd, a company listed in Shenzhen Stock Exchange which primarily engages in toy and animation industry (Ticker: 002292). Some of our competitors, especially major foreign and China-based publicly listed media and virtual world operators, have significantly greater financial and marketing resources and name recognition than we have. Our competitors may adopt loss-leading pricing or other tactics or business models to attract our users. See "Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We may not be able to maintain our revenues and profitability as we operate in a competitive industry and compete against many companies."

We believe we compete primarily on the basis of our innovative culture and proven content development capabilities, our understanding of children and the industry, our brand recognition, our advanced technology platform and our strong commitment to online safety.

As of December 31, 2013, our dedicated customer service team had 86 employees, mostly serving our online users. From our inception, we have focused on catering to the needs of children and their parents and this focus is reflected in all major aspects of our service.

All members of our customer service team receive training on how to communicate with children and their parents. Our call center functions as an extension to users' online experience. For instance, unlike most call centers where customer support is identified by a numeric ID, each member of our customer service team is assigned a unique nickname. Users can reach our customer service by telephone, email or our online bulletin board. Periodic reports based on these feedbacks are provided to our management and operational team. We frequently hold "Taomee Superdays" when we invite children and parents to visit our office and meet our creative team.

We believe user referral is a significant and effective medium for promoting our franchises among children as they share their experiences with friends and schoolmates.

We also leverage the large user base of our online community to engage in effective and targeted cross-selling of our online and offline products and services. We publicize the launch of new franchises primarily through promotion campaigns in our existing virtual worlds, online services and mobile applications. We also embed promotional messages in our digital products for certain licensed products sold offline. We believe such cross-selling through our online community is one of the most effective means for promoting online and offline services to our users. We also place advertisements on search engines and popular casual game portals in China to reach new users. Our distributors, who cover over

118,200 retail outlets in over 2,200 towns and cities as of December 31, 2013, are obligated to promote our prepaid cards according to the terms of our distribution agreements with them.

We believe the films and television series based on our franchises, such as the films and television series based on Mole's World and Seer that were released in 2011, 2012 and 2013, are an important part our effort to build brand awareness and promote our franchises to a broader audience within a short time. See "—Our Business Segments—Offline Business."

For a number of our licensed products, such as trading cards and books, we bundle the products with labels and promotion materials containing redemption codes for virtual items to promote cross-selling of our online and our licensees' products.

We also attend animation and toy exhibitions and expos, such as the Chinajoy Digital Entertainment Expo and Conference that usually attract a large number of children and their parents to reach more potential users.

We actively safeguard our copyrights, trademarks, trade secrets and similar intellectual property. We rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, suppliers and others to protect our proprietary rights. All of our research and development personnel have entered into confidentiality and proprietary information agreements or contract clauses with us. These agreements address intellectual property protection issues and require our employees to assign to us all of the inventions, designs, and technologies they develop during their employment with us.

As of December 31, 2013, we had received approval for 351 and 7 trademark registrations in China and Taiwan respectively and are in the process of applying for registration of 46 trademarks in China. In addition, we have obtained 69 copyright registrations for software we developed, 4 copyright registrations for Mole's World and Seer animation series and 392 copyright registrations for artworks which were produced by our employees and owned by us. We also registered 39 domain names, including www.61.com, our primary operation website, and www.taomee.com, our corporate information website.

Under the contractual arrangements we enter into with producers of film and television series, we either wholly own or jointly own the intellectual property rights for newly created characters in the television series and films we help develop.

While we actively take steps to protect our proprietary rights, such steps may not be adequate to prevent the infringement or misappropriation of our intellectual property. This is particularly the case in China where the laws may not protect our proprietary rights as fully as in the United States. Infringement or misappropriation of our intellectual property could materially harm our business.

We had 575, 640 and 623 employees as of December 31, 2011, 2012 and 2013, respectively. The following table sets forth the number of our employees categorized by areas of operations as of December 31, 2013:

Our success depends on our ability to attract, retain and motivate qualified personnel. We believe we offer our employees competitive compensation packages, and we have generally been able to attract and retain qualified personnel and maintain a stable core management team. For a description of the employment agreement we signed with some members of our senior management, see "Item. 6. Directors, Senior Management and Employees—C. Board Practices—Employment Agreements."

Substantially all of our employees are based in the PRC. In accordance with PRC laws, we participate in employee benefit plans organized by municipal and provincial governments, including pension, work-related injury benefits, maternity insurance, medical insurance, unemployment benefit and housing fund plans. We are required under PRC laws to make contributions to the employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government. A labor union of our employees was established to represent employees with respect to labor disputes and other employee matters. We believe that we maintain a good working relationship with our employees and we have not experienced any significant labor disputes or disputes with the labor department of the PRC government since our inception.

We are headquartered in Shanghai and have leased an aggregate of approximately 8,890 square meters of offices in Shanghai from independent third parties and do not own any real property.

In May 2013, we entered into a land pre-development cooperation agreement with respect to our intention to purchase the land use rights of two parcels with an aggregated area of approximately 23,300 square meters in Songjiang District, Shanghai for a total consideration of RMB8.8 million (US$1.5 million). A prepayment of RMB4.4 million (US$0.7 million) was paid in May 2013. In August 2013, we entered into a letter of intent with respect to our intention to purchase a building with an aggregated construction area of approximately 4,860 square meters in Songjiang District, Shanghai for a total consideration of RMB46.6 million (US$7.7 million). A prepayment of RMB14.0 million (US$2.3 million) was paid as of December 31, 2013. Pursuant to the agreements we have entered into with the parties thereto, we will be fully refunded of the prepayments of RMB18.4 million (US$3.0 million) if we fail to obtain the land use rights and the building. Please see "Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We may not be able to obtain the land use rights and building ownership right in Songjiang, Shanghai in a timely manner and we may not successfully recover our prepayment thereunder, which may have a material adverse effect on our results of operations and financial condition."

We do not maintain any property insurance other than insurance for our vehicles. Consistent with customary industry practice in China, we do not maintain business interruption insurance or key employee insurance for our executive officers. Uninsured damage to any of our equipment or buildings or a significant product liability claim could have a material adverse effect on our results of operations. See "Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We have a limited insurance coverage which could expose us to significant costs and business disruption."

We are currently not a party to, and we are not aware of any threat of, any legal, arbitral or administrative proceedings, which, in the opinion of our management, is likely to have a material and adverse effect on our business, financial condition or results of operations. We may from time to time become a party to various legal, arbitral or administrative proceedings arising in the ordinary course of our business.

Our online and offline business are subject to various PRC laws and regulations relating to the telecommunications, Internet information services, information security and censorship, online games and media industries, and are regulated by various PRC government authorities, including:

According to the Proposal on the Institutional Reform and Functional Transformation of the State Council promulgated by the State Council on March 10, 2013, among the other things, GAPP and SARFT are integrated to form the State General Administration for Press, Publication, Radio, Film and Television. The foregoing proposal was approved by the National People's Congress according to the Decision of the First Session of the 12^th National People's Congress on the Proposal on the Institutional Reform and Functional Transformation of the State Council promulgated by the National People's Congress on March 14, 2013.

New laws and regulations may be adopted from time to time to address new and developing issues in the Internet information service and other industries, and such laws and regulations may require licenses and permits in addition to those we currently have. As a result, uncertainties may exist with respect to the interpretation and implementation of current and any future PRC laws and regulations applicable to our business.

Among all of the applicable laws and regulations, the Telecommunications Regulations of the PRC, or the Telecom Regulations, implemented on September 25, 2000, are the primary regulations governing our online business activities. The Telecom Regulations set forth extensive guidelines on various aspects of telecommunications operations in China and draw a distinction between "basic telecommunications services" and "value-added telecommunications services." The Catalog of Telecommunications Business, which was amended on February 21, 2003 and became effective on April 1, 2003, and issued as an attachment to the Telecom Regulations, provides that Internet information services are value-added telecommunications services. Under the Telecom Regulations, a telecommunication business operator in China must obtain an operating license from MII or its provincial-level counterparts.

According to the Administrative Regulations on Foreign-Invested Telecommunications Enterprises issued by the PRC State Council on December 11, 2001 and amended on September 10, 2008, foreign-invested value-added telecommunications enterprises must be in the form of a Sino-foreign equity joint venture. The regulations restrict the ultimate capital contribution percentage held by foreign investor(s) in a foreign-invested value-added telecommunication enterprise to 50% or less. In July 2006, the MII issued the Circular of the Ministry of Information Industry on Strengthening the Administration of Foreign Investment in Value-added Telecommunication Business, according to which, a foreign investor in the telecommunication service industry of China must establish a foreign invested enterprise and apply for a telecommunication businesses operation license. On March 1, 2009, the MIIT promulgated the Administrative Measures for Telecommunications Business Operating License, or the Telecom License Measures, effective from April 10, 2009, which set forth the types of licenses required to provide telecommunication services in China and the procedures and requirements for obtaining such licenses. The licenses for foreign invested telecommunications business operators must be sought from the MIIT.

In order to comply with foreign ownership restrictions, we conduct our operations in China primarily through Shanghai Taomee via a series of contractual arrangements that were entered into with it and its shareholders. We exercise effective control through these arrangements and receive economic benefits generated from them. See "Item 4. Information on the Company—C. Organizational Structure."

The Internet information services are regulated by the Administrative Measures on Internet Information Services, or the ICP Measures, issued on September 25, 2000 and amended on January 8, 2011 by the State Council. The ICP Measures define "Internet information services" as services that provide information to online users through the Internet. Internet information services are divided into commercial services and non-commercial services. According to the ICP Measures, the Internet information commercial service providers are required to obtain an operating license, or an ICP license, from the MIIT or the relevant provincial counterparts while the Internet information non-commercial service providers are required to undertake the filing procedures with the MIIT or the relevant provincial counterparts. We obtained the ICP license from the Shanghai branch of the MIIT in 2009.

The PRC government has promulgated measures relating to Internet information service specifically prohibiting Internet activities that result in the publication of any content which is found to, among other things, propagate obscenity, gambling or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC, or compromise state security or secrets. When an Internet information service provider finds that information falling within the above scope is transmitted on its website, it must terminate the transmission of such information or delete such

information immediately, maintain records and report to relevant authorities. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its websites.

GAPP and the MII jointly promulgated the Tentative Measures for Internet Publication Administration, or Internet Publication Measures, on June 27, 2002, which took effect on August 1, 2002 and imposed a license requirement for any company that intends to engage in Internet publishing, defined as any act by an Internet information service provider to select, edit and process content or programs and to make such content or programs publicly available on the Internet. Since the provision of online games is deemed an Internet publication activity, an online game operator must obtain an Internet publishing license in order to directly offer its online games to the public in the PRC. We have been approved by the MIIT to conduct Internet publication activities.

We obtained the Internet publishing license from GAPP in December 2010. Prior to obtaining an Internet publishing license from GAPP, we worked with third party publishers to publish Mole's World, Seer, Flower Fairy, Magic Haqi and Gong Fu Pai. If this practice is later challenged by the GAPP, we may be subject to various penalties. See "Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The laws and regulations governing virtual worlds and online games in China are developing and are subject to future changes. If we or the third-party publishers we work with fail to obtain or maintain all applicable permits and approvals, our business and operations would be materially and adversely affected." In the future, after we receive an Internet publishing license from GAPP, we would be able to apply for GAPP pre-approval for our virtual worlds. For more information on the pre-approval by the GAPP, see "—Online games administration measures."

On May 10, 2003, the MOC promulgated the Provisional Regulations for the Administration of Internet Culture, or the Internet Culture Measures, which were revised in July 2004 and February 2011 respectively. The Internet Culture Measures apply to entities engaging in the provision of "Internet culture products" and the relevant services. The term "Internet culture products" refers to the culture products produced and disseminated via the Internet, further divided into two categories, (1) culture products specifically produced for Internet, such as online audio-video entertainment, online games, online plays, online performance, online works of art and online cartoons, and so forth; (2) culture products such as audio-video entertainment, games, plays, performance, works of art and cartoons, and so forth, reproduced onto Internet by technical measures. According to the Internet Culture Measures, commercial entities are required to apply for, in addition to the ICP license, an Internet culture operation license from the MOC, if they engage in any of the following types of activities: the production, duplication, importation, distribution or broadcasting of Internet culture products; the dissemination of Internet culture product on the Internet or transmission thereof to computers, fixed-line or mobile phones, radios, television sets or gaming consoles for the purpose of browsing, reading, using or downloading such products; or the exhibition or holding of contests related to Internet culture products. We obtained the ICP license and Internet culture operation license in 2009.

The Provisional Administration Measures of Online Games, or the Online Games Administration Measures, were promulgated by the Ministry of Culture on June 3, 2010 and became effective as of August 1, 2010. The Online Games Administration Measures govern the activities in respect of online game development and operations, issuance of virtual currency, and provision of virtual currency exchange service. In addition, it provides that the MOC will be responsible for the censorship of imported online games and record-filing of domestic online games. Record-filing procedures for domestic online games, which include the virtual worlds we develop, will be carried out with the MOC within 30 days from the date such online games begin to be operated online, and in the case of material change, within 30 days from the date when the relevant alteration takes effect.

All operators of online games, issuers of virtual currencies, and virtual currency exchange service providers (collectively, "Online Game Business Operators") are required to obtain the abovementioned Internet culture operation license. An online cultural operating permit is valid for three years, and an application of renewal should be filed 30 days before the permit expires in order to renew the permit. As to Online Game Business Operators, they must (1) request a valid identity certificate of game users for real name registration, and save their information; (2) make the information public 60 days ahead when they terminate online games or transfer the franchising to operate online games, and return the unused virtual currencies and the currently effective game services to the users by legal money or other means accepted by users; and they must not: (1) set compulsory battles between users without their consents in games; (2) promote and propagandize games with any aforementioned prohibited content; and (3) induce game users to devote legal money or virtual currencies in exchange for game products and services, by any incidental means such as random draw. It is also provided that the state culture activity administration will be responsible to promulgate the requisite terms of a standard online game service agreement, which must be incorporated in the services agreement of each online game operator. The game operators' services agreement cannot contravene these requisite terms.

On July 11, 2008, the General Office of the State Council issued the Regulation on Main Functions, Internal Organization and Staffing of the PRC General Administration of Press and Publication, or the Regulation on Three Provisions. On September 7, 2009, the Central Organization Establishment Commission issued the corresponding interpretation, or the Interpretation on Three Provisions, collectively as the Regulation on Three Provisions and Interpretation thereof. The Regulation on Three Provisions and Interpretation thereof authorized the MOC with overall jurisdiction to regulate the online gaming industry, while granting GAPP the authority to grant approvals for the Internet publication of online games, by expressly stating that (1) administration over online games (other than pre-examination and approval before Internet publication of online games) is granted to the MOC; (2) subject to MOC's overall administration, GAPP is responsible for the pre-examination and approval for Internet publication of online games; and (3) once games are launched online, the online games will be only administrated and regulated by MOC. As of the date hereof, we have obtained 19 approvals from the GAPP in total, covering the Internet publications of all the virtual worlds which are developed by us and have been commercially launched, including the above-mentioned five franchises of Mole's World, Seer, Magic Haqi, Flower Fairy and Gong Fu Pai. We used to work with third party publishers for the publication of such franchises prior to our obtaining of the Internet publishing license.

On September 28, 2009, the GAPP together with several other governmental authorities jointly published the Notice Regarding the Consistent Implementation of the "Regulation on Three Provisions" of the State Council and the Relevant Interpretations of the State Commission Office for Public Sector Reform and the Further Strengthening of the Administration of Pre-examination and Approval of Online Games and the Examination and Approval of Imported Online Games, or the GAPP Notice. The GAPP Notice is issued for the purpose of consistent implementation of the Regulation on Three Provisions and Interpretation thereof. However, Article IV of the GAPP Notice prohibits foreign investors from controlling or participating in online game operating businesses directly or indirectly via wholly owned, equity joint venture or cooperative joint venture investments in China, or via contractual or technical support arrangements, or the Contractual Arrangements. As to the implementation of Article IV of the GAPP Notice, please see "Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—If the PRC government determines that our ownership structure does not comply with the restrictions contained in the GAPP Notice, we could be subject to severe penalties" and "Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The laws and regulations governing virtual worlds and online games in China are developing and are subject to future changes. If we, as the developer of our mobile games, are required to obtain applicable permits and licenses, or if we are required to obtain approval for the release of our e-books on mobile platforms, it may materially and adversely affect our business results and future growth."

We issue virtual currency to our users, in the form of a prepaid charge card and prepaid points that function as virtual exchange instruments, in exchange for services in our virtual worlds. On February 15, 2007, the MOC, the SAIC and other relevant governmental authorities jointly issued the Circular on Further Strengthening the Administration of Internet Cafes and Online Games, or the Internet Cafes Circular. Under the Internet Cafes Circular, the SAIC is directed to strengthen the administration of virtual currency in online games to avoid any adverse impact on the PRC economy and financial system. The Internet Cafes Circular provides that, (i) the total amount of virtual currency issued by online game operators and the amount purchased by individual game players should be strictly limited; (ii) a strict and clear division between virtual transactions and real transactions carried out by way of electronic commerce must be observed, in that virtual currency should only be used for purchasing virtual items and services within the online games and not for purchasing tangible or physical products; (iii) in case the virtual currency is redeemed, the value of the payment cannot be more than the original purchase price; and (iv) the resale for a profit (i.e., scalping) of virtual currency is prohibited. Such prohibition provided by the Internet Cafes Circular in 2007 is for the purpose of preventing an adverse impact on financial stability caused by the issuance of virtual currency.

On June 4, 2009, the MOC and the Ministry of Commerce jointly issued the Notice on Strengthening the Administration of Virtual Currency in Online Games, or the Virtual Currency Notice, which is designed to standardize the issuance and exchange service of virtual currency, or VCOG, in online games through establishing a market access threshold for the issuance and exchange of virtual currency in online games, as well as to strengthen the management of the relevant qualifications for market players. The Virtual Currency Notice requires that enterprises issuing virtual currency or providing virtual currency exchange services must meet the relevant requirements for setting up a commercial Internet culture enterprise and must apply for an Internet culture operation license from the MOC.

The Virtual Currency Notice further requires VCOG exchange service enterprises to (i) require a VCOG seller to register in its real name and be associated with a domestic bank account registered with the same registration information, and retain all transaction and accounting records for no less than 180 days; (ii) develop recovery systems and technologies to detect illegal VCOG transactions and examine the exchange information it receives to prevent illegal transactions; (iii) promptly delete the improper transaction information and stop providing service once the VCOG exchange service enterprise is aware of or has confirmed after receiving notice that the VCOG was illegally obtained; and (iv) not provide service to underage game players. We do not believe our business involves VCOG exchange services, which is the provision of a marketplace or platform to exchange VCOG among users.

Pursuant to the Online Games Administration Measures, game operators who issue virtual currencies are required to ensure: (1) the virtual currencies can only be exchanged for the online game services and products provided by themselves, but not for the purchase of services and products that are provided by other game operators; (2) the prepaid money of users for purchase of virtual currencies shall not be misappropriated; (3) the game operators will keep purchase records of users for at least 180 days since the last time they receive services; (4) the game operators will file the category, price, amount, and so forth, with the provincial culture administration which they register with.

Internet content in China is also regulated and restricted from a state security standpoint. The Standing Committee of National People's Congress enacted a decision on December 28, 2000 and amended such decision on August 27, 2009 that makes it unlawful to: (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets; (iv) falsify or disseminate false commercial information that influences trading of stock exchange or future exchanges or disrupts financial orders; or (v) infringe intellectual property rights. The MPS has promulgated measures that prohibit the use of the Internet in ways which, among other things, result in a release of State secrets or a distribution of socially destabilizing content. The MPS has supervision and inspection rights in this regard, and we may be subject to the jurisdiction of the local security bureaus. If an ICP operator violates these measures, the PRC government may revoke its ICP license and shut down its websites.

On May 14, 2004, the MOC issued the Notice Regarding the Strengthening of Network Game Censorship. This notice mandates that all imported and domestic online games are required to be filed with the MOC. We have made such filings for all of our existing virtual worlds. The filings of Mole's World, Seer and Flower Fairy have been completed, and the filings of other virtual worlds are being reviewed as of the date of this annual report.

On July 12, 2005, the MOC and the MII promulgated the Opinions on the Development and Administration of Online Game reflecting the PRC government's intent to foster and control the development of the online game industry in China. In addition, the MOC will censor online games that threaten state security, disturb the social order, or contain obscenity or violence.

On July 16, 2013, MIIT issued the Provisions on Protecting the Personal Information of Telecommunications and Internet Users, effective on September 1, 2013. Pursuant to these provisions, an Internet content provider (i) shall not collect or use the personal information of users unless such collection or usage is agreed by the users;(ii) should keep user personal information collected under the users' consent strictly confidential and take relevant measures to prevent such information from being divulged, impaired or lost; and (iii) may not sell or illegally provide user personal information collected under the users' consent to any third parties. We require our users to accept a user agreement whereby they agree to provide certain personal information to us and keep such personal information strictly confidential. If an Internet content provider violates these regulations, the MIIT or its local bureaus may impose penalties and the Internet content provider may be liable for damages caused to its users.

In April 2007, GAPP and several other governmental authorities issued a circular requiring the implementation of addiction prevention and the identity verification system by all PRC online game operators, in an effort to curb addictive online game play behaviors in minors under 18. Game operators are required to reduce in-game gains or benefits after three hours of continuous play and eliminate in-game gains or benefits after five or more hours of continuous play.

To identify whether a game player is a minor and thus subject to the addiction prevention system, an identity verification system is also adopted, which requires online game players to register their real identity information before they play online games and requires us to submit the identity information of game players to the public security authority for verification. We have implemented addiction prevention programs for all of our virtual worlds and have established the identity verification system in all of our virtual worlds as one of the ways for registration. Please see "Item 3. Key Information—Risk Factors—Risks Related to Doing Business in China—Uncertainties in PRC government policies and regulations regarding virtual worlds and online games and children's Internet use in China may adversely affect our business."

The Tort Law of the PRC, which was promulgated by the Standing Committee of National People's Congress on December 26, 2009, became effective on July 1, 2010. According to the Tort Law, an Internet user or an Internet service provider who infringes upon the civil rights or interests of others through the use of the Internet will assume tort liability. Where an Internet user infringes upon the civil rights or interests of another through the use of the Internet, the infringee will be entitled to notify and request the Internet service provider whose Internet services are facilitating the infringement to take necessary measures including the deletion, blocking or disconnection of an Internet link. If, after being notified, the Internet service provider fails to take necessary measures in a timely manner to end the infringement, it will be jointly and severally liable for any additional harm caused by its failure to act. Under the Tort Law, civil rights and interests will include the personal rights and rights of property, such as the right to life, right to health, right to name, right to reputation, right to honor, right of portraiture, right of privacy, right of marital autonomy, right of guardianship, right to ownership, right to usufruct, right to security interests, copyright, patent right, exclusive right to use trademarks, right to discovery, right to equity interests and right of heritage.

We have expanded into film and television production through the co-production of, or investments in, two animation series and two feature films, based on our "Mole's World" and "Seer" franchises. On July 19, 2004, SARFT promulgated the Administration Rules on the Production and Operation of Broadcasting Television Programs, pursuant to which an entity that plans to produce and operate television and broadcast programs in China is required to obtain the License for Producing and Operating Television and Broadcast Programs. On July 11, 2006, SARFT issued Provisional Regulations on Filing and Publicity of Domestic Television Animations, stipulating that registrations for domestic television animations must be filed with, and be publicly displayed by SARFT prior to their production. On February 14, 2008, SARFT promulgated the Notice of the State Administration of Radio, Film and Television on Strengthening the Administration of the Broadcasting of Domestic Animation Series and later on May 14, 2010, SARFT further promulgated Regulations on Content of Television Series, pursuant to which for each domestic television animation completed, the animation production entity is required to obtain the Domestic Animation Publication License prior to the broadcast of such domestic television animation to the public. On December 25, 2001, the State Council promulgated Regulations on the Administration of Movies, according to which, an entity other than film production entities that intends to independently engage in movie production shall report to SARFT for approval and obtain a One-Time Film Production License for each single film to be produced from SARFT. We cooperate with third parties with the requisite qualifications and licenses in the production and distribution of the animation series and film based on our Mole's World franchise and the film based on our Seer franchise. Shanghai Taomee Animation Co., Ltd. has obtained (i) the license for the production and broadcasting of radio and television program, and the license for the broadcasting of Seer I, Seer II, Mole's World III and Flower Fairy animation series, (ii) one-time film production license for the third film based on our Seer franchise, and (iii) one-time film production license for the third film based on our Mole's World franchise.

Since 2004, several circulars have been issued to encourage the development of the still nascent animation industry in China. On April 20, 2004, SARFT promulgated Several Opinions on Developing Domestic Animation and Film Industry, which restricts foreign animation content by putting a time limit on total hours allowed to be broadcast in television stations in China. SARFT issued the Circular on Further Regulating the Broadcasting of Animations in 2006, and the Circular on Strengthening the Regulation on the Broadcasting of Animations in 2008, effectively prohibiting the broadcasting of foreign animation content by nationwide television stations from 17:00 to 21:00 every day. In 2006 and 2008,

circulars were issued by various governmental departments including the Ministry of Finance and MOC, supporting domestic animation industry and promoting the animation production industrial chain. Furthermore, on July 17, 2009, the Ministry of Finance and State Administration of Taxation jointly promulgated the Circular on Tax Policy to Support Animation Industry, which provides domestic animation producers a series of preferential tax treatment with regard to their self-developed products. The Ministry of Finance and State Administration of Taxation further promulgated the Circular on the Value-Added Tax Policy of Software Products on October 13, 2011and the Circular on the Tax Policies of Value-Added Tax and Business for Animation Industry on November 28, 2013, which update the tax policies on value-added tax and business tax for animation industry.

In January 2012, in cooperation with a number of China's leading online video websites which have obtained the audio/video program transmission licenses, we launched v.61.com, a website that offers animation series based on our franchises, such as Seer and Mole's World, as well as other content from these websites. In November 2012, we jointly developed with Turner Broadcasting System Asia Pacific (the parent company of Cartoon Network) the website of ben10.61.com, a dedicated Chinese online zone for Ben 10 fans to get access to featuring videos, online games, wallpaper downloads, e-comics and character profiles. If the governmental authorities determine that our online website falls within Document 56, we may not be able to obtain the audio/video program transmission license, and we may become subject to significant penalties, fines, legal sanctions or an order to suspend our online website.

On October 9, 2010, GAPP have promulgated The Opinions of GAPP on the Development of E-Books Industry, which came into effect on the same day, according to which enterprises engaging in e-book industries are subject to approvals and administration from relevant governmental authorities. In addition, enterprises engaging in the creation, editing and publication of e-books or in the operation of platform where the e-book resources are delivered to users are deemed as e-book publisher and are subject to approvals for the publication of e-books. We have released over ten e-books in the middle of 2012 which featured the Mole's World franchise, and Seer animation application on Apple's iOS platform. Since there is no official or public interpretation on the definition of e-book publication, we are not sure whether our release of e-books on mobile platforms will be deemed as publication and therefore be subject to the approval of GAPP.

The State Council and the NCAC have promulgated various rules and regulations relating to the protection of software in China. Under these rules and regulations, software owners, licensees and transferees may register their rights in software with the NCAC or its local branches and obtain software copyright registration certificates. Although such registration is not mandatory under PRC law, software owners, licensees and transferees are encouraged to go through the registration process to enjoy better protections of registered software rights.

On March 5, 2009, the MIIT promulgated the Administrative Measures on Software Products, or the Software Measures, which replaced the original Administrative Measures on Software Measures promulgated by MII in October 2000, to regulate software products and promote the development of the software industry in China. Pursuant to the Software Measures, software products which are developed in China and registered with the local provincial government authorities in charge of the information industry and filed with MIIT may enjoy the relevant encouragement policies. Software developers or producers are may sell or license their registered software products independently or through agents. Upon registration, the software products will be granted registration certificates. Each registration certificate is valid for five years and may be renewed upon expiration.

The PRC Trademark Law, adopted in 1982 and revised in 2001 and 2013, with its implementation rules adopted in 2002, protects registered trademarks. The PRC Trademark Office of the SAIC handles trademark registrations and grants a protection term of ten years to registered trademarks.

The MII amended its Administrative Measures on China Internet Domain Names in 2004. According to these measures, the MII is in charge of the overall administration of domain names in China. The registration of domain names in PRC is on a "first apply-first-registration" basis. A domain name applicant will become the domain name holder upon the completion of the application procedure.

On June 29, 2007, the Standing Committee of the National People's Congress adopted the Employment Contract Law, or ECL, which became effective as of January 1, 2008. The ECL was further amended by the Standing Committee of the National People's Congress on December 28, 2012. The ECL requires employers to provide written contracts to their employees, restricts the use of temporary workers, and aims to give employees long-term job security.

Pursuant to the ECL, employment contracts lawfully concluded prior to the implementation of the ECL and continuing as of the date of its implementation will continue to be performed. Where an employment relationship was established prior to the implementation of the ECL but no written employment contract was concluded, a contract must be concluded within one month after the ECL's implementation.

The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, as amended in August 2008. Under this regulation, the RMB is freely convertible for current account items, including the trade and service-related foreign exchange transactions and other current exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments in securities, unless the prior approval of SAFE is obtained and prior registration with SAFE is made.

Pursuant to the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange promulgated on June 20, 1996 by the PBOC, foreign-invested enterprises in China may purchase or remit foreign currency for settlement of current account transactions without the approval of the SAFE. Foreign currency transactions under the capital account are still subject to limitations and require approvals from, or registration with, the SAFE and other relevant PRC governmental authorities.

In October 2005, the SAFE issued the Circular on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Circular 75, which became effective as of November 1, 2005. This was further supplemented by an implementing notice issued by SAFE on November 24, 2005. Circular 75 suspends the implementation of two prior regulations promulgated in January and April of 2005 by SAFE. Circular 75 states that PRC residents, whether natural or legal persons, must register with the relevant local SAFE branch prior to establishing or taking control of an offshore entity established for the purpose of overseas equity financing involving onshore assets or equity interests held by PRC residents. The term "PRC legal person residents" as used in Circular 75 refers to those entities with legal person status or other economic organizations established within the territory of the PRC. The term "PRC natural person residents" as used in Circular 75 includes all PRC citizens and all other natural persons, including foreigners, who habitually reside in China for economic benefit. Under Circular 75, PRC residents are required to complete amended registrations with the local SAFE branch upon (i) injection of equity interests or assets of an onshore enterprise into an offshore entity, or (ii) subsequent overseas equity financing by such offshore entity. PRC residents are also required to complete amended registrations or filings with the local SAFE branch within 30 days of any material change in the shareholding or capital of the offshore entity, such as changes in share capital, share transfers and long-term equity or debt investments, and providing security. PRC residents who have already incorporated or gained control of offshore entities that have made onshore investment in the PRC before Circular 75 was promulgated are required to register their shareholding in the offshore entities with the local SAFE branch on or before March 31, 2006.

Under the Circular 75, PRC residents are further required to repatriate to the PRC all of their dividends, profits or capital gains obtained from their shareholdings in the offshore entity within 180 days of their receipt of such dividends, profits or capital gains. The registration and filing procedures under the Circular 75 are prerequisites for other approval and registration procedures necessary for capital inflow from the offshore entity, such as inbound investments or shareholders loans, or capital outflow to the offshore entity, such as the payment of profits or dividends, liquidating distributions, equity sale proceeds, or the return of funds upon a capital reduction. All our individual shareholders who are subject to Circular 75 have obtained registration with regards to the establishment of our company and the later changes of their shareholding in our company as required under Circular 75. Please see "Item 3. Key Information—Risk Factors—Risks Related to Doing Business in China—We may be subject to penalties, including restriction on our ability to inject capital into our PRC subsidiary and our PRC subsidiary's ability to distribute profits to us, if our PRC resident shareholders or beneficial owners fail to comply with relevant PRC foreign exchange rules."

On February 15, 2012, SAFE promulgated the Notice regarding Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Option Plan of Overseas-Listing Companies, which substitutes the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed Companies promulgated by SAFE on March 28, 2007. Under the Stock Option Rule, the domestic individuals as defined under the Foreign Exchange Administration Regulations who are granted stock options or other incentive alternatives by an overseas publicly listed company are required, through a PRC agent or PRC subsidiary of such overseas publicly listed company, to register with SAFE and complete certain other procedures.

The principal regulations governing distribution of dividends of foreign holding companies include the Foreign Investment Enterprise Law issued in 1986 and amended in 2000, and the Implementation Rules under the Foreign Investment Enterprise Law issued in 1990 and amended in 2001. Under these regulations, foreign investment enterprises in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, foreign investment enterprises in the PRC are required to allocate at least 10% of their respective accumulated profits each

year, if any, to fund certain reserve funds unless these reserves have reached 50% of the registered capital of the enterprises. Funds held in these reserves are not distributable as cash dividends.

On March 16, 2007, the National People's Congress, the PRC legislature, passed the new Enterprise Income Tax Law, or the new EIT Law which became effective on January 1, 2008. On December 6, 2007, the State Council approved and promulgated the Implementation Rules of PRC Enterprise Income Tax Law, which took effect simultaneously with the new EIT Law.

The new EIT Law applies a uniform 25% Enterprise Income Tax rate to both foreign-invested enterprises and domestic enterprises and eliminates many of the preferential tax policies afforded to foreign investors. Furthermore, dividends out of post-2007 earnings paid by a foreign-invested enterprise to a non-resident shareholder are now subject to a withholding tax of 10%, which may be reduced under any applicable bi-lateral tax treaty between the PRC and the jurisdiction where the non-resident shareholder resides. According to the Administrative Measures for Non-residents Enjoying Tax Treaty Benefits (Trial Implementation) issued by the State Administration of Taxation on August 24, 2009, which became effective on October 1, 2009, an applicant seeking a preferential withholding tax rate under a bilateral tax treaty must apply to the competent PRC tax authorities for recognition of eligibility for such treaty benefits. According to the Circular of the SAT on How to Understand and Identify "Beneficial Owner" under Tax Treaties, which became effective on October 27, 2009, or Circular 601, the PRC tax authorities must evaluate whether an applicant for treaty benefits with respect to dividends, interest and royalties qualifies as a "beneficial owner" on a case-by-case basis, and must follow the "substance over form" principle. Circular 601 sets up criteria to identify a "beneficial owner" and provides that an applicant that does not carry out substantial business activities, an agent or a conduit company, will not be regarded as a "beneficial owner" and therefore cannot enjoy treaty benefits.

Pursuant to the Arrangement between Mainland of the PRC and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income signed on August 21, 2006, which in Hong Kong, applies to income derived in any year of assessment commencing on or after April 1, 2007, and in the PRC, in any year commencing on or after January 1, 2007, a company incorporated in Hong Kong will be subject to withholding income tax at a rate of 5% on dividends it receives from its PRC subsidiaries if it is deemed the beneficial owner by PRC tax authorities and holds a 25% or more equity interest in that particular PRC subsidiary at the time of the distribution, or 10% if it holds less than a 25% equity interest in that subsidiary or is not the beneficial owner of the income.

An enterprise registered under the laws of a jurisdiction outside the PRC may be deemed a PRC tax resident if its place of effective management is in the PRC. According to the implementation rules, an enterprise's place of effective management may be deemed to be in the PRC if the PRC is the location of its "de facto management bodies", which are defined as the bodies that have substantial and overall management and control over such aspects as the production and the business, personnel, accounts and properties of the enterprise.

In addition, under the new EIT Law, foreign shareholders could become subject to a 10% income tax on any gains they realized from the transfer of their shares, if such gains are regarded as income derived from sources within the PRC, and the enterprise in which their shares invested is considered a "tax resident enterprise" in the PRC. Once a non-PRC company is deemed to be a PRC tax resident by following the "place of effective management" concept and any dividend distributions from such company are regarded as income derived from sources within the PRC, PRC withholding income tax may be imposed and applied to dividend distributions from the deemed PRC tax resident to its foreign shareholders, and dividends distributed by its PRC subsidiaries to such deemed PRC tax resident would be exempt from PRC tax if certain requirement are met.

Pursuant to the PRC Individual Income Tax Law, or the Individual Income Tax Law, adopted on December 29, 2007 and amended on June 30, 2011, individuals who are domiciled in the PRC or who are not domiciled but have resided in the PRC for at least one year are required to pay Individual Income Taxes in accordance with the Individual Income Tax Law on income derived from sources in and outside the PRC. For those individuals who are neither domiciled in nor residents of the PRC, or who are not domiciled and reside for less than one year in the PRC, are required to pay Individual Income Taxes in accordance with this law on income derived from sources within the PRC.

Pursuant to the PRC Provisional Regulations on Business Tax, taxpayers providing taxable services falling under the category of service industry in China are required to pay a business tax at a normal tax rate of 5% of their revenues. In November 2011, the Ministry of Finance and the SAT promulgated the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax. Pursuant to this pilot plan and relevant notices, or Circular 111, pursuant to which from January 1, 2012, VAT has replaced business tax in the transport and shipping industry and some of the modern service industries in Shanghai. In July 2012, the Ministry of Finance and the SAT promulgated the Circular concerning Implementing the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax for Transport and Shipping Industry and Certain Modern Service Industries in Eight Provinces and Municipalities (including Beijing), , or Circular 71, which expanded the pilot regions to other eight provinces and municipalities including Beijing, Tianjin, and Shenzhen. In May 2013, the Ministry of Finance and the State Administration of Taxation promulgated the Circular concerning Implementing the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax for Transport and Shipping Industry and Certain Modern Service Industries across the Country, or Circular 37, which expanded the pilot regions to the whole nation and Circular 111 and Circular 71 were annulled accordingly. In December 2013, the Ministry of Finance and the State Administration of Taxation promulgated the Circular on Expanding the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax to Railway Transport and Postal Service, or Circular 106, pursuant to which, from January 1, 2014, VAT would replace business tax in the transport and shipping industry, postal service and some of the modern service industries in PRC and Circular 37 was annulled accordingly. Under Circular 106, a VAT rate of 6% applies to certain modern service industries. The revenues recognized from part of our businesses operated by Shanghai Shengran, Shanghai Taomee and Shanghai Animation are subject to VAT at a rate of 6% for certain other services such as advertisement, merchandise licensing and box office revenue sharing and 17% for software sales, while other part of our business are still subject to PRC business tax at a statutory tax rate of 5%. If this plan is extended to apply to other part of our business, we may be subject to VAT rate which is higher than the business tax rate, which could harm our financial condition and results of operations.

On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State-owned Assets Supervision and Administration Commission, the State Administration of Taxation, the SAIC, the CSRC and SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rules, which became effective on September 8, 2006 and was amended by the Ministry of Commerce on June 22, 2009. The New M&A Rules, among other things, require that (i) PRC entities or individuals obtain MOFCOM approval before they establish or control a special purpose vehicle, or SPV, overseas, provided that they intend to use the SPV to acquire their equity interests in a PRC company at the consideration of newly issued share of the SPV, or Share Swap, and list their equity interests in the PRC company overseas by listing the SPV in an overseas market; (ii) the SPV obtains MOFCOM's approval before it acquires the equity interests held by the PRC entities or PRC individual in the PRC company by Share Swap; and (iii) the SPV obtains CSRC approval before it lists overseas. Please see "Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with the initial public offering under a PRC regulation. The regulation also establishes more complex procedures for acquisitions conducted by foreign investors that could make it more difficult for us to grow through acquisitions."

The following diagram illustrates our corporate structure and the place of incorporation of each of our significant subsidiaries, VIEs and VIEs' subsidiaries as of December 31, 2013.

We have entered into contractual arrangements with Shanghai Taomee and its shareholders, through which we exercise effective control over operations of Shanghai Taomee and receive economic benefits generated from it. As a result of these contractual arrangements, under U.S. GAAP, we are considered the primary beneficiary of Shanghai Taomee and thus consolidate its results in our consolidated financial statements. However, these contractual arrangements may not be as effective in providing us with control over the VIE as direct ownership of it. In addition, the VIE or its shareholders may breach the contractual arrangements with us. In such cases, we would have to rely on legal remedies under PRC law, which may not always be effective, particularly in light of uncertainties in the PRC legal system. See "Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—If the PRC government determines that the contractual arrangements that establish the structure for operating our business do not comply with applicable PRC laws and regulations, we could be subject to severe penalties" and "Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—If the PRC government determines that our ownership structure does not comply with the restrictions contained in the GAPP Notice, we could be subject to severe penalties."

Our relationships with Shanghai Taomee and its shareholders are governed by a series of contractual arrangements. Under PRC laws, each of Shanghai Taomee and Shanghai Shengran is an independent legal person and neither of them is exposed to liabilities incurred by the other party. Other than pursuant to the contractual arrangements between Shanghai Taomee and Shanghai Shengran, Shanghai Taomee is not required to transfer any funds generated from its operations to Shanghai Shengran.

Loan Agreement. Certain shareholders of Shanghai Taomee, namely Messrs. Jason Liqing Zeng, Benson Haibing Wang, Crow Zhen Wei, Roc Yunpeng Cheng and Bin Wang entered into a loan agreement with Shanghai Shengran, under which Shanghai Shengran provided an interest-free loan of RMB2.5 million (US$0.4 million) to these shareholders, solely for their respective contributions to the increased capital of Shanghai Taomee. The loan has a term of ten years, which can be extended if mutually agreed by the parties. Shanghai Shengran has the right to determine the method of loan repayment, including requiring the shareholders to transfer all of their respective equity interest in Shanghai Taomee to Shanghai Shengran and/or its designee.

Option Agreement. Shanghai Taomee's shareholders have entered into an option agreement with Shanghai Shengran, under which each shareholder of Shanghai Taomee granted Shanghai Shengran an exclusive option to purchase or have its designee purchase his equity interest in Shanghai Taomee at the purchase price equal to the lowest price permitted by the PRC laws, and agreed to assist Shanghai Shengran in obtaining all necessary government approvals as may be then required in connection with the purchase. Shanghai Shengran may exercise such option at any time to the extent permitted by the PRC laws. In addition, Shanghai Taomee and its shareholders agree that without Shanghai Shengran's prior written consent, they will not engage in certain actions including transferring or otherwise disposing of the equity interest in Shanghai Taomee.

Proxy Agreement. Shanghai Taomee and its shareholders have entered into a proxy agreement with Shanghai Shengran, under which each shareholder of Shanghai Taomee granted an irrevocable power of attorney to Shanghai Shengran that authorizes Shanghai Shengran to vote as the shareholder's attorney-in-fact on all of the matters of Shanghai Taomee requiring shareholders' approval, including the appointment of board members and senior management members.

Business Operation Agreement. Shanghai Taomee and its shareholders have entered into a business operation agreement with Shanghai Shengran, under which each of the shareholders agrees that, without the prior written consent of Shanghai Shengran or its designee, Shanghai Taomee will not

conduct any transactions which might substantially affect its assets, businesses, personnel, obligations, rights or operations confirmed by Shanghai Shengran. Shanghai Taomee and its shareholders agree to fully comply with the advices in connection with its business operation and financial management provided by Shanghai Shengran from time to time and to elect directors and officers of Shanghai Taomee in consistence with the direction of Shanghai Shengran. In addition, the shareholders agree to unconditionally transfer to Shanghai Shengran, without any consideration, any dividends or other proceeds received from Shanghai Taomee in their capacity as shareholders of Shanghai Taomee.

Commercial Cooperation Agreement. Under the commercial cooperation agreement between Shanghai Taomee and Shanghai Shengran, Shanghai Shengran agrees to place certain game updates and value-added components developed by it, or the objects, on Shanghai Taomee's platform for operation. Shanghai Shengran will provide routine maintenance, updates, technical support and debugging for the operation of the objects, and Shanghai Taomee will provide platform servers, broadband resources and customer services. Unless Shanghai Shengran directs otherwise and subject to applicable laws, any intellectual property in relation to the objects will belong to Shanghai Shengran and cannot be used by Shanghai Taomee beyond the agreed scope of uses. Shanghai Shengran will enjoy the profits generated from this operation after the deduction of a reasonable portion thereof by Shanghai Taomee. The rate for the deduction will be determined through negotiation by both parties based on the principles of arm's-length pricing.

Equity Interest Pledge Agreement. Shanghai Taomee and its shareholders have entered into an equity interest pledge agreement with Shanghai Shengran, under which the shareholders of Shanghai Taomee pledged all of their equity interests in Shanghai Taomee to Shanghai Shengran to secure their and Shanghai Taomee's obligations under certain agreements above and as collateral for all of the amounts payable by Shanghai Taomee to Shanghai Shengran under those agreements. If any event of default as defined under this agreement occurs, Shanghai Shengran, as the pledgee, will be entitled to dispose of the pledged equity interests. In addition, any equity proceeds (including but not limited to any dividend or profit) from Shanghai Taomee will be further pledged in favor of Shanghai Shengran excepted otherwise agreed by Shanghai Shengran in writing.

Our principal executive offices are located at 16/F, Building No. A-2, No. 1528 Gumei Road, Xuhui District, Shanghai 200233, People's Republic of China. Our telephone number at this address is (86-21) 6128-0056 and our fax number is (86-21) 3367-4012. We are headquartered in Shanghai and have leased an aggregate of approximately 8,890 square meters of offices in Shanghai from independent third parties and do not own any real property.

In May 2013, we entered into a land pre-development cooperation agreement with respect to our intention to purchase the land use right of two parcels with an aggregated area of approximately 23,300 square meters in Songjiang District, Shanghai for a total consideration of RMB8.8 million (US$1.5 million). A prepayment of RMB4.4 million (US$0.7 million) was paid in June 2013. In August 2013, we entered into a letter of intent with respect to our intention to purchase a building with an aggregated construction area of approximately 4,860 square meters in Songjiang District, Shanghai for a total consideration of RMB46.6 million (US$7.7 million). A prepayment of RMB14.0 million (US$2.3 million) was paid as of December 31, 2013. Pursuant to the agreements we have entered into with the parties thereto, we will be fully refunded of the prepayments of RMB18.4 million (US$3.0 million) if we fail to obtain the land use rights and the building. Please see "Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We may not be able to obtain the land use rights and building ownership right in Songjiang, Shanghai in a timely manner and we may not successfully recover our prepayment thereunder, which may have a material adverse effect on our results of operations and financial condition."

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results 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 annual report.

We are one of the leading children's entertainment and media companies in China. Our success online has translated into growing demand for our content offline in merchandising, television, film and books. In our virtual worlds, children adopt avatars and learn through interactive games and group activities set in imaginative landscapes with evolving story lines of exploration and adventure.

In order to leverage our investment and expansion into offline and mobile products, we have developed a cross media platform. We work with publishers to offer a wide range of children's books and magazines, featuring iconic characters, story lines and images we have developed and popularized. We license our franchises to leading brands in toys and other consumer products for children in China. We also design and distribute toys, trading cards and products that potentially other interactive features. We have also developed content for animation film and television, which we released in 2011, 2012 and 2013. We refer to these other businesses as our offline business.

We generate revenues from our online business primarily through the sales of subscriptions and virtual items, which users pay for primarily in the form of virtual currency purchased with prepaid cards. Our prepaid cards are distributed in over 118,200 retail outlets in over 2,200 towns and cities in China. We generate revenues from our offline business mainly from license fees and royalties based on contracts with book publishers, makers of consumer products and other licensees as well as wholesale of interactive toys.

For 2011, 2012 and 2013, approximately 88.8%, 80.0% and 73.1%, respectively, of our net revenues were generated from online business, and approximately 11.2%, 20.0% and 26.9%, respectively, of our net revenues were generated from offline business.

Our net revenues were US$45.4 million in 2011, US$40.2 million in 2012 and US$48.4 million in 2013. Our gross profit was US$37.7 million in 2011, US$30.2 million in 2012 and US$35.1 million in 2013. Our net income was US$19.5 million in 2011, US$8.9 million in 2012 and US$5.4 million in 2013. The number of active paying accounts, in our online entertainment community were 1.7 million in the three months ended December 31, 2011, 1.2 million in the three months ended December 31, 2012 and 1.3 million in the three months ended December 31, 2013, and per paying account average gross revenues from the operation of our virtual communities in China, or ARPU, increased from approximately US$4.7 to US$4.8 and US$6.0 in the same periods.

Our results of operations are affected by the factors described in more details in the "—Descriptions of Certain Statement of Operations Items—Net revenues" as well as the general and specific factors, including:

We generate revenues from two sources: (i) online business through the operation of our virtual worlds, mobile games and provision of other online services and products, including royalties for licensing our virtual worlds, and (ii) offline business.

In 2012, our net revenues from online business decreased together with the decrease of the active paying accounts. We believe the decrease is primarily due to competition and our strategy to decelerate monetization temporarily to attract new users and increase user stickiness, which is evidenced by increased active accounts in 2012. In 2013, our net revenues from online business increased as a result of our revenue growth of our core virtual worlds from the prior year, as well as contribution from several newly launched virtual worlds. Our net revenues from offline business have increased in both amount and percentage in 2011, 2012 and 2013 as a result of our strategy to build our cross-media

entertainment platforms. The following table sets forth a breakdown of our net revenues from the periods indicated.

Our net revenues from online business amounted to US$40.3 million, US$32.2 million and US$35.3 million in 2011, 2012 and 2013, respectively.

Our net revenues from online business are net of discounts and rebates granted to our distributors, as well as business taxes or VAT and related surcharges incurred in connection with our operations. Each of Shanghai Shengran and Shanghai Taomee is subject to PRC business tax at a statutory tax rate of 5% or VAT at a rate of, depending on different product categories, 17% or 6%, and surcharges related to urban construction and education, which we deduct from our gross online business revenues.

We generate revenues from our online business primarily through two revenue streams for virtual features—time-based and item-based. While users can access our virtual worlds for free, users may choose to pay a RMB10 (US$1.7) fee per virtual world to access premium features and gain privileges within each of our virtual worlds for 30 days. Users who pay the subscription fee enjoy additional capabilities, special privileges, such as having a higher upper limit for the total number of friends that the users can have and access to exclusive online parties. In addition, users pay a fee for each virtual item within our virtual worlds. For more details on revenue recognition, see "—Critical Accounting Policies and Estimates—Revenue Recognition." Starting from June, 2011, we began to generate online business revenues from licensing our virtual worlds outside of China. Starting from the second half of 2010, we also began to operate third-party online casual games on our platform and generate revenues from such licensing arrangements.

Users can purchase subscriptions and virtual items using our virtual currency, the Mibi, which in turn can be purchased from different distribution channels, such as our prepaid cards, third-party prepaid cards, online payment channels and cellular telecom operators. We sell the prepaid cards to our distributors at a pre-negotiated discount on the face value of the cards and offer a volume rebate to distributors if they meet a pre-set sales requirement. Net proceeds from distributors are initially recorded as advances from customer. Upon activation or charge of the prepaid cards or the Mibi, these advances from customers are transferred to deferred revenues. The proceeds received from sales of the Mibi directly to users through third-party payment channels are recorded as deferred revenues. For more details on our distribution agreements and payment systems, see "Item 4. Information on the Company—B. Business Overview—Our Business Segments—Online Business—Pricing, payment and distribution."

Our physical prepaid cards will expire on the expiration date printed thereon, which is generally two years after the date of card production. The proceeds from the expired physical prepaid cards that have not been activated are recognized as other operating income upon expiration of the cards. In 2011, 2012 and 2013, we recognized US$546,360, US$1,867,626 and US$1,620,842, respectively, as other operating income due to expiration of prepaid cards.

The following table sets forth the number of active accounts, the number of active paying accounts and ARPU for each period indicated.

We believe net revenue from our online business is primarily affected by the following factors:

Our net revenues from offline business amounted to US$5.1 million, US$8.0 million and US$13.0 million in 2011, 2012 and 2013, respectively.

Our revenues from offline business mostly consisted of publishing royalties, film and merchandise licensing fees generated from licensing our content in the PRC. In addition to licensing our franchises, we also design and sell interactive toys that bear images of our franchises, and sometimes books featuring our franchises. We take the associated inventory risks in connection with such sales. See "—Cost of Services—Offline business."

We invested in the production of, or licensed our franchise to producers of five feature films, based on our "Mole's World" and, "Seer" franchises, which we released in 2011, 2012 and 2013, and generated revenues through box office sharing proceeds and distribution of films on television and website.

Our results of operations will be significantly affected by our ability to grow our offline business by leveraging our brand name and the popularity of our franchise assets and content creation capabilities. We believe net revenue from our offline business is primarily affected by the following factors:

The following table sets forth a breakdown of our cost of services and as a percentage of total cost of services for the periods indicated.

Our cost of services relating to our online business primarily consists of bandwidth and server hosting costs, salaries and benefits of our operations staff, production costs for prepaid cards, amortization of upfront licensing fees, depreciation and amortization of equipment and software purchased from third-parties, and other direct costs.

Our bandwidth costs represent the fees we pay to bandwidth vendors, which are typically telecommunications operators such as China Telecom and China Unicom, or independent third parties that purchase bandwidth from major telecommunications operators in China. We also purchase servers from which we incur depreciation expenses and rental expenses for storing our servers. In the foreseeable future, we expect our bandwidth costs and server-related depreciation and rental expenses to continue to increase in absolute amount given the anticipated increase in the volume of our website

traffic. We expect this increase in absolute terms to be partially offset to the extent we are able to achieve better economies of scale as a result of increased sales volume and continued technological improvements that optimize bandwidth and server usage.

Salaries and benefits (including share-based compensation) cost for our online business primarily comprise compensation to operations support staff, including employees responsible for database and user system maintenance, bandwidth and server monitoring and maintenance, prepaid card and billing system maintenance, online security, technical support and customer service. We expect costs associated with salaries and benefits to increase as we continue to expand our operations and hire more staff. Our operations staff for online business increased from 115 as of December 31, 2011 to 118 as of December 31, 2012, and slightly decreased to 117 as of December 31, 2013.

Our production costs include the cost of manufacturing and transporting physical prepaid cards to our distributors around China. Such production costs may increase in absolute amount as we continue to expand our operations and enter into distribution agreements with city level distributors. However, we do not expect production costs of the prepaid card to comprise a material part of our cost of services going forward.

Cost of services relating to our offline business is primarily comprised of compensation to our operations employees, film production cost and toy production and distribution cost, which is the inventory costs of our interactive toys and the cost involved in producing labels for the verification of the authenticity of our licensed products.

Our operating expenses primarily consist of product development expenses, sales and marketing expenses and general and administration expenses as well as impairment loss on acquired intangible assets and other operating income. The following table sets forth a breakdown of our operating expenses in terms of amount and as a percentage of our total net revenues for the periods indicated. As we continue to expand both our online and offline business, we expect our operating expenses to increase in absolute amount, and we aim to maintain or enhance our operating efficiency when our business further scales up.

	For the Years Ended December 31,

	2011						2012						2013
	US$			%			US$			%			US$			%
	(in thousands, except percentages)
Total net revenues:		45,397			100			40,208			100			48,354			100
Operating expenses:
Product development expenses		10,304			22.7			12,318			30.6			13,886			28.7
Sales and marketing expenses		6,255			13.8			9,966			24.8			9,446			19.5
General and administrative expenses		7,965			17.5			10,078			25.1			13,095			27.1
Impairment loss on acquired intangible assets		—			—			—			—			1,046			2.2
Other operating (income)		(1,734	)		(3.8	)		(5,512	)		(13.7	)		(5,708	)		(11.8	)


Total operating expenses		22,790			50.2			26,850			66.8			31,765			65.7

Our product development expenses consist primarily of salaries and benefits, including share-based compensation, for personnel engaged in concept generation, community function development and design, story line development, website structure and content development and design, graphic and

audio design, quality control and testing of our virtual worlds and mobile games as well as other online services. Product development expenses accounted for approximately 22.7%, 30.6% and 28.7% of our total net revenues in 2011, 2012 and 2013, respectively. Our product development expenses increased in recent years primarily due to the increased payroll expenses related to our hiring of additional writers, engineers, development staff, animation and graphic artists as well as the increase in average salary. We expect that our product development expenses will further increase in absolute amount in the future as we continue to devote resources to improve our interactive communities and the overall user experience and to create new virtual worlds, new online products and mobile products, and to the extent we incur higher share-based compensation expenses.

Our sales and marketing expenses primarily consist of advertising and promotional expenses, film promotion and animation production related expenses, salaries and benefits, including share-based compensation, and other overhead expenses incurred by our sales and marketing personnel. Sales and marketing expenses accounted for approximately 13.8%, 24.8% and 19.5% of our total net revenues in 2011, 2012 and 2013, respectively. Our sales and marketing expenses increased in the absolute amount from 2011 to 2012 primarily due to an expansion of our marketing efforts related to animation production in connection with promotional activities, as well as the growth of our sales and marketing team, and decreased slightly in 2013 primarily due to the decreased advertising expenses, partially offset by an increase in payroll expenses related to sales and marketing. We expect that our sales and marketing expenses will increase in absolute amount as we further promote our virtual worlds in future periods on search engines, web portals and casual game websites and produce more promotional TV animations featured in our franchises.

Our general and administration expenses primarily consist of salaries and benefits, including share-based compensation, for our general and administration, finance and human resources personnel, office rentals, depreciation and amortization expenses relating to property and equipment used in general and administrative functions, professional service fees and other expenses incurred in connection with general corporate purposes. General and administration expenses accounted for approximately 17.5%, 25.1% and 27.1% of our total net revenues in 2011, 2012 and 2013, respectively. Our general and administration expenses increased in recent years primarily due to increases in payroll expenses and increases of indirect tax costs related to intercompany transactions. We expect our general and administration expenses to increase in absolute amount as we incur additional expenses in connection with the expansion of our business, our investment activities and our operations as a publicly traded company, which include hiring more staff for our general and administrative team, expenses related to improving and maintaining our internal control over financial reporting and complying with our reporting obligations, and as we incur higher share-based compensation expenses. However, we expect our general and administration expenses to stay relatively stable or increase in absolute amount in the future as we expect our general and administration expenses will keep pace with our revenue growth.

Our impairment loss on acquired intangible assets was incurred by writing off the remaining term of two underperforming games, Wizard 101 and Speed Hunter. Impairment on acquired intangible assets amounted to US$1.0 million in 2013.

Our other operating income consists of PRC government subsidies granted to our operating subsidiary and significant VIE and VIEs' subsidiaries in China, income recognized as a result of

expiration of prepaid cards and government subsidies. Other operating income amounted to US$1.7 million in 2011, US$5.5 million in 2012 and US$5.7 million in 2013. We received government subsidies in 2011, 2012 and 2013. However, the amount we receive may vary depending on government policy, our business operations and other factors. In 2011, 2012 and 2013, we recognized US$0.5 million, US$1.9 million and US$1.6 million as other operating income due to the expiration of prepaid cards, respectively.

In December 2009, we obtained a minority interest in Elyn Corporation and its wholly owned subsidiary Taiwan Taomee Co., Ltd., of which 20% equity interests was initially held through a related party, as consideration, in exchange for a three-year exclusive right to operate certain of our virtual worlds in Taiwan, Hong Kong and Macau. As we have the ability to exercise significant influence over Elyn Corporation, we account for this investment using the equity method of accounting.

On February 25, 2011, we entered into an agreement to effectively sell a 10.5% equity interest in Elyn Corporation that had been indirectly held by the related party on our behalf. Of the 10.5% equity interest in Elyn Corporation, 9.14% was sold to Qiming Funds which are our existing shareholders and 1.36% was sold to a third party investor for US$3.4 million and US$0.5 million, respectively, in cash. A gain of US$3.7 million was recognized in share of profit in equity method investments in the consolidated statement of operations. In addition, the nominee shareholding agreement was terminated with the related party and we held all of our 29.5% equity in Elyn Corporation directly, and continued to account for this investment using the equity method.

On August 12, 2011, our equity interest in Elyn Corporation was diluted from 29.5% to 28.8% as a result of Elyn Corporation's issuing shares to its employees.

In November 2011, Taiwan Taomee went through a reorganization and contemporaneously issued new ordinary shares to existing shareholders and certain employees. As a result of such transactions, our equity interest in Taiwan Taomee was changed from 28.8% interest held through Elyn Corporation to a 27.6% effective interest which was held through (1) 29.50% in Elyn Corporation, which held 72.09% of Taiwan Taomee, and (2) 28.77% in Joy Children Technology Co., Ltd., or Joy Children, a shell company with no operations, which owned 21.86% of Taiwan Taomee after the reorganization. The change in equity interest reflected a dilution resulting from shares issued to Taiwan Taomee's employees, which were accounted for by Taiwan Taomee as stock compensation. In addition, we paid total consideration of US$668,992 in cash for the newly issued shares of Taiwan Taomee through Joy Children, which was recorded as an increase in equity method investment.

In July 2012, our aggregated equity interest through Elyn and Joy Children in Taiwan Taomee was diluted from 27.6% to 27.1%, i.e. (1) 29.50% in Elyn, which holds 70.88% of Taiwan Taomee and (2) 28.77% in Joy Children, which holds 21.49% of Taiwan Taomee. The dilution was mainly due to the issue of new ordinary shares by Taiwan Taomee from capital surplus and appropriations of 2011 earnings to certain existing shareholders and employees.

In June 2013, as part of a legal reorganization of Taiwan Taomee, our equity interest in Taiwan Taomee was held through Playgame Sdn. Bhd, a holding company established in Malaysia, and Elyn was liquidated. Our aggregated equity interest in Taiwan Taomee was not changed. In September 2013, Playgame transferred 3% of Taiwan Taomee's shares to Taiwan Taomee's underwriters upon it initial public offering in Taiwan Emerging Stock Market. As a result, Playgames's equity interest in Taiwan Taomee was accordingly diluted to 67.87% from 70.88%, resulting in a gain from investment of approximately $287,790 recognized in the year 2013, reported within share of profit in equity method investees in the consolidated statements of operations.

Our equity in profit in 2011, 2012 and 2013 was US$1.0 million, US$0.5 million and US$0.5 million of Elyn Corporation (or Playgame, as applicable) and US$7,757, US$0.2 million and US$0.1 million of Joy Children, respectively, and was recognized as share of profit in equity investment in the consolidated statements of operations.

In October 2010, pursuant to an equity investment agreement which we entered into with Shenzhen Decent Investment Limited and two individuals unrelated to us, Shenzhen Ruigao was formed in the PRC for the purpose of developing console games. We obtained a 17.65% equity interest in Shenzhen Ruigao for total cash consideration of US$1.0 million which was paid in two installments, with the first payment being made in October 2010 and the remaining payment of US$0.5 million being paid in the first quarter of 2011. As we have the ability to exercise significant influence over Shenzhen Ruigao, we account for this investment using the equity method of accounting. In May 2012, a third party investor obtained 7.5% equity interest in Shenzhen Ruigao through capital injection, and our equity interest in Shenzhen Ruigao was reduced to 15.61%. In July 2012, Shanghai Taomee transferred all its equity interest in Shenzhen Ruigao for US$1.0 million and recorded a gain of US$0.3 million. Our share of losses in equity investment in Shenzhen Ruigao was US$0.4 million in 2011, and our share of profits was US$0.2 million in 2012 and nil in 2013.

In December 2013, Chuangyou entered into an agreement to issue new shares for RMB2.5 million (approximately US$0.4 million) to a new investor. The Company's equity share in Chuangyou will be diluted to 9.58% upon the closing of the transaction. Chuangyou is a related party of us, as one of Chuangyou's investors is our director and principle shareholder.

As of December 31, 2013, Chuangyou has experienced a deterioration financial position and performance and we did not expect Chuangyou to generate positive future cash flows. Accordingly, we accrued an impairment charge of US$370,407 in 2013 for our investment in Chuangyou. Our equity in loss in Chuangyou was US$35,310 in 2012, and our equity in loss was US$212,240 in 2013.

In March 2013, Shanghai Taomee entered into an agreement to set up Shanghai Taoyue Information Technology Co., Ltd., or Taoyue, a new online game development company, with five third-party individuals, of which Shanghai Taomee held a 40% equity interest for a consideration of RMB2.0 million (approximately US$0.3 million). Our equity in loss in Taoyue was US$150,052 in 2013. In January 2014, Shanghai Taomee agreed to transfer such 40% equity interests in Taoyue to an existing investor for a consideration of RMB2.0 million (approximately US$0.3 million).

In September 2013, we entered into an investment agreement with two third-parties to establish a joint venture, Jiangxi Haomi Network Technology Co., Ltd., or Jiangxi Haomi, a company which develops family entertainment and education application on mobile and multi-screen platforms, including Smart TV portal for children in China. We paid a consideration of RMB12.9 million (US$2.1 million) for 43.0% equity interests in Jiangxi Haomi. Our equity in loss in Jiangxi Haomi was US$27,199 in 2013.

In January 2014, Shanghai Taomee entered into an agreement with Shanghai Weiju Network Technology Co., Ltd ("Shanghai Weiju"), an hi-tech interactive toy design and R&D company, to subscribe 25% of Shanghai Weiju's newly issued shares at a consideration of RMB3.0 million (US$0.5 million).

We are an exempted company incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to income, corporate or capital gains tax. In addition, payment of dividends and capital by us to our shareholders in respect of our shares will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of dividends or capital to any holder of our shares, nor will gains derived from the disposal of our shares be subject to Cayman Islands income or corporation tax. The Cayman Islands currently have no income, corporation or capital gains tax and no estate duty, inheritance tax or gift tax.

Our subsidiary in Hong Kong is subject to profits tax at the rate of 16.5% on assessable profits determined under relevant Hong Kong tax legislation.

Under the new EIT Law, the dividends paid by a foreign invested enterprise, or a FIE, to its immediate holding company outside the PRC (to the extent that such holding company does not have a business organization or business place in China, or if it has a business organization or business place in China, its profits generated from PRC are not related to the foregoing business organization or business place) are subject to withholding tax at a rate of 10% or a lower rate if such foreign investor's jurisdiction of incorporation has a tax treaty with the PRC. According to the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income signed in August, 2006, or the Tax Treaty, dividends payable by a FIE to a Hong Kong resident company which directly owns at least 25.0% of the equity interest in that FIE will be subject to withholding tax at a lower rate of 5%.

Taomee HK, a company incorporated in Hong Kong in November 2008, currently holds all the equity interest in Shanghai Shengran. However, according to Circular 124 issued by the SAT, which came into effect on October 1, 2009, the 5% withholding tax rate for dividends under the Tax Treaty does not apply automatically and Taomee HK needs to obtain an approval from the competent local tax authority before it can enjoy such a preferential tax rate. According to Circular 81 issued by the SAT in February 2009, a key condition for a foreign investor to enjoy the preferential withholding tax rate for dividends payable by a FIE is that such foreign investor is the "beneficial owner" of such dividends. Circular 601 issued by the SAT on October 27, 2009 further clarifies that, generally the "beneficial owner" shall engage in substantive business operations such as manufacturing, distribution or management and, among others, the fact that the immediate offshore holding company does not have any other business operations except holding property or rights generated from dividend income from the FIE would adversely affect such offshore shareholder in the determination of its "beneficial owner" status by the tax authority.

In respect of financial years 2011, 2012 and 2013, Taomee HK recorded a loss and therefore did not apply for approval to enjoy the 5% preferential tax rate under the Tax Treaty. Given that Taomee HK is not engaged in substantive business operations and it does not have any other business operations except for its holding in Shanghai Shengran, Taomee HK may be subject to the 10.0% withholding tax rate if it is not regarded as the "beneficial owner" of the dividends.

Dividends paid by Taomee HK to its shareholder is not subject to any withholding tax in Hong Kong.

Prior to January 1, 2008, companies established in China were generally subject to state and local EIT at statutory rates of 30% and 3% respectively. On March 16, 2007, the National People's Congress of China enacted a new enterprise income tax law, i.e. the PRC Enterprise Income Tax Law, which took effect beginning January 1, 2008. On December 6, 2007, the State Council also adopted the Implementing Rules for the Enterprise Income Tax Law, or the Implementing Rules, which also took effect beginning January 1, 2008. Under the PRC Enterprise Income Tax Law, foreign invested enterprises, or FIEs, and Chinese domestic companies are subject to EIT at a uniform rate of 25%. On February 22, 2008, the Ministry of Finance and the State Administration of Taxation, or the SAT, promulgated the Notice on Several Preferential Policies in Respect of Enterprise Income Tax, or Notice No. 1 2008, reiterating the policy that a software enterprise newly established within China may, upon determination, be exempted from income taxes for its first two profit-making years and shall be subject to the income tax at half the standard rate for the next three years. On April 24, 2009, the Ministry of Finance and SAT promulgated the Notice on Several Issues Relevant to the Implementation of the Preferential Policies on Enterprise Income Tax, which states that, software enterprises established prior to the end of 2007 may, upon certification, enjoy the preferential policies on the EIT reductions and exemptions within specified periods as provided in the Notice No. 1 2008. On April 20, 2012, the Ministry of Finance and SAT promulgated the Notice on Enterprise Income Tax for Further Encouraging the Development of Software and Integrated Circuit Industries, which reiterates the preferential policy on EIT of software enterprises in Notice No.1 2008, limits the scope of applicable software enterprises to enterprises which are profitable before December 31, 2017 and suspends the implementation of certain provisions in Notice No. 1 2008.

In addition, an enterprise may benefit from a preferential tax rate of 15% under the EIT Law if it qualifies as a "High and New Technology Enterprise", or HNTE. Pursuant to the Administrative Measures on the Recognition of High and New Technology Enterprises, the provincial counterparts of the Ministry of Science and Technology, the Ministry of Finance and the State Administration of Taxation shall jointly determine whether an enterprise is qualified as a HNTE under the EIT Law. In making such determination, these government agencies shall consider, among other factors, ownership of core technology, whether the products or services fall within the scope of high and new technology strongly supported by the state as specified in the measures, the ratios of technical personnel and research and development personnel to total personnel, the ratio of research and development expenditures to annual sales revenues, the ratio of revenues attributed to high and new technology products or services to total revenues, and other measures set forth in relevant guidance. All enterprises that had been granted the HNTE status before the effectiveness of the EIT Law are required to be re-examined in accordance with the measures mentioned above before they can be entitled to the preferential tax rate. A HNTE certificate is effective for a period of three years and could be renewed for another three years. After that, an entity needs to re-apply for the "High and New Technology Enterprise" status in order to be able to enjoy the preferential tax rate of 15%.

Our VIE, Shanghai Taomee, which was established in 2007 and qualified as a "software enterprise" in 2009, enjoys a full exemption from EIT in 2009 and 2010 and a reduced EIT rate of 12.5% from 2011 to 2013. Shanghai Taomee's tax holiday period was approved by relevant tax authorities in May 2010. In addition, in 2010, Shanghai Taomee obtained HNTE qualification, which is effective for a period of three years and could be renewed thereafter. In 2013, Shanghai Taomee applied for the renewal and received a new HNTE qualification. Currently Shanghai Taomee has not applied to the relevant tax authority for preferential tax treatment as a HNTE.

Our wholly-owned subsidiary, Shanghai Shengran, which was established in 2009 and qualified as a "software enterprise" in 2010 and was informed in April 2011 that the full EIT exemption would apply

retroactively in 2009 and 2010, and 50% reduction in EIT rate will apply from 2011 to 2013. In May 2012, Shanghai Shengran further received a written approval from local tax authorities, according to which Shanghai Shengran was entitled to the full EIT exemption for 2010 and 2011, and 50% reduction in EIT rate, i.e. EIT rate of 12.5%, from 2012 to 2014, which resulted in an adjustment of US$2.1 million as a one-time tax benefit in 2012.

Our VIE's subsidiary, Shanghai Animation was recognized as an "animation enterprise" in November 2013. Animation enterprises as recognized by the relevant department of the State Council which independently develop or produce animation products can apply for certain tax preferential treatment as applied to the software enterprises. Shanghai Animation is in the process of obtaining a written approval from relevant tax authorities for a full exemption from EIT for two years and subsequently a 50% reduction in EIT rate for three years.

Continued qualification as a "software enterprise" or as an "animation enterprise"or as a "HNTE" is however subject to assessment by the relevant government authorities in China.

See "Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We may be classified as a "resident enterprise" for PRC enterprise income tax purposes, which could result in our global income becoming subject to 25% PRC enterprise income tax."

Under the PRC Enterprise Income Tax Law and the Implementing Rules, dividends generated from the business of our PRC subsidiary after January 1, 2008 and payable to us may be subject to a withholding tax rate of 10% if we are considered a non-resident enterprise incorporated outside of the PRC unless there is an applicable tax treaty with China that provides for a different withholding arrangement and we are deemed to be entitled to such favorable treatment. Distributions of earnings generated before January 1, 2008 are exempt from PRC withholding tax.

The PRC Enterprise Income Tax Law provides that enterprises established outside China whose "effective management" is located in China are considered "resident enterprises" and will generally be subject to the uniform 25% EIT rate as to their global income. Under the implementation regulations, "effective management" is defined as substantial and overall management and control over such aspects as the production and business, personnel, accounts and properties of an enterprise. The risk that we may be deemed to be a PRC resident enterprise under the PRC Enterprise Income Tax Law and be subject to the PRC enterprise income tax at the rate of 25% on our worldwide income is disclosed in "Risk Factors—Risks Related to Doing Business in China—We may be classified as a "resident enterprise" for PRC enterprise income tax purposes, which could result in our global income becoming subject to 25% PRC enterprise income tax."

In May 2009, we adopted our 2009 Employee Stock Option Plan, or the 2009 Plan. We reserved 45,000,000 shares for grants under the 2009 Plan. As of December 31, 2013, options to purchase 11,879,840 ordinary shares were outstanding, 20,728,680 ordinary shares were exercised and 12,391,480 ordinary shares were available for future grants under the 2009 Plan.

On June 24, 2009, we granted options to purchase a total of 10,500,000 ordinary shares at the price of US$0.0400 per share to certain of our employees under the 2009 Plan. These options are subject to vesting over four years, starting from June 24, 2009, and were valued at the estimated fair value on the date of the award.

On June 7, 2010, we granted options to purchase a total of 35,175,000 ordinary shares at the price of US$0.0700 per share to certain of our directors, executive officers and employees under the 2009 Plan. These options are subject to vesting over four years, starting from June 7, 2010, and were valued at the estimated fair market value on the date of the award. We did not grant any options under our 2009 Plan in 2011, 2012 and 2013.

On March 18, 2014, we granted restricted share to our employees which will allow them to purchase up to a total of 1,600,000 restricted shares upon vesting at par value under the 2009 Plan. These non-vested restricted shares vest over a four-year requisite service period, with 25% to vest on each anniversary after the grant date.

In June 2010, we adopted our 2010 Share Incentive Plan, or the 2010 Plan. We reserved 55,000,000 shares for grants under the 2010 Plan. As of the date December 31, 2013, options to purchase 16,120,000 ordinary shares were outstanding, 19,040,414 restricted shares were outstanding and 12,626,167 ordinary shares were available for future grants under the 2010 Plan.

On January 4, 2011, we granted options to our employees and a third-party consultant to purchase 16,665,000 and 2,500,000 of ordinary shares of the Company, respectively, at an exercise price of US$0.3600 per share under the 2010 Plan. These options vest over a four-year requisite service period, with 25% of the options to vest on each anniversary after the grant date. The fair value of the stock options as of the grant date was US$3,605,856 in the aggregate, or US$0.1881 per share. The options granted to the third-party consultant was subsequently forfeited in September 2011 as the contract was terminated.

On May 24, 2011, we granted options to purchase a total of 20,175,000 ordinary shares at the initial public offering price and a total of 4,500,000 restricted shares to our independent director appointees, executive officers and certain employees under the 2010 Plan. The options granted to the independent director appointees are subject to vesting over three years, and the rest are subject to vesting over four years, starting from May 24, 2011.

On November 21, 2011, we granted options to an employee of us to purchase up to 150,000 shares under the 2010 Plan. The exercise price of the options is $0.2600 per share. These options vest over a four-year requisite service period, with 25% of the options to vest on each anniversary after the grant date.

On February 28, 2012, our compensation committee approved a share option exchange program that offered our eligible directors and employees the right to exchange vested and unvested outstanding share options to purchase our ordinary shares granted under the 2010 Share Incentive Plan between January 2011 to May 2011 for our restricted shares at the ratio of 3:1. The exchange ratio was determined based on the fair value of replacement restricted shares so that the fair value of the replacement restricted shares to be issued upon exchange would be approximately equivalent to the fair value of the share options surrendered by an individual on the date of exchange. These replacement restricted shares are subject to substantially the same vesting schedule as the options that are validly tendered in the exchange offer. A total of 102 directors and employees accepted the offer, and tendered options to purchase an aggregate of 28,790,000 ordinary shares, including 14,090,000 shares granted on January 4, 2011 and 14,700,000 shares granted on May 24, 2011, in exchange for an aggregate of 9,596,718 restricted shares at a ratio of 3:1, which were granted on March 30, 2012. The exchange of the share option for restricted shares was accounted for as a modification of share-based award, which involves a cancellation of the original award and an issuance of a new award, with no incremental compensation cost recognized as the fair value of the restricted shares was not more than the fair value of the options given up on the date of exchange.

On July 16, 2012, we granted options to employees and directors to purchase up to a total of 19,840,000 ordinary shares under our 2010 Plan. The exercise price of the options is US$0.2395 per share. These options vest over a four-year period, each with a graded vesting schedule, all commencing on July 16, 2012. We also granted to employees and directors to purchase up to a total of 400,000 restricted shares at par value under the 2010 Plan. These non-vested restricted shares vest over a four-year requisite service period, with 25% to vest on each anniversary after the grant date.

On July 20, 2012, we granted options to directors to purchase up to a total of 3,600,000 ordinary shares under our 2010 Plan. The exercise price is US$0.1960 per share. These options vest over a three year period, each with a graded vesting schedule, all commencing on July 20, 2012.

On September 4, 2013, we granted restricted shares to our employees which will allow them to purchase up to a total of 10,190,000 restricted shares upon vesting at par value under the 2010 Plan. These non-vested restricted shares vest over a four-year requisite service period, with 25% to vest on each anniversary after the grant date.

On November 5, 2013, we granted restricted shares to our senior management which will allow them to purchase up to a total of 4,800,000 restricted shares upon vesting at par value under the 2010 Plan. These non-vested restricted shares vest over a four-year requisite service period, with 25% to vest on each anniversary after the grant date.

On December 11, 2013, we granted restricted shares to an external consultant which will allow him to purchase up to a total of 394,560 restricted shares upon vesting at par value under the 2010 Plan. These non-vested restricted shares vest over a four-year requisite service period, with 25% to vest on each anniversary after the grant date.

In July 2012, we adopted our 2012 Share Incentive Plan, or the 2012 Plan. We reserved 30,000,000 shares for grants under the 2012 Plan. As of December 31, 2013, there were no options or restricted shares granted under the 2012 Plan.

We recognize the share grants as compensation for the relevant employees' services to us and recorded share-based compensation expenses. Our share-based compensation expenses amounted to approximately US$2.0 million, US$2.2 million and US$2.1 million in 2011, 2012 and 2013, respectively.

As of December 31, 2013, we had US$1.2 million in unrecognized compensation expenses related to unvested options, which we expect to recognize over a weighted average period of 2.2 years, and we had US$4.8 million of total unrecognized compensation expenses related to non-vested restricted shares granted under the 2010 Plan, which we expect to recognize over a weighted average period of 3.0 years.

We are required to estimate the grant-date fair value of the share options and other share-based awards that we grant to our employees. The grant date fair value of the share options granted in the year ended December 31, 2011 was estimated using the Black-Scholes-Merton option-pricing model, and the grant date fair value of the share options granted in the years ended December 31, 2012 was estimated using binomial option-pricing model. The fair value of non-vested restricted shares granted to our employees and officers was computed based on the fair value of our ordinary shares on the grant date, while the fair value of non-vested restricted shares granted to an external consultant was re-measured at the end of each reporting period until the services being provided is completed. We estimated the expected term based on option terms related to vesting schedule and expected option expiration date. The volatility rate estimation is developed based on the volatility of the comparable companies within the expected term commensurate with the expected time period modified to reflect ways in which currently available information indicates that the future of the subject company is reasonably expected. The risk-free interest rate is selected based on the yield of Chinese International Government Bond, which is denominated in U.S. dollars, with duration closest to the expected term.

On November 28, 2011, we announced a share repurchase plan to repurchase up to US$10 million worth of outstanding ADSs over a 12-month period. On September 28, 2012 and November 26, 2013, respectively, we extended the share repurchase plan for another 12 months from November 23, 2012 to November 23, 2013, and from November 24, 2013 to November 23, 2014, respectively. As of December 31, 2013, we had repurchased an aggregated of 1,064,177 ADSs, representing 21,283,540 ordinary shares on the open market for total cash consideration of $4.4 million.

On March 28, 2014, we completed the share repurchase program, under which we repurchased an aggregate of 41,191,160 ordinary shares, representing approximately 5.4% of our outstanding shares as of March 28, 2014, at an average price of US$0.2 per ordinary share, or US$4.9 per ADS. On March 28, 2014, we announced a new share repurchase plan to repurchase up to US$10 million worth of outstanding ADSs over a 12-month period.

Since the completion of our initial public offering, we determined the fair value of the ordinary shares for the above option awards to our employees and officers was based on the closing price of our ADSs traded on the NYSE on the grant day, while the fair value of non-vested restricted shares granted to an external consultant was re-measured at the end of each reporting period until the services being provided is completed. The table below sets forth certain information concerning the options and restricted shares awarded to our directors and executive officers and other individuals as a group in 2011, 2012 and 2013 on the dates indicated:

Grant Date/Award Date

June 24, 2009	10,500,000	—	0.0400	0.0214
June 7, 2010	35,175,000	—	0.0700	0.0700
January 4, 2011	19,165,000	—	0.3600	0.3600
May 24, 2011	20,175,000	—	0.4500	0.5000	(1)
	—	4,500,000	nil	0.5000	(1)
November 21, 2011	150,000	—	0.2600	0.2600	(2)
July 16, 2012	19,840,000	—	0.2395	0.2395	(3)
	—	400,000	0.00002	0.2395	(3)
July 20, 2012	3,600,000	—	0.1960	0.1960	(4)
September 4, 2013	—	10,190,000	0.00002	0.2390	(5)
November 5, 2013	—	4,800,000	0.00002	0.2600	(6)
December 11, 2013	—	394,560	0.00002	0.2560	(7)

We prepare our financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of our contingent assets and liabilities. We continually evaluate these judgments, estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about matters that are not

readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates.

An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could material impact our consolidated financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this annual report.

When reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgment and other uncertainties affecting the application of such policies, and (iii) the sensitivity of reported results to changes in conditions and assumptions.

We determine the allowance for doubtful accounts when facts and circumstances indicate that the receivable is unlikely to be collected. Allowance for doubtful accounts are charged to general administrative expenses. We recorded nil and US$0.3 million allowance for doubtful accounts as of December 31, 2012 and 2013, respectively.

We assess our equity investments for other-than-temporary impairment by considering factors as well as all relevant and available information including, but not limited to, current economic and market conditions, the operating performance of the investees including current earnings trends, the technological feasibility of the investee's products and technologies, the general market conditions in the investee's industry or geographic area, factors related to the investee's ability to remain in business, such as the investee's liquidity, debt ratios, and cash burn rate and other company-specific information including recent financing rounds. We recorded nil, nil and US$0.4 million in impairment losses on equity investee as of December 31, 2011, 2012 and 2013, respectively.

We evaluate out long-lived assets with definite useful life, including property and equipment and acquired intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When these events occur, we measure impairment by comparing the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the future undiscounted cash flow is less than the carrying amount of the assets, we would recognize an impairment loss equal to the excess of the carrying amount over the fair value of the assets. There were nil, nil and US$1.0 million impairment charge recognized for the years ended December 31, 2011, 2012 and 2013.

We test the intangible asset with indefinite useful life for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. If the carrying amount of the intangible asset exceeds its fair value, we recognize an impairment loss in an amount equal to that excess.

We earn revenues through developing and operating proprietary online virtual worlds. We provide such services to children via an online entertainment platform pursuant to a time-based revenue model and an item-based revenue model. Since our inception, we have not licensed or otherwise marketed any of our proprietary software to third parties except in one instance which was immaterial.

Time-based model—Users pay RMB10 (US$1.7) for a 30-day subscription per virtual world to access premium features in each of our virtual worlds. We recognize revenue generated from subscription fees ratably over the users' subscription period.

Item-based model—Users purchase our in-game virtual items under this model. Revenues are recognized over the estimated lives of the in-game virtual premium items purchased or as the virtual premium items are consumed. For the virtual premium items that are immediately consumed, we recognize revenue upon consumption. For the virtual premium items with no predetermined expiration or permanent items, we recognize revenue ratably over the estimated average lives of the permanent items (i.e. estimated period paying players play our games), which range from one year to one and a half years. The amount of the unamortized permanent items and unconsumed items are recognized as deferred revenue. We recognized US$21.2 million, US$16.3 million and US$22.4 million gross revenue from virtual premium items accounted for under the item-based model for the years ended December 31, 2011, 2012 and 2013, respectively. We estimate the average lives of our permanent items based on an assessment of our historical data and user behavior patterns, including the average period that users typically stay in our virtual worlds, the age group of our target users, and the number of active paying users in our virtual worlds, and the promotional events we launched, with reference to industry research data. We assess the estimated lives of our permanent items periodically. If there are indications of any significant changes to the estimated lives of these permanent items, the revised estimates would be applied prospectively in the period of change. Prior to June 30, 2010, we did not have sufficient historical data from our virtual worlds to estimate the useful life of the permanent items, and used the industry research data and peer company information in developing the estimate of the average life of permanent items, which was determined to be one year for all our virtual worlds. Effective July 1, 2010, we changed the accounting estimate of the useful life of our permanent items in Mole's World from one year to 18 months based on an analysis of the life of the virtual world and user behavior patterns using historical user data since the launch of Mole's World in September 2008, and applied such change prospectively. The effect of the change in accounting estimate on the results of operations for the year ended December 31, 2010 was immaterial. In 2011 and 2012, we did not make changes to the useful life of any of our virtual worlds. In 2013, we assessed its historical data of user behavior as well as industry research data and noticed a shortening trend user lifespan and changed the estimated lives of premium items for newly launched online virtual worlds to half a year. The estimated lives of existing virtual worlds remained unchanged. We will continue to monitor the user behavior patterns of each of our virtual worlds and will utilize such information to update the estimates of the useful lives of permanent items.

We record revenues net of sales discounts and rebates paid to our distributors. The cost of providing free virtual items as a result of promotional activities was immaterial for each of the three years presented.

Users pay subscription fees and purchase virtual items using our virtual currency, the Mibi, which can be purchased via various distribution channels, such as our prepaid cards, third-party prepaid cards, online payment channels, and via short messages, or SMS, through cellular telecom operators. Under both the time-based and the item-based revenue models, proceeds we receive directly from end users for sales of online points are recorded as deferred revenues, while proceeds we receive from sales of online points to parties in the distribution channel and from sales of prepaid cards are initially

recorded as advances from customers. As we do not have control over and generally do not know the ultimate selling price of the prepaid cards or online points sold by the distributors, we record net proceeds from the distributors as advances from customers. Upon activation of prepaid cards or purchase of online points, advances from customers are immediately transferred to deferred revenues.

Prepaid cards expire on the expiration date printed thereon, which is generally two years after the date of card production. Proceeds from expired prepaid cards that have not been activated are recognized as other operating income upon expiration of the cards. We recognized US$0.5 million, US$1.9 million and US$1.6 million in other operating income in connection with expired prepaid cards for the years ended December 31, 2011, 2012 and 2013, respectively.

Licensing and royalty fee revenue—revenues from our offline business include licensing income and royalty fees for licensing our proprietary cartoon figures to merchandisers and book publishers Most of the revenues generated under merchandise licensing income and royalty fees are recognized at the end of each month and calculated at the contractual royalty rate times the sales of the licensed merchandise product for the month. The sales of the licensed product are derived from the monthly sales reports provided by the licensee.

In certain of the merchandise licensing arrangements, we receive a guaranteed base fee and additional royalty fees that are contingent on sales volume. Proceeds from minimum guaranteed royalties in excess of royalties earned are generally recognized as revenues at the end of the contract term. In a small number of our merchandise licensing arrangements, we receive a fixed royalty fee from the licensee over the contract period. We recognize this type of royalty revenue ratably over the contract period.

Film revenue—we recognize revenue from the distribution of our films when the film is exhibited in theaters, provided that no significant obligations remain, amounts can be accurately estimated, and collection is reasonably assured.

Revenue from the distribution of the film on television and websites is recognized when the production is made available for exhibition and when other contractual obligations or conditions are met.

Merchandise sales revenue—revenues from selling interactive toys, books and merchandise are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured.

Share-based payment transactions with employees, directors and external consultant, such as share options and non-vested restricted shares, are measured based on the grant-date fair value of the equity instrument. We recognize share-based compensation costs net of a forfeiture rate on a straight line basis over the requisite service period of the award, which is generally the same as the vesting period of the award. We adjust the estimated forfeiture rate over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of share-based compensation costs to be recognized in future periods.

related to vesting schedule and expected option expiration date. The volatility rate estimation was developed based on the volatility of the comparable companies within the expected term commensurate with the expected time period modified to reflect ways in which currently available information indicates that the future of the subject company is reasonably expected. The risk-free interest rate was selected based on the yield of Chinese International Government Bond, which is denominated in U.S. dollars, with duration closest to the expected term.

Before we completed the initial public offer, when we were a private company, we determined the fair value of our ordinary shares as of the grant date of the share-based awards by making complex and highly subjective judgments and assumptions about our projected financial and operating results. We were also required to make other assumptions such as our weighted average cost of capital, general market and macroeconomic conditions, nature and prospects of the children's entertainment and media industry, nature and stage of development of our company, comparable companies, and our business risks. These assumptions were inherently uncertain. Changes in these assumptions could significantly affect the valuation results and the amount of share-based compensation expenses we recognized in our consolidated financial statements.

The fair value of our Company's ordinary shares underlying the share options granted prior to our completion of the initial public offering in June, 2011 was estimated by determining the equity value of our Company and then allocating the equity value into the various classes of shares and options using the option-pricing method, which is one of the generally accepted valuation methodologies. Firstly, the total equity value was developed by using the discounted cash flow approach and the guideline companies approach, which incorporated certain assumptions including the market performance of comparable listed companies, as well as the our forecasted financial results and growth trends. We checked the results obtained under the discounted cash flow approach against the results obtained from the guideline companies approach and found no material discrepancies. Then, equity value was allocated using the option pricing method under three scenarios, namely liquidation scenario, redemption scenario and IPO scenario (based on the terms of the preferred shares, share options and management's expectation on an IPO event) to determine the fair value of our ordinary shares. Under the option-pricing method, each class of equity is modeled as a call option with a distinct claim on the enterprise value of our company. The main inputs to this model included equity value of our company, exercise price, expected volatility, expected term, expected dividend yield and risk-free interest rate. With regard to the share options and restricted shares that were awarded on May 24, 2011, we used the mid-point of the price range set forth in the preliminary prospectus of IPO as the estimated fair value of ordinary shares.

For the purpose of determining the estimated fair value of our share options prior to our initial public offering, we believed that the expected volatility is the most sensitive assumptions since we had limited trading histories at the date we granted our options. Changes in the volatility assumption could significantly impact the estimated fair values of the options calculated by the Black-Scholes option pricing model. Expected volatility was estimated based upon the average stock price volatility of the comparable companies over a period commensurate with the expected term of the options. When estimating expected volatility of the share price of a nonpublic entity, historical volatility of other companies in a similar industry group was considered.

Determining the value of our share-based compensation expense in future periods required the input of highly subjective assumptions, including estimated forfeitures. We estimated the forfeitures of our share options based on past employee retention rates and our expectations of future retention rates, and we will prospectively revise our forfeiture rates based on actual history. Our share-based compensation expense may change based on changes to our actual forfeitures.

Since the completion of our initial public offering, we determined the fair value of the ordinary shares for the above option awards based on the closing price of our ADSs traded on the NYSE on the date of grant.

Our actual share-based compensation expense may be materially different from our current expectations. As of December 31, 2013, we had US$1.2 million of unrecognized compensation expense related to unvested options granted under the option plans, which we expect to recognize over a weighted-average period of 2.2 years. As of December 31, 2013, we also had US$4.8 million of total unrecognized compensation expense related to non-vested restricted shares granted under the 2010 Plan, which is expected to be recognized over a weighted-average period of 3.0 years.

In arriving at the equity value of our company, we applied a discount for lack of marketability, or DLOM, of 7.0% for the January 2011 grant, to reflect the fact that, at the time of the grant, we were a closely-held company and there was no public market for our ordinary shares. We used the put option method to estimate the DLOM, taking into consideration factors like the timing of liquidity event such as an IPO and estimated volatility of our ordinary shares. The decrease in the DLOM was primarily because we were approaching our initial public offering, as the closer the valuation date was from the offering, the lower the put option value was, and thus the lower the implied DLOM. For the determination of the fair value of the options granted on each of the grant dates prior to the initial public offering and the fair value of the underlying ordinary shares of our company prior to the initial public offering, we also considered retrospective valuations conducted by an independent appraiser.

Other general assumptions used in deriving the fair value of the ordinary shares transferred and our total equity value include the following: (i) there will be no material changes in the existing political, legal, fiscal and economic conditions in China; (ii) there will be no material changes in tax law in China and the tax rates applicable to our subsidiary, VIE and VIEs' subsidiary; (iii) exchange rates and interest rates will not differ materially from currently prevailing rates, (iv) the availability of finance will not be a constraint on the future growth of the Company, (v) the Company will retain and have competent management, key personnel and technical staff to support its ongoing operation, and (vi) there will be no material deviation in industry trends and market conditions from economic forecasts.

We provide for current income taxes in accordance with the laws of the relevant tax authorities. We recognize deferred income taxes when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Net operating loss carry forwards and credits are applied using enacted statutory tax rates applicable to future years. We reduce deferred tax assets by a valuation allowance when, in the opinion of our management, it is more-likely-than-not that a portion of or all of our deferred tax assets will not be realized. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics.

We consider positive and negative evidence when determining whether some portion or all of our deferred tax assets will not be realized. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods, our historical results of operations, and our tax planning strategies. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. As of December 31, 2013, we believe it is more-likely-than-not that Shanghai Animation will not realize the deferred tax assets resulted from the tax loss carried forward in the future periods. Thus, a full valuation allowances are provided for the deferred tax assets of Shanghai Animation. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income

during the carry forward periods are reduced. Such reduction of deferred tax asset could increase our income tax expense and adversely affect our results of operations in the period in which an allowance is recorded.

Under applicable accounting principles, a deferred tax liability should be recorded for taxable temporary differences attributable to the excess of financial reporting basis over tax basis in a domestic subsidiary. However, recognition is not required in situations where the tax law provides a means by which the reported amount of that investment can be recovered tax-free and the enterprise expects that it will ultimately use that means. As of December 31, 2013, we have accrued deferred tax liabilities of US$1.5 million for undistributed earnings of Shanghai Taomee and Guangdong Taomee, on the basis that distribution of the earnings generated after January 1, 2008, in the form of dividends or otherwise, to the Company would be subject to the then applicable PRC tax laws and regulations, unless a tax strategy which we determined to avail ourselves of were devised to avoid such tax. Prior to 2013, these entities were in an accumulated loss position.

We recognize the impact of uncertain income tax positions at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority. For a tax position that meets the more-likely-than-not recognition threshold, we initially and subsequently measure the tax benefit as the largest amount that we judge to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. Our liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. Our effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by our management. We classify interest and/or penalties related to uncertain tax positions in income tax expense.

PRC laws and regulations currently prohibit or restrict foreign ownership of Internet-related business. In order to comply with these foreign ownership restrictions, we operate our online entertainment community through Shanghai Taomee. We have entered into a series of contractual arrangements with Shanghai Taomee and its equity owners. As a result of these contractual arrangements, we have the ability and intention to exercise control over the entities and the right and obligation to absorb substantially all of their profits and losses Therefore, we have concluded that we are the primary beneficiary of Shanghai Taomee and have consolidated the entities since the date of execution of the contractual arrangements. This conclusion is predicated on the assumption that the contractual arrangements are legally enforceable, which we have determined based on the advice of our PRC legal counsel. However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Any changes in PRC laws and regulations that affect our ability to control Shanghai Taomee might preclude us from consolidating Shanghai Taomee in the future. See "Item 3 Key Information —Risks Related to Our Corporate Structure.

The following table sets forth a summary of our consolidated results of operations for the periods indicated both in absolute amount and as a percentage of our total net revenues.

	For Years Ended December 31,

	2011						2012						2013
	US$			%			US$			%			US$			%
	(in thousands, except percentages)
Net revenues:
Online business	$	40,331			88.8		$	32,169			80.0		$	35,330			73.1
Offline business		5,066			11.2			8,039			20.0			13,024			26.9


Total net revenues		45,397			100.0			40,208			100.0			48,354			100.0


Cost of services:
Online business		(6,035	)		(13.3	)		(6,950	)		(17.3	)		(7,644	)		(15.8	)
Offline business		(1,653	)		(3.6	)		(3,048	)		(7.6	)		(5,621	)		(11.6	)


Gross profit		37,709			83.1			30,210			75.1			35,089			72.6


Operating income (expenses):
Product development expenses		(10,304	)		(22.7	)		(12,318	)		(30.6	)		(13,886	)		(28.7	)
Sales and marketing expenses		(6,255	)		(13.8	)		(9,966	)		(24.8	)		(9,446	)		(19.5	)
General and administrative expenses		(7,965	)		(17.5	)		(10,078	)		(25.1	)		(13,095	)		(27.1	)
Impairment loss on acquired intangible assets		—			—			—			—			(1,046	)		(2.2	)
Other operating income		1,734			3.8			5,512			13.7			5,708			11.8


Total operating expenses		(22,790	)		(50.2	)		(26,850	)		(66.8	)		(31,765	)		(65.7	)


Income from operations		14,919			32.9			3,360			8.4			3,324			6.9
Interest income		1,410			3.1			2,647			6.6			2,932			6.1
Other income (expenses), net		667			1.5			859			2.1			771			1.6
Impairment loss on investment in an equity investee		—			—			—			—			(370	)		(0.8	)
Income before income taxes and share of profit in equity method investments		16,996			37.4			6,866			17.1			6,657			13.8
Income tax (expense)/benefit:
Current		(2,539	)		(5.6	)		1,279			3.2			(789	)		(1.6	)
Deferred		812			1.8			(424	)		(1.1	)		(630	)		(1.3	)
Total income tax (expenses)/benefits		(1,727	)		(3.8	)		855			2.1			(1,419	)		(2.9	)
Income before share of profit in equity method investments		15,269			33.6			7,721			19.2			5,238			10.8
Share of profit in equity method investments		4,224			9.3			1,140			2.8			207			0.4


Net income		19,493			42.9			8,861			22.0			5,445			11.3


Less: Net loss attributable to non-controlling interest		—			—			(1	)		0.0			4			0.0


Net income attributable to Taomee Holdings Limited		19,493			42.9			8,862			22.0			5,441			11.3


Deemed dividend on Series A convertible redeemable preferred shares		(200	)		(0.4	)		—			—			—			—


Net income attributable to holders of ordinary shares	$	19,293			42.5		$	8,862			22.0		$	5,441			11.3

For 2011, 2012 and 2013, we had two reportable segments: (i) online business and (ii) offline business. Segment revenues from the online business segment and our offline business segment accounted for 88.8% and 11.2%, respectively, in 2011, 80.0% and 20.0%, respectively, in 2012, and 73.1% and 26.9%, respectively, in 2013. The online business segment comprises primarily the operation of the virtual worlds offered through our online virtual community, mobile games and applications, online video platform as well as other online services. In 2011, 2012 and 2013, the offline business segment comprised primarily of the licensing of our franchises to book publishers and makers of consumer products, as well as revenues from film series and interactive toys featuring our cartoon figures. We do not allocate operating expenses to the segments. The following table sets forth our net revenues, gross profit and gross profit margin by segment for the periods indicated.

Net Revenues. Our net revenues increased by 20.3% from US$40.2 million in 2012 to US$48.4 million in 2013. This increase was primarily attributable to the increase in both online business revenues and offline business revenues.

Online Business. Net revenues generated from the online business increased by 9.8% from US$32.2 million in 2012 to US$35.3 million in 2013. The increase was primarily driven by continued revenue growth of our core virtual worlds, as well as contribution from several newly launched franchises.

Offline Business. Net revenues generated from our offline business increased by 62.0% to US$13.0 million in 2013 from approximately US$8.0 million in 2012. This increase was primarily attributable to revenue contribution from our interactive toy sales and box office sharing of our film Seer III: Universal Force.

Cost of Services. Our cost of services increased from US$10.0 million in 2012 to US$13.3 million in 2013, primarily due to the increased costs resulting from the growth of both online and offline businesses.

Online Business. Cost of services relating to our online business increased by 10.0% to US$7.6 million in 2013 from US$6.9 million in 2012. This increase was primarily due to an increase in bandwidth costs, fees related to our operation of certain third-party developed virtual worlds and amortization costs associated with game licensing fees.

Offline Business. Cost of services relating to our offline business increased by 84.4% to US$5.6 million in 2013 from approximately US$3.0 million in 2012. This increase was primarily due to an increase in interactive toy costs resulting from our expansion of our interactive toy sales.

Gross Profit. As a result of the foregoing, our gross profit increased to US$35.1 million in 2013 from US$30.2 million in 2012, while our gross margin decreased to 72.6% in 2013 from 75.1% in 2012, as a result of the revenue contribution from interactive toy business, which generates lower gross margin as compared to our online business and other offline business.

Operating Expenses. Our operating expenses increased by 18.3% to US$31.8 million in 2013 from US$26.8 million in 2012. The increase in our operating expenses was primarily due to the increase in general and administrative expenses and impairment loss on acquired intangible assets, and to a lesser extent, an increase in product development expenses.

Income Tax Benefit/(Expense). We had income tax expense of US$1.4 million in 2013, compared to an income tax benefit of approximately US$0.9 million in 2012. The change was primarily due the accrual of deferred tax liabilities on the undistributed earnings of our VIEs and VIE subsidiaries in 2013, whereas in the prior year they were in cumulative loss positions.

Interest Income, Net. Our net interest income increased to approximately US$2.9 million in 2013 from approximately US$2.6 million in 2012 primarily.

Other Income (Expenses), Net. Our other income decreased to US$0.8 million in 2013 from approximately US$0.9 million in 2012.

Impairment loss on Investment in an Equity Investee. We incurred impairment loss on investment in an equity investee of US$0.4 million in 2013 primarily due to the deteriorating operating and financial performance of our investment in Chuangyou.

Share of Profit in Equity Method Investments. We incurred share of profit in equity investment of US$0.2 million in 2013, compared with US$1.1 million in 2012. The change was mainly due to our most recent equity method investments in entities which are loss-making as they are in the early stage of research and development.

Net Income. As a result of the foregoing, our net income decreased from US$8.9 million in 2012 to US$5.4 million in 2013.

Net Revenues. Our net revenues decreased by 11.4% from US$45.4 million in 2011 to US$40.2 million in 2012. This decrease was primarily due to the decline in online revenues and was partially offset by the increase in offline revenues.

Online Business. Net revenues generated from the online business decreased from US$40.3 million in 2011 to US$32.2 million in 2012. The decrease was primarily due to the implementation of our strategy to focus less on short-term revenue growth and instead invest in long-term brand enhancement and platform expansion to attract new users and increase user stickiness.

Offline Business. Net revenues generated from our offline business increased by 58.7% to US$8.0 million in 2012 from approximately US$5.1 million in 2011. This increase was primarily due to the increase in revenues generated from our co-branding and merchandise licensing, revenue-sharing arrangements for two films based on the Mole and Seer franchises and revenue contributed by the interactive toy design and sales business.

Cost of Services. Our cost of services increased from US$7.7 million in 2011 to US$10.0 million in 2012, primarily due to the increased costs related to the development of both online and offline businesses.

Online Business. Cost of services relating to our online business increased by 15.2% to US$6.9 million in 2012 from US$6.0 million in 2011. This increase was primarily due to an increase in personnel-related expenses, wireless products hosting cost as a result of the increased wireless revenue and amortization costs associated with game licensing fees.

Offline Business. Cost of services relating to our offline business increased by 84.5% to US$3.0 million in 2012 from approximately US$1.7 million in 2011. This significant increase was primarily due to the increase in personnel-related expenses, the film production costs, interactive toy inventory costs.

Gross Profit. As a result of the foregoing, our gross profit decreased to US$30.2 million in 2012 from US$37.7 million in 2011, and our gross margin decreased to 75.1% in 2012 from 83.1% in 2011, as a result of the decreased net revenue and increased cost of services.

Operating Expenses. Our operating expenses increased by 17.8% to US$26.8 million in 2012 from US$22.8 million in 2011. The increase in our operating expenses was primarily due to the increase in sales and marketing expenses, and to a lesser extent, increase in product development expenses and general and administrative expenses.

Income Tax Benefit/(Expense). We had income tax benefit of US$0.9 million in 2012, compared to an income tax expense of approximately US$1.7 million in 2011. The change was primarily due to our recognition of a one-time income tax benefit of US$2.1 million as a result of governmental approval for tax reduction for the year of 2011.

Interest Income, Net. Our net interest income increased to approximately US$2.6 million in 2012 from approximately US$1.4 million in 2011 primarily due to the increase in our cash balance.

Other Income (Expenses), Net. Our other income increased to US$0.9 million in 2012 from approximately US$0.7 million in 2011 primarily due to exchange gains from our deposit denominated in RMB.

Share of Profit in Equity Method Investments. Share of profit in equity investment was US$1.1 million in 2012, compared with US$4.2 million in 2011. The decrease is mainly due to the gains on disposals, whereby in 2012 we disposed all our equity interest in Shenzhen Ruigao for US$1.0 million and recorded a gain of US$0.3 million in 2012, compared with a gain of US$3.7 million recognized from the sale of 10.5% equity interest in Elyn Corporation in 2011.

Net Income. As a result of the foregoing, our net income decreased from US$19.5 million in 2011 to US$8.9 million in 2012.

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

To date, we have financed our operations primarily through cash from operations and proceeds from our initial public offering. We did not have any short-term or long-term bank borrowings outstanding as of December 31, 2011, 2012 and 2013. As of December 31, 2012 and 2013, we had US$118.6 million and US$114.3 million in cash and cash equivalents, respectively, among which US$51.5 million and US$44.9 million were held outside the PRC, respectively. Our cash and cash equivalents held outside the PRC primarily originated from our initial public offering, and as of

December 31, 2013, the proceeds were used as follows: (i) US$0.6 million were used to subscribe for the newly issued shares of Taiwan Taomee through Joy Children in the fourth quarter of 2011; (ii) US$6.2 million were used to acquire 8.02% equity interest in Gamespedia in second half of 2012; (iii) US$4.3 million were used to pay increased legal, accounting and other operational expenses and costs we incurred as a public company; (iv) US$6.4 million were used to pay a cash dividend declared in November 2010 to our shareholders in July 2011 and August 2011; (v) US$1.4 million were used to acquire a minority equity interest in Voozclub in January 2013; (vi) US$3.0 million invested in a short-term money market investment in the second quarter of 2013; (vii) US$2.0 million were used to acquire a minority equity interest in a Beijing-based pre-school education service provider in September 2013, (viii) US$0.2 million were used to acquire a minority equity interest in a New York City company that develops mobile applications, animation and products for pre-school children in December 2013, and (ix) US$4.4 million were used to repurchase from the open market during the period from December 2011 to December 2013 a total of 1,064,177 ADSs under our share repurchase program approved by the Board in November 2011 and extended in September 2012 and November 2013. We will continue to use the IPO proceeds primarily for the purposes described in the "Use of Proceeds" section of our Form F-1 in accordance with our business plans and on an as-needed basis.

Our cash and cash equivalents as of December 31, 2011, 2012 and 2013 are listed in the table below:

Cash located in the PRC, which are held by our VIEs (including VIEs' subsidiaries) and non-VIE entities, can be transferred to our subsidiaries outside of China through dividend payments, subject to PRC government's control of currency conversion. Such transfer will incur cost in the form of PRC withholding tax. See "Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We principally rely on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiary to make payments to us, or the tax implications of making payments to us, could have a material adverse effect on our ability to conduct our business.", "—Restrictions on currency exchange may limit our ability to receive and use our revenues effectively", and "—Governmental control of currency conversion may affect the value of your investment."

The decrease of the cash and cash equivalents from 2012 to 2013 was primarily due to a short-term money market investment of US$3.0 million as well as prepayment of US$3.0 million for purchase of land use rights and building, and partially offset by the increase in interest income and foreign exchange gain. The decrease in cash provided by operating activities from 2011 to 2013 was primarily attributable to the decrease in revenues of our online business, partially offset by the increases in our offline business revenues.

2011 and August 2011 by using the proceeds from our initial public offering. We did not declare any dividend in 2012 and 2013.

We are a holding company, and we rely principally on dividends and other distributions from our subsidiary in China for our cash requirements. We receive economic benefits generated from our significant VIE, Shanghai Taomee, through various contractual arrangements entered into by Shanghai Shengran, our PRC subsidiary, with Shanghai Taomee. Such contractual arrangements include business operation agreement, commercial cooperation agreement and equity interest pledge agreement with Shanghai Taomee. Under these contractual arrangements, Shanghai Taomee will pay to Shanghai Shengran its earnings in RMB in the form of services fees. Under China's existing foreign exchange regulations, our PRC subsidiary is able to make payments of current accounts, like dividends to its offshore holding companies, in foreign currencies, without prior approval from the SAFE, after complying with certain procedural requirements. See "Item 3. Key Information—Risk Factors—Risks Related to Doing Business in China—Governmental control of currency conversion may affect the value of your investment" and "Item 3. Key Information—Risk Factors—Risks Related to Doing Business in China—We may be subject to penalties, including restriction on our ability to inject capital into our PRC subsidiary and our PRC subsidiary's ability to distribute profits to us, if our PRC resident shareholders or beneficial owners fail to comply with relevant PRC foreign exchange rules."

In addition, current PRC regulations permit our subsidiary to pay dividends to us only out of its accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Each of our subsidiaries, VIEs and VIEs' subsidiaries in China is required to set aside at least 10% of its after tax profits, as determined on a calendar year basis and in accordance with PRC GAAP, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. The registered capital of Shanghai Taomee and Shanghai Shengran are RMB10 million (US$1.4 million) and US$2.5 million, respectively. As of the date of this annual report, Shanghai Taomee and Shanghai Shengran have made allocations to the statutory reserve fund in compliance with the applicable PRC laws and regulations. Each of Shanghai Taomee and Shanghai Shengran has made no allocations for the year ended December 31, 2013 because their statutory reserves have reached 50% of their registered capital, the maximum amount required under the PRC regulations. These reserves are not distributable as cash dividends.

We determine the amount of statutory reserves to be set aside each year in accordance with PRC regulations based the amount of accumulated profits of our subsidiaries, VIEs and VIEs' subsidiaries in China as determined under PRC GAAP. The differences in the amount of accumulated profits under PRC GAAP and the amount of retained earnings in our financial statements, prepared and presented in accordance with U.S. GAAP, relate to the different methods of revenue recognition and accounting for share-based compensation under PRC GAAP and U.S. GAAP.

We believe that our current levels of cash balances and cash flows from operations will be sufficient to meet our anticipated cash needs to fund our operations for at least the next 12 months. However, we may need additional cash resources in the future if we experience adverse business conditions or other developments or if we find and wish to pursue opportunities for investment, acquisitions, strategic cooperation or other similar actions.

Our net cash provided by operating activities in 2013 was approximately US$9.9 million. This is based on our net income of US$5.4 million in 2013, positively adjusted by a US$2.2 million increase in depreciation and amortization, US$2.1 million increase in share-based compensation, US$1.7 million increase in allowance for doubtful accounts as well as impairment of intangible assets and long-term investment. This was partially offset by US$1.5 million increase in amounts due from related parties, US$1.2 million decrease in advance from customers, US$1.1 million decrease in accounts payable,

US$0.9 million increase in other assets, and, to a less extent, by adjustment of accrued expenses and other current liabilities, accounts receivable, income tax payable and deferred revenue.

Our net cash provided by operating activities in 2012 was approximately US$7.2 million. This is based on our net income of US$8.9 million in 2012, positively adjusted by a US$2.3 million increase in share-based compensation and US$0.6 million dividends received from Elyn Corporation and Joy Children. This was partly offset primarily by a US$2.2 million adjustment in income tax recoverable, as well as a US$2.1 million decrease in advance from customers, a US$0.9 million decrease in deferred revenue and a US$0.9 million decrease in accounts receivable which are attributable to the decrease of our revenues of 2012 compared to the revenue of 2011, and, to a lesser extent, by adjustment of accrued expenses, accounts payables, deferred income tax, prepayments and other assets.

Our net cash provided by operating activities in 2011 was approximately US$22.4 million. This is based on our net income of US$19.5 million in 2011, positively adjusted by a US$2.0 million increase in share-based compensation, a US$2.1 million increase in deferred revenues, a US$2.2 increase in income taxes payable, a US$1.5 million increase in advance from customers as our online business segment grew from 2010 to 2011. This was partly offset by a US$1.0 million decrease in accounts receivable, a US$0.4 million decrease in accrued expenses and other current liabilities, and a US$1.5 million adjustment to amounts due from related parties, accounts payable, amounts due to related parties, prepaid and other current assets and deferred income taxes, and other assets. The change in accrued expenses and other current liabilities were largely due to an increase in unpaid professional fees.

Our net cash used in investing activities in 2013 was approximately US$14.8 million, primarily due to US$6.5 million paid to acquire equity investees, US$3.0 million paid to purchase short-term investment, US$3.0 million paid as prepayments for land use right and building purchase, US$1.4 million paid for the purchase of property and equipment for our ordinary course of businesses, as well as US$0.9 million paid to purchase intangible assets such as exclusive licensing right of Avata Star and Speed Hunter.

Our net cash used in investing activities in 2012 was approximately US$7.7 million, primarily due to US$7.0 million paid to acquire equity investees, including the purchase of 8.02% equity interest in Gamespedia,US$1.4 million for the purchase of intangible assets such as Canimals franchise and additional three franchises for our future pipeline from Voozclub, and the exclusive licensing right of two online games from our related parties, and to a lesser extent, US$0.3 million paid for the purchase of property and equipment for our ordinary course of business. This was partly offset by US$1.0 million proceeds from the sale of all our equity interest in Shenzhen Ruigao.

Our net cash provided by investing activities in 2011 was approximately US$0.7 million, primarily as a result of US$3.9 million from the proceeds from our sale of a 10.5% equity interest in Elyn Corporation in February 2011, and partly offset by US$1.2 million payment to a third party game company as upfront licensing fee, US$1.1 million in investment in an equity investee, and US$0.8 million in purchase of property and equipment.

Our net cash used in financing activities in 2013 was approximately US$1.1 million, resulting from US$2.1 million used in repurchase of ordinary shares, and was offset by the proceeds of US$1.0 million received from exercise of share options.

Our net cash used in financing activities in 2012 was approximately US$1.7 million, resulting from US$1.7 million used in repurchase of ordinary shares and US$0.3 million as issuance costs of our ordinary shares, and was offset by US$0.3 million received from exercise of share options.

Our net cash provided by financing activities in 2011 was approximately US$53.0 million, resulting from the proceeds of US$69.4 million received from the initial public offering, and was offset by US$9.0 million of cash dividends paid, US$6.9 million payment of initial public offering costs and US$0.6 million used to repurchase of ordinary shares.

We had capital expenditures of US$2.1 million, US$1.7 million and US$5.3 million for 2011, 2012 and 2013, respectively. Our capital expenditures were used primarily for (i) purchase of computer hardware and equipment, (ii) purchase of intangible assets, (iii) purchase of franchises and online game licensing rights for our pipeline, and (iv) prepayments as deposits for purchasing land use rights and building ownership. Actual future capital expenditures may differ from the amounts indicated above.

Pursuant to laws applicable to entities incorporated in the PRC, our subsidiaries, VIEs and VIEs' subsidiaries in the PRC must make appropriations from after-tax profit to non-distributable reserve funds. These reserve funds include one or more of the following: (i) a general reserve, (ii) an enterprise expansion fund and (iii) a staff bonus and welfare fund. Subject to certain cumulative limits, the general reserve fund requires annual appropriation of 10% of after tax profit (as determined under accounting principles generally accepted in the PRC at each year-end) until the accumulative amount of such reserve fund reaches 50% of their registered capital; the other fund appropriations are at the subsidiaries' discretion. These reserve funds can only be used for specific purposes of enterprise expansion and staff bonus and welfare and are not distributable as cash dividends and amounted to US$2.0 million as of December 31, 2013. In addition, due to restrictions on the distribution of registered capital from our PRC subsidiaries, the PRC subsidiaries' registered capital of US$24.9 million as of December 31, 2013, were considered restricted. As a result of these PRC laws and regulations, as of December 31, 2013, approximately US$26.9 million, were not available for distribution to the Company by its PRC subsidiaries in the form of dividends, loans or advances.

We have created a proprietary engine for powering our virtual worlds. Our scalable hardware infrastructure allows us to cost-effectively accommodate rapid growth in user base and traffic. The advanced modular architecture of our technology platform allows us to quickly update the content of our virtual worlds with new features, shorten development cycles and rapidly roll out new virtual worlds and other services. The layering of more advanced features and functionalities afford us opportunities to increase the monetization of our user base. Our reliable account and virtual currency management system and integrated prepaid card and online payment systems also allow us to analyze user spending patterns and quickly monetize any new virtual worlds and services. Our research and development team possesses extensive experience in Flash and HTML5 technologies and is credited with the creation of innovative and advanced features, such as the continuous side-scrolling action scenes that deliver a superior and highly engaging user experience and add monetization values. Our technology platform also features a scalable data warehouse and advanced data and integrated data analytical functions that help us measure the popularity of themes, features and virtual items. This helps our product development team understand user preferences and develop content that enhances user experience and creates better monetization potential.

In each of the three years ended December 31, 2011, 2012 and 2013, our research and development expenditures, including share-based compensation expenses for research and development staff, were US$10.3 million, US$12.3 million and US$13.9 million, representing 22.7%, 30.6% and 28.7% of our total net revenues for 2011, 2012 and 2013, respectively. Our research and development

expenses consist primarily of payroll expenses, share-based compensation expenses and rental expenses. We have expensed all of the development costs for the research and development of products.

We regard our copyrights, trademarks, trade secrets and similar intellectual property as important to our success, and rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, suppliers and others to protect our proprietary rights. All of our research and development personnel have entered into confidentiality and proprietary information agreements or contract clauses with us. These agreements address intellectual property protection issues and require our employees to assign to us all of the inventions, designs, and technologies they develop during their employment with us.

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the year ended December 31, 2013 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

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

The following table sets forth our operating lease obligations as of December 31, 2013:

Our operating lease obligations related to lease agreements for our corporate offices and Internet data centers.

Other than the obligations set forth above, we did not have any long-term debt obligations, capital lease obligations, purchase obligations or other long-term liabilities as of December 31, 2013.

This annual report contains forward-looking statements that are based on our management's beliefs and assumptions and on information currently available to us. These statements involve known and unknown risks, uncertainties and other factors, including those listed under "Risk Factors," which 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, you can identify these forward-looking statements 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. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, among other things, statements relating to:

This annual report also contains data related to the children's online entertainment industry in China, including projections that are based on a number of assumptions. These market data, including the public data from EntGroup.cn include projections that are based on a number of assumptions. The children's entertainment and media market and children's product market in China may not grow at the rates suggested by the market data, or at all. The failure of the markets to grow at the projected rates may have a material adverse effect on our business and the market price of our ADSs. In addition, the rapidly changing nature of the children's online entertainment industry in China subjects any projections or estimates relating to the growth prospects or future condition of our market to significant uncertainties. If any one or more of the assumptions underlying the market data turns out to be incorrect, our actual results may differ from the projections based on these assumptions.

You should read thoroughly this annual report and the documents that we refer to in this annual report with the understanding that our actual results in the future may be materially different from or worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements. Other sections of this annual report include additional factors which could adversely affect our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The following table sets forth information regarding our directors and executive officers as of the date of this annual report.

Directors and Executive Officers		Position/Title

Jason Liqing Zeng	44	Chairman
Benson Haibing Wang	33	Co-Founder, Director and Chief Executive Officer
Roc Yunpeng Cheng	36	Co-Founder, Director and President
Crow Zhen Wei	38	Co-Founder and Director
JP Gan	42	Independent Director
Shengwen Rong	45	Independent Director
Ted Lai	43	Independent Director
Changtian Wang	48	Independent Director
George Kuan	40	Independent Director
Paul Keung	43	Chief Financial Officer
Owen Quan Zhou	37	Vice president

Mr. Jason Liqing Zeng has served as our chairman since October 2008. Mr. Zeng founded Shenzhen Decent Investment Limited, an investment company which focuses on high-technology investment, in May 2007 and has served as the chairman since its inception. Previously, Mr. Zeng co-founded Tencent Holdings Limited, an Internet service company in China listed on the Hong Kong

Stock Exchange, and served as its chief operating officer from 1999 to 2007. From 1993 to 1999, Mr. Zeng served as a manager in the Shenzhen Branch of China Telecom Corporation Limited, a company engaging in information service and wired telecommunications and broadband services in China and listed on the Hong Kong Stock Exchange and the New York Stock Exchange. Mr. Zeng is also an independent director of A8 Digital Music Holdings Limited, an integrated digital music company listed on the Hong Kong Stock Exchange, a director of Shenzhen Ruigao, a director of Chuangyou, a director of Shenzhen Taole Network Technology Co., Ltd, a director of Shenzhen Kuaibo Technology Co., Ltd. and a director of several private companies. Mr. Zeng received his EMBA degree from China Europe International Business School in China in 2007 and his bachelor's degree in computer communication from Xi'an Electronic Technology University in 1993.

Mr. Benson Haibing Wang is one of the founders and the creative architect of many of our franchises. Mr. Wang is also our chief executive officer and has served as our director since October 2008. Prior to co-founding our company, Mr. Wang worked as a project manager at Tencent Technology (Shenzhen) Company Limited, a subsidiary of Tencent Holdings Limited, from 2004 to 2007. Mr. Wang is also a director of Gamespedia Holdings Limited and a director of Chuangyou. Mr. Wang has approximately ten years of experience in the development of online products in China and has formulated our current strategy and led our rapid growth. Mr. Wang received his bachelor's degree in electrical engineering and his master's degree in computer science from Huazhong University of Science and Technology in 2001 and 2004, respectively.

Mr. Roc Yunpeng Cheng is one of our founders and our president. Mr. Cheng has served as our director since October 2008. Prior to co-founding our company, Mr. Cheng worked as an assistant general manager of the advertising department of Tencent Technology (Shenzhen) Company Limited from 2001 to 2007, primarily responsible for advertising business in East and South China. Mr. Cheng was a sales manager in the Shenzhen Branch of International Network Communications (Shanghai) Co., Ltd., a company engaging in Internet portal and related business, from 1999 to 2001. Ms. Cheng is also a director of Shanghai Taoyue Information Technology Co., Ltd., an online game development company, and a director of Jiangxi Haomi Network Technology Co., Ltd., a company which develops family entertainment and education application on mobile and multi-screen platforms in China. Mr. Cheng has approximately 15 years of experience in marketing and operations. Mr. Cheng received his bachelor's degree in materials engineering from Harbin Institute of Technology in 1999.

Mr. Crow Zhen Wei is one of our founders. Mr. Wei has served as our director since October 2008 and as our chief technology officer from October 2008 to February 2014. Prior to co-founding our company, Mr. Wei worked as a software engineer at Novell China Inc., a company engaging in infrastructure software business, from 2006 to 2007. Mr. Wei was a system architecture designer and project manager at Tencent Technology (Shenzhen) Company Limited from 2004 to 2006. Prior to that, Mr. Wei was a software engineer at Huawei Technologies Co., Ltd., a China-based telecom solutions provider, from July 2003 to December 2003. Mr. Wei has approximately 11 years of experience in software and Internet technology. Mr. Wei received his bachelor's degree in chemistry and his master's degree in computer science from University of Science and Technology of China in 1999 and 2003, respectively.

Mr. JP Gan has served as our director since May 2009 and is currently our independent director. Mr. Gan has been serving as a managing director and a member of the investment committee of Qiming Venture Partners, a private equity firm affiliated to the Qiming Funds, since 2007. From 2005 to 2006, Mr. Gan was the chief financial officer of Kongzhong Corporation, a Nasdaq listed wireless Internet company. Prior to joining Kongzhong, Mr. Gan was a director of the Carlyle Group responsible for venture capital investments in the Greater China region from 2000 to 2005. Mr. Gan worked at the investment banking division of Merrill Lynch, in Hong Kong from 1999 to 2000, and worked at PricewaterhouseCoopers LLP in the United States from 1994 to 1997. Currently, Mr. Gan is also a director of Ctrip.com International Limited and Jiayuan.com International Ltd., both of which

are NASDAQ-listed companies, a director of Playgame Sdn. Bhd, or Playgame, an affiliate of us, and a director of several private companies. Mr. Gan obtained his Masters of Business Administration from the University of Chicago Booth School of Business and his bachelor's degree in business administration from the University of Iowa.

Mr. Shengwen Rong has served as our independent director since June 2011. Mr. Rong has been the chief financial officer of UCWeb Inc., a leading provider of mobile Internet software technology and application services. From April 2010 to January 2012, Mr. Rong was the chief financial officer of Country Style Cooking Restaurant Chain Co., Ltd, a NYSE-listed company. Prior to that, Mr. Rong had been the chief financial officer of two privately held education companies in China since April 2008. From 2000 to 2008, Mr. Rong held multiple financial management positions at Google, Inc. Solectron Corp., and Siebel Systems. Mr. Rong also worked at PricewterhouseCoopers as an auditor both in its Chicago and Beijing offices. Mr. Rong obtained a bachelor's degree in economics from Renmin University of China in 1991, a master's degree in professional accountancy from West Virginia University in 1996 and an MBA from the Booth School of Business at the University of Chicago in 2000. Mr. Rong is a certified public accountant in the United States.

Mr. Ted Lai has served as our independent director since June 2012. Mr. Lai serves on the steering committee of AngelVest, a China based angel investor organization. From November 2011 to September 2013, Mr. Lai served as executive vice president for Asia of BBC Worldwide, responsible for strategic development across the Asia region, driving growth through new brand, product and service initiatives. Before joining BBC, Mr. Lai spent more than a decade working for Time Warner with his last role being senior vice president of Warner Bros. International TV. Previously, Mr. Lai was a business development and product management executive in the digital media industry, having worked in several high-profile companies, including idealab's FreePC from inception to merger and initial public offering. Mr. Lai also developed strategic plans for theme parks and location-based entertainment centers for the Walt Disney Company. Mr. Lai earned his MBA at Harvard Business School and master's and bachelor's degrees in engineering at Stanford University.

Mr. Changtian Wang has served as our independent director since June 2012. Mr. Wang is the chairman and chief executive officer of Beijing Enlight Media Co., Ltd., a company listed on the Shenzhen Stock Exchange. Mr. Wang has more than twenty years' experience in media industry. Before founding Beijing Enlight Media Co., Ltd., Mr. Wang worked for some television channels and newspapers in China, such as Beijing Television. Mr. Wang is also director of JinHua Changfeng Information and Technology Co., Ltd., a Zhejiang-based instant messaging and internet value-added service provider, and is also the chairman or director of several companies which are affiliates or subsidiaries of Beijing Enlight Media Co., Ltd.. Mr. Wang earned his bachelor's degree in journalism from Fudan University.

Mr. George Kuan has served as our independent director since June 2012. Mr. Kuan is currently in a sales leadership role at Nike Inc. Greater China. Prior to joining Nike Inc. Greater China, Mr. Kuan worked at several well-known multinational corporations, including Coca-Cola (China) Beverages, Ltd., SAP, Oracle Corporation and BMC Software Inc. Mr. Kuan earned his bachelor's degree in business administration in finance from the University of Houston in 1996, his master of science in management and systems from New York University in 2004, and his Ph.D. in philosophy from the International School of Management in 2011.

Mr. Paul Keung has been our chief financial officer and executive vice president of investment department since February 2011. Prior to joining us, Mr. Keung was a managing director of Oppenheimer Investments Asia since 2009, overseeing the firm's Asia research practice. Between 2000 and 2008, Mr. Keung was the executive director of CIBC World Markets, where for the majority of his time, he was responsible for coverage of the Internet, Media and Entertainment sectors in the US and China. From 1998 to 2000, Mr. Keung was the chief information officer of Wyndham International, a

global hospitality company. Between 1994 and 1998, he served in various investment banking and equity research roles at Deutsche Morgan Grenfell, PaineWebber Securities, and Salomon Brothers. Mr. Keung currently serves as an Independent director of Jiayuan.com International Ltd., a NASDAQ-listed company, and the director of Taiwan Taomee. Mr. Keung obtained his bachelor's degree in hotel administration from Cornell University and his master's degree in real estate from New York University.

Mr. Owen Quan Zhou has been our vice president in charge of human resources since July 2011. Prior to joining our company, Mr. Zhou worked as a strategic manager of human resources and manager of human resources of wireless industry department of Tencent Technology Company Limited, from January 2004 to July 2011. Mr. Zhou was the officer of human resources development and the manager of human resources of Ping An Insurance (Group) Company of China, Ltd., Henan branch, from July 1997 to December 2003. Mr. Zhou has approximately 17 years of experience in human resources management. Mr. Zhou received his bachelor's degree in international trade and commerce from Jiangxi University of Finance and Economics in 1997.

In 2013, we paid an aggregate of approximately RMB5.5 million (US$0.9 million) in cash to our executive officers, and an aggregate of approximately US$60,000 in cash to our independent directors. For options granted to our executive officers, see "—Share Incentive Plans."

We have neither set aside nor accrued any amount of cash to provide pension, retirement or other similar benefits to our officers and directors. Our PRC subsidiaries, VIE and VIEs' subsidiaries are required by law to make contributions equal to certain percentages of each employee's salary for his or her retirement benefit, medical insurance benefits, housing funds, unemployment and other statutory benefit. Our PRC subsidiary contributed an aggregate of RMB0.4 million (US$0.07 million) for retirement and similar benefits for our officers and directors in 2013.

We have adopted our 2009 Stock Option Plan, or the 2009 Plan, to promote our success and to increase shareholder value by providing an additional means, through the grant of awards, to attract, motivate, retain and reward selected employees and other eligible persons. The maximum number of shares which may be issued pursuant to all awards under the 2009 Plan is 45,000,000. As of December 31, 2013, options to purchase an aggregate of 11,879,840 ordinary shares under the 2009 Plan were outstanding.

Types of Awards. The 2009 Plan permits the grant of several kinds of awards, including among others, options, restricted shares and restricted share units.

Plan Administration. Our board of directors, or one or more committees designated by our board of directors, will administer the 2009 Plan. The administrator will determine the terms and conditions of each grant, including, without limitation, the eligibility of the persons, whether and to what extent awards are granted, the grant price, the number of awards, the forms of the award agreements, limited amendment of terms of any outstanding award, the construction and interpretation of the 2009 Plan and any award agreements, and such other action not inconsistent with the terms of the 2009 Plan as the administrator deems appropriate.

Award Agreements. Options and other awards granted under the 2009 Plan are evidenced by a written award agreement that sets forth the material terms and conditions for each grant.

Eligibility. We may grant awards to employees and directors of our company and consultants.

Term of the Option and Stock Appreciation Rights. The term of each option and stock appreciation rights granted will not exceed ten years.

Vesting Schedule. In general, the option agreements specify the vesting schedules.

Amendment and Termination of the 2009 Plan. Unless terminated earlier, the 2009 Plan will continue in effect for a term of ten years from the date of its approval by the board of directors. Our board of directors has the authority to amend, modify, suspend, or terminate the 2009 Plan subject to shareholder approval to the extent required by applicable laws or if such amendment would lessen the shareholder approval requirements. However, no such action may impair the rights of any award recipient unless agreed by the recipient in written.

We have adopted our 2010 Share Incentive Plan, or the 2010 Plan. The maximum number of shares which may be issued pursuant to all awards under the 2010 Plan is 55,000,000. As of December 31, 2013, options to purchase an aggregate of 16,120,000 ordinary shares and 19,040,414 restricted shares under the 2010 Plan were outstanding.

Types of Awards. The 2010 Plan permits the grant of several kinds of awards, including among others, options, restricted shares, restricted share units and share appreciation rights.

Plan Administration. The compensation committee of our board of directors will administer the 2010 Plan, and may delegate its administrative authority to a committee of one or more members of our board or one or more of our officers, subject to certain restrictions. Among other things, the compensation committee will designate the eligible individuals who may receive awards, and determine the types and number of awards to be granted and terms and conditions of each award grant. The compensation committee has the sole power and discretion to cancel, forfeit or surrender an outstanding award.

Award Agreements. Options and other awards granted under the 2010 Plan will be evidenced by a written award agreement that sets forth the material terms and conditions for each grant.

Eligibility. We may grant awards to the employees, consultants rendering bona fide services to us or our affiliated entities designated by our board, as well as our directors, provided that awards cannot be granted to consultants or non-employee directors who are resident of any country in the European Union, and any other country which pursuant to applicable laws does not allow grants to non-employees.

Term of the Option and Stock Appreciation Rights. The term of each option and stock appreciation rights granted will not exceed ten years, and the compensation committee may extend the term subject to certain limitation under relevant applicable regulations.

Acceleration of Awards upon Corporate Transactions. The compensation committee may, in its sole discretion, upon or in anticipation of a corporate transaction, accelerate awards, purchase the awards from the holder or replace the awards.

Vesting Schedule. In general, the compensation committee determines, or the option agreements specify the vesting schedules.

Amendment and Termination of the 2010 Plan. The compensation committee may at any time amend, modify or terminate the 2010 Plan subject to shareholder approval to the extent required by laws. Additionally, shareholder approval will be specifically required to increase the number of shares available under the 2010 Plan, or to permit the compensation committee to extend the term or the exercise period of an option or share appreciation right beyond ten years, or if amendments result in

material increases in benefits or a change in eligibility requirements. Any amendment, modification or termination of the 2010 Plan must not impair any rights or obligations under awards already granted without consent of the holder of such awards. Unless terminated earlier, the 2010 Plan will expire and no further awards may be granted after the tenth anniversary of the shareholders' approval of the 2010 Plan.

We have adopted our 2012 Share Incentive Plan, or the 2012 Plan. The maximum number of shares which may be issued pursuant to all awards under the 2012 Plan is 30,000,000. As of December 31, 2013, there were no options or restricted shares granted under the 2012 Plan.

Types of Awards. The 2012 Plan permits the grant of several kinds of awards, including among others, options, restricted shares, restricted share units and share appreciation rights.

Plan Administration. The compensation committee of our board of directors will administer the 2012 Plan, and may delegate its administrative authority to a committee of one or more members of our board or one or more of our officers, subject to certain restrictions. Among other things, the compensation committee will designate the eligible individuals who may receive awards, and determine the types and number of awards to be granted and terms and conditions of each award grant. The compensation committee has the sole power and discretion to cancel, forfeit or surrender an outstanding award.

Award Agreements. Options and other awards granted under the 2012 Plan will be evidenced by a written award agreement that sets forth the material terms and conditions for each grant.

Vesting Schedule. In general, the compensation committee determines, or the option agreements specify the vesting schedules.

Amendment and Termination of the 2012 Plan. The compensation committee may at any time amend, modify or terminate the 2012 Plan subject to shareholder approval to the extent required by laws. Additionally, shareholder approval will be specifically required to increase the number of shares available under the 2012 Plan, or to permit the compensation committee to extend the term or the exercise period of an option or share appreciation right beyond ten years, or if amendments result in material increases in benefits or a change in eligibility requirements. Any amendment, modification or termination of the 2012 Plan must not impair any rights or obligations under awards already granted without consent of the holder of such awards. Unless terminated earlier, the 2012 Plan will expire and no further awards may be granted after the tenth anniversary of the shareholders' approval of the 2012 Plan.

The table below sets forth, as of December 31, 2013, the option and restricted share grants made to our directors and executive officers and other individuals as a group, under our share incentive plans:

Name	Ordinary Shares Underlying Outstanding Options/ Restricted Shares		Grant Date/ Award Date	Expiration Date

Benson Haibing Wang	*	0.07	June 7, 2010	June 7, 2020
	*	0.00002	November 5, 2013	November 5, 2023
Roc Yunpeng Cheng	*	0.07	June 7, 2010	June 7, 2020
	*	0.00002	November 5, 2013	November 5, 2023
Crow Zhen Wei	*	0.07	June 7, 2010	June 7, 2020
	*	0.00002	November 5, 2013	November 5, 2023
Shengwen Rong	*	0.45	May 24, 2011	May 24, 2021
Ted Lai	*	0.1960	July 20, 2012	July 20, 2022
Changtian Wang	*	0.1960	July 20, 2012	July 20, 2022
George Kuan	*	0.1960	July 20, 2012	July 20, 2022
JP Gan	*	0.1960	July 20, 2012	July 20, 2022
Paul Keung	*	nil	May 24, 2011	May 24, 2021
	*	0.2395	July 16, 2012	July 16, 2022
	*	0.00002	November 5, 2013	November 5, 2023
Quan Zhou	*	nil	May 24, 2011	May 24, 2021
	*	0.2395	July 16, 2012	July 16, 2022
	*	0.00002	November 5, 2013	November 5, 2023
Directors and executive officers as a group	7,750,000	0.07	June 7, 2010	June 7, 2020
	3,083,334	nil	May 24, 2011	May 24, 2021
	3,000,000	0.2395	July 16, 2012	July 16, 2022
	3,600,000	0.1960	July 20, 2012	July 20, 2022
	4,800,000	0.00002	November 5, 2013	November 5, 2023
Other individuals as a group	1,368,260	0.04	June 24, 2009	June 24, 2019
	2,761,580	0.07	June 7, 2010	June 7, 2020
	1,460,844	0.36/nil	January 4, 2011	January 4, 2021
	441,676	nil	May 24, 2011	May 24, 2021
	8,770,000	0.2395	July 16, 2012	July 16, 2022
	9,610,000	0.00002	September 4, 2013	September 4, 2023
	394,560	0.00002	December 11, 2013	December 11, 2023

offer. A total of 102 directors and employees accepted the offer, and tendered options to purchase an aggregate of 28,790,000 ordinary shares, including 14,090,000 shares granted on January 4, 2011 and 14,700,000 shares granted on May 24, 2011, in exchange for an aggregate of 9,596,718 restricted shares at a ratio of 3:1, which were granted on March 30, 2012. The exchange of the share option for restricted shares was accounted for as a modification of share-based award, which involves a cancellation of the original award and an issuance of a new award, with no incremental compensation cost recognized as the fair value of the restricted shares was not more than the fair value of the options given up on the date of exchange. This exchange program is expected to provide additional incentive and retention value. The replacement restricted shares to our directors, officers and employees as listed below:

Our board of directors consists of nine members. A director is not required to hold any shares in the company by way of qualification. A director may vote with respect to any contract or proposed contract or arrangement notwithstanding that he may be interested therein and if he does so his vote shall be counted and he may be counted in the quorum at any meeting of the directors at which any such contract or proposed contract or arrangement is considered. A director who is in any way, whether directly or indirectly, interested in a contract or proposed contract with our company is required to declare the nature of his interest at a meeting of our directors. The directors may exercise all the powers of our company to borrow money, mortgage or charge its undertaking, property and uncalled capital or any part thereof, and issue debentures or other securities whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third-party. None of our non-executive directors has a service contract with us that provides for benefits upon termination of employment.

We have established three committees under the board of directors: the audit committee, the compensation committee and the corporate governance and nominating committee, and adopt a charter for each of the committees. Each committee's members and functions are described below.

Our audit committee consists of Mr. Shengwen Rong, Mr. Ted Lai and Mr. George Kuan. Mr. Rong, Mr. Lai and Mr. Kuan satisfy the "independence" requirements of Section 303A of the Corporate Governance Rule of the New York Stock Exchange and Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Mr. Rong is the chairman of our audit committee and meets the criteria of an audit committee financial expert as set forth under the applicable rules of the SEC. Mr. Rong, Mr. Lai and Mr. Kuan all have extensive knowledge and experience applying U.S. GAAP. From April 2010 to January 2012, Mr. Rong was the chief financial officer of Country Style Cooking Restaurant Chain Co., Ltd, a NYSE-listed company which prepares and presents its consolidated financial statements in accordance with U.S. GAAP, and also had experience applying U.S. GAAP at his previous positions at Google, Inc., Solectron Corp., and Siebel Systems. Prior to that, Mr. Rong worked at PricewaterhouseCoopers LLP in the United States and Beijing. Mr. Rong is a certified public accountant in the United States. Mr. Kuan has served in various finance and accounting roles at BMC Software Inc., including serving as the regional finance manager based in Australia and the country controller at BMC Japan. In BMC Software Inc., Mr. Kuan was a member of the corporate accounting team responsible for operating expenses management control. In BMC Japan, Mr. Kuan served in the corporate accounting team responsible for revenue recognition accounting practice, in accordance with GAAP software policy. Mr. Lai has experience of reviewing company financial statements related to his work with AngelVest, as well as with BBC Worldwide, Time Warner and the Walt Disney Company.

The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things:

Our compensation committee consists of Mr. JP Gan, Mr. Ted Lai and Mr. George Kuan. Mr. Gan, Mr. Tai and Mr. Kuan satisfy the "independence" requirements of Section 303A of the Corporate Governance Rule of the New York Stock Exchange. Mr. Gan is the chairman of our compensation committee. Our compensation committee assists the board of directors in reviewing and approving the compensation structure of our directors and executive officers, including all forms of compensation to be provided to our directors and executive officers. Our chief executive officer may

not be present at any committee meeting during which his compensation is deliberated. The compensation committee is responsible for, among other things:

Our corporate governance and nominating committee consists of Mr. Changtian Wang, Mr. JP Gan and Mr. Shengwen Rong. Mr. Wang, Mr. Gan and Mr. Rong satisfy the "independence" requirements of Section 303A of the Corporate Governance Rule of the New York Stock Exchange. Mr. Wang is the chairman of our corporate governance and nominating committee. The corporate governance and nominating committee assists our board of directors in identifying individuals qualified to become our directors and in determining the composition of the board and its committees. The corporate governance and nominating committee is responsible for, among other things:

Under Cayman Islands law, our directors owe to us fiduciary duties, including a duty of loyalty, a duty to act honestly, and a duty to act in what they consider in good faith and to be in our best interests. Our directors also have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association as may be amended from time to time. Our company has a right to seek damages against any director who breaches a duty owed to us.

Pursuant to our memorandum and articles of association, our board of directors are designated into three classes, namely Class A directors, Class B directors and Class C directors, who shall retire from office and be eligible for re-election at the first, second and third annual general meeting after our initial public offering, respectively. Mr. Roc Yunpeng Cheng, Mr. Ted Lai and Mr. Changtian Wang have been designated as Class A directors. Mr. Crow Zhen Wei, Mr. Shengwen Rong and Mr. George Kuan have been designated as Class B directors. Mr. Jason Liqing Zeng, Mr. Benson Haibing Wang and Mr. JP Gan have been designated as Class C directors. At each subsequent annual general meeting after the third annual general meeting after our initial offering, one-third of our directors for the time being (or, if their number is not a multiple of three (3), the number nearest to but not greater than one-third) shall retire from office by rotation, and each such retiring director shall be eligible for re-election. Every director shall be subject to retirement by rotation at least once every three years. A director may be removed from office at any time by an ordinary resolution of our shareholders. In addition, the office of a director shall be vacated if the director (i) dies, becomes bankrupt or makes any arrangement or composition with his creditors, (ii) is found to be or becomes of unsound mind, (iii) resigns his office by notice in writing to our company, (iv) without special leave of absence from our board of directors, is absent from three consecutive meetings of the board and the board resolves that his office be vacated, or (v) if he is otherwise removed from office pursuant to our memorandum and articles of association or the Companies Law or other laws of the Cayman Islands.

Officers are appointed by and serve at the discretion of our board of directors.

We have entered into employment agreements with each of our executive officers. Under these agreements, each of our executive officers is employed for a three-year period or five-year period. We may terminate an executive officer's employment for cause, at any time, without notice or remuneration, for certain acts of the officer, including but not limited to serious or persistent breach or non-observance of the employment terms or a conviction of a criminal offence. An executive officer may terminate his/her employment at any time with one-month prior written notice. Furthermore, we may terminate the employment at any time without cause upon advance written notice and certain amount of compensation payment.

Each executive officer has agreed to hold, both during and after the employment agreement expires or is earlier terminated, in strict confidence and not to use, except for our benefit, any confidential information of our company. In addition, the majority of our executive officers have agreed to be bound by non-competition restrictions which are set forth in his or her employment agreement.

We have granted Saban Media Ventures, an affiliate of Saban Capital Group, a non-voting observer seat on our board of directors for a period of eighteen months after the closing of the initial public offering, and our board of directors further renewed such period for another eighteen months to June 9, 2014. Mr. Sumeet Jaisinghani has been designated by Saban as our board observer since July 2011. Mr Jaisinghani is the Managing Director of Saban Capital Group (Asia), responsible for Saban's principal investment activities in Asia, and is head of the firm's Singapore office. In addition, Mr. Jaisinghani is a member of the Board of Directors of Partner Communications and Celestial Tiger Entertainment (CTE), and played a key role in Saban's investments in Bezeq Telecommunications, Partner, Media Nusantara Citra, MNC Sky Vision, CTE and Taomee.

The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of the date of this annual report, by:

The total number of ordinary shares outstanding as of December 31, 2013 is 757,684,760, including ordinary shares represented by ADSs. As of December 31, 2013, we had 16,557,901 ordinary shares which were legally issued according to our share incentive plans, but were not deemed issued or outstanding from accounting perspective.

For each person and group included in the following table, percentage of beneficial ownership is calculated by dividing the number of shares beneficially owned by such person or group (which includes ordinary shares underlying share options held by such person or group that are exercisable within 60 days after the date of this annual report) by the sum of (i) the number of ordinary shares outstanding as of the date of this annual report, (ii) the number of ordinary shares underlying share options held by such person or group that are exercisable within 60 days after the date of this annual

report , and (iii) the number of non-vested equity shares held by such person or group that will vest within 60 days after the date of this annual report.

Except as otherwise noted, the business address of each person listed in the table is c/o Taomee Holdings Limited, 16/F, Building No. A-2, No. 1528 Gumei Road, Xuhui District, Shanghai 200233, People's Republic of China.

	Ordinary Shares Beneficially Owned

	Number		%
Directors and Executive Officers:
Jason Liqing Zeng(1)		167,568,540		22.1
Benson Haibing Wang(2)		87,392,592		11.5
Roc Yunpeng Cheng(3)		74,323,193		9.8
Crow Zhen Wei(4)		74,492,593		9.8
JP Gan(5)		125,300,000		16.5
Shengwen Rong(6)		*		*
Ted Lai(7)		*		*
Changtian Wang(8)		*		*
George Kuan(9)		*		*
Paul Keung(10)		*		*
Quan Zhou(11)		*		*
All Directors and Executive Officers as a Group(12)		533,901,958		70.5
Principal Shareholders:
Frontier Technology Holdings Limited(13)		135,000,000		17.8
Speednext Industrial Limited (14)		32,568,540		4.3
Qiming Venture Partners II, L.P.(15)		113,418,000		15.0
Qiming Venture Partners II-C, L.P.(16)		9,931,500		1.3
Qiming Managing Directors Fund II, L.P(17).		1,650,500		0.2
Joy Union Holdings Limited(18)		86,392,592		11.4
Universys Holdings Ltd.(19)		74,492,593		9.8
Charming China Limited(20)		71,392,593		9.4

*: Less than 1%
(1): Includes 6,750,000 ADSs representing 135,000,000 ordinary shares held by Frontier Technology Holdings Limited and 1,628,427 ADSs representing 32,568,540 ordinary shares held by Speednext Industrial Limited, a British Virgin Islands company wholly-owned by Mr. Zeng.
(2): Represents 12 ordinary shares and 86,392,580 ordinary shares represented by 4,319,629 ADSs held by Joy Union Holdings Limited, a British Virgin Islands company wholly owned by Mr. Wang, and 1,000,000 ordinary shares issuable upon exercise of options within 60 days of the date of this annual report held by Mr. Wang.
(3): Represents 13 ordinary shares and 71,392,580 ordinary shares represented by 3,569,629 ADSs held by Charming China Limited, a British Virgin Islands company wholly owned by Mr. Cheng, and 2,930,600 ordinary shares issuable upon exercise of options within 60 days of the date of this annual report held by Mr. Cheng.
(4): Represents 13 ordinary shares and 74,492,580 ordinary shares represented by 3,724,629 ADSs held by Universys Holdings Ltd., a British Virgin Islands company wholly owned by Mr. Wei.

(5): Represents 113,418,000 ordinary shares held by Qiming Venture Partners II, L.P., 9,931,500 ordinary shares held by Qiming Venture Partners II-C, L.P., 1,650,500 ordinary shares held by Qiming Managing Directors Fund II, L.P., and ordinary shares issuable upon exercise of options and the non-vested equity shares that will vest within 60 days of the date of this annual report held by Mr. Gan. Mr. Gan is a managing director of and participates on the investment committee of Qiming Corporate GP II, Ltd. The business address of Mr. Gan is c/o Qiming Corporate GP II, Ltd., 11400 SE Sixth Street, Suite 100 Bellevue, Washington 98004, USA.
(6): Represents ordinary shares issuable upon exercise of options and the non-vested equity shares that will vest within 60 days of the date of this annual report held by Mr. Rong.
(7): Represents ordinary shares issuable upon exercise of options and the non-vested equity shares that will vest within 60 days of the date of this annual report held by Mr. Lai.
(8): Represents ordinary shares issuable upon exercise of options and the non-vested equity shares that will vest within 60 days of the date of this annual report held by Mr. Wang.
(9): Represents ordinary shares issuable upon exercise of options and the non-vested equity shares that will vest within 60 days of the date of this annual report held by Mr. Kuan.
(10): Represents ordinary shares issuable upon exercise of options and the non-vested equity shares that will vest within 60 days of the date of this annual report held by Mr. Keung.
(11): Represents ordinary shares issuable upon exercise of options and the non-vested equity shares that will vest within 60 days of the date of this annual report held by Mr. Zhou.
(12): Represents ordinary shares held by all of our directors and executive officers as a group and ordinary shares issuable upon exercise of options and the non-vested equity shares that will vest within 60 days of the date of this annual report held by all of our directors and executive officers as a group.
(13): Represents 6,750,000 ADSs representing 135,000,000 ordinary shares held by Frontier Technology Holdings Limited, a British Virgin Islands company wholly owned by Mr. Jason Liqing Zeng. The registered address for Frontier Technology Holdings Limited is Trinity Chambers, P.O. Box 4301, Road Town, Tortola, British Virgin Islands.
(14): Represents 1,628,427 ADSs representing 32,568,540 ordinary shares held by Speednext Industrial Limited, a British Virgin Islands company wholly owned by Mr. Jason Liqing Zeng. The registered address of Speednext Industrial Limited is Offshore Incorporations Limited, P.O Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands.
(15): Represents 113,418,000 ordinary shares held by Qiming Venture Partners II, L.P. The general partner of both Qiming Venture Partners II, L.P. and Qiming Venture Partners II-C, L.P. is Qiming GP II, L.P., a Cayman Islands exempted limited partnership, whose general partner is Qiming Corporate GP II, Ltd., a Cayman Islands limited company which is also the general partner of Qiming Managing Directors Fund II, L.P. Voting and investment power of the shares held by the Qiming Funds is exercised by the investment committee of Qiming Corporate GP II, Ltd., which consists of Duane Kuang, Gary Rieschel, JP Gan and Robert Headley. Each of Duane Kuang, Gary Rieschel, JP Gan and Robert Headley disclaims beneficial ownership of the ordinary shares, except to the extent of such person's own pecuniary interest therein. The business address of each of the Qiming Funds, Qiming GP II, L.P. and Qiming Corporate GP II, Ltd. is 11400 SE Sixth Street, Suite 100 Bellevue, Washington 98004, USA.

(16): Represents 9,931,500 ordinary shares held by Qiming Venture Partners II-C, L.P. See also note (15) to this table above.
(17): Represents 1,650,500 ordinary shares held by Qiming Managing Directors Fund II, L.P. See also note (15) to this table above.
(18): Represents 12 ordinary shares and 86,392,580 ordinary shares represented by 4,319,629 ADSs held by Joy Union Holdings Limited, a British Virgin Islands company wholly owned by Mr. Benson Haibing Wang. The registered address for Joy Union Holdings Limited is Trinity Chambers, P.O. Box 4301, Road Town, Tortola, British Virgin Islands.
(19): Represents 13 ordinary shares and 74,492,580 ordinary shares represented by 3,724,629 ADSs held by Universys Holdings Ltd., a British Virgin Islands company wholly owned by Mr. Crow Zhen Wei. The registered address for Universys Holdings Ltd. is Trinity Chambers, P.O. Box 4301, Road Town, Tortola, British Virgin Islands.
(20): Represents 13 ordinary shares and 71,392,580 ordinary shares represented by 3,569,629 ADSs held by Charming China Limited, a British Virgin Islands company wholly owned by Mr. Roc Yunpeng Cheng. The registered address for Charming China Limited is Trinity Chambers, P.O. Box 4301, Road Town, Tortola, British Virgin Islands.

As of the date of this annual report, to our knowledge, 628,184,722 ordinary shares were held by two record holders in the United States, including JPMorgan Chase Bank N.A., the depositary of our ADS program. The number of beneficial owners of our ADSs in the United States is likely to be much larger than the number of record holders of our ordinary shares in the United States. None of our existing shareholders has different voting rights from other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.

PRC laws currently restrict foreign ownership of online virtual world businesses. To comply with PRC laws, we conduct our online virtual world business through contractual arrangements with Shanghai Taomee and its shareholders. See "Item 4. Information on the Company—C. Organizational Structure" for a description of these contractual arrangements.

As part of our contractual arrangements with Shanghai Taomee and certain of its shareholders, Mr. Jason Liqing Zeng, our chairman, Mr. Benson Haibing Wang, our co-founder, director and chief executive officer, Mr. Crow Zhen Wei, our co-founder, director and chief technology officer, Mr. Roc Yunpeng Cheng, our co-founder, director and president and Mr. Bin Wang, Shanghai Shengran entered into a loan agreement with these five persons, under which Shanghai Shengran lent an interest-free loan of RMB2.5 million (US$0.4 million) to these persons, solely for their respective contributions to the increased capital of Shanghai Taomee, our significant VIE.

Transactions with Certain Officers, Shareholders and Affiliates and Key Management Personnel

In June 2009, Shanghai Taomee entered into an agreement with Shenzhen ParaEngine Corporation, or Shenzhen ParaEngine, a company significantly influenced by Mr. Jason Liqing Zeng, who is a director of Shenzhen ParaEngine's controlling entity, for developing and operating a 3-D online virtual world for children. In August 2011, Shanghai Taomee entered into a supplement agreement with ParaEngine, pursuant to which Shanghai Taomee gave up its exclusive rights of this 3-D online virtual world and increased the royalty percentage to be paid to ParaEngine. In May 2012, Shanghai Taomee entered into another 3-D online virtual world co-develop agreement with ParaEngine. For the years ended December 31, 2011, 2012 and 2013, we paid US$173,281, US$203,444 and US$193,559 in royalty, and nil, US$0.2 million and nil in licensing fees to Shenzhen ParaEngine, respectively. As of December 31, 2013, we had approximately US$18,857 due to Shenzhen ParaEngine Corporation.

In June 2011, Shanghai Shengran entered into an agreement with Taiwan Taomee for the license to Taiwan Taomee of certain operating rights of an online game developed and owned by Shanghai Shengran. Shanghai Shengran also entered into agreement with Taiwan Taomee for the license of certain offline products which are derived from the online game images. In 2012, Shanghai Shengran licensed Taiwan Taomee two additional online games. In 2013, Shanghai Shengran further granted Taiwan Taomee the exclusive right of three additional games at an aggregate license fee of approximately US$0.3 million in Taiwan and will share the royalty at a certain agreed percentage. Revenues generated from Taiwan Taomee were US$245,015 and US$240,160 for online licensing and offline licensing respectively for the year ended December 31, 2011, US$127,644 and US$175,500 respectively for the year ended December 31, 2012, and US$767,267 and US$130,808 respectively for the year ended December 31, 2013. As of December 31, 2013, we had an amount due from Taiwan Taomee of US$72,517, and an amount due to Taiwan Taomee of US$347,026.

On February 25, 2011, we entered into an agreement to effectively sell a 10.5% equity interest in Elyn Corporation that had been indirectly held by a related party on our behalf. Of the 10.5% equity interest in Elyn Corporation, 9.14% was sold to Qiming Funds, which are our existing shareholders and 1.36% was sold to an investor, an independent third party who was not affiliated with us or the Series A shareholders, for a consideration of approximately US$3.4 million and US$0.5 million in cash, respectively, at the same price per share. In addition, the nominee shareholding agreement was terminated with the related party and we currently hold 29.5% equity in Elyn Corporation directly.

On August 12, 2011, our equity interest in Elyn Corporation was diluted from 29.5% to 28.8% as a result of Elyn Corporation's issuing shares to its employees.

In June 2013, as part of a restructuring of Taiwan Taomee, our equity interest in Taiwan Taomee was held through Playgame, and Elyn was liquidated. Our aggregated equity interest in Taiwan Taomee was not changed. In September 2013, Playgame transferred 3% of Taiwan Taomee's shares to Taiwan Taomee's underwriters upon it initial public offering in Taiwan Emerging Stock Market. As a result, Playgames's equity interest in Taiwan Taomee was diluted from 70.88% to 67.87%, resulting in a gain from investment of approximately US$287,790 recognized in the year 2013, reported within share of profit in equity method investees in the consolidated statements of operations.

Our equity in profit in 2011, 2012 and 2013 was US$965,959, US$506,644 and US$500,388 of Elyn Corporation (or Playgame, as applicable) and US$7,757, US$191,381 and US$96,869 of Joy Children, respectively, and was recognized as share of profit in equity investment in the consolidated statements of operations.

In November 2011, Shanghai Taomee entered into an agreement with Shenzhen Taole Network Technology Co., Ltd., or Shenzhen Taole, a company engages in the research and development of network games, to obtain the licenses of certain operating rights of an online game. For the years ended December 31, 2011, 2012 and 2013, we paid nil, US$8,969 and US$6,067 in royalty, respectively, to Shenzhen Taole. As of December 31, 2013, we had an amount of US$1,594 due to Shenzhen Taole.

In July 2012, Shanghai Taomee entered into an operating agreement with Guangzhou Chuangyou Information Technology Co., Ltd., or Chuangyou, a company principally engaged in the design and development of online games in China, and a related party of us, as one of Chuangyou's investors is our director and principle shareholder. According to such operating agreement, Chuangyou granted to Shanghai Taomee the operating rights of an online game developed and owned by Chuangyou. For the years ended December 31, 2011, 2012 and 2013, Shanghai Taomee has paid nil, nil and US$9,787 royalties and nil, US$150,000 and US$50,000 licensing fee to Chuangyou, respectively. As of December 31, 2013,, Shanghai Taomee had US$2,506 as licensing fee to Chuangyou, and recorded as amount due to Chuangyou.

In the first quarter of 2013, Shanghai Animation entered into an agreement with Beijing Enlight Pictures Co. Ltd., or Enlight Media, to jointly invest in the production and distribution of an animation film of our feature film, Seer III: Universal Force. As at December 31, 2013, Enlight Media paid RMB 3.9 million (approximately US$0.6 million) to Shanghai Animation to invest in the film. The film was released in July 2013 in Mainland China. As of December 31, 2013, we had an amount of RMB13.3 million (approximately US$2.2 million) due from such related party.

See "Item 6. Directors, Senior Management and Employees—C. Board Practices—Employment Agreements"

See "Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers—Share Incentive Plan."

We have appended consolidated financial statements filed as part of this annual report.

We are not currently a party to any material litigation or other legal proceeding and are not aware of any pending or threatened litigation or other legal proceeding that may have a material adverse impact on our business or operations.

Our board of directors has complete discretion over whether to pay dividends on our ordinary shares. If our board of directors decides to pay dividends on our ordinary shares, 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.

On May 6, 2009, we issued 125,000,000 shares of Series A convertible redeemable preferred shares for aggregate cash proceeds of US$4,948,718, net of direct and incremental equity issuance costs of US$51,282 to new investors. As the Series A preferred shares were negotiated with independent third-party investors, the cash proceeds received represented the fair value of the issued Series A preferred shares. The accretion to the redemption value, which was considered as deemed dividends, was calculated over the period from the issuance date to the earliest redemption date using the effective interest method and reflected as a reduction to net income to arrive at net income attributable to the ordinary shareholders in the accompanying consolidated statements of operations and amounted to US$200,601, nil and nil in 2011, 2012 and 2013, respectively.

In November 2010, we declared a cash dividend of US$10.0 million to our shareholders who were record holders of ours as of October 31, 2010, of which we paid US$1.05 million in December 2010 and an additional US$2.55 million in March 2011 by using our cash reserves, and paid the rest in July 2011 and August 2011 by using the proceeds from our initial public offering. We did not declare any dividend in 2012 and 2013.

We intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business. If we pay any dividends, the depositary will pay our ADS holders the dividends it receives on our ordinary shares, after deducting its fees and expenses as provided in the deposit agreement. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

We are a holding company incorporated in the Cayman Islands. We rely principally on dividends from our subsidiary in China for our cash requirements, including any payment of dividends to our shareholders. Current PRC regulations permit our PRC subsidiary to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries, VIEs and VIEs' subsidiaries in China is required to set aside a certain amount of its after-tax profits each year, if any, to fund certain statutory reserves. These reserves are not distributable as cash dividends. Furthermore, if our subsidiaries, VIEs and VIEs' subsidiaries in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us.

Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.

The following table provides the high and low trading prices for our ADSs on the NYSE for the periods shown.

	Sales Price

	High		Low
Annual Highs and Lows
Fiscal Year ended December 31, 2011 (from June 8, 2011)		17.90		3.95
Fiscal Year ended December 31, 2012		6.50		3.15
Fiscal Year ended December 31, 2013		6.98		3.54
Quarterly Highs and Lows
First Quarter ended March 31, 2012		6.50		4.50
Second Quarter ended June 30, 2012		5.75		3.74
Third Quarter ended September 31, 2012		4.89		3.25
Fourth Quarter ended December 31, 2012		3.84		3.15
First Quarter ended March 31, 2013		5.29		3.54
Second Quarter ended June 30, 2013		5.10		3.69
Third Quarter ended September 31, 2013		6.98		3.92
Fourth Quarter ended December 31, 2013		6.44		4.73
First Quarter ended March 31, 2013		8.90		5.06
Monthly Highs and Lows
October 2013		6.44		5.03
November 2013		5.60		4.76
December 2013		5.41		4.73
January 2014		7.78		5.06
February 2014		7.20		5.68
March 2014		8.90		5.73
April 2014 (through April 10, 2014)		6.28		5.75

Our ADSs, each representing 20 ordinary shares, have been listed on the NYSE since June 8, 2011. Our ADSs are traded under the symbol "TAOM."

We are a Cayman Islands company and our affairs are governed by our memorandum and articles of association and the Companies Law of the Cayman Islands, which is referred to as the Companies Law below. We incorporate by reference into this annual report the description of our third amended and restated memorandum and articles of association contained in our F-1 registration statement (File No. 333-174293) originally filed with the SEC on May 18, 2011.

We have not entered into any material contracts other than in the ordinary course of business and other than those described in "Item 4. Information on the Company" or elsewhere in this annual report on Form 20-F.

See "Item 4. Information on the Company—B. Business Overview—Regulations Related to Our Business—Regulation related to Foreign Currency Exchange and Dividend Distribution".

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

The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty or withholding tax applicable to us or to any holder of our ADSs and ordinary shares. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the Cayman Islands. No stamp duty is payable in the Cayman Islands on transfers of shares of Cayman Islands companies, except those which hold interests in land in the Cayman Islands. The Cayman Islands is not party to any double tax treaties which are applicable to payments made by or to our company. There are no exchange control regulations or currency restrictions in the Cayman Islands.

Pursuant to Section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, we have obtained an undertaking from the Governor-in-Council:

If the PRC tax authorities determine that our Cayman Islands holding company is a "resident enterprise" for PRC enterprise income tax purposes, a withholding tax of 10% for our non-PRC enterprise shareholders or potentially 20% for non-PRC individual shareholders may be imposed on dividends they receive from us and a 10% (20% in the case of non-PRC individual shareholders) income tax may be imposed on gains they recognize from transferring our shares or ADSs. See "Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We may be classified as a "resident enterprise" for PRC enterprise income tax purposes, which could result in our global income becoming subject to 25% PRC enterprise income tax" and "Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—If we are classified as a "resident enterprise" for PRC enterprise income tax purposes, you may be subject to PRC withholding tax on dividends from us and to PRC income tax on gain realized on the transfer of our ADSs or ordinary shares."

The following discussion describes the material U.S. federal income tax consequences to U.S. Holders (as defined below) under current law of an investment in the ADSs or ordinary shares. This discussion applies only to U.S. Holders that hold the ADSs or ordinary shares as capital assets within the meaning of Section 1221 of the United States Internal Revenue Code of 1986, as amended (generally, property held for investment), and that have the U.S. dollar as their functional currency. The effects of other U.S. federal tax laws, such as estate and gift tax laws, and any applicable state, local or non-U.S. tax laws are not discussed. This discussion is based on the tax laws of the United States as of the date of this annual report and on U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this annual report, as well as judicial and administrative interpretations thereof available on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below. We have not sought and will not seek any rulings from the U.S. Internal Revenue Service regarding the matters discussed below. There can be no assurance the U.S. Internal Revenue Service or a court will not take a contrary position to that discussed below regarding the tax consequences of the ownership and disposition of the ADSs or ordinary shares.

The following discussion does not address all U.S. federal income tax consequences relevant to a U.S. Holder's particular circumstances, including the impact of the Medicare contribution tax on net investment income. In addition, it does not address consequences relevant to U.S. Holders subject to special rules, including, without limitation:

INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL, NON-U.S. AND OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR ORDINARY SHARES.

For purposes of the discussion below of the U.S. federal income tax consequences to "U.S. Holders," you are a U.S. Holder if you are a beneficial owner of ADSs or ordinary shares and you are, for U.S. federal income tax purposes,

If you are a partner in a partnership (or other entity taxable as a partnership for U.S. federal income tax purposes) that holds ADSs or ordinary shares, your tax treatment will generally depend on your status and the activities of the partnership. If you are a partner in such a partnership, you should consult your tax advisor.

The discussion below assumes the representations contained in the deposit agreement are true and the obligations in the deposit agreement and any related agreement have been and will be complied with in accordance with their terms. If you own ADSs, you should be treated as the owner of the underlying ordinary shares represented by those ADSs for U.S. federal income tax purposes.

The U.S. Treasury has expressed concerns that intermediaries in the chain of ownership between the holder of a depositary share and the issuer of the security underlying the depositary share may be taking actions that are inconsistent with the beneficial ownership of the underlying security (which may include, for example, pre-releasing ADSs to persons that do not have the beneficial ownership of the securities underlying the ADSs). Accordingly, the creditability of any PRC taxes, or the availability of the reduced tax rate for any dividends received by certain non-corporate U.S. Holders, including individual U.S. Holders (discussed below), could be affected by actions taken by intermediaries in the chain of ownership between the holders of ADSs and our company if as a result of such actions the holders of ADSs are not properly treated as beneficial owners of underlying ordinary shares.

Based on the market price of our ADSs and the composition of our income and assets, we believe we were a PFIC for U.S. federal income tax purposes for our taxable year ended December 31, 2013. A non-U.S. corporation will be a PFIC for U.S. federal income tax purposes for any taxable year if either:

For this purpose, passive income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not derived from a related person). In addition, we will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock.

A separate determination must be made after the close of each taxable year as to whether we were a PFIC for that year. Because the value of our assets for purposes of the PFIC test will generally be determined, in part, by reference to the market price of our ADSs and ordinary shares, our PFIC status will depend in large part on the market price of the ADSs and ordinary shares, which may fluctuate significantly.

If we were treated as a PFIC for our taxable year ended December 31, 2013 and you held ADSs or ordinary shares during such year, we generally will continue to be treated as a PFIC with respect to you for all succeeding years during which you hold ADSs or ordinary shares, unless we cease to be a PFIC and you make a "deemed sale" election with respect to the ADSs or ordinary shares. If such election is made, you will be deemed to have sold ADSs or ordinary shares you hold at their fair market value on the last day of the last taxable year in which we were a PFIC and any gain from such deemed sale would be subject to the rules described in the following two paragraphs. After the deemed sale election, your ADSs or ordinary shares with respect to which the deemed sale election was made will not be treated as shares in a PFIC unless we subsequently become a PFIC.

For each taxable year we are treated as a PFIC with respect to you, you will be subject to special tax rules with respect to any "excess distribution" you receive and any gain you recognize from a sale or other disposition (including a pledge) of the ADSs or ordinary shares, unless you make a "mark-to-market" election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for the ADSs or ordinary shares will be treated as an excess distribution. Under these special tax rules:

The tax liability for amounts allocated to taxable years prior to the year of disposition or excess distribution cannot be offset by any net operating losses for such years, and gains (but not losses)

realized on the sale or other disposition of the ADSs or ordinary shares cannot be treated as capital, even if you hold the ADSs or ordinary shares as capital assets.

If we are treated as a PFIC with respect to you for any taxable year, to the extent any of our subsidiaries are also PFICs or we make direct or indirect equity method investments in other entities that are PFICs, you may be deemed to own shares in such lower-tier PFICs that are directly or indirectly owned by us in that proportion which the value of the ADSs or ordinary shares you own bears to the value of all of our ADSs or ordinary shares, as applicable, and you may be subject to the adverse tax consequences described in the preceding two paragraphs with respect to the shares of such lower-tier PFICs that you are deemed to own. You should consult your tax advisors regarding the application of the PFIC rules to any of our subsidiaries.

A U.S. Holder of "marketable stock" in a PFIC may make a mark-to-market election for such stock to elect out of the PFIC rules described above regarding excess distributions and recognized gains. For this purpose, "marketable stock" is stock that is regularly traded on a qualified exchange or other market, as defined in applicable U.S. Treasury regulations. Our ADSs, but not our ordinary shares, are listed on the New York Stock Exchange, which is a qualified exchange or other market for these purposes. Consequently, if the ADSs are listed on the New York Stock Exchange and are regularly traded, and you are a holder of ADSs, we expect the mark-to-market election would be available to you.

If you make a mark-to-market election for the ADSs, you will include in income for each year we are a PFIC an amount equal to the excess, if any, of the fair market value of the ADSs as of the close of your taxable year over your adjusted basis in such ADSs. You will be allowed an ordinary deduction for the excess, if any, of the adjusted basis of the ADSs over their fair market value as of the close of the taxable year. However, deductions will be allowable only to the extent of any net mark-to-market gains on the ADSs included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the ADSs, will be treated as ordinary income. Ordinary loss treatment will also apply to the deductible portion of any mark-to-market loss on the ADSs, as well as to any loss realized on the actual sale or other disposition of the ADSs, to the extent the amount of such loss does not exceed the net mark-to-market gains previously included for such ADSs. Your basis in the ADSs will be adjusted to reflect any such income or loss amounts. If you make a mark-to-market election, any distributions we make would generally be subject to the rules discussed below under "—Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares," except the lower tax rate applicable to qualified dividend income would not apply. Because a mark-to-market election cannot be made for equity interests in any lower-tier PFICs that we own, a U.S. Holder may continue to be subject to the PFIC rules with respect to its indirect interest in any investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes. You should consult your tax advisors as to the availability and desirability of a mark-to-market election, as well as the impact of such election on interests in any lower-tier PFICs.

Alternatively, if a non-U.S. corporation is a PFIC, a holder of shares in that corporation may avoid taxation under the PFIC rules described above regarding excess distributions and recognized gains by making a "qualified electing fund" election to include in income its share of the corporation's income on a current basis. However, you may make a qualified electing fund election with respect to your ADSs or ordinary shares only if we agree to furnish you annually with certain tax information, and we currently do not intend to prepare or provide such information.

Unless otherwise provided by the U.S. Treasury, each U.S. Holder of a PFIC is required to file an annual report containing such information as the U.S. Treasury may require. Since we believe we were a PFIC for our taxable year ended December 31, 2013, you should consult your tax advisor regarding any reporting requirements that may apply to you.

You are strongly urged to consult your tax advisor regarding the application of the PFIC rules to your investment in the ADSs or ordinary shares.

Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares

Subject to the PFIC rules discussed above, the gross amount of any distributions we make to you with respect to the ADSs or ordinary shares (including the amount of any taxes withheld therefrom) generally will be includible in your gross income as dividend income on the date of receipt by the depositary, in the case of ADSs, or on the date of receipt by you, in the case of ordinary shares, but only to the extent the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Any such dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of certain dividends received from U.S. corporations. To the extent the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), such excess amount will be treated first as a tax-free return of your tax basis in your ADSs or ordinary shares, and then, to the extent such excess amount exceeds your tax basis in your ADSs or ordinary shares, as capital gain. We currently do not and we do not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, you should expect any distribution we make to you will be reported as a dividend even if such distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.

With respect to certain non-corporate U.S. Holders, including individual U.S. Holders, any dividends may be taxed at the lower capital gains rates applicable to "qualified dividend income," provided (1) either (a) our ADSs or ordinary shares, as applicable, are readily tradable on an established securities market in the United States, or (b) we are eligible for the benefits of a qualifying income tax treaty with the United States that includes an exchange of information program, (2) we were neither a PFIC nor treated as such with respect to you for the taxable year in which the dividend was paid and the preceding taxable year (discussed below), and (3) certain holding period requirements are met. Under U.S. Internal Revenue Service authority, ADSs are considered for purposes of clause (1) above to be readily tradable on an established securities market in the United States if they are listed on the New York Stock Exchange, as our ADSs (but not our ordinary shares) are. Based on existing guidance, it is not entirely clear whether dividends you receive with respect to the ordinary shares may qualify as qualified dividend income because the ordinary shares are not themselves listed on a U.S. exchange. In addition, as discussed above in "—Passive Foreign Investment Company," we believe we were a PFIC for our taxable year ended December 31, 2013. If we are treated as a "resident enterprise" for PRC tax purposes under the PRC EIT Law, we may be eligible for the benefits of the income tax treaty between the United States and the PRC. You should consult your tax advisors regarding the availability of the lower tax rates applicable to qualified dividend income for any dividends we pay with respect to the ADSs or ordinary shares, as well as the effect of any change in applicable law after the date of this annual report.

Any dividends we pay with respect to the ADSs or ordinary shares will constitute foreign source income for foreign tax credit limitation purposes. If any such dividends are taxed as qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will in general be limited to the gross amount of the dividend, multiplied by the reduced tax rate applicable to qualified dividend income and divided by the highest tax rate normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, any dividends we pay with respect to the ADSs or ordinary shares will generally constitute "passive category income" but could, in the case of certain U.S. Holders, constitute "general category income."

If PRC withholding taxes apply to any dividends paid to you with respect to our ADSs or ordinary shares (see "Item 5. Operating and Financial Review and Prospects—A. Operating Results—Taxation—

China"), the amount of the dividend would include the withheld PRC taxes and, subject to certain conditions and limitations, such PRC withholding taxes would be treated as foreign taxes eligible for credit against your U.S. federal income tax liability. The rules relating to the determination of the foreign tax credit are complex, and you should consult your tax advisors regarding the availability of a foreign tax credit in your particular circumstances.

Subject to the PFIC rules discussed above, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of ADSs or ordinary shares equal to the difference between the amount realized for the ADSs or ordinary shares and your tax basis in the ADSs or ordinary shares. The gain or loss generally will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, that has held the ADSs or ordinary shares for more than one year, you may be eligible for reduced U.S. federal income tax rates. The deductibility of capital losses is subject to limitations. Any gain or loss you recognize on a disposition of ADSs or ordinary shares will generally be treated as U.S. source income or loss for foreign tax credit limitation purposes. However, if we are treated as a "resident enterprise" for PRC tax purposes, we may be eligible for the benefits of the income tax treaty between the United States and the PRC. In such event, if PRC tax were to be imposed on any gain from the disposition of the ADSs or ordinary shares (see "Item 5. Operating and Financial Review and Prospects—A. Operating Results—Taxation—China"), a U.S. Holder that is eligible for the benefits of the income tax treaty between the United States and the PRC may elect to treat the gain as PRC source income for foreign tax credit purposes, in which case, subject to certain conditions and limitations, such PRC tax would be eligible for credit against the holder's U.S. federal income tax liability. You should consult your tax advisors regarding the proper treatment of gain or loss in your particular circumstances, including the effects of any applicable income tax treaties.

Any dividend payments with respect to ADSs or ordinary shares and proceeds from the sale, exchange or other taxable disposition of ADSs or ordinary shares may be subject to information reporting to the U.S. Internal Revenue Service and backup withholding, unless the U.S. Holder is an exempt recipient. Backup withholding will not apply, however, to a U.S. Holder that furnishes a correct taxpayer identification number and makes any other required certification on U.S. Internal Revenue Service Form W-9. U.S. Holders that are exempt from backup withholding may be required to complete U.S. Internal Revenue Service Form W-9 to avoid possible erroneous backup withholding. U.S. Holders should consult their tax advisors regarding the application of the information reporting and backup withholding rules.

Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the U.S. Internal Revenue Service and furnishing any required information in a timely manner.

Certain U.S. Holders who are individuals are required to report information relating to an interest in our ADSs or ordinary shares, subject to certain exceptions (including an exception for ADSs and ordinary shares held in accounts maintained by certain financial institutions). U.S. Holders should consult their tax advisors regarding the effect, if any, of these rules on their ownership and disposition of the ADSs or ordinary shares.

We previously filed with the SEC our registration statement on Form F-1 (Registration Number 333-174293), as amended and prospectus under the Securities Act of 1933, with respect to our ordinary shares represented by the ADSs. We also filed with the SEC a related registration statement on Form F-6 (Registration Number 333-174441) with respect to the ADSs. We have also filed with the SEC our registration statements on Form S-8 (Registration Number 333-176920 and 333-183651) with respect to our securities to be issued under our 2009 Stock Option Plan, 2010 Share Incentive Plan and 2012 Share Incentive Plan.

We are subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Accordingly, we are required to file reports, including annual reports on Form 20-F, and other information with the SEC. All documents filed by us with the SEC can be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. The SEC also maintains a web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system.

As a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act.

We intend to furnish JPMorgan Chase Bank, N.A., the depositary of our ADSs, with all notices of shareholders' meeting and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our written request, will mail to all record holders of ADSs the information contained in any notice of a shareholders' meeting received by the depositary from us.

In accordance with NYSE Rules 203.01, we will post this annual report on Form 20-F on our website at http://ir.taomee.com/phoenix.zhtml?c=243417&p=irol-sec. In addition, we will provide hard copies of our annual report free of charge to shareholders and ADS holders upon request.

For a listing of our subsidiaries, see "Item 4—Information on the Company—C. Organizational Structure," as well as Exhibit 8.1 filed herewith.

Our revenues and purchases are generally denominated in Renminbi. Our assets and liabilities are also denominated in Renminbi, except for cash held in other currencies, which included approximately US$17.2 million as of December 31, 2013. As a result, fluctuations in the exchange rates between the U.S. dollar and Renminbi will affect our results of operations and financial condition. Such fluctuations will also affect us with respect to the translation of the net proceeds that we will receive from the initial public offering into Renminbi. The Renminbi's exchange rate with the U.S. dollar is affected by, among other things, changes in China's political and economic conditions and China's foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under this policy, the Renminbi was permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. For almost two years after reaching a high against the U.S. dollar in July 2008, the Renminbi traded within a narrow band against the U.S. dollar. As a consequence, the Renminbi fluctuated sharply since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. In June 2010, the PRC government announced that it would increase the Renminbi exchange rate flexibility and since that time the Renminbi has gradually appreciated against the U.S. dollar. However, it remains unclear how this flexibility might be implemented. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in greater fluctuation of the Renminbi against the U.S. dollar.

To the extent that we need to convert U.S. dollars that we have on hand or receive from future financing activities into the Renminbi for our operations or other uses within the PRC, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. On the other hand, a decline in the value of the Renminbi against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results, the value of your investment in our company and the dividends we may pay in the future, if any, all of which may have a material adverse effect on the prices of ADSs. As of December 31, 2013, we had U.S. dollar-denominated cash balances of US$17.2 million. Assuming we had converted the US$17.2 million into the Renminbi at the exchange rate of US$1.00 for RMB6.0537 as of December 31, 2013, this cash balance would have been RMB104.1 million. Assuming a 5% appreciation of the RMB against the U.S. dollar, this cash balance would have decreased to RMB99.2 million as of December 31, 2013.

Our exposure to interest rate risk primarily relates to finance income generated by excess cash invested in demand deposits with original maturities of three months or less. We have not used any derivative financial instruments to manage our interest risk exposure. We have not been exposed, nor do we anticipate being exposed, to material risks due to changes in interest rates. However, our future finance income may be lower than expected due to changes in market interest rates.

In recent years, inflation has not had a material impact on our results of operations. According to the National Bureau of Statistics of China, the change in China's Consumer Price Index increased by 5.4% in 2011, 2.6% in 2012 and 2.6% in 2013. If inflation rises, it may materially and adversely affect our business.

As of December 31, 2011, 2012 and 2013, substantially all of our cash and cash equivalents were held by financial institutions that we believe to have high credit quality. Therefore, we believe we are

not exposed to unusual risks. We have not experienced any losses on deposits of cash and cash equivalents. Due to the limited availability of online payment systems in China and the limited access children have to online payment channels, users pay for our online business primarily through purchase of our prepaid cards, which distributed through a network of third-party distributors. Our top three distributors contributed to 10.3%, 8.5% and 8.4% of the sales of our prepaid cards in 2011, 9.8%, 8.9% and 7.2% in 2012, and 7.4%, 6.4% and 6.0% in 2013. We collect payment from distributors upon delivery of the prepaid cards, which helps reduce our accounts receivable related to our online business. Accounts receivables generated from offline business are primarily resulted from sharing of box-office revenues and licensing royalties. We made nil, nil and US$0.3 allowance for doubtful accounts in 2011, 2012 and 2013, respectively. We wrote off RMB1.0 million (US$0.2 million) in bad debt to an independent third party in 2011.

ADS holders will be required to pay the following service fees to the depository:

Service		Fee

• Issuance of ADSs		Up to US$0.05 per ADS issued
• Cancellation of ADSs		Up to US$0.05 per ADS canceled
• Distribution of cash dividends or other cash distributions		Up to US$0.05 per ADS held
• Distribution of ADSs pursuant to stock dividends, free stock distributions or exercise of rights.		Up to US$0.05 per ADS held
• Distribution of securities other than ADSs or rights to purchase additional ADSs		Up to US$0.05 per ADS held
• Depositary services		Up to US$0.05 per ADS held on the applicable record date(s) established by the depositary
• Transfer of ADSs		US$1.50 per certificate presented for transfer

The depositary may charge each person to whom ADSs are issued, including, without limitation, issuances against deposits of shares, issuances in respect of share distributions, rights and other distributions, issuances pursuant to a stock dividend or stock split declared by us or issuances pursuant to a merger, exchange of securities or any other transaction or event affecting the ADSs or deposited securities, and each person surrendering ADSs for withdrawal of deposited securities or whose ADRs

are cancelled or reduced for any other reason, $5.00 for each 100 ADSs (or any portion thereof) issued, delivered, reduced, cancelled or surrendered, as the case may be. The depositary may sell (by public or private sale) sufficient securities and property received in respect of a share distribution, rights and/or other distribution prior to such deposit to pay such charge.

The following additional charges shall be incurred by the ADR holders, by any party depositing or withdrawing shares or by any party surrendering ADSs or to whom ADSs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by us or an exchange of stock regarding the ADRs or the deposited securities or a distribution of ADSs), whichever is applicable:

We will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from time to time between us and the depositary. The charges described above may be amended from time to time by agreement between us and the depositary.

Our depositary has agreed to reimburse us for certain expenses we incur that are related to establishment and maintenance of the ADR program, including investor relations expenses and

exchange application and listing fees. Neither the depositary nor we can determine the exact amount to be made available to us because (i) the number of ADSs that will be issued and outstanding, (ii) the level of fees to be charged to holders of ADSs and (iii) our reimbursable expenses related to the ADR program are not known at this time. The depositary collects its fees for issuance and cancellation of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions, or by directly billing investors, or by charging the book-entry system accounts of participants acting for them. The depositary will generally set off the amounts owing from distributions made to holders of ADSs. If, however, no distribution exists and payment owing is not timely received by the depositary, the depositary may refuse to provide any further services to holders that have not paid those fees and expenses owing until such fees and expenses have been paid.

At the discretion of the depositary, all fees and charges owing under the deposit agreement are due in advance and/or when declared owing by the depositary.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None. See "Item 10. Additional Information" for a description of the rights of securities holders, which remain unchanged.

The following "Use of Proceeds" information relates to our registration statement on Form F-1 (file No. 333-174293) filed with the Securities and Exchange Commission on May 18, 2011 for our initial public offering of 7,187,500 ADSs, representing 143,750,000 ordinary shares, and the underwriters' exercise of their option to purchase an additional 525,224 ADSs, representing 10,504,480 ordinary shares, which registration statement was declared effective by the Securities and Exchange Commission on June 10, 2011.

We received net proceeds from the initial public offering (including over-allotment) of approximately US$62.2 million after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us. As of December 31, 2013, the proceeds were used as follows: (i) US$0.6 million were used to subscribe for the newly issued shares of Taiwan Taomee through Joy Children in the fourth quarter of 2011; (ii) US$6.2 million were used to acquire 8.02% equity interest in Gamespedia in second half of 2012; (iii) US$4.3 million were used to pay increased legal, accounting and other operational expenses and costs we incurred as a public company; (iv) US$6.4 million were used to pay a cash dividend declared in November 2010 to our shareholders in July 2011 and August 2011; (v) US$1.4 million were used to acquire a minority equity interest in Voozclub in January 2013; (vi) US$3.0 million were used to invest in a short-term money market investment in the second quarter of 2013; (vii) US$2.0 million were used to acquire a minority equity interest in a Beijing-based pre-school education service provider in September 2013, (viii) US$0.2 million were used to acquire a minority equity interest in a New York City company that develops mobile applications, animation and products for pre-school children in December 2013; and (ix) US$4.4 million were used to repurchase our ADSs from the open market during the period from

December 2011 to December 2013 a total of 1,064,177 ADSs under our share repurchase program approved by the Board in November 2011 and extended in September 2012 and November 2013. We will continue to use the IPO proceeds primarily for the purposes described in the "Use of Proceeds" section of our Form F-1 in accordance with our business plans and on an as-needed basis.

Proceeds from our initial public offering that have yet to be applied have been invested in bank deposits. Credit Suisse Securities (USA) LLC and Deutsche Bank Securities Inc were the managing underwriters for our initial public offering.

Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report, as required by Rule 13a-15(b) under the Exchange Act.

Based upon that evaluation, our chief executive officer and chief financial officer have concluded that, as of December 31, 2013, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act was recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms, and that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act for our company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with generally accepted accounting principles, and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company's assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that a company's receipts and expenditures are being made only in accordance with authorizations of a company's management and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of a company's assets that could have a material effect on the consolidated financial statements.

Due to its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to consolidated financial statement preparation and presentation, and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

As required by Section 404 of the Sarbanes-Oxley Act and related rules as promulgated by the SEC, our management assessed the effectiveness of the internal control over financial reporting as of December 31, 2013 using criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on this assessment, our management has concluded that the internal control over financial reporting was effective as of December 31, 2013.

There were no changes in our internal control over financial reporting during 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Mr. Shengwen Rong qualifies as an "audit committee financial expert" as defined in Item 16A of Form 20-F. Mr. Rong satisfies the independence requirements under the standards set forth in Section 303A of the Corporate Governance Rules of the New York Stock Exchange and Rule 10A-3 under the Securities Exchange Act of 1934, as amended.

Our board of directors adopted a code of business conduct and ethics that applies to our directors, officers and employees. We have filed our code of business conduct and ethics as Exhibit 99.1 of our registration statement on Form F-1 (file No. 333-174293) filed with the Securities and Exchange Commission on May 18, 2011, and have filed the amended code of business conduct and ethics as Exhibit 11.1 of our annual report on Form 20-F (file No. 001-35190) filed with the Securities and Exchange Commission on April 18, 2012. We have posted a copy of our code of business conduct and ethics on our investor relations website at http://ir.taomee.com/phoenix.zhtml?c=243417&p=irol-sec. We hereby undertake to provide to any person without charge, upon a written request, a copy of our code of business conduct and ethics.

The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by Deloitte Touche Tohmatsu Certified Public Accountants LLP our principal external auditors, for the periods indicated.

The policy of our audit committee is to pre-approve all audit and non-audit services provided by Deloitte Touche Tohmatsu Certified Public Accountants LLP including audit services, audit-related services, tax services and other services as described above for the fiscal year ended December 31, 2013, other than those for de minimus services which are approved by our audit committee prior to the completion of the audit. Prior to our initial public offering, all initial public offering related accountant fees were approved by the Board.

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.

On November 28, 2011, we announced a share repurchase plan approved by our board of directors on November 22, 2011 to repurchase our ADSs, through open market purchase or privately negotiated transactions, up to US$10 million over a period of 12 months. On September 28, 2012 and November 26, 2013, respectively, our board of directors approved the extension of such share repurchase plan for another 12 months from November 23, 2012 to November 23, 2013, and from November 24, 2013 to November 23, 2014, respectively, to repurchase our ADSs up to the remaining balance of the US$10 million. On March 28, 2014, we completed the share repurchase program, under which we repurchased 41,191,160 common shares, representing approximately 5.4% of our outstanding shares as of March 28, 2014, at an average price of $4.9 per share. On March 28, 2014, we announced a new share repurchase plan to repurchase up to US$10 million worth of outstanding ADSs over a 12-month period.

The table below is a summary of the ADSs repurchased by us in the fiscal year of 2013.

Period		Average Price Paid Per ADS(2)			Approximate Dollar Value of ADSs that May Yet Be Purchased Under the Plans

January 2, 2013 to January 31, 2013	118,771	US$	3.82	704,323	US$	7,228,488
February 1, 2013 to February 28, 2013	27,308	US$	4.37	731,631	US$	7,109,049
March 1, 2013 to March 28, 2013	71,855	US$	3.96	803,486	US$	6,824,840
April 1, 2013 to April 15, 2013	22,197	US$	4.28	825,683	US$	6,729,746
May 10, 2013 to May 31, 2013	20,100	US$	4.17	845,783	US$	6,645,995
June 3, 2013 to June 14, 2013	36,314	US$	3.99	882,097	US$	6,500,969
July 8, 2013 to July 26, 2013	67,940	US$	4.32	950,037	US$	6,207,195
August 30, 2013	200	US$	4.53	950,237	US$	6,206,289
November 29, 2013	1,900	US$	4.97	952,137	US$	6,196,846
December 2, 2013 to December 27, 2013	112,040	US$	5.10	1,064,177	US$	5,625,935
Total	478,625	US$	4.30	1,064,177	US$	5,625,935

We are incorporated in the Cayman Islands and our corporate governance practices are governed by applicable Cayman Islands law. As a foreign private issuer with shares listed on the NYSE, we are subject to corporate governance requirements imposed by the NYSE. Under Section 303A of the NYSE's Listed Company Manual, NYSE listed non-US companies may, in general, follow their home country corporate governance practices in lieu of some of the NYSE corporate governance

requirements. We are committed to a high standard of corporate governance. We believe that there are no significant differences between our corporate governance practices and those of U.S. domestic companies under the listing standards of the New York Stock Exchange.

The consolidate financial statements of Taomee Holdings Limited and its subsidiaries are included at the end of this annual report.

Exhibit Number			Description of Document

	1.1		Form of Third Amended and Restated Memorandum and Articles of Association of the Registrant, which became effective upon the completion of the initial public offering. (incorporated by reference to Exhibit 3.2 of our registration statement on Form F-1 (File No. 333-174293), as amended, initially filed with the Commission on May 18, 2011)
	2.1		Registrant's Specimen American Depositary Receipt (incorporated by reference to Exhibit 99.A of our registration statement on Form F-6 (File No. 333-174441) filed with the Commission on May 24, 2011)
	2.2		Registrant's Specimen Certificate for Ordinary Shares (incorporated by reference to Exhibit 4.2 of our registration statement on Form F-1 (File No. 333-174293), as amended, initially filed with the Commission on May 31, 2011)
	2.3		Form of Deposit Agreement among the Registrant, the depositary and holder of the American Depositary Receipts (incorporated by reference to Exhibit 99.A of our registration statement on Form F-6 (File No. 333-174441) filed with the Commission on May 24, 2011)
	4.1		Shareholder's Agreement, dated as of May 6, 2009, among the Registrant, the then shareholders of the Registrant and certain other parties listed thereunder. (incorporated by reference to Exhibit 4.4 of our registration statement on Form F-1 (File No. 333-174293), as amended, initially filed with the Commission on May 18, 2011)
	4.2		2009 Stock Option Plan (incorporated by reference to Exhibit 10.1 of our registration statement on Form F-1 (File No. 333-174293), as amended, initially filed with the Commission on May 18, 2011)
	4.3		2010 Share Incentive Plan (incorporated by reference to Exhibit 10.2 of our registration statement on Form F-1 (File No. 333-174293), as amended, initially filed with the Commission on May 18, 2011)
	4.4		2012 Share Incentive Plan (incorporated by reference to Exhibit 10.1 of our registration statement on Form S-8 (File No. 333-183651), filed with the Commission on August 31, 2012)

		Description of Document

4.5		Form of Indemnification Agreement with the Registrant's directors and officers (incorporated by reference to Exhibit 10.3 of our registration statement on Form F-1 (File No. 333-174293), as amended, initially filed with the Commission on May 18, 2011)
4.6	†	Form of Employment Agreements with the Registrant's senior executives.(incorporated by reference to Exhibit 10.4 of our registration statement on Form F-1 (File No. 333-174293), as amended, initially filed with the Commission on May 18, 2011 and May 24, 2011)
4.7		English Translation of Loan Agreement, dated as of June 12, 2009, among Mr. Jason Liqing Zeng, Mr. Bin Wang, Mr. Benson Haibing Wang, Mr. Roc Yunpeng Cheng, Mr. Crow Zhen Wei and Shanghai Shengran Information Technology Co., Ltd. (incorporated by reference to Exhibit 10.5 of our registration statement on Form F-1 (File No. 333-174293), as amended, initially filed with the Commission on May 18, 2011)
4.8		English Translation of Proxy Agreement, dated as of December 31, 2009, among Mr. Jason Liqing Zeng, Mr. Bin Wang, Mr. Benson Haibing Wang, Mr. Roc Yunpeng Cheng, Mr. Crow Zhen Wei, Mr. Yuliang Feng, Shanghai Taomee Network Technology Co., Ltd. and Shanghai Shengran Information Technology Co., Ltd. (incorporated by reference to Exhibit 10.6 of our registration statement on Form F-1 (File No. 333-174293), as amended, initially filed with the Commission on May 18, 2011)
4.9		English Translation of Option Agreement, dated as of December 31, 2009, among Mr. Jason Liqing Zeng, Mr. Bin Wang, Mr. Benson Haibing Wang, Mr. Roc Yunpeng Cheng, Mr. Crow Zhen Wei, Mr. Yuliang Feng and Shanghai Shengran Information Technology Co., Ltd. (incorporated by reference to Exhibit 10.7 of our registration statement on Form F-1 (File No. 333-174293), as amended, initially filed with the Commission on May 18, 2011)
4.10		English Translation of Business Operation Agreement, dated as of December 31, 2009, among Mr. Jason Liqing Zeng, Mr. Bin Wang, Mr. Benson Haibing Wang, Mr. Roc Yunpeng Cheng, Mr. Crow Zhen Wei, Mr. Yuliang Feng, Shanghai Taomee Network Technology Co., Ltd. and Shanghai Shengran Information Technology Co., Ltd. (incorporated by reference to Exhibit 10.8 of our registration statement on Form F-1 (File No. 333-174293), as amended, initially filed with the Commission on May 18, 2011)
4.11		English Translation of Commercial Cooperation Agreement between Shanghai Taomee Network Technology Co., Ltd. and Shanghai Shengran Information Technology Co., Ltd. (incorporated by reference to Exhibit 10.9 of our registration statement on Form F-1 (File No. 333-174293), as amended, initially filed with the Commission on May 18, 2011)
4.12		English Translation of Equity Interest Pledge Agreement, dated as of March 17, 2010 among Mr. Jason Liqing Zeng, Mr. Bin Wang, Mr. Benson Haibing Wang, Mr. Roc Yunpeng Cheng, Mr. Crow Zhen Wei, Mr. Yuliang Feng, Shanghai Taomee Network Technology Co., Ltd. and Shanghai Shengran Information Technology Co., Ltd. (incorporated by reference to Exhibit 10.10 of our registration statement on Form F-1 (File No. 333-174293), as amended, initially filed with the Commission on May 18, 2011)
4.13		Form of Director Agreement with independent directors of the Registrant (incorporated by reference to Exhibit 10.20 of our registration statement on Form F-1 (File No. 333-174293), as amended, initially filed with the Commission on May 18, 2011)

		Description of Document

4.14		Registration Rights Addendum, dated as of May 4, 2011, between Taomee Holdings Limited and Saban Media Ventures LLC. (incorporated by reference to Exhibit 10.21 of our registration statement on Form F-1 (File No. 333-174293), as amended, initially filed with the Commission on May 18, 2011)
4.15		English Translation of Building Lease Contract, undated, between M&G Chenguang Holding Group Co., Ltd. and Shanghai Taomee Network Technology Co., Ltd. (incorporated by reference to Exhibit 4.17 of our annual report on Form 20-F (File No. 001-35190), filed with the Commission on April 17, 2013)
4.16		English Translation of Building Lease Contract, undated, between M&G Chenguang Holding Group Co., Ltd. and Shanghai Shengran Information Technology Co., Ltd. (incorporated by reference to Exhibit 4.18 of our annual report on Form 20-F (File No. 001-35190), filed with the Commission on April 17, 2013)
4.17		English Translation of Building Lease Contract, undated, between M&G Chenguang Holding Group Co., Ltd. and Shanghai Xinsheng Information Technology Co., Ltd. (incorporated by reference to Exhibit 4.19 of our annual report on Form 20-F (File No. 001-35190), filed with the Commission on April 17, 2013)
4.18		English Translation of Building Lease Contract, undated, between M&G Chenguang Holding Group Co., Ltd. and Shanghai Taomee Animation Co., Ltd. (incorporated by reference to Exhibit 4.20 of our annual report on Form 20-F (File No. 001-35190), filed with the Commission on April 17, 2013)
4.19		English Translation of Form Regional Agency Sales Cooperation Agreement of Internet Physical Cards between the Company and third-party distributor (incorporated by reference to Exhibit 4.21 of our annual report on Form 20-F (File No. 001-35190), filed with the Commission on April 17, 2013)
4.20		English Translation of Form Regional Agency Sales Cooperation Agreement of Internet Visual Cards between the Company and third-party distributor (incorporated by reference to Exhibit 4.22 of our annual report on Form 20-F (File No. 001-35190), filed with the Commission on April 17, 2013)
4.21		Subscription Agreement, dated June 1, 2012, between Shanghai Taomee Network Technology Co., Ltd. and Jinjun Zhao with respect to the establishment of Guangdong Taomee (incorporated by reference to Exhibit 4.24 of our annual report on Form 20-F (File No. 001-35190), filed with the Commission on April 17, 2013)
4.22		Joint Investment Contract for Seer III the Movie, dated February 1, 2013, between Shanghai Taomee Animation Co., Ltd. and Beijing Enlight Pictures Co. Ltd. (incorporated by reference to Exhibit 4.25 of our annual report on Form 20-F (File No. 001-35190), filed with the Commission on April 17, 2013)
4.23	*	Series B Preferred Share Purchase Agreement, dated September 13, 2013, among Slanissue Holdings Limited, Slanissue Hong Kong Limited, Slanissue (Beijing) Information Technology Co., Ltd., Beijing Slanissue Technology Co., Ltd., Beijing Huibozhiye Culture Communication Co., Ltd., Wei Yang, Qi Mo, Liqing Zeng, Zhaoyang Liu, Fan Peng, Qiming Venture Partners III, L.P., Qiming Managing Directors Fund III, L.P., Taomee Holdings Limited and Ace Classic Investments Limited.
8.1	*	Subsidiaries of the Registrant

		Description of Document

11.1		Code of Business Conduct and Ethics of the Registrant, as amended (incorporated by reference to Exhibit 11.1 of our annual report on Form 20-F (File No. 001-35190), filed with the Commission on April 18, 2012)
12.1	*	CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2	*	CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1	*	CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2	*	CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
15.1	*	Consent of Allbright Law Offices
15.2	*	Consent of Deloitte Touche Tohmatsu Certified Public Accountants LLP
101.INS	**	XBRL Instance Document.
101.SCH	**	XBRL Taxonomy Extension Schema Document.
101.CAL	**	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	**	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	**	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	**	XBRL Taxonomy Extension Presentation Linkbase Document.

The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

TAOMEE HOLDINGS LIMITED

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013

We have audited the accompanying consolidated balance sheets of Taomee Holdings Limited (the "Company") and its subsidiaries and variable interest entities (the "Group") as of December 31, 2012 and 2013, and the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Group's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Group is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2012 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

TAOMEE HOLDINGS LIMITED

CONSOLIDATED BALANCE SHEETS

(In US dollars, except share and per share data, unless otherwise stated)

	As of December 31,

	2012			2013
Assets
Current assets:
Cash and cash equivalents	$	118,570,672		$	114,250,772
Short-term investment		—			2,992,343
Accounts receivable, net		2,371,060			2,387,747
Inventory		41,316			196,757
Income tax recoverable		49,956			402,460
Due from related parties		893,020			2,242,382
Prepayments and other current assets		2,071,509			2,904,695
Deferred tax assets—current		2,969,896			4,166,088


Total current assets		126,967,429			129,543,244
Investment in equity investees		8,262,077			14,047,509
Property and equipment, net		1,305,721			1,840,419
Prepayments for land use rights and building purchase		—			3,008,520
Acquired intangible asset		1,664,763			1,252,572
Other assets		1,557,532			1,496,242


Total assets	$	139,757,522		$	151,188,506




Liabilities and equity
Current liabilities:
Accounts payable (including accounts payable of the consolidated VIEs without recourse to Taomee Holdings Limited of 425,845 and 1,538,665 as of December 31, 2012 and 2013, respectively)	$	434,626		$	1,549,908
Income tax payable (including income tax payable of the consolidated VIEs without recourse to Taomee Holdings Limited of 245,189 and nil as of December 31, 2012 and 2013, respectively)		—			—
Due to related parties (including due to related parties of the consolidated VIEs without recourse to Taomee Holdings Limited of 14,725 and 22,957 as of December 31, 2012 and 2013, respectively)		89,728			369,983
Advance from customers (including advance from customers of the consolidated VIEs without recourse to Taomee Holdings Limited of 6,730,725 and 6,184,953 as of December 31, 2012 and 2013, respectively)		8,142,177			6,960,857
Deferred revenue (including deferred revenue of the consolidated VIEs without recourse to Taomee Holdings Limited of 12,061,510 and 12,340,821 as of December 31, 2012 and 2013, respectively)		12,061,510			12,340,821
Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the consolidated VIEs without recourse to Taomee Holdings Limited of 1,281,439 and 1,680,767 as of December 31, 2012 and 2013, respectively)		5,265,461			6,279,858
Deferred tax liabilities—current (including deferred tax liabilities of the consolidated VIEs without recourse to Taomee Holdings Limited of 13,473 and 1,758,134 as of December 31, 2012 and 2013, respectively)		13,473			1,758,134


Total current liabilities		26,006,975			29,259,561


Commitments and contingencies (Note 13)
Equity:
Taomee Holdings Limited shareholders' equity
Ordinary shares ($0.00002 par value; 875,000,000 shares authorized; 736,648,732 and 741,126,859 shares issued; 732,409,792 and 735,913,039 shares outstanding as of December 31, 2012 and 2013, respectively)		14,733			14,823
Treasury stock (at cost)		(747,359	)		(1,198,904	)
Additional paid-in capital		72,437,283			73,757,483
Accumulated other comprehensive income		2,555,570			4,342,755
Retained earnings		39,412,717			44,853,977


Taomee Holdings Limited shareholders' equity		113,672,944			121,770,134
Noncontrolling interests		77,603			158,811


Total equity		113,750,547			121,928,945


Total liabilities and equity	$	139,757,522		$	151,188,506

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

TAOMEE HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013

(In US dollars, except share and per share data, unless otherwise stated)

	For the years ended December 31,

	2011			2012			2013
Revenues:
Online business, net	$	40,330,778		$	32,169,495		$	35,330,152
Offline business, net		5,066,263			8,038,739			13,023,535


Total net revenues		45,397,041			40,208,234			48,353,687


Cost of services:
Online business		(6,035,323	)		(6,949,772	)		(7,643,598	)
Offline business		(1,652,235	)		(3,048,618	)		(5,620,619	)


Total cost of services		(7,687,558	)		(9,998,390	)		(13,264,217	)


Gross profit		37,709,483			30,209,844			35,089,470


Operating income (expenses):
Product development expenses		(10,303,929	)		(12,317,528	)		(13,885,922	)
Sales and marketing expenses		(6,254,531	)		(9,966,282	)		(9,446,025	)
General and administrative expenses		(7,965,104	)		(10,077,739	)		(13,095,086	)
Impairment loss on acquired intangible assets		—			—			(1,046,173	)
Other operating income		1,733,418			5,511,806			5,708,455


Total operating expenses		(22,790,146	)		(26,849,743	)		(31,764,751	)


Income from operations		14,919,337			3,360,101			3,324,719
Interest income		1,409,662			2,646,967			2,931,511
Other income (expenses), net		666,961			858,869			770,807
Impairment loss on investment in an equity investee		—			—			(370,407	)


Income before income taxes and share of profit in equity method investments		16,995,960			6,865,937			6,656,630


Income tax benefit (expense):
Current		(2,539,332	)		1,279,003			(788,724	)
Deferred		812,262			(424,099	)		(630,339	)


Total income tax benefit (expense)		(1,727,070	)		854,904			(1,419,063	)


Income before share of profit in equity method investments		15,268,890			7,720, 841			5,237,567
Share of profit in equity method investees		4,224,281			1,139,650			207,766


Net income		19,493,171			8,860,491			5,445,333
Net income (loss) attributable to noncontrolling interest		—			(1,376	)		4,073


Net income attributable to Taomee Holdings Limited	$	19,493,171		$	8,861,867		$	5,441,260
Deemed dividend on Series A convertible redeemable preferred shares		(200,601	)		—			—


Net income attributable to holders of ordinary shares	$	19,292,570		$	8,861,867		$	5,441,260




Earnings per share:
Basic	$	0.03		$	0.01		$	0.01
Diluted	$	0.03		$	0.01		$	0.01
Weighted average number of shares used in calculating earnings per share:
Basic		606,648,098			731,303,362			733,333,891
Diluted		640,377,175			753,533,499			746,532,112

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

TAOMEE HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013

(In US dollars, except share and per share data, unless otherwise stated)

	For the years ended December 31,

	2011			2012			2013
Net income	$	19,493,171		$	8,860,491		$	5,445,333
Other comprehensive income, net of tax of nil
Foreign currency translation adjustments		1,683,779			189,354			1,787,185


Comprehensive income		21,176,950			9,049,845			7,232,518
Comprehensive income (loss) attributable to noncontrolling interest		—			(1,376	)		4,073


Comprehensive income attributable to Taomee Holdings Limited		21,176,950			9,051,221			7,228,445
Deemed dividend on Series A convertible redeemable preferred shares		(200,601	)		—			—


Comprehensive income attributable to holders of ordinary shares	$	20,976,349		$	9,051,221		$	7,228,445

	Taomee Holdings Limited Shareholders' equity

	Ordinary shares						Treasury stock												Accumulated other comprehensive income
	Ordinary shares						Treasury stock						Additional paid-in capital			Retained earnings								Noncontrolling interests
	Shares			Amount			Shares			Amount			Additional paid-in capital			Retained earnings					Total			Noncontrolling interests			Total
Balance as of January 1, 2011		450,000,000		$	9,000			—			—		$	1,158,534		$	11,258,280		$	682,437	$	13,108,251		$	—		$	13,108,251
Issuance of ordinary shares (net of issuance cost of US$7,707,115)		154,254,480			3,085			—			—			61,704,316			—			—		61,707,401			—			61,707,401
Conversion of series A preferred shares to ordinary shares		125,000,000			2,500			—			—			5,825,491			—			—		5,827,991			—			5,827,991
Deemed dividend on Series A convertible redeemable preferred shares		—			—			—			—			—			(200,601	)		—		(200,601	)		—			(200,601	)
Repurchase of shares		—			—			2,473,160			(562,502	)		—			—			—		(562,502	)		—			(562,502	)
Exercise of options		1,646,200			33			—			—			97,276			—			—		97,309			—			97,309
Share-based compensation		—			—			—			—			1,996,753			—			—		1,996,753			—			1,996,753
Net income		—			—			—			—			—			19,493,171			—		19,493,171			—			19,493,171
Foreign currency translation adjustment		—			—			—			—			—			—			1,683,779		1,683,779			—			1,683,779


Balance as of December 31, 2011		730,900,680		$	14,618			2,473,160		$	(562,502	)	$	70,782,370		$	30,550,850			2,366,216	$	103,151,552		$	—		$	103,151,552
Repurchase of shares		—			—			9,237,880			(1,754,792	)		—			—			—		(1,754,792	)		—			(1,754,792	)
Cancellation of repurchased shares		(7,472,100	)		(149	)		(7,472,100	)		1,569,935			(1,569,786	)		—			—		—			—			—
Issuance of ordinary shares upon exercise of options and vesting of restricted shares		13,220,152			264			—			—			550,966			—			—		551,230			—			551,230
Share-based compensation		—			—			—			—			2,252,552			—			—		2,252,552			—			2,252,552
Reversal of accrued IPO costs		—			—			—			—			421,181			—			—		421,181			—			421,181
Noncontrolling interest for establishment of Guangdong Taomee		—			—			—			—			—			—			—		—			78,979			78,979
Net income (loss)		—			—			—			—			—			8,861,867			—		8,861,867			(1,376	)		8,860,491
Foreign currency translation adjustment		—			—			—			—			—			—			189,354		189,354			—			189,354


Balance as of December 31, 2012		736,648,732		$	14,733			4,238,940		$	(747,359	)	$	72,437,283		$	39,412,717		$	2,555,570	$	113,672,944		$	77,603		$	113,750,547
Repurchase of shares		—			—			9,572,500			(2,056,771	)		—			—			—		(2,056,771	)		—			(2,056,771	)
Cancellation of repurchased shares		(8,597,620	)		(172	)		(8,597,620	)		1,605,226			(1,605,054	)		—			—		—			—			—
Issuance of ordinary shares upon exercise of options and vesting of restricted shares		13,075,747			262			—			—			859,944			—			—		860,206			—			860,206
Share-based compensation		—			—			—			—			2,142,445			—			—		2,142,445			—			2,142,445
Noncontrolling interest on establishment of Guangdong Taomee		—			—			—			—			(77,135	)		—			—		(77,135	)		77,135			—
Net income		—			—			—			—			—			5,441,260			—		5,441,260			4,073			5,445,333
Foreign currency translation adjustment		—			—			—			—			—			—			1,787,185		1,787,185			—			1,787,185


Balance as of December 31, 2013		741,126,859		$	14,823			5,213,820		$	(1,198,904	)	$	73,757,483		$	44,853,977		$	4,342,755	$	121,770,134		$	158,811		$	121,928,945

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

TAOMEE HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013

(In US dollars, except share and per share data, unless otherwise stated)

	For the years ended December 31,

	2011			2012			2013
Operating activities:
Net income	$	19,493,171		$	8,860,491		$	5,445,333
Adjustments to reconcile net income to net cash provided by operating activities:
Share-based compensation		1,996,753			2,252,552			2,142,445
Depreciation and amortization		2,320,731			2,629,532			2,234,816
Share of profit in equity method investees, net of gain/loss on disposals		(4,224,281	)		(1,139,650	)		(207,766	)
Deferred income taxes		(812,262	)		424,099			630,339
Loss on disposal of property and equipment		12,325			3,891			62,811
Write-off of other receivable		(155,171	)		—			—
Provision of allowance for doubtful accounts		—			—			313,851
Loss from impairment on acquired intangible assets		—			—			1,046,173
Loss from impairment on investment in an equity investee		—			—			370,407
Changes in assets and liabilities:
Accounts receivable		(984,291	)		(948,526	)		(330,538	)
Inventories		—			(41,316	)		(155,441	)
Due from related parties		(202,267	)		16,608			(1,499,362	)
Prepayments and other current assets		360,721			(232,860	)		(775,819	)
Other assets		(713,993	)		(565,770	)		(921,629	)
Accounts payable		(122,878	)		212,806			1,115,282
Income taxes payable		2,187,076			(2,237,032	)		(352,504	)
Due to related parties		(25,711	)		76,613			280,255
Advance from customers		1,539,111			(2,081,132	)		(1,181,320	)
Deferred revenue		2,129,741			(851,429	)		279,311
Accrued expenses and other current liabilities		(412,638	)		160,218			858,830
Return on investment in equity investees		—			623,120			581,238


Net cash provided by operating activities		22,386,137			7,162,215			9,936,712


Investing activities:
Purchases of short-term investment		—			—			(2,992,343	)
Purchases of property and equipment		(826,122	)		(336,612	)		(1,432,161	)
Purchases of intangible asset		(1,233,020	)		(1,398,020	)		(853,939	)
Prepayments for land use rights and building purchase		—			—			(2,963,461	)
Lending of loans receivable		—			(79,548	)		—
Lending to a related party		—			(76,366	)		—
Collection of amounts due from related party		—			76,366			—
Cash paid to acquire equity investees		(1,118,538	)		(6,957,520	)		(6,529,154	)
Proceeds from sale of equity method investees		3,885,000			1,041,124			—


Net cash provided by (used in) investing activities		707,320			(7,730,576	)		(14,771,058	)


Financing activities:
Proceeds from issuance of ordinary shares		69,414,516			—			—
Issuance cost of ordinary shares		(6,943,426	)		(340,713	)		—
Cash dividends paid		(8,950,000	)		—			—
Proceeds from exercise of share options		—			275,825			1,046,021
Capital contribution from noncontrolling interest		—			78,979			—
Repurchase of ordinary shares		(562,502	)		(1,681,520	)		(2,144,386	)

	For the years ended December 31,

	2011		2012			2013
Net cash provided by (used in) financing activities		52,958,588		(1,667,429	)		(1,098,365	)


Effect of exchange rate changes		1,539,719		127,564			1,612,811


Net increase (decrease) in cash and cash equivalents		77,591,764		(2,108,226	)		(4,319,900	)


Cash and cash equivalents, beginning of the year		43,087,134		120,678,898			118,570,672


Cash and cash equivalents, end of the year	$	120,678,898	$	118,570,672		$	114,250,772




Supplemental disclosure of cash flow information:
Income taxes paid	$	352,255	$	950,028		$	1,528,394




Supplemental schedule of non-cash investing and financing activities:
Purchases of property and equipment included in accrued expenses	$	80,942	$	—		$	—
Initial public offering costs not yet paid	$	761,894	$	—		$	—
Repurchases of ordinary shares included in accrued expenses	$	14,343	$	87,615		$	—

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

TAOMEE HOLDINGS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2011, 2012 AND 2013

(In US dollars, except share data, unless otherwise stated)

Taomee Holdings Limited (the "Company"), all of its subsidiaries and consolidated variable interest entities ("VIEs") are collectively referred to as the "Group". The Group is principally engaged in the development and operation of online virtual worlds, mobile applications and other online services, the provision of related offline operations by licensing the Group's proprietary cartoon figures to merchandisers and book publishers as well as producing films and trading interactive toys. The Group's principal operations and geographic market are in the People's Republic of China ("PRC").

The subsidiaries and consolidated VIEs of the Company as of December 31, 2013 are as follows:

Name of subsidiaries and consolidated VIEs				Place of incorporation

Taomee Holdings (HK) Limited ("Taomee Hong Kong")	100	%	November 27, 2008	Hong Kong
Shanghai Shengran Information Technology Co., Ltd. ("Shanghai Shengran")	100	%	June 12, 2009	PRC
Shanghai Taomee Network Technology Co., Ltd. ("Shanghai Taomee")	VIE		October 8, 2007	PRC
Shanghai Qidong Information Technology Co., Ltd. ("Shanghai Qidong")	VIE		March 4, 2009	PRC
Shanghai Taomee Animation Co., Ltd. ("Shanghai Animation")	VIE		November 11, 2010	PRC
Guangdong Taomee Animation Technology Co., Ltd. ("Guangdong Taomee")	VIE		June 1, 2012	PRC
Shanghai Xinsheng Information Technology Co., Ltd. ("Shanghai Xinsheng")	100	%	October 31, 2012	PRC
Shanghai Taomee Wireless Technology Co., Ltd. ("Shanghai Wireless")	99	%	May 6, 2013	PRC
Shanghai Taomee Software Development Co., Ltd. ("Shanghai Software")	99	%	October 29, 2013	PRC
Shanghai Taomee Property Service Co., Ltd. ("Shanghai Property Service")	99	%	November 1, 2013	PRC

The Group conducts its business primarily through two consolidated VIEs Shanghai Taomee and Shanghai Qidong. Shanghai Animation and Guangdong Taomee were incorporated under Shanghai Taomee and were consolidated since their respective date of incorporation.

The Company, through its wholly owned subsidiary Shanghai Shengran, entered into a series of contractual arrangements with the VIEs and the shareholders, pursuant to which the Company is entitled to receive effectively all economic benefits generated from the shareholders' equity interests in the VIEs. These contractual arrangements include:

(i) a Proxy Agreement, under which each shareholder of the VIEs has assigned Shanghai Shengran all rights as a shareholder of the VIEs including voting rights. The Proxy Agreement is valid infinitely and is only subject to be terminated by Shanghai Shengran;

(ii) an Option Agreement, under which the shareholders of the VIEs granted Shanghai Shengran an irrevocable and exclusive option to purchase all or a portion of their equity interests in the VIEs when and to the extent permitted by PRC law. The Option Agreement will terminate when the equity interests in the VIEs are legally transferred to Shanghai Shengran;

(iii) a Business Operation Agreement, under which the shareholders of the VIEs have agreed that Shanghai Shengran shall direct the day-to-day operational and financial activities of the VIEs including electing directors and officers and hiring personnel, that the VIEs will not conduct any transactions which might substantially affect their assets and business operations without the prior written consent of Shanghai Shengran, and that the shareholders will unconditionally transfer to Shanghai Shengran, for no consideration, all dividends or other proceeds received from the VIEs in their capacity as shareholders;

(iv) a Commercial Cooperation Agreement between the VIEs and Shanghai Shengran, under which Shanghai Shengran is engaged by the VIEs as the exclusive provider of software services, technology support, and marketing services for a service fee. By virtue of the governance rights Shanghai Shengran maintains over the VIEs, through the terms of the other agreements noted above, the Company is able unilaterally renew, extend or amend the service agreements at its discretion;

(v) an Equity Interest Pledge Agreement, under which the shareholders pledged all of their equity interests in the VIEs to Shanghai Shengran as collateral to secure their obligations under the agreement, and all benefits derived from the equity interests in the VIEs shall be the guarantee for the VIEs' debt. The Equity Interest Pledge Agreement is continuously effective until the full performance of the contractual obligations or the full repayment of the guaranteed liabilities as described in such agreement; and

(vi) a Loan Agreement, under which Shanghai Shengran shall provide interest-free loans of up to a total of RMB2.5 million (equivalent to $366,129) to PRC citizens Mr. WANG Haibing, Mr. WEI Zhen, Mr. CHENG Yunpeng, Mr. ZENG Liqing and Mr. WANG Bin (collectively referred to as the "five shareholders") for their respective capital contributions in the VIEs. The loans have an unspecified term and will remain outstanding for the duration of Shanghai Shengran or until such time that Shanghai Shengran elects to terminate the agreement (which is at Shanghai Shengran's sole discretion) at which point the loans are payable on demand. The five shareholders of the VIEs may not prepay all or any portion of the loans without Shanghai Shengran's prior written request.

Under the above agreements, the shareholders of the VIEs irrevocably granted Shanghai Shengran the power to exercise all voting rights to which they were entitled. In addition, Shanghai Shengran has the option to acquire all of the equity interests in the VIEs, to the extent permitted by the then-effective PRC laws and regulations, for nominal consideration. Shanghai Shengran is entitled to receive service fees for certain services to be provided to the VIEs.

These contractual agreements are designed to provide the Company control of the VIEs. The Option Agreement and Proxy Agreement provide Shanghai Shengran effective control over the VIEs, while the Equity Interest Pledge Agreement secures the shareholers' obligations under these agreements. Because the Company, through its wholly owned subsidiary Shanghai Shengran has (1) the

power to direct the activities of the VIEs that affect the Company's economic performance and (2) the right to receive benefits from the VIEs, it has been deemed to be the primary beneficiary of the VIEs and has a result consolidated the respective VIEs since the date of execution of such agreements. The call option on subsidiary shares under the Option Agreement and the guarantee of VIEs' debt under the Equity Interest Pledge Agreement have not been accounted for in the consolidated financial statements since they are agreements between a parent and a consolidated subsidiary. The service fees under the Commercial Cooperation Agreement are eliminated upon consolidation.

In arriving at the conclusion that the Company is the primary beneficiary of the VIEs, the Company relied on the determination that the Company's rights under the terms of the Option Agreement provide it with a substantive kick out right, subject to applicable PRC law. The Company also believes that the minimum amount of consideration permitted by the applicable PRC law to exercise the option does not represent a financial barrier or disincentive for the Company to currently exercise its rights under the Option Agreement.

The Company has concluded that these contractual arrangements are legally binding and the Company exercises control over the VIEs. The Group's current ownership structure, as well as the contractual arrangements that Shanghai Shengran entered into with the consolidated VIEs and their shareholders are in compliance with all existing PRC laws and regulations. However, the aforementioned contractual arrangements with the VIEs and their respective shareholders are subject to risks and uncertainties:

If these adverse circumstances were to occur, the Company may lose the ability to exert effective control over the VIEs and its shareholders, and it may lose the ability to receive economic benefits from the VIEs. As a result, the Company may not be able to consolidate the VIEs into its consolidated financial statements. The Company, however, does not believe such actions would result in the liquidation or dissolution of the Company, the WFOE or the VIEs.

The aforementioned shareholders collectively own all of the equity interests in the VIEs and together own a majority of the Company's shares as of December 31, 2013. The Company cannot assure that, when conflicts of interest arise, the shareholders will act in the best interests of the Company or that conflicts of interests will be resolved in the Company's favor. Currently, the Company does not have existing arrangements to address potential conflicts of interest the shareholders may encounter in their capacity as owners of record and directors of the VIEs, on the one hand, and as beneficial owners and directors of the Company, on the other hand. The Company believes the shareholders will not act contrary to any of the contractual arrangements and the Option Agreement entitles the Company to remove the shareholders as beneficial shareholders of the VIEs should any of them act in a way that is detrimental to the Company. The Company relies on the shareholders as directors and executive officers of the Company to fulfill their fiduciary duties and abide by laws of the PRC and Cayman Islands and act in the best interest of the Company. If the Company cannot resolve any conflicts of interest or disputes between the Company and the shareholders, the Company would have to rely on legal proceedings, which could result in disruption of its business, and there would likely be substantial uncertainty as to the outcome of any such legal proceedings.

Nonetheless, the Company believes that its ability to direct the activities of the VIEs that most significantly impact their economic performance and the VIE arrangements are not affected by current PRC laws and regulations. Accordingly, the VIEs continue to be consolidated by the Company, as the primary beneficiary.

However, there may be changes and other developments in the PRC laws and regulations or their interpretation could affect the Company's ability to control the VIEs and preclude the Company from consolidating the VIEs in the future.

Summary financial information of the Group's VIEs included in the accompanying consolidated financial statements (after eliminating all intercompany transactions and balances, except for cash flow information which was before eliminating intercompany transactions and balances) is as follows:

	December 31,

	2012		2013
Assets
Current assets:
Cash and cash equivalents		15,466,456		12,216,436
Accounts receivable, net		2,012,824		1,849,786
Inventory		41,316		196,757
Income tax recoverable		—		585,861
Due from related party		707,968		2,169,866
Prepayments and other current assets		427,844		1,614,931
Deferred tax assets—current		2,435,351		3,489,805


Total current assets		21,091,759		22,123,442
Investment in equity investees		28,186		2,326,793
Property and equipment, net		643,315		1,163,086
Acquired intangible asset		350,631		1,030,702
Other assets		362,148		376,926


Total assets		22,476,039		27,020,949




Liabilities
Accounts payable		425,845		1,538,665
Income taxes payable		245,189		—
Due to related parties		14,725		22,957
Advance from customers		6,730,725		6,184,953
Deferred revenue		12,061,510		12,340,821
Accrued expenses and other current liabilities		1,281,439		1,680,767
Deferred tax liabilities—current		13,473		1,758,134


Total liabilities		20,772,906		23,526,297

The Company earns service fees from the VIEs which are eliminated upon consolidation. For the years ended December 31, 2011, 2012 and 2013, the service fees payable by the VIEs to Shanghai Shengran were RMB207 million (US$32.2 million), RMB102 million (US$16.2 million) and RMB118 million (US$19.1 million). The service fees outstanding and payable to the WFOE from the

VIEs were RMB5 million (US$0.8 million) and RMB0.3 million (US$0.05 million) as of December 31, 2012 and 2013, respectively.

The VIEs contributed an aggregate of 90.8%, 83.4% and 84.8% of the consolidated net revenues for the year ended December 31, 2011, 2012 and 2013, respectively. The Company's operations not conducted through contractual arrangements with the VIEs primarily consist of its merchandise licensing and book royalty business. As of the fiscal years ended December 31, 2012 and 2013, the VIEs accounted for an aggregate of 16.1% and 17.9%, respectively, of the consolidated total assets, and 79.9% and 80.4%, respectively, of the consolidated total liabilities. The assets not associated with the VIEs primarily consist of cash and cash equivalents.

There are no creditors (or beneficial interest holders) of the VIEs that have recourse to the general credit of the Company or any of its consolidated subsidiaries. There are no terms in any arrangements, considering both explicit arrangements and implicit variable interest that require the Company or its subsidiaries to provide financial support to the VIEs. However, if the VIEs were to require financial support, the Company or its subsidiaries may, at its option and subject to statutory limits and restrictions, provide financial support to the VIEs through loans.

Relevant PRC laws and regulations restrict the VIEs from transferring a portion of its net assets, equivalent to the balance of its statutory reserve and its share capital, to the Company in the form of loans and advances or cash dividends. Please refer to Note 12 for disclosure of restricted net assets.

The consolidated financial statements of the Group have been prepared in accordance with the accounting principles generally accepted in the United States of America ("US GAAP"). Significant accounting policies followed by the Group in the preparation of the accompanying consolidated financial statements are summarized below.

The consolidated financial statements include the financial statements of the Group, its subsidiaries and VIEs. All intercompany transactions and balances are eliminated upon consolidation.

A subsidiary is an entity in which the Company, directly or indirectly, controls more than one half of the voting power or has the power to: appoint or remove the majority of the members of the board of directors; cast a majority of votes at the meeting of the board of directors; or govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.

US GAAP provides guidance on the identification and financial reporting for entities over which control is achieved through means other than voting interests, which requires certain VIEs to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Through the contractual arrangements between the Company and the VIEs, the Company controls the operating activities and holds all the beneficial interests of the VIEs and has been determined to be the primary beneficiary of the VIEs. The Company has concluded that such contractual arrangements are legally enforceable (see footnote 1 for related risks and uncertainties).

The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affected the reported amount of the assets and liabilities, the disclosure of assets and liabilities at the date of the financial statements, and the reported revenues and expenses during the reported periods. Actual results may differ from those estimates. Significant accounting estimates reflected in the Group's consolidated financial statements mainly include allowance for doubtful accounts, the useful life of in-game items, useful life and impairment for property and equipment and intangible asset, impairment of cost method investment and equity method investments, future cash flow estimates for purposes of determining the fair value of the ordinary shares of the Company before the initial public offering ("IPO"), assumptions related to the valuation of share-based compensation and related forfeiture rates, consolidation of VIEs, assumptions applied in the classification of equity investments and realization of deferred tax assets. Such accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of our consolidated financial statements, and actual results could differ materially from these estimates.

Cash and cash equivalents represent cash on hand and demand deposits, which are unrestricted as to withdrawal or use, and which have original maturities of three months or less when purchased.

Investments in debt or equity securities are accounted for based on the nature of the products invested, and the Group's intent and ability to hold the investments to maturity. In 2013, the Company invested in a short-term money market investment whose return is linked to a short term interest rate with interest income accrued on a daily basis. The instrument does not have a stated maturity but can be traded daily at par value plus accrued interest, subject to certain normal market conditions. The investment was accounted for as an available-for-sale security at fair value with changes in fair value reflected in other comprehensive income.

Accounts receivable mainly consists of receivables from the distribution of films, receivables from third party online payment channels, and royalties due from corporate customers, and is recorded net of allowance for doubtful accounts. The Group determines the allowance for doubtful accounts when facts and circumstances indicate that the receivable is unlikely to be collected. Allowance for doubtful accounts are charged to general administrative expenses. The Group recorded nil and $0.3 million allowance for doubtful accounts as of December 31, 2012 and 2013, respectively.

Inventory as of December 31, 2013 primarily consists of interactive toys. Inventories are stated at the lower of cost or market and the cost of merchandise inventory is determined using the weighted average cost method. The Group records valuation adjustments to write-down the inventories if the cost of specific inventory items on hand exceeds the amount expected to be realized from the ultimate sale or disposal of the inventory. The Group recorded no inventory write-downs in the periods presented.

The Group uses the equity method to account for an equity investment over which it has significant influence but does not own a majority equity interest or otherwise control. The Group records equity method adjustments in share of earnings and losses. Equity method adjustments include the Group's proportionate share of investee income or loss, adjustments to recognize certain differences between the Group's carrying value and its equity in net assets of the investee at the date of investment, impairments, and other adjustments required by the equity method. Dividends received are recorded as a reduction of carrying amount of the investment. Cumulative distributions that do not exceed the Group's cumulative equity in earnings of the investee are considered as a return on investment and classified as cash inflows from operating activities. Cumulative distributions in excess of the Group's cumulative equity in the investee's earnings are considered as a return of investment and classified as cash inflows from investing activities. Equity method investments only include non-marketable investments. For equity investments over which the Group does not have significant influence or control, the cost method of accounting is used.

The Group assesses its equity investments for other-than-temporary impairment by considering factors as well as all relevant and available information including, but not limited to, current economic and market conditions, the operating performance of the investees including current earnings trends, the technological feasibility of the investee's products and technologies, the general market conditions in the investee's industry or geographic area, factors related to the investee's ability to remain in business, such as the investee's liquidity, debt ratios, and cash burn rate and other company-specific information including recent financing rounds.

The group recorded nil, nil and US$0.4 million in impairment losses on equity investee as of December 31, 2011, 2012 and 2013, respectively.

Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization is calculated on a straight-line method over the following estimated useful lives:

The Group evaluates its long-lived assets with definite useful life, including property and equipment and acquired intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When these events occur, the Group measures impairment by comparing the carrying amount of the assets to the future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the future undiscounted cash flow is less than the carrying amount of the assets, the Group would recognize an impairment loss equal to the excess of the carrying amount over the fair value of the assets. There were nil, nil and US$1.0 million impairment charge recognized for the years ended December 31, 2011, 2012 and 2013.

The Group tests the intangible asset with indefinite useful life for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. If the carrying amount of the intangible asset exceeds its fair value, the Group recognizes an impairment loss in an amount equal to that excess.

Upfront licensing fees paid to third party licensors are capitalized when paid and amortized on a straight-line basis over the shorter of the estimated economic life of the intangible assets or license period, ranging from three to seven years. Amortization of acquired game licenses commences upon the commercial launch of the related online game. As of December 31, 2012 and 2013, the carrying values of these acquired upfront licensing fees were $1.5 million and $1.1 million, the accumulated amortization were $0.2 million and $0.2 million, respectively.

The less than satisfactory performance of certain games indicated that the carrying amounts of acquired intangible assets may not be recoverable. The Group tested the long-lived assets and goodwill for impairment. As a result of the long-lived asset impairment tests, upfront licensing fees held and used with a carrying amount of $1.0 million were fully impaired, with the resulting impairment charges included in earnings for the year ended December 31, 2013.

Company purchased a domain name from a third party in 2009 for $141,735. The domain name is considered to have an indefinite useful life, as there is no legal or contractual limit to its terms of usage. The intangible asset is carried at cost less any accumulated impairment losses.

The Group recorded amortization of acquired intangible assets of nil, $204,266 and $414,510 for the years ended December 31, 2011, 2012 and 2013, respectively. The amortization expenses of the above acquired intangible assets will be approximately $273,542, $274,094, $206,875, $206,875 and $124,866 for 2014, 2015, 2016, 2017 and 2018, respectively

Film cost include capitalized production costs, production overhead, development costs and acquired production costs for the production of animated films which have been completed or are still in production. The costs are stated at the lower of cost, less accumulated amortization, or fair value.

Film production costs are capitalized and then amortized to cost when the films are completed and on release, together with any participation and residual costs, based on the ratio of the current period's revenues to estimated remaining total revenues ("Ultimate Revenues") from all sources on an individual production basis. Ultimate Revenues for film productions include revenues that will be earned within ten years from the date of the initial theatrical release. These estimates are reviewed on a periodic basis.

Costs of film productions are subject to regular recoverability assessments which compare the estimated fair values with the unamortized costs. The amount by which the unamortized costs of film productions exceed their estimated fair values is written off.

During production, the Group records the amount paid to the third parties as its capitalized film costs up to the Group's proportionate share of the actual cumulative film production costs that have

been incurred by the third parties, as the Group assumes full risk for that portion of the film asset acquired in this transaction. The Group shares the same estimates of ultimate revenue and ultimate participation costs as the other participants. When the film is released, the Group recognizes its share of the net profit due from the other participants as film revenue and amortizes the capitalized film costs as cost of film revenue on the consolidated statement of operations based on the ratio of the current period revenues to the estimated ultimate revenues and an estimated profit margin from the film. The Group records the prepayments and capitalized film costs under these arrangements in other assets on its consolidated balance sheet.

The Group recorded amortization of capitalized film costs of $556,899, $968,276 and $937,860 for the years ended December 31, 2011, 2012 and 2013, respectively.

The Group accounted for those shares repurchased but not yet cancelled as Treasury Stock at cost and presented separately in the Shareholders' Equity. When the Group cancels the treasury stock, the difference between the original issuance price and the repurchase price is charged to additional paid-in capital.

The Group earns revenue primarily through developing and operating proprietary online virtual worlds. The Group provides such services to children via an online entertainment platform pursuant to two types of revenue models: a time-based revenue model and an item-based revenue model.

For online services using the time-based model, users pay a subscription fee for calendar days of unlimited play on the online platform. The Group recognizes revenue generated from subscription fees based on the number of calendar days on which the users are provided the services.

For the item-based model, revenue is recognized over the estimated lives of the in-game virtual premium items purchased or as the virtual premium items are consumed. For the virtual premium items that are immediately consumed, revenue is recognized upon consumption. For virtual premium items with no predetermined expiration ("permanent items"), revenue is recognized ratably over the estimated average lives of the permanent items, which range from half a year to one and a half years. The amount of the unamortized permanent items and unconsumed items are recognized as deferred revenue. The Group recognized $21,203,727, $16,269,659 and $22,396,393 gross revenue from virtual premium items accounted for under the item-based model for the years ended December 31, 2011, 2012 and 2013, respectively. The Group estimates the average lives of the permanent items based on an assessment of its historical data and user behavior patterns, including the average period that users typically stay on the platform, the age group of the target users, and the number of active paying users in the virtual worlds, and the promotional events launched, with reference to industry research data. The Group assesses the estimated lives of premium items periodically. If there are indications of any

significant changes to the estimated lives of these premium items, the revised estimates would be applied prospectively in the period of change. Prior to June 30, 2010, the Group did not have sufficient historical data from its virtual worlds to estimate the useful life of the permanent items, and used the industry research data and peer company information in developing the estimate of the average life of permanent items, which was determined to be one year for all its virtual worlds. Effective on July 1, 2010, the Group changed the accounting estimate of the useful life of the permanent items in Mole's World from one year to 18 months based on an analysis of the life of the virtual world and user behavior patterns using historical user data since the launch of Mole's World in September 2008, and applied such change prospectively. The effect of the change in accounting estimate on the results of operations for the year ended December 31, 2010 was immaterial. In 2011 and 2012, the Group did not make any changes to the useful life of any of its virtual worlds. In 2013, the Group assessed its historical data of user behavior as well as industry research data and noticed a shortening trend user lifespan and changed the estimated lives of premium items for newly launched online virtual worlds to half a year. The estimated lives of existing virtual worlds remained unchanged. The Group will continue to monitor the user behavior patterns of each of its virtual worlds and will utilize such information to update the estimates of the useful lives of permanent items.

Revenues are recorded net of sales discounts and rebates paid to distributors. The cost of providing free virtual items as a result of promotional activities was immaterial for each of the three years presented.

Users pay subscription fees and purchase virtual items using the Group's virtual currency, which can be purchased via various distribution channels, such as the prepaid cards sold by the Group, third party prepaid cards, online payment channels, and via Short Message Services ("SMS") through cellular telecom operators. Under both the time-based and the item-based revenue models, proceeds that the Group receives directly from end users for sales of online points are recorded as deferred revenues, while proceeds received from sales of online points to parties in the distribution channel and from sales of prepaid cards are initially recorded as advances from customers. As the Group does not have control over and generally does not know the ultimate selling price of the prepaid cards or online points sold by the distributors, the Group records net proceeds from the distributors as advances from customers. Upon activation of prepaid cards or purchase of online points, advances from customers are immediately transferred to deferred revenues.

Prepaid cards will expire on the expiration date printed thereon, which is generally two years after the date of card production. Proceeds from expired prepaid cards that have not been activated are recognized as other operating income upon expiration of the cards. The Group had recognized $546,360, $1,867,626 and $1,620,842 in other operating income in connection with expired prepaid cards for the years ended December 31, 2011, 2012 and 2013, respectively.

Revenues from the Group's offline business include licensing income and royalty fees for licensing the Group's proprietary cartoon figures to merchandisers and book publishers. Most of the revenues generated under merchandise licensing income and royalty fees are recognized at the end of each month and calculated at the contractual royalty rate times the sales of the licensed merchandise product for the month. The sales of the licensed product are derived from the monthly sales reports provided by the licensee.

In certain of the merchandise licensing arrangements, the Group receives a guaranteed base fee and additional royalty fees that are contingent on sales volume. Proceeds from minimum guaranteed royalties in excess of royalties earned are generally recognized as revenues at the end of the contract term. In a small number of its merchandise licensing arrangements, the Group receives a fixed royalty fee from the licensee over the contract period. The Group recognizes this type of royalty revenue ratably over the contract period.

The Group recognizes revenue from the distribution of its films when the film is exhibited in theaters, provided that no significant obligations remain, amounts can be accurately estimated, and collection is reasonably assured. Revenue from the distribution of the film on television and websites is recognized when the production is made available for exhibition and other contractual obligations or conditions are met.

Revenues from selling interactive toys, books and merchandise are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured.

The Group is subject to sales tax at a rate of 5% for sales of prepaid Mimi cards, or value-added tax at a rate of 17% for software sales and interactive toy sales, or value-added tax at a rate of 6% for certain other services such as advertisement, merchandise licensing and box office revenue sharing, as well as related surcharges on revenue earned from online services and offline business conducted in the PRC, respectively. The Group presents revenue net of sales taxes or value-added tax incurred.

In July 2012, the Ministry of Finance and the State Administration of Taxation jointly issued a circular regarding the pilot collection of Value-added tax in lieu of business tax in certain areas and industries in the PRC. Such VAT pilot program is to be phased in Beijing, Jiangsu, Anhui, Fujian, Guangdong, Tianjin, Zhejiang, and Hubei between September and December 2012. Starting from August 2012, certain subsidiaries and VIEs became subject to VAT at the rates of 6% on certain service revenues which were previously subject to business tax.

For online services, online points that have been sold but not activated yet are recognized as advance from customers. Online points that have been activated but for which online entertainment services will be rendered in the future are recognized as deferred revenue. Under the time-based model, deferred revenue is recognized as revenue based on the calendar days on which the online services are provided to the end users. Under the item-based model, deferred revenue represents the amounts of unamortized permanent items and unconsumed items. For offline services, advance from customers represents the unamortized balance of advance royalty fees paid by licensees.

Cost of revenues consists of primarily of salaries and benefits, bandwidth costs, film production costs, amortization of upfront licensing fees, depreciation and amortization of equipment and software, inventory cost of merchandise and other direct costs.

Product development costs consist primarily of personnel-related expenses and other overhead expenses related to the research and development activities.

The Group expenses software development costs incurred prior to reaching technological feasibility. Once a software product has reached technological feasibility, all subsequent software costs for that product are capitalized until that product is released for marketing. After a virtual world is released, the capitalized product development costs are amortized over the estimated product life. Since the inception of the Group, the amount of costs qualifying for capitalization has been immaterial and, as a result, all software development costs have been expensed as incurred.

Sales and marketing expenses consist primarily of advertising and promotional expenses, animation related expenses, payroll and other overhead expenses incurred by the Group's sales and marketing personnel. Advertising expenses in the amount of $3,295,128, $5,078,703 and $3,468,749, for the years ended December 31, 2011, 2012 and 2013, respectively, were expensed as incurred.

The Group receives unrestricted cash subsidies of $1,187,059, $3,377,496 and $3,792,495 for the years ended December 31, 2011, 2012 and 2013, respectively, from local government agencies. The government agencies use their discretion to determine the amount of the subsidies with reference to business tax, value-added tax and income tax paid by the Group and qualification as high technology projects. These subsidies were an incentive to the Group to establish business within a particular geographic area in China. The subsidies are unrestricted as to use and can be utilized by the Company in any manner it deems appropriate. The Company has utilized, and expects to continue to utilize,

these subsidies to fund general operating expenses. The Group records unrestricted government subsidies as other operating income in the consolidated statements of operations.

Share-based payment transactions with employees, such as share options and non-vested restricted shares are measured based on the grant date fair value of the equity instrument. Share-based payment transactions with nonemployees are remeasured at the end of each reporting period until a measurement date is established. The measurement date of a nonemployee award is the earlier of (1) the performance commitment date or (2) the date on which the performance is complete. The Group recognizes the compensation costs net of a forfeiture rate on a straight-line basis, over the requisite service period of the award, which is generally the vesting period of the award. The amount of compensation expenses recognized for any period is not less than the portion of the grant date fair value of the options vested during that period. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.

Leases are accounted for as operating leases if substantially all of the risks and rewards of ownership of assets remain with the leasing company. Payments made under operating leases net of any incentives received are charged to the consolidated statements of operations on a straight-line basis over the lease periods.

Current income taxes are provided for in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Net operating loss carry forwards and credits are applied using enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that a portion of or all of the deferred tax assets will not be realized. The

components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics.

Under ASC 740 "Income Taxes", a deferred tax liability ("DTL"), except for certain exceptions which is only applicable in terms of investment in foreign subsidiaries, should be recorded for taxable temporary differences attributable to the excess of financial reporting basis over tax basis of an investment in a more than 50% interest in a domestic subsidiary, which represents the outside basis difference. However, the DTL is also not required in the situation where that such outside basis difference can be recovered tax-free and the enterprise expects that it will ultimately use that means. The Group accrues deferred tax liabilities on the undistributed earnings of its Variable Interest Entities ("VIEs").

The Group recognizes the impact of uncertain income tax positions at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority. The Group classifies interest and/or penalties related to uncertain tax positions in income tax expense.

The functional currency and reporting currency of Taomee Holdings Limited and Taomee Hong Kong are the United States dollar ("U.S. dollar"). Monetary assets and liabilities denominated in currencies other than the U.S. dollar are translated into the U.S. dollar at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than the U.S. dollar during the year are converted into U.S. dollar at the applicable rates of exchange prevailing on the first day of the month in which the transactions occurred. Transaction gains and losses are recognized in the consolidated statements of operations.

The financial records of the Group's PRC subsidiaries and VIEs are denominated in its local currency, the Renminbi ("RMB"), which is the functional currency. Assets and liabilities are translated into the U.S. dollar at the exchange rates at the balance sheet date, equity accounts are translated at historical exchange rates. Revenues, expenses, gains and losses are translated into the U.S. dollar using the average rate for the period. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of accumulated other comprehensive income in the consolidated statements of changes in equity and comprehensive income (loss).

The RMB is not a freely convertible currency. The PRC State Administration for Foreign Exchange, under the authority of the People's Bank of China, controls the conversion of RMB into foreign currencies. The value of RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. The Group's aggregate amount of cash and cash equivalents denominated in RMB amounted to RMB 619,722,535 and RMB 590,488,850 as of December 31, 2012 and 2013, respectively.

Financial instruments that potentially expose the Group to concentration of credit risk consist primarily of cash and cash equivalents, due from related party and accounts receivable. All of the Group's cash and cash equivalents are held with financial institutions that the Group believes to be high credit quality. The Group conducts credit evaluations of customers and generally does not require collateral or other security from its customers. The Group establishes an allowance for doubtful accounts primarily based on the age of the receivables and factors surrounding the credit risk of specific customers.

Due to the limited availability of online payment systems in China, a substantial portion of the Group's sales are carried out via a distribution network composed of third-party distributors. In 2011, 2012 and 2013, there was no concentration of third-party distributors, and none of the distributors represented more than 10% of the total sales to third-party distributors.

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability. Authoritative literature provides a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of input that is significant to the fair value measurement as follows:

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The Group's financial instruments not reported at fair value consist of cash and cash equivalents, accounts receivable, due from related parties, accounts payable, and due to related parties. The carrying amounts of these financial instruments as of December 31, 2012 and 2013 were considered representative of their fair values due to their short-term in nature.

Before the conversion of Series A convertible redeemable preferred shares, the Group has determined that its Series A convertible redeemable preferred shares are participating securities as the preferred shares participate in the undistributed earnings on the same basis as the ordinary shares. Accordingly, the Group has used the two-class method of computing earnings per share. Under this method, net income applicable to the holders of ordinary shares is allocated on a pro-rata basis to the ordinary and preferred shares to the extent that each class may share in income for the period. Losses are not allocated to the participating securities. Diluted earnings per share are computed using the more dilutive of the two-class method or the if-converted method.

After the conversion of Series A convertible redeemable preferred shares, basic earnings per share is computed by dividing net income attributable to the holders of ordinary shares by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share is calculated by dividing net income attributable to the holders of ordinary shares as adjusted for the effect of dilutive ordinary share equivalents, if any, by the weighted average number of ordinary shares and dilutive ordinary share equivalents outstanding during the period. Ordinary share equivalents of stock options and warrants are calculated using the treasury stock method. However, ordinary share equivalents are not included in the denominator of the diluted earnings per share calculation when inclusion of such shares would be anti-dilutive, such as in a period in which a net loss is recorded.

In March 2013, the FASB issued ASU 2013-05 related to parent's accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. When a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity, the parent is required to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. This ASU is effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. It should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted. Early adoption is permitted. If an entity elects to early adopt the amendments, it should apply them as of the beginning of the entity's fiscal year of adoption. The adoption of the amendments will not have a material impact on the Group's consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11 which provides guidance on financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The ASU requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not

available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This ASU applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of the amendments will not have a material impact on the Group's consolidated financial statements.

Depreciation and amortization expense for property and equipment was $1,763,832, $1,456,990 and $1,296,956 for the years ended December 31, 2011, 2012 and 2013, respectively.

In December 2009, the Company obtained a 40% equity interest in Elyn Corporation ("Elyn"), a newly formed entity and its wholly owned subsidiary Taiwan Taomee Co., LTD ("Taiwan Taomee"), of which 20% was initially held through a related party, as consideration, in exchange for a three-year exclusive right to operate three virtual worlds on the Group's online entertainment platform in Taiwan and other areas in Asia. The fair value of the exclusive operating right contributed by the Company was $1,666,680. As the Company has the ability to exercise significant influence over Elyn, the Group accounts for this investment using the equity method of accounting.

In February 2011, the Company entered into an agreement to sell 10.5% of its equity interest in Elyn that had been indirectly held by the related party. Of the 10.5% equity interest in Elyn, 9.14% was sold to Qiming Funds, which are existing shareholders of the Company and 1.36% was sold to a

third party investor for $3,385,000, and $500,000, respectively in cash. A gain of $3,662,098 was recognized in share of profit in equity method investments in the consolidated statement of operations. In addition, the nominee shareholding agreement was terminated with the related party and the Company now holds all of its 29.5% equity in Elyn directly, and continues to account for this investment using the equity method.

On August 12, 2011, the Company's equity interest in Elyn was diluted from 29.5% to 28.8% as a result of Elyn's issuing shares to its employees.

In November 2011, Taiwan Taomee underwent reorganization and contemporaneously issued new ordinary shares to existing shareholders and certain employees. As a result of such transactions, the Company's equity interest in Taiwan Taomee was changed from 28.8% interest held through Elyn to a 27.6% effective interest which is now held through (1) 29.50% in Elyn, which held 72.09% of Taiwan Taomee, and (2) 28.77% in Joy Children, shell company with no operations, which owned 21.86% of Taiwan Taomee after the reorganization. The change in equity interest reflected a dilution resulting from shares issued to Taiwan Taomee's employees, which were accounted for by Taiwan Taomee as stock compensation. In addition, the Company paid total consideration of $668,992 in cash for the newly issued shares of Taiwan Taomee through Joy Children, which was recorded as an increase in equity method investment.

In July 2012, the Company's aggregated equity interest through Elyn and Joy Children in Taiwan Taomee was diluted from 27.6% to 27.1%, and is comprised of (1) 29.50% in Elyn, which holds 70.88% of Taiwan Taomee and (2) 28.77% in Joy Children, which holds 21.49% of Taiwan Taomee. The dilution was due to the issue of new ordinary shares by Taiwan Taomee from capital surplus and appropriations of 2011 earnings to certain existing shareholders and employees.

In June 2013, as part of a restructuring of Taiwan Taomee, our equity interest in Taiwan Taomee held through Elyn was transferred to Playgame Sdn. Bhd, a holding company established in Malaysia, and Elyn was liquidated. Our aggregated equity interest in Taiwan Taomee was not changed. In September 2013, Playgame transferred 3% of Taiwan Taomee's shares to Taiwan Taomee's underwriters after its initial public offering in Taiwan Emerging Stock Market. As a result, Playgames's equity interest in Taiwan Taomee was diluted from 70.88% to 67.87%, resulting in a gain from investment of approximately $287,790 recognized within share of profit in equity method investees in the consolidated statements of operations of 2013.

The Group's share of profit in these equity method investments recorded in the consolidated statements of operations for 2011, 2012 and 2013 was $965,959, $506,644 and $500,388 from Elyn / (Playgame) and $7,757, $191,381 and $96,869 from Joy Children, respectively.

In October 2010, pursuant to an equity investment agreement entered into with Shenzhen Decent Investment Limited (Note 15) and two individuals unrelated to the Group, Shenzhen Ruigao Information Technology Co., Ltd. ("Ruigao") was formed in the PRC for the purpose of developing console games. Shanghai Taomee obtained a 17.65% equity interest in Ruigao for total cash

consideration of $986,370, which was paid in two installments, with the first payment being made in October 2010 and the remaining payment of $502,534 being paid in the first quarter of 2011. As Shanghai Taomee has the ability to exercise significant influence over Ruigao, the Group accounts for this investment using the equity method of accounting.

In May 2012, a third party investor obtained 7.5% equity interest in Ruigao through a capital injection. As a result of this transaction, Shanghai Taomee's effective equity interest in Ruigao was diluted to 15.61%.

In July 2012, Shanghai Taomee sold all its equity interest in RuiGao for $1,041,124 and recorded a gain of $323,982.

The Group's equity in losses of Ruigao in 2011 was $52,864 and the equity in profit of Ruigao in 2012 was $152,953.

In the first quarter of 2012, the Company paid RMB 900,000 ($142,694) to acquire a 6% of equity interest in Guangzhou Chuangyou Information Technology Co., Ltd ("Chuangyou"), a company principally engaged in the design and development of online games in China, and a call option to further subscribe for a 13.16% newly issued equity interest in the future at RMB 3,500,000 (equivalent to $555,476) if certain operating targets are met ("Call Option"). In September 2012, the Company exercised the Call Option and completed the further acquisition in January 2013 with a total equity share of 19.16%. Prior to these events, Chuangyou was a related party of the Company as one of Chuangyou's investors is the Company's director and also a principal shareholder. Refer to Note 15 for detail description of related party transactions.

Shanghai Taomee has the ability to exercise significant influence over Chuangyou primarily through representation in the board of directors and accounts for the investment using the equity method of accounting. In December 2013, Chuangyou entered into an agreement to issue new shares for RMB 2.5 million (approximately $0.4 million) to a new investor. The Company's equity share in Chuangyou will be diluted to 9.58% upon the closing of the transaction.

The Group's equity in the losses of Chuangyou in 2012 and 2013 were $35,310 and $212,240, which were recognized as share of loss in equity method investment in the consolidated statements of operations.

As of December 31, 2013, Chuangyou has experienced a deteriorating financial position and performance and the Company does not expect them to generate any positive future cash flows. Accordingly, the Company recorded an impairment loss of $370,407 in 2013 on Chuangyou investment based on its fair value.

In March 2013, pursuant to an equity investment agreement entered into with five individuals unrelated to the Group, Shanghai Taoyue Information Technology Co., Ltd. ("Taoyue") was formed in

the PRC for the purpose of developing online games. Shanghai Taomee obtained a 40% equity interest in Taoyue for cash consideration of RMB 2.0 million (equivalent to $323,798).

As Shanghai Taomee has the ability to exercise significant influence over Taoyue, the Group accounts for this investment using the equity method of accounting.

The Group's equity in the losses of Taoyue in 2013 was $150,052 and was recognized as share of loss in equity method investment in the consolidated statements of operations.

In January 2014, Shanghai Taomee fully transferred its investment in Taoyue to an existing shareholder of Taoyue at the original purchase price.

In September 2013, pursuant to an equity investment agreement entered into with two individuals unrelated to the Group, Jiangxi Haomi Network Technology Co., Ltd ("Jiangxi Haomi") was formed in the PRC to develop family entertainment and education applications on mobile and multi-screen platforms in Mainland China. Shanghai Taomee obtained a 43% equity interest in Jiangxi Haomi for cash consideration of RMB 12.9 million (approximately $2.1 million).

As Shanghai Taomee has the ability to exercise significant influence over Jiangxi Haomi, the Group accounts for this investment using the equity method of accounting.

The Group's equity in the losses of Jiangxi Haomi in 2013 was $27,199 and was recognized as share of loss in equity method investments in the consolidated statements of operations.

The Company applies the cost method of accounting for investments in unconsolidated affiliates when the Company does not have the ability to exercise significant influence.

In September 2012, the Company acquired 8.02% equity interest in Gamespedia Holdings Limited ("Gamespedia") for $6.2 million in cash. Gamespedia is a Cayman company and operates its mini game portal website through its wholly owned subsidiaries and VIEs in China. This investment is accounted for under the cost method.

In February 2013, the Company acquired a minority equity interest in Voozclub Co., Ltd., or Voozclub, a Korea-based character and animation studio with an established presence in global brand licensing, online games, publishing and theme parks, for a cash consideration of $1.4 million.

In September 2013, the Company acquired a minority stake of a Beijing-based pre-school education service provider for a cash consideration of $2.0 million.

In December 2013, we entered into an investment agreement to acquire a minority stake of a New York City company that develops mobile applications, animation and products for pre-school children, for a cash consideration of $150,003.

As of December 31, 2013, there were no indicators of impairment for any of the Company's investments in cost method investees.

On May 6, 2009, the Group issued 125,000,000 shares of Series A convertible redeemable preferred shares, par value $0.00002, at $0.04 per share ("Preferred Shares") for aggregate cash proceeds of $4,948,718, net of direct and incremental equity issuance costs of $51,282 to new investors (the "Investors"). As the Preferred Shares were negotiated with independent third party investors, the cash proceeds received represented the fair value of the issued Preferred Shares. The accretion to the redemption value was calculated over the period from the issuance date to the earliest redemption date using the effective interest method and reflected as a reduction to net income to arrive at net income attributable to the ordinary shareholders in the accompanying consolidated statements of operations and amounted to $200,601 for the year ended December 31, 2011.

Given the nature of certain key terms of the Preferred Shares including the conversion feature and redemption feature, the Company classified the Preferred Shares as mezzanine equity.

All the Preferred Shares were converted into 125,000,000 ordinary shares upon the consummation of the IPO in June 2011 on a one-to-one basis.

The reconciliation of the Series A Convertible Redeemable Preferred Shares is as follows:

On February 14, 2011, the Company's shareholders approved and executed a 50-for-one share split of the Company's share capital. Each ordinary share and each Series A convertible redeemable preferred share of the Company is subdivided into 50 shares at a par value of $0.00002. The preferred shares remain convertible into ordinary shares at a 1:1 ratio. This share split has been retroactively reflected for all periods presented.

On June 10, 2011, the Company completed an initial public offering of 154,254,480 ordinary shares on New York Stock Exchange and received proceeds of $64,555,500, net of underwriting discounts and commissions of $4,859,016. On June 8, 2011, we listed our ADSs on the New York Stock Exchange, or NYSE, under the ticker symbol "TAOM". As of December 31, 2012 and 2013, the Group had 29,633,648 and 16,557,901 ordinary shares respectively, including restricted shares, which were legally

issued according to its share incentive plans, but were not deemed issued or outstanding from an accounting perspective.

In November 2011, the Company's Board authorized a share repurchase program to repurchase up to US$10 million of the Company's American Depositary Shares ("ADSs") (each ADS represents twenty ordinary shares) from November 2011 to November 2012. In September 2012, the Group decided to further extend the share repurchase plan for another 12 months to November 23, 2013. In December 2013, the Group announced the further extension of the share repurchase plan from November 24, 2013 to November 23, 2014.

During the years of 2011, 2012 and 2013, the Company had repurchased 123,658, 461,894 and 478,625 ADSs respectively on the open market, representing 2,473,160, 9,237,880 and 9,572,500 ordinary shares for total cash consideration of $562,502, $1,754,792 and $ 2,056,771, respectively. As of December 31, 2013, the Company has repurchased a total of 1,064,177 ADSs, representing 21,283,540 ordinary shares for cash consideration of $ 4,374,065.

The Company measures share-based compensation cost on the grant date at the fair value of the award and recognizes this cost as an expense over the grant recipients' requisite service periods.

The following table presents the Company's share-based compensation expense by type of award:

Prior to 2009, the Group did not grant share-based awards to employees, officers, directors or individual consultants and/or advisors who rendered services to the Group.

On May 6, 2009, the Board of Directors of the Company approved the 2009 Share Incentive Plan, which authorized the issuance of options to purchase up to 45,000,000 ordinary shares to the Group's employees, directors, and consultants, as determined by the Board of Directors of the Company. The maximum contractual term of the awards under this plan shall be no more than ten years from the date of grant. For the years ended December 31, 2009 and 2010, 10,500,000, 35,175,000 options were granted to the employees of the Group at exercise prices at $0.04 and $0.07, respectively, and these awards vest over a four-year period, with 25% of the options to vest on the each of the anniversary

after the grant date. As of December 31, 2013, options to purchase 11,879,840 ordinary shares were outstanding under the Company's 2009 Share Incentive Plan.

On June 13, 2010, the Board of Directors of the Company further approved the 2010 Share Incentive Plan, which authorized the issuance of options to purchase up to 55,000,000 ordinary shares to employees, directors, and consultants of the Group, as determined by the Board of Directors of the Company. The maximum contractual term of the awards under this plan shall be no more than ten years from the date of grant.

On January 4, 2011, the Company granted options to the employees of the Group and a third party consultant to purchase 16,665,000 and 2,500,000 of ordinary shares of the Company, respectively, at an exercise price of $0.36 per share under the Company's 2010 Share Incentive Plan. These options vest over a four-year requisite service period, with 25% of the options to vest on each anniversary after the grant date. The 2,500,000 options were in provided exchange for consulting services which were to have been delivered over the next four years. In September 2011, the options granted to a third party consultant were forfeited as the underlying service contract was terminated.

On May 24, 2011, the Company granted options to the directors and certain employees to purchase a total of 20,175,000 ordinary shares of the Company at an exercise price of $0.45 per share under the Company's 2010 Share Incentive Plan. These options vest over either a four or three year period, each with a graded vesting schedule, all commencing on May 24, 2011.

On November 21, 2011, the Company granted options to an employee of the Group to purchase up to 150,000 ordinary shares at an exercise price of $0.26 per share under the Company's 2010 Share Incentive Plan. These options vest over a four-year requisite service period, with 25% of the options to vest on each anniversary after the grant date.

On July 16, 2012, the Company granted options to employees and directors of the Group to purchase up to a total of 19,840,000 ordinary shares of the Company at an exercise price of $0.24 per share under the Company's 2010 Share Incentive Plan. These options vest over a four-year period, each with a graded vesting schedule, all commencing on July 16, 2012.

On July 20, 2012, the Company granted options to directors of the Group to purchase up to a total of 3,600,000 ordinary shares of the Company at an exercise price of $0.20 per share under the Company's 2010 Share Incentive Plan. These options vest over a three year period, each with a graded vesting schedule, all commencing on July 20, 2012.

As of December 31, 2013, options to purchase 16,120,000 ordinary shares were outstanding under the Company's 2010 Share Incentive Plan.

On July 25, 2012, the Annual General Meeting of the Company further approved the 2012 Share Incentive Plan, which authorized the issuance of options to purchase up to 30,000,000 ordinary shares

to employees, directors, and consultants of the Group, as determined by the Board of Directors of the Company. The maximum contractual term of the awards under this plan shall be no more than ten years from the date of grant. As of December 31, 2013, there were no options granted under the 2012 Share Incentive Plan.

The weighted-average grant date fair value for options granted during the years ended December 31, 2011, 2012 and 2013 was $0.22, $0.12 and nil per share, respectively. 1,646,200, 9,639,780 and 10,412,700 options were exercised during the years ended December 31, 2011, 2012 and 2013, respectively. Total intrinsic value of options exercised for the years ended December 31, 2011, 2012 and 2013 was $266,516, $1,251,212, and $1,569,183, respectively.

On March 30, 2012, 14,090,000 shares granted on January 4, 2011 and 14,700,000 shares granted on May 24, 2011 have been converted to restricted shares at a ratio of 3:1. This event was accounted for as a modification of share-based award with no incremental compensation cost recognized as the fair value of the restricted shares was not more than the fair value of the options canceled on the date of exchange.

The fair value of the options was estimated using the Black-Scholes-Merton option-pricing model in 2011 and binomial option-pricing model in 2012. The risk-free interest rate for periods within the contractual life of the option is based on the yield of Chinese International Government Bond, which is denominated in U.S. dollars. The expected life of options granted represents the period of time that the options are expected to be outstanding and is based on option terms related to vesting schedule and option expiration date. Expected volatilities are based on the volatility of comparable companies with the time period commensurate with the expected time period.

The key assumptions used in the Black-Scholes-Merton and binomial option-pricing model were as follows:

In determining the fair value of the Company's ordinary shares underlying the options granted before the completion of the Company's IPO in 2011, the Company used generally accepted valuation methodologies, including the discounted cash flow approach and the guideline comparable method, which incorporates certain assumptions including the market performance of comparable listed companies as well as the financial results and growth trends of the Company, to derive the total equity value of the Company. The equity value is then allocated using the option pricing method under three scenarios, namely liquidation scenario, redemption scenario and IPO scenario (based on the terms of the preferred shares, share options and management's expectation on IPO event) to determine the fair

value of ordinary shares. Under the option-pricing method, each class of stock is modeled as a call option with a distinct claim on the enterprise value of the Company. The main inputs to this model include equity value of the Company, exercise price, expected volatility, expected time to expiration, expected dividend yield, and risk free interest rate. With regard to the share options and restricted shares that were awarded on May 24, 2011, the Company used the mid-point of the price range set forth in the preliminary prospectus of IPO as the estimated fair value of ordinary shares.

In determining the fair value of the Company's ordinary shares underlying the options granted after the IPO, the Company used the closing spot price of the Company on the principal exchange or system.

A summary of the option activity for the year ended December 31, 2013 and the information regarding the options outstanding as of December 31, 2013 were as follows:

As of December 31, 2013, there was $1,208,282 in total unrecognized compensation expense related to unvested options granted under the share incentive plans, which is expected to be recognized over a weighted-average period of 2.2 years.

On May 24, 2011 and July 16, 2012, the Company granted 4,500,000 and 400,000 non-vested restricted shares to its employees and officers for no consideration, respectively, under the Company's 2010 Share Incentive Plan. These restricted shares will vest over a four-year requisite service period, with 25% to vest on each anniversary after the grant date. The fair value of non-vested restricted shares was computed based on the fair value of the Group's ordinary shares on the grant date.

On June 1, 2012, Shanghai Taomee granted a co-founder and senior management of Guangdong Taomee a 15% equity interest in Guangdong Taomee in the form of non-vested restricted shares. These restricted shares will vest over a three-year requisite service period, with 33.3% to vest on each anniversary after the grant date. The fair value of non-vested restricted shares was determined based

on estimated fair value of Guangdong Taomee on the grant date. The Company recorded $46,072 and $80,571 compensation expense related to these non-vested restricted shares in 2012 and 2013. As of December 31, 2013, there was $114,439 unrecognized compensation expense to be recognized over the weighted-average period of 1.5 years.

On September 4, November 5, and December 11, 2013, the Company granted a total of 10,190,000, 4,800,000 and 394,560 non-vested restricted shares to employees, officers and an external consultant at par value, respectively, under the Company's 2010 Share Incentive Plan. These restricted shares will vest over a four-year requisite service period, with 25% to vest on each anniversary after the grant date. The fair value of non-vested restricted shares granted to employees and officers was computed based on the fair value of the Group's ordinary shares on the grant date, while the fair value of non-vested restricted shares granted to an external consultant was re-measured at the end of each reporting period until the services being provided is completed.

A summary of the non-vested restricted shares activities under share incentive plan for the year ended December 31, 2013 and the information regarding the restricted shares outstanding as of December 31, 2013 were as follows:

As of December 31, 2013, there was $4,785,797 of total unrecognized compensation expense related to non-vested restricted shares granted under 2010 share incentive plan, which is expected to be recognized over a weighted-average period of 3.0 years.

The Group is incorporated in the Cayman Islands and is not subject to tax in this jurisdiction. In addition, upon payment of dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed.

The Group's subsidiaries in Hong Kong did not have assessable profits that were derived in Hong Kong during each of the three years ended December 31, 2011, 2012 and 2013. Therefore, no Hong Kong profit tax has been provided for in the years presented.

Pursuant to PRC New Corporate Income Tax Law effective January 1, 2008, the Group's VIE subsidiaries incorporated in the PRC are subject to Enterprise Income Tax ("EIT") on the taxable income as reported in their respective statutory financial statements adjusted in accordance with the EIT Law and the Income Tax Law of the People's Republic of China.

In April 2009, Shanghai Taomee obtained a Software Enterprise Certification (the "Certification"), which was effective on January 1, 2009. An enterprise having such Certification is entitled to two years' exemption and three years' 50% reduction in corporate income tax (the "tax holiday"). Shanghai Taomee was subject to an income tax rate of 0% for both 2009 and 2010, and 12.5% from 2011 to 2013. Shanghai Taomee's tax holiday period was approved by relevant tax authorities in May 2010. In 2010 Shanghai Taomee obtained "High and New Technology Enterprise" ("HNTE") qualification. Subject to certain new implementation rules for application and assessment of HNTE announced by certain government authorities in 2008, every qualified HNTE company is required to re-apply for this qualification. The HNTE qualification is valid for three years and could be renewed for another 3 year period. In 2013 Shanghai Taomee re-applied for the HNTE and received approval for the HNTE qualification. Entities with HNTE are entitled to enjoy a 15% preferential EIT rate during the valid period.

In September 2010, Shanghai Shengran also obtained a Software Enterprise Certification and was informed in April 2011 that the full EIT exemption would apply retroactively in 2009 and 2010, and 50% reduction in EIT rate will apply from 2011 to 2013.In May 2012, Shanghai Shengran further received a written approval from local tax authorities, according to which Shanghai Shengran was entitled to the full EIT exemption for 2010 and 2011, and 50% reduction in EIT rate of 12.5%, from 2012 to 2014, which resulted in an adjustment of $2.1 million as a one-time tax benefit in 2012.

In November 2013, Shanghai Animation obtained an Animation Enterprise Certification, which provides an enterprise entitling to two years' exemption and three years' 50% reduction in corporate income tax (the "tax holiday"). The Company is in the process of obtaining the written approval from tax authorities for the tax holiday.

Shanghai Qidong, Guangdong Taomee, Shanghai Xinsheng, Shanghai Wireless, Shanghai Software and Shanghai Property Service were subject to an income tax rate of 25%.

In accordance with the EIT Law, dividends, which arise from profits of foreign invested enterprises ("FIEs") earned after January 1, 2008, are subject to a 10% withholding income tax. In addition, under certain tax treaties between the PRC and Hong Kong, if the foreign investor is incorporated in Hong Kong and qualifies as a Hong Kong tax resident and beneficial owner, the applicable withholding tax rate is reduced to 5%, if the investor holds at least 25% in the FIE, or 10%, if the investor holds less

than 25% in the FIE. A deferred tax liability should be recognized for the undistributed profits of PRC companies unless the Company has sufficient evidence to demonstrate that the undistributed dividends will be reinvested and the remittance of the dividends will be postponed indefinitely. As of December 31, 2013, the Group plans to indefinitely reinvest undistributed profits earned from Shanghai Shengran in its operations in the PRC. Therefore, no withholding income tax for undistributed profits of Shanghai Shengran has been provided in 2013.

Upon distribution of those earnings generated after January 1, 2008, in the form of dividends, the Group would be subject to the applicable PRC dividend withholding tax. Distributions of earnings generated before January 1, 2008 are exempt from PRC dividend withholding tax. The amounts of unrecognized deferred tax liabilities for these earnings generated after January 1, 2008 are in the range of $3.0 million to $6.0 million, as the withholding tax rate of the profit distribution will be 5% or 10% depends on whether the immediate offshore companies can enjoy the preferential withholding tax rate of 5%.

Under applicable accounting principles, a deferred tax liability should be recorded for taxable temporary differences attributable to the excess of financial reporting basis over tax basis in a domestic subsidiary. However, recognition is not required in situations where the tax law provides a means by which the reported amount of that investment can be recovered tax-free and the enterprise expects that it will ultimately use that means. As of December 31, 2013, deferred tax liabilities of US$1.5 million were accrued for undistributed earnings of Shanghai Taomee and Guangdong Taomee, on the basis that distribution of the earnings, in the form of dividends or otherwise, to Shanghai Shengran would be subject to the applicable PRC tax laws and regulations, unless a tax strategy which the Group determined to avail itself of were devised to avoid such tax. Prior to 2013, these entities were in an accumulated loss position.

The Group made its assessment of the level of authority for each of its uncertain tax position (including the potential application of interests and penalties) based on the technical merits, and has measured the unrecognized benefits associated with the tax positions. This assessment did not have any impact on the Group's total liabilities or equity. At December 31, 2011, 2012 and 2013, the amounts of gross unrecognized tax benefits were zero. The Group does not anticipate any significant increase to its liability for unrecognized tax benefit within the next 12 months. The Group will classify interest and penalties related to income tax matters, if any, in income tax expense.

According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of income taxes is due to computational errors made by the taxpayer. The statute of limitations will be extended to five years under special circumstances, which are not clearly defined, but an underpayment of income tax liability exceeding RMB 100,000 is specifically listed as a special circumstance. In the case of a transfer pricing related adjustment, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion. The Group's PRC subsidiaries are therefore subject to examination by the PRC tax authorities from 2009 through 2013 on non-transfer pricing matters, and from 2007 (year of incorporation) through 2013 on transfer pricing matters.

Reconciliation between the effective income tax rate and the PRC statutory income tax rate was as follows:

	Years ended December 31,

	2011			2012			2013
PRC statutory tax rate		25.0	%		25.0	%		25.0	%
Tax effect of other expenses that are not deductible in determining taxable profit		0.1	%		0.4	%		2.5	%
Effect of different tax rate of group entity operating in other jurisdictions		2.8	%		7.0	%		3.5	%
Effect of tax holidays granted to PRC subsidiaries, deferred income tax impact		(0.6)	%		(2.8)	%		(8.5)	%
Effect of tax holidays granted to PRC subsidiaries, current income tax impact		(14.3)	%		(13.9)	%		(13.7)	%
Effect of additional research and development of new technology, products, and processes ("R&D") deduction		(0.8)	%		(3.5)	%		(1.8)	%
Effect of valuation allowance		0.9	%		1.4	%		1.3	%
Withholding tax on undistributed earnings		(2.9)	%		—			21.8	%
Effect of adjustment of prior year tax benefit		—			(26.0)	%		(9.6)	%


Effective tax rate		10.2	%		(12.4)	%		20.5	%

The aggregate dollar effect of tax holidays on income tax expense for the period amounted to $2,463,963, $2,546,454, and $1,551,717 in 2011, 2012 and 2013, respectively, representing a decrease in basic earnings per share of less than $0.01 and a decrease in diluted earnings per share less than of $0.01 for each of the three years in the period ended December 31, 2013

The principal components of the Group's deferred income tax assets and liabilities as of December 31, 2012 and 2013 were as follows:

	December 31,

	2012			2013
Deferred tax assets:
Deferred revenue and advance from customers	$	2,441,578		$	2,738,502
Payroll payable and accrued expenses		363,097			639,491
Net operating losses		242,460			475,471
Advertising expenses		151,510			356,419
Other		13,711			292,192


Gross deferred tax assets:	$	3,212,356		$	4,502,075
Valuation allowances		(242,460	)		(335,987	)
Net deferred tax assets	$	2,969,896		$	4,166,088




Deferred tax liabilities:
Amortization of intangible assets		13,473			229,540
Undistributed retained earnings of VIE		—			1,528,594


Net deferred tax liabilities	$	13,473		$	1,758,134




Deferred tax assets are analyzed as:
Current	$	2,969,896		$	4,166,088
Non-Current		—			—


	$	2,969,896		$	4,166,088




Deferred tax liabilities are analyzed as:
Current	$	13,473		$	1,758,134
Non-Current		—			—


	$	13,473		$	1,758,134

The Group considers positive and negative evidence to determine whether some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

As of December 31, 2013, some of the Group's PRC subsidiaries had net operating loss carry forwards of $1.92 million, of which $0.01 million, $0.01 million, $0.01 million, $1.36 million and $0.53 million will expire in 2014, 2015, 2016, 2017 and 2018, respectively. The Group has provided a full valuation allowance as it is more likely than not that the net operation losses cannot be utilized before expiry.

The full-time employees of the Company's subsidiaries and VIE subsidiaries that are incorporated in the PRC are entitled to staff welfare benefits, including medical care, welfare subsidies, unemployment insurance and pension benefits through a PRC government-mandated multi-employer defined contribution plan. These companies are required to accrue for these benefits based on certain percentages of the employees' salaries in accordance with the relevant regulations, and to make contributions to the state-sponsored pension and medical plans out of the amounts accrued for medical and pension benefits. The total amounts charged to the consolidated statements of operations for such employee benefits amounted to $1,809,423, $3,130,133 and $3,721,218 for the years ended December 31, 2011, 2012 and 2013 respectively. The PRC government is responsible for the medical benefits and ultimate pension liability to these employees.

Pursuant to laws applicable to entities incorporated in the PRC, the subsidiaries and the VIEs of the Group in the PRC must make appropriations from after-tax profit to non-distributable reserve funds. These reserve funds include one or more of the following: (i) a general reserve, (ii) an enterprise expansion fund and (iii) a staff bonus and welfare fund. Subject to certain cumulative limits, the general reserve fund requires annual appropriation of 10% of after tax profit (as determined under accounting principles generally accepted in the PRC at each year-end) until the accumulative amount of such reserve fund reaches 50% of their registered capital; the other fund appropriations are at the subsidiaries' discretion. These reserve funds can only be used for specific purposes of enterprise expansion and staff bonus and welfare and are not distributable as cash dividends and amounted to $2,009,740 as of December 31, 2013. In addition, due to restrictions on the distribution of registered capital from the Company's PRC subsidiaries, the PRC subsidiaries' registered capital of $24,906,325 as of December 31, 2013, were considered restricted. As a result of these PRC laws and regulations, as of December 31, 2013, approximately $26,916,065, were not available for distribution to the Company by its PRC subsidiaries in the form of dividends, loans or advances.

Relevant PRC laws and regulations restrict the WFOE and VIEs from transferring a portion of their net assets, equivalent to the balance of their statutory reserves and their share capital, to the Company in the form of loans, advances or cash dividends. The balance of restricted net assets was $26,916,065, of which $7,756,591 was attributed to the paid in capital and statutory reserves of the VIEs and $19,159,474 was attributed to the paid in capital and statutory reserves of the WFOE, as of December 31 2013, respectively. The WFOE's accumulated profits may be distributed as dividends to the Company without the consent of a third party. The VIEs' revenues and accumulated profits may be transferred to the Company through contractual arrangements without the consent of a third party. Under applicable PRC law, loans from PRC companies to their offshore affiliated entities require governmental approval, and advances by PRC companies to their offshore affiliated entities must be supported by bona fide business transactions.

The Group has entered into operating lease arrangements relating to the use of certain office premises and internet data centers. Rental expenses under operating leases for 2011, 2012 and 2013 were $1,986,464, $2,149,379 and $ 2,689,618, respectively.

As of December 31, 2013, total future minimum lease payments under non-cancelable operating leases agreements are as follows,

In May 2013, the Group entered into a land pre-development cooperation agreement with respect to the intention to purchase land use rights in Songjiang District, Shanghai for a total consideration of RMB8.8 million (US$1.5 million). A prepayment of RMB4.4 million (US$0.7 million) was paid in June 2013. In August 2013, the Group entered into a letter of intention to purchase a building in the same area for a total consideration of RMB46.6 million (US$7.7 million). A prepayment of RMB14.0 million (US$2.3 million) was paid as of December 31, 2013. The execution of a definite land use rights and building purchase agreement and payment of the remaining consideration are contingent upon relevant PRC government authorities' approval. The prepayments of RMB18.4 million (US$3.0 million) are refundable if we fail to obtain the land use rights and the building.

The Group is subject to periodic legal or administrative proceedings in the ordinary course of our business. Currently, the Group does not have any significant pending legal or administrative proceedings to which the Group is a party and the Group believes that none of the existing proceedings will have a material effect on the Company's cash flows, operating results, or financial condition.

The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2011, 2012 and 2013:

	For the years ended December 31,

	2011			2012		2013
Basic earnings per share:
Net income attributable to Taomee Holdings Limited	$	19,493,171		$	8,861,867	$	5,441,260
Less:
Deemed dividend on Series A convertible redeemable preferred shares		(200,601	)		—		—
Amounts allocated to preferred shares for participating rights to dividends		(1,589,047	)		—		—


Net income attributable to ordinary shareholders-basic and diluted	$	17,703,523		$	8,861,867	$	5,441,260




Weighted average ordinary shares outstanding—basic		606,648,098			731,303,362		733, 333,891




Basic earnings per share	$	0.03		$	0.01	$	0.01




Diluted earnings per share:
Net income attributable to ordinary shareholders-basic and diluted	$	17,703,523		$	8,861,867	$	5,441,260




Weighted average ordinary shares outstanding—basic		606,648,098			731,303,362		733,333,891
Stock options		33,729,077			22,230,137		13,198,221


Weighted average ordinary shares outstanding-diluted		640,377,175			753,533,499		746,532,112




Diluted earnings per share	$	0.03		$	0.01	$	0.01

For the years ended December 31, 2011, 2012 and 2013, the Group had securities which could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted earnings per share as their effects would have been anti-dilutive. Such securities consisted of the following:

The following parties/ entities are considered to be related parties of the Group:

Related Party		Nature of the Relationship

WANG Haibing		Co-founder and CEO
CHENG Yunpeng		Co-founder and President
WEI Zhen		Co-founder and CTO
ZENG Liqing		Director and a principal shareholder
WANG Bin		Principal shareholder before May 2010
Shenzhen Decent Investment Limited ("Decent Investment")		Controlled by ZENG Liqing
Shenzhen ParaEngine Corporation ("PE")		Significantly influenced by ZENG Liqing who is a director of the controlling entity
Guangzhou Chuangyou Information Technology Co., Ltd ("Chuangyou")		Equity method investee of the Group
Shenzhen Ruigao Information Technology Co., Ltd. ("Ruigao")		Equity method investee of the Group
Taiwan Taomee Co., Ltd. ("Taiwan Taomee")		Equity method investee of the Group
Beijing Enlight Pictures Co. Ltd ("Enlight Media")		Controlled by WANG Changtian who is a director
Shenzhen Taole Network Technology Co., Ltd ("Shenzhen Taole")		Significantly influenced by ZENG Liqing who is a director and principal shareholder
Jiangxi Haomi Network Technology Co., Ltd ("Jiangxi Haomi")		Equity method investee of the Group
Qiming Funds		Principal shareholder

In June 2009 and May 2012, Shanghai Taomee entered into two agreements with PE to co-develop 3-D online virtual worlds for children. For the years ended December 31, 2011, 2012 and 2013, Shanghai Taomee has paid $173,281, $203,444 and $193,559 royalties and nil, $200,000 and nil licensing fee to PE, respectively. As of December 31, 2013, the Group had $18,857 royalty fee due to PE.

In November 2011, Shanghai Taomee entered into an agreement with Shenzhen Taole for the license to Shanghai Taomee of certain operating rights of an online game. For the years ended

December 31, 2011, 2012 and 2013, Shanghai Taomee has paid nil, $8,969 and $6,067 royalties, respectively. As of December 31, 2013, the Group had $1,594 as royalty fee due to Shenzhen Taole.

In November 2011, the Company entered into a share transfer agreement with Qiming Funds at consideration of $52,989. The Company paid this amount in February 2012. Refer to Note 4 for a detailed description of the share transfer.

In July 2012, Shanghai Taomee entered into an operating agreement with Chuangyou for the license to Shanghai Taomee of certain operating rights of an online game developed and owned by Chuangyou. For the years ended December 31, 2011, 2012 and 2013, Shanghai Taomee has paid nil, nil and $9,787 royalties and nil, $150,000 and $50,000 licensing fee to Chuangyou, respectively. As of December 31, 2013, the Group had $2,506 as royalty fee due to Chuangyou.

In November 2012, Shanghai Shengran provided a RMB 480,000 (equivalent to $76,366) interest-free loan to Chuangyou. Chuangyou paid off the loan in December 2012.

In the first quarter of 2013, Shanghai Animation entered into an agreement with Enlight Media to jointly invest in the production and distribution of the Group's feature film, Seer III: Universal Force. The film was release in July in mainland China. As of December 31, 2013, the Group had an amount due from Enlight Media of RMB 13,299,454 (equivalent to $2,169,865).

The Group's chief operating decision maker has been identified as the Chief Executive Officer, who reviews consolidated results of operations data by two segments, online business and offline business, when making decisions about allocating resources and assessing performance of the Group. In identifying its reportable segments, the Group also considers the nature of services provided by its operating segments.

The Group's chief operating decision maker evaluates segment performance based on revenues, cost of revenues and gross profit. Accordingly, all expenses are considered corporate level activities and are not allocated to segments. Therefore, it is not feasible to show profit or loss by reportable segments. Also, the Group's chief operating decision maker does not assign assets to these segments and no asset information by segment is provided to the chief operating decision maker.

The Group has two reportable segments: online business and offline business. The online business segment is responsible for developing and operating online virtual worlds and operating proprietary

online virtual worlds. The offline business segment is responsible for licensing the Group's proprietary cartoon figures, producing films and merchandising sales of the Group's cartoon figures.

The Group generates substantially all of its revenues from customers in the PRC. Substantially all of the Group's long-lived assets are located in the PRC.

The Group did not have any assets or liabilities measured at fair value on a recurring or non-recurring basis for the years ended December 31, 2011 and 2012.

As of December 31, 2013, the Group's asset measured at fair value on a recurring basis subsequent to initial recognition consisted of short-term investment in a money market fund accounted for as available-for-sale security. As the return of the investment was referenced to short term interest rate and interest income accrued on a daily basis, the fair value approximates carrying amount of US$3.0 million and is classified as a Level 2 fair value measurement.

In the year ended December 31, 2013, the Group's assets measured at fair value on a non-recurring basis consisted of the following:

In accordance with the provision of ASC 350, upfront licensing fees related to two games with a carrying amount of $0.8 million and $0.2 million, respectively, were fully impaired, with the resulting impairment charge of $1,046,173 included in earnings for the year ended December 31, 2013.

In accordance with the provision of ASC 323, investment in Chuangyou was written down to its fair value of $82,466, resulting in an impairment charge of $370,407 recognized as share of profit (loss) in equity method investees in the consolidated statements of operations for the year ended December 31, 2013 (Note 4). The fair value of the investment was measured based on a discounted cash flow approach. The discounted cash flow analysis requires the use of significant unobservable inputs, including projected future cash flows and a discount rate calculated based on the weighted average cost of capital of 45%. As the significant inputs are not observable or cannot be corroborated with market information, the fair value measurement is classified as Level 3. Any change in the projected future cash flow would result in a change in the fair value measurement in the same direction, while the change in discount rate would result in adverse change in the fair value measurement.

In January 2014, Shanghai Taomee entered into an agreement with Shanghai Weiju Network Technology Co., Ltd ("Shanghai Weiju"), a Hi-tech toy design and R&D company to subscribe for 25% of Shanghai Weiju's newly issued ordinary shares for cash consideration of RMB3.0 million (approximately $0.5 million).

On March 28, 2014, the Company's Board authorized a share repurchase program to repurchase up to $10 million worth of the outstanding American Depositary Shares ("ADSs") (each ADS represents twenty ordinary shares of the Company) over the next 12 months.


(Mark One)
o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013.
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
OR
o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report: .

Title of Each Class		Name of Each Exchange on Which Registered

American Depositary Shares, each representing 20 ordinary shares of par value US$0.00002 per share		New York Stock Exchange


CONVENTIONS USED IN THIS ANNUAL REPORT		2
PART I		3
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	3
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	3
ITEM 3.	KEY INFORMATION	3
ITEM 4.	INFORMATION ON THE COMPANY	40
ITEM 4A.	UNRESOLVED STAFF COMMENTS	70
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	70
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	103
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	117
ITEM 8.	FINANCIAL INFORMATION	119
ITEM 9.	THE OFFER AND LISTING	121
ITEM 10.	ADDITIONAL INFORMATION	122
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	130
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	131
PART II		133
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	133
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	133
ITEM 15.	CONTROLS AND PROCEDURES	134
ITEM 16.	AUDIT COMMITTEE FINANCIAL EXPERT	135
ITEM 16B.	CODE OF ETHICS	135
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	135
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	136
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.	136
ITEM 16F.	CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT	136
ITEM 16G.	CORPORATE GOVERNANCE	136
ITEM 16H.	MINE SAFETY DISCLOSURE	137
PART III		137
ITEM 17.	FINANCIAL STATEMENTS	137
ITEM 18.	FINANCIAL STATEMENTS	137
ITEM 19.	EXHIBITS	137

	For Years Ended December 31,

	2009		2010		2011		2012		2013
	(US$ in thousands)
Share-based compensation expenses:
Cost of services		1.0		14.8		203.6		255.3		289.9
Product development expenses		10.1		80.9		814.2		498.5		360.9
Sales and marketing expenses		0.2		69.1		63.4		69.0		31.9
General and administrative expenses		61.9		5.6		915.6		1,383.7		1,459.7


Total		73.2		170.4		1,996.8		2,206.5		2,142.4

	For the Three Months Periods Ended

	2011								2012								2013
	March 31		June 30		September 30		December 31		March 31		June 30		September 30		December 31		March 31		June 30		September 30		December 31
Active Accounts (in thousands)		27,329		24,046		37,126		27,009		42,267		43,680		57,348		34,401		43,910		40,645		60,797		38,615
Active Paying Accounts (in thousands)(1)		2,741		2,207		2,129		1,677		1,899		1,817		1,716		1,213		1,463		1,340		1,726		1,295
ARPU (in US$)(2)		4.6		5.1		5.2		4.7		5.0		4.8		4.6		4.8		5.3		6.0		5.8		6.0


o Large accelerated filer		o Accelerated filer		ý Non-accelerated filer

Function

Online operations	117	18.8	%
Offline operations	30	4.8	%
Product development	333	53.4	%
Sales and marketing	82	13.2	%
General and administrative	61	9.8	%


Total	623	100.0	%

	Held in US$(in thousands)								Held in RMB (in thousands)								US$(in thousands)

			Cash located inside the PRC(1)								Cash located inside the PRC(1)
	Cash located outside the PRC		Held by non-VIEs		Held by VIEs(2)		Total		Cash located outside the PRC		Held by non-VIEs		Held by VIEs(2)		Total		Total translated to US$
December 31, 2013		17,122		103		—		17,225		168,453		347,554		74,482		590,489		114,251
December 31, 2012		19,541		103		—		19,644		198,699		323,809		97,214		619,722		118,571
December 31, 2011		22,465		103		—		22,568		227,071		284,430		108,213		619,714		120,679

	Payments Due by Period

	Less than 1 Year		1 - 3 Years		3 - 5 Years		More than 5 years		Total
	(US$ in thousands)
Operating lease obligations		1,812		878		—		—		2,690


Total		1,812		878		—		—		2,690

Name	Number of Restricted Shares Granted

Shengwen Rong	*	March 30, 2012	May 24, 2011
Paul Keung	*	March 30, 2012	May 24, 2011
Quan Zhou	*	March 30, 2012	May 24, 2011
Directors and executive officers as a group	*	March 30, 2012	January 4, 2011/
			May 24, 2011
Other individuals as a group	*	March 30, 2012	January 4, 2011/
			May 24, 2011

	2012		2013

	USD (in thousands)		USD (in thousands)
Audit fees(1)		625		680
Audit-related fees(2)		61		36
Tax fees(3)		13		30

		Page(s)

Report of independent registered public accounting firm			F-2
Consolidated balance sheets as of December 31, 2012 and 2013			F-3
Consolidated statements of operations for the years ended December 31, 2011, 2012 and 2013			F-4
Consolidated statements of comprehensive income for the years ended December 31, 2011, 2012 and 2013			F-5
Consolidated statements of changes in equity for the years ended December 31, 2011, 2012 and 2013			F-6
Consolidated statements of cash flows for the years ended December 31, 2011, 2012 and 2013			F-7
Notes to the consolidated financial statements			F-9

		Estimated useful lives

Leasehold improvements		Lesser of the lease term or their estimated useful lives
Computers and office equipment		3-5 years
Software		Lesser of 5 years or the contracted term of use
Vehicles		4 years

	Year ended December 31, 2011

Balance at January 1	$	5,627,390
Issuance of Series A convertible redeemable preferred shares		—
Deemed dividend on Series A convertible redeemable preferred shares		200,601


Conversion to ordinary shares		(5,827,991	)
Balance at December 31	$	—


		NONE (Title of Class)


		NONE (Title of Class)



Risk-free interest rate	1.11%-2.61%	2.51%-3.04%
Expected term	6-6.25 years	—
Contractual term	—	8.78-10 years
Expected volatility rate	55.00%-60.00%	54.57%-57.16%
Dividend yield	0%	0%

			Weighted average exercise price		Weighted Average remaining contract terms

Options outstanding at January 1, 2013	46,921,360		$	0.14
Granted	—		$	—
Forfeited	(8,508,820	)	$	0.16
Conversion to restricted shares	—		$	—
Exercised	(10,412,700	)	$	0.08


Options outstanding at December 31, 2013	27,999,840		$	0.16	7.5 years	2,565,529




Options vested or expected to vest at December 31, 2013	26,599,848		$	0.16	7.5 years	2,437,252




Options exercisable at December 31, 2013	12,051,090		$	0.13	7.0 years	1,561,389



Non-vested as of January 1, 2013	8,649,648		0.60
Granted	15,384,560		0.25
Forfeited	(2,330,747	)	0.54
Vested	(2,663,047	)	0.59


Non-vested as of December 31, 2013	19,040,414		0.32



2014	11,212,168	1,811,453
2015	5,435,489	878,165


	16,647,657	2,689,618

Year ended December 31, 2011	Online Business		Offline Business		Total

Revenue	$	43,115,126	$	5,296,444	$	48,411,570
Less: sales tax and related taxes		2,784,348		230,181		3,014,529


Net revenue		40,330,778		5,066,263		45,397,041
Less: cost of services		6,035,323		1,652,235		7,687,558


Gross profit	$	34,295,455	$	3,414,028	$	37,709,483

Year ended December 31, 2012	Online Business		Offline Business		Total

Revenue	$	34,091,925	$	8,188,499	$	42,280,424
Less: sales tax and related taxes		1,922,430		149,760		2,072,190


Net revenue		32,169,495		8,038,739		40,208,234
Less: cost of services		6,949,772		3,048,618		9,998,390


Gross profit	$	25,219,723	$	4,990,121	$	30,209,844

Year ended December 31, 2013	Online Business		Offline Business		Total

Revenue	$	37,670,793	$	13,117,356	$	50,788,149
Less: sales tax and related taxes		2,340,641		93,821		2,434,462


Net revenue		35,330,152		13,023,535		48,353,687
Less: cost of services		7,643,598		5,620,619		13,264,217


Gross profit	$	27,686,554	$	7,402,916	$	35,089,470

			Fair Value Measurement at Reporting Date Using

	Year Ended December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Losses
			USD		USD		USD
Acquired intangible assets-upfront licensing fees	$	—	$	—	$	—	$	—	$	1,046,173
Investment in equity investees—Chuangyou		82,466		—		—		82,466		370,407
Total									$	1,416,580

Taomee Holdings Limited

/s/ BENSON HAIBING WANG

Benson Haibing Wang

Chief Executive Officer