Cdc Corp - Amended Annual and Transition Report (foreign private issuer) (20-F/A)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F/A

(Amendment No. 1)

¨	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006.

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

¨	SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-30134

CDC Corporation

(Exact name of Registrant as specified in its charter)

Cayman Islands

(Jurisdiction of incorporation or organization)

c/o CDC Corporation Limited

33/F Citicorp Centre

18 Whitfield Road

Causeway Bay

Hong Kong

852-2893-8200

e-mail: investor_relations@cdccorporation.net

(Address of principal executive offices)

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

Class A common shares

Indicate the number of outstanding shares of each of the Issuer’s class of capital or common stock as of the close of the period covered by this Annual Report:


Class of shares		Number outstanding as of March 31, 2007
Class A common shares		114,944,204

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

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

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. Yes x 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):

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ¨ Item 18 x

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). Yes ¨ No x

TABLE OF CONTENTS


			Page

Explanatory Note			1

PART I.

	Item 5.	Operating and Financial Review and Prospects	2

	Item 8.	Financial Information	34

PART II.

	Item 15T	Controls and Procedures	35

PART III.

	Item 18.	Financial Statements	38

	Item 19.	Exhibits	38

SIGNATURES			41

Index to Consolidated Financial Statements			F-1

Index to Exhibits


Exhibit 12.1		Certification of CEO required by Rule 13a-14(a)
Exhibit 12.2		Certification of CFO required by Rule 13a-14(a)
Exhibit 13.(a).1		Certification of CEO pursuant to Section 906
Exhibit 13.(a).2		Certification of CFO pursuant to Section 906
Exhibit 15.(a).5		Consent of Deloitte & Touche LLP dated June 30, 2008
Exhibit 15.(a).6		Consent of Ernst & Young dated June 30, 2008
Exhibit 15.(a).7		Consent of Deloitte Touche Tohmatsu June 30, 2008

EXPLANATORY NOTE

The purpose of this Amendment No. 1 on Form 20-F/A (“Amendment No. 1”) to the annual report on Form 20-F (the “Annual Report”) of CDC Corporation (the “Company”) for the year ended December 31, 2006, filed with the U.S. Securities and Exchange Commission (the “SEC”) on July 2, 2007 (the “Annual Report Filing Date”) is to: (i) amend and restate Note 27, “Segment Information” to the Notes to Consolidated Financial Statements for the period ended December 31, 2006 to correct certain accounting errors contained therein, as more fully described below (the “Restatement”); and (ii) include amendments in the Annual Report to address comments received by the Company from the U.S. Securities and Exchange Commission (the “SEC”) in comment letters dated November 30, 2007 and January 25, 2008 (collectively, the “SEC Comments”).

The following items have been amended in this Amendment No. 1 as a result of the Restatement or the SEC Comments:

Part I – Item 4A – Unresolved Staff Comments

Part I – Item 5 – Operating and Financial Review and Prospects

Part I – Item 8 – Financial Information

Part II – Item 15T – Controls and Procedures

Part III – Item 18 – Financial Statements

Part III – Item 19 – Exhibits

Restatement of Notes to 2006 Financial Statements

The Restatement relates to certain amounts presented in the business segment footnote to the Company’s consolidated financial statements for the year ended December 31, 2006. The Restatement adjustments are limited to the business segment footnote and do not affect any other reported amounts or disclosures in the Company’s consolidated financial statements for the year ended December 31, 2006. Consolidated net income for the Company for the year ended December 31, 2006 remained unchanged.

The Company concluded that the financial statement footnote disclosure of segment net income (loss) for fiscal year ended December 31, 2006 contained in Footnote 27 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 20-F for the year ended December 31, 2006 contained two accounting errors related to the allocation of expenses among the Company’s business segments. First, an aggregate of approximately $6.3 million of purchased intangibles amortization expense related to certain acquisitions was improperly allocated to the Software and Business Services segments. Purchased intangible amortization should have been included in the measurement of Corporate segment net income (loss). Second, an inter-company consolidation adjustment within the Mobile Services and Applications segment of approximately $8.5 million was improperly allocated to the Corporate segment.

Other Changes

The Company made the following additional changes to the Annual Report:

•

We made several clarifying changes to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 5. A. to make it easier for the reader of our financial statements to understand our results.

•

We corrected two amounts within the operating cash flow section of the Consolidated Statement of Cash Flows, as discussed in Footnote 2 of Notes to Consolidated Financial Statements. Each of these two amounts offset the other, and had no impact on total cash provided by operating activities.

•

We expanded our disclosure around our revenue recognition policy for CDC Games included in Footnote 2 of Notes to Consolidated Financial Statements to explain the Company’s return policy for prepaid cards.

•

We expanded to description of the assets purchases for certain business combinations included in Footnote 3 of Notes to Consolidated Financial Statements.

Other than as set forth herein, the Company has not modified or updated any other disclosures in the Annual Report. The Company has made no changes to the Items in the Annual Report other than those set forth above, and accordingly, it has omitted all such unchanged information.

Other than expressly set forth herein, this Amendment No. 1 does not reflect events occurring after the Annual Report Filing Date or modify or update those disclosures affected by subsequent events. Rather, except as described above, information is unchanged and reflects the disclosures made at the time of the Annual Report Filing Date. Accordingly, this Amendment No. 1 should be read in conjunction with the Annual Report and the Company’s filings made subsequent thereto, including any amendments to those filings. The filing of this Amendment No. 1 shall not be deemed an admission that the Annual Report when made included any untrue statement of a material fact or omitted to state a material fact necessary to make a statement not misleading.

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Cautionary Statement

You should read the following discussion of our financial condition and results of operations together with our consolidated financial statements and the related notes included elsewhere in this Amendment No. 1 to our Annual Report on the Form 20-F/A. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from those anticipated in these forward-looking statements as a result of factors including, but not limited to, those set forth under Item 3.D. of this Annual Report on the Form 20-F, “Key Information – Risk Factors”.

A.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Products and Services

CDC Corporation is a global provider of enterprise software, mobile services and internet and media services and the development and operation of online games. The Company offers the following products and services to customers around the world:

•

Software . We are a global provider of enterprise software applications and related services. Our products are designed to support and automate the processes of an organization to achieve company-wide integration of business and technical information across multiple divisions and organizational boundaries, such as finance, manufacturing, logistics, human resources, marketing, sales and customer service, by utilizing common databases and programs that share data real time across multiple business functions. Our products and services seek to help companies worldwide fulfill their business growth objectives through increased operational efficiencies, improved profitability, strengthened customer relationships and improved regulatory compliance. The software suite includes Enterprise Resource Planning, or ERP, Customer Relationship Management, or CRM, Supply Chain Management, or SCM, Order Management Systems, or OMS, Human Resources and Payroll Management, or HRM, and Business Intelligence, or BI, products.

•

Business Services. The Company’s business services offerings include information technology services, eBusiness consulting, web development and outsourcing in Hong Kong, Australia, Korea, and the U.S., and a marketing database and marketing support service offered principally in Australia and New Zealand. The Company’s business services companies provide program management, outsourcing services, application development and ongoing support services using a wide range of technologies.

•

CDC Games. Our Games business is principally derived from online game services in China. We operate our Massively Multiplayer Online Role-Playing Games, or MMORPGs, under two models. The first model is the traditional subscription based pay-to-play, where users purchase pre-paid cards, or the PP-Cards, to play for a fixed number of hours. The second model is free-to-play, under which players are able to access the games free of charge but may choose to purchase in-game merchandise or premium features to enhance their game playing experience, such purchases can only be made through the use of PP-Cards.

•

Mobile Services and Applications. Our mobile services and applications business provides news and mobile applications services targeting the consumer market in China. It offers wireless services including Short Message Service, or SMS, Interactive Voice Response, or IVR, Multimedia Message Service, or MMS and Wireless Application Protocol, or WAP. We have established strong local direct connectivity with provincial mobile network operators in 29 provinces in the PRC, which facilitates the marketing and promotional activities of our wireless services. Our mobile services and applications business is primarily operated through Newpalm and Go2joy, both of which are held through our subsidiary, China.com.

•

Internet and Media. Our Internet and Media business encompasses a range of businesses, including our Internet media business which is focused on online entertainment and Internet products and services that target users in China via our portal network (www.china.com and www.hongkong.com) and a Singapore-based travel trade publisher and organizer serving the travel and tourism industry in the Asia Pacific region operated by TTG.

Effect of acquisitions

During 2004 and 2006, we made the following significant business acquisitions, by business segment, the results of which have been consolidated from the respective dates of acquisition. There were no significant acquisitions during 2005.

Software


Acquired company		Date
Pivotal Corporation (“Pivotal”)		Feb-04

Ross Systems, Inc. (“Ross”)		Aug-04

Business Services


Acquired company		Date
D B Professionals, Inc. ("DBPI")		Jul-06

Vis.align, Inc. (“Vis.align”)		Dec-06

Mobile Services and Applications


Acquired company		Date
Group Team Investments Limited (holds Beijing He He Technology Co. Ltd. (“Go2joy”))		May-04

TimeHeart Science Technology Limited (the “TimeHeart Group”)		Nov-06

CDC Games


Acquired company		Date
Equity Pacific Limited (the “17game Group”).		Mar-06

For a list of all acquisitions, see Item 4 – “Information on the Company.”

Operating Segments and Discontinued Operations

We report results in five business segments, “Software,” “Business Services,” Mobile Services and Applications,” ”Internet and Media” and “CDC Games.”

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, goodwill and intangible assets, business combinations, valuation of derivative financial instruments, fair value of investments not actively traded, capitalization of software costs, investments, accounts receivable and allowance for doubtful accounts, deferred tax valuation allowance, stock based compensation, and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in “Note 2- Summary of Significant Accounting Policies” in Item 18- Financial Statements.

We believe the following critical accounting policies are some of the more critical judgment areas in the application of our accounting policies that affect our financial condition and results of operations.

Revenue Recognition

We generally recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectibility is probable. If an acceptance period is required, revenues are recognized upon the earlier of customer acceptance or the expiration of the acceptance period. The Company’s agreements with its customers, resellers and distributors do not contain product return rights. If the fee is not fixed or determinable due to the existence of extended payment terms, revenue is recognized periodically as payments become due, provided all other conditions for revenue recognition are met.

We generate revenues from five primary sources: Software, Business Services, Mobile Services and Applications, Internet and Media services and CDC Games. We recognize revenue in accordance with US GAAP. The specific literature that the Company follows in connection with its revenue recognition policy includes the Securities and Exchange Commission’s Staff Accounting Bulletin 104, “Revenue Recognition”, the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, “Software Revenue Recognition”, as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions”, Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force (“EITF”) 00-21, “Revenue Arrangements with Multiple Deliverables” EITF 00-3 “Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware”, and in certain instances EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent”, and SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts”.

In addition to these basic criteria, the following are the specific revenue recognition policies we follow for each major stream of revenue by reporting segment.

Software

We generate software revenues from the sale of software licenses, and the maintenance and services for such software licenses. Such sales often include a combination of software consulting and integration services, implementation training and maintenance services. We allocate the arrangement fee in these multi-element arrangements to each individual element using its relative fair value as based on vendor specific objective evidence (“VSOE”). VSOE of fair value is typically determined by the customary price charged for each element when sold separately after the application of any standard approved discount. In the case of an element not yet sold separately, VSOE of fair value is the price established by authorized management if it is probable that the price, once established, will not change before market introduction. Where fair value exists for all undelivered elements of the arrangement but not the delivered elements, we apply the “residual” method of accounting and defer revenue allocated to the undelivered elements while recognizing the residual revenue allocated to the delivered elements. In the absence of VSOE of fair value for any undelivered element, we defer the entire arrangement fee and recognize revenue when all undelivered elements are delivered assuming all other basic criteria for revenue recognition have been met. We generally recognize revenues from services separately from license fees revenues because the service arrangements qualify as "service transactions" as defined by SOP 97-2. The factors considered in determining whether the revenues should be accounted for separately include the nature of the services and whether the services are essential to the functionality of the licensed product, availability of services from other vendors, and the impact of payment timing on the realizability of the software license fee.

Software license revenues are normally generated through licensing with end-users, value-added resellers (“VARs”) and distributors, and through the sale of the software with or incorporating third-party products. VARs and distributors do not have rights of return, price protections, rotation rights, or other features that would preclude revenue recognition. When software licenses are sold indirectly to end-users through

VARs, we recognize as revenue only the net fee receivable upon sell-through to the end-user. License revenues from distributors are calculated at an agreed upon percentage of the distributors’ net selling price to the end-user. We typically do not earn any portion of fees for services provided by the distributor to the end-user. We earn maintenance fees based on an agreed upon percentage of the maintenance fees that the distributor earns from the end-user.

When software licenses incorporating third-party software products are sold or sold with third-party products that complement our software, we recognize as revenue the gross amount of sales of third-party products. The recognition of gross revenue is in accordance with criteria established in EITF 99-19 because we are ultimately responsible for the fulfillment and acceptability of the products purchased, have full latitude in establishing pricing and assume all credit and general inventory risks.

Revenues related to consulting and integration services and the provision of training services for software products are deferred and recognized as the services are delivered, assuming all other basic criteria for revenue recognition have been met.

Revenues related to maintenance agreements on software products are deferred and recognized ratably over the terms of the agreements which are normally one year.

We make provisions for discounts and rebates to customers and other adjustments in the same period in which the related revenues are recorded. Such provisions are calculated after considering relevant historical data.

Recognition of revenues from the licensing of our software products requires management judgment with respect to determination of fair values and in determining whether to use the gross versus net method of reporting for certain types of revenue. The timing of our revenue recognition could differ materially if we were to incorrectly determine the fair value of the undelivered elements in an arrangement for which we are using the “residual” method. The composition of revenues and cost of revenues would change if we made a different assessment on the gross versus net method of reporting sales of software licenses which incorporate third-party software products.

Business Services

We generate business services revenues from information technology services, eBusiness consulting, web development and outsourcing.

We recognize revenues from time and materials outsourcing contracts as the services are delivered assuming all other basic criteria for revenue recognition have been met.

We recognize revenues from the design, development and integration of Internet web sites and mobile phone devices using contract accounting based on either client acceptance of completed milestones or using the cost-to-cost percentage-of-completion method. We use the cost-to-cost method based on hours incurred as a percentage of the total estimated hours to complete the project because our historical experience has demonstrated that it produces a reliable indication of the progress on each engagement. We regularly reevaluate estimates of total projected contract costs and revise them if appropriate. Any adjustments to revenues due to changes in estimates are accounted for in the period of the change in estimate. When estimates indicate that a loss will be incurred on a contract upon completion, a provision for the expected loss is recorded in the period in which the loss becomes evident. Historically, we have not experienced material losses on fixed-price contracts. The majority of our contracts are short term in duration, and the use of the completed contract method would not result in a material difference in the timing of revenue recognition. Some projects include acceptance clauses requiring customers’ sign-off at the conclusion of the projects. Historically, we have not experienced projects where sign-off or acceptance has been withheld by a customer resulting in a material loss on a project. Recognition of revenues using contract accounting requires judgment with respect to the method used. The

timing of our revenue recognition could differ if we were to use a different methodology for estimating progress to completion, such as an output method based on milestones for contracts where we currently use an input method such as hours incurred.

Revenues from Internet web site maintenance agreements are deferred and recognized ratably over the terms of the related agreements, which are usually for periods of six months or one year.

Database and marketing support services include list rental, database development and supply, data analysis and call center services. Revenue is recognized when the service or list has been delivered assuming all other basic criteria for revenue recognition have been met.

Advertising revenues arising from direct mailing or placement of print advertising are recognized when the advertisements are sent or published, assuming all other basic criteria for revenue recognition have been met.

We derive advertising and marketing services revenues from consulting services, marketing database and support services, online and print advertising, and our Internet media business which is focused on online entertainment and Internet products services that target users in China via our portal network.

Advertising and marketing consulting services revenues for fixed price contracts are recognized upon completion of contractual milestones which are specified in the contracts along with pricing, payment terms and project timetable. Revenues from time and materials outsourcing contracts are recognized as the services are delivered, assuming all other basic criteria for revenue recognition have been met.

Mobile Services and Applications

We generate mobile services and applications revenues from a comprehensive suite of mobile data applications, including dating, chatting, fortune telling, entertainment, information-related content and community services to mobile subscribers in China utilizing SMS, MMS, WAP and IVR services. We rely on mobile network operators in China to bill mobile phone users for our subscription fees. We have revenue sharing arrangements with China Mobile and China Unicom under which we receive 70% to 85% of the subscription fee collected from a mobile subscriber, with the balance being retained by the mobile operators. In addition to our charges, the mobile operators separately charge their subscribers RMB0.10 to RMB1.00 for every SMS, MMS or WAP message sent. These amounts are collected by the mobile operators and are not shared with us.

Mobile services and applications revenues are recognized in the month in which the services are performed, provided that all other basic criteria for revenue recognition have been met. The mobile operators provide statements after month-end indicating the amount of fees that were charged to users for mobile services and applications services that we provided during that month and the portion of fees that are due to us in accordance with our contractual arrangements with the mobile operators. We typically receive these statements within 30 to 90 days following month-end, and we typically receive payment within 30 to 90 days following receipt of the statement. We also maintain an internal system that records the number of messages sent to and messages received from mobile users. Generally, there are differences between the expected value of delivered messages based on our system records and our portion of the fees confirmed by the mobile operators for the delivered messages. These differences may result from the user’s phone being turned off, problems with the mobile operators’ networks or our billing system or other issues which prevent delivery of our services to users. These are known in the industry as billing and transmission failures. We do not recognize revenues for services which result in billing and transmission failures. Billing and transmission failures can vary significantly from month to month, province to province and between mobile operators. At the end of each reporting period, where an operator fails to provide us with a monthly statement confirming the amount of charges billed to their mobile phone users for that month, we use the information generated from our internal system and historical data to make estimates of the billing and transmission failures and accrue as revenue the estimated amount of collectable mobile services and applications fees. If an actual discrepancy varies significantly from our estimate, it could result in an overstatement or understatement of revenues and costs of revenues.

We are also required to pay some of our content providers either monthly fee or a percentage of the revenue received from or confirmed by the mobile operators, with or without a minimum guaranteed payment, with respect to services incorporating the content providers’ products. In calculating the fees payable to these providers, we reduce the amount of the fee payable by our estimate of account billing and transmission failures which may have been applicable to the services incorporating these products. If we receive confirmation of billing or transmission failures which differ from our estimate after we make payments, we do not ask for refunds, make additional payments, or make adjustments with respect to fees payable for future periods. If the assumptions we use in making such estimates prove inaccurate, we may have paid, and may continue to pay, fees to such providers which are disproportionate to the amount we have been paid for the services.

Prior to 2005, we recognized mobile services and applications revenues net of the mobile phone operator’s share of revenue and uncollectible amounts because we considered the mobile operators to be the primary obligors based on the fact that the mobile operators set maximum prices that we could charge and that the mobile operators also had the right to set requirements and procedures associated with using their platform. Prior to 2004, we relied on the mobile operators to advertise our services, and customers were not necessarily aware the services to which they were subscribing were being provided by us because they did not receive confirmations after subscribing to such services. This situation changed in 2005 as a result of (i) beginning in 2005, a large portion of our revenues are being generated on a new transmission platform which requires direct confirmation of every service ordered by customers and makes it clear to customers that we are responsible for providing such services; (ii) a substantial increase in direct advertising of our services; (iii) enhanced ability to select suppliers due to a shift from primarily using internally-produced content to purchasing content; and (iv) changes in mobile operators’ practices such as shifting their credit risk to us by taking an additional percentage of revenues from the arrangement to cover expected bad debts. Based on these recent changes, we changed our revenue presentation to the gross method on a prospective basis as of January 1, 2005.

Recognition of mobile services and applications revenues requires judgment with respect to the estimation of revenues not yet confirmed by the mobile operators at the end of a period, and whether to use the gross versus net method of reporting revenue. The company regularly re-evaluates its EITF 99-19 assessment as the mobile services environment continues to evolve with the transition to new platforms and significant changes in the operating practices of the network operators. The composition of revenues and cost of revenues would change if we made a different assessment on the gross versus net basis of reporting. Our estimates also rely to some extent on our historical experience. We believe we have the ability to make reasonable estimates. However, material differences in the amount and timing of our revenue and cost of revenue could result during any period because of differences between the actual billing and transmission failure rate per the mobile operators’ statements and our estimates based on our internal records and historical experience, or if we were to use a different methodology for estimating the billing and transmission failure rate applicable to unconfirmed revenues. In the future we may also change our estimation methodology based on future experience or if there are changes in the manner in which the mobile operators confirm revenue.

Internet and Media

Revenue from internet and media mainly represents revenue from advertising, which is recognized on a straight-line basis over the period in which the advertisement is displayed, and when collection of the resulting receivable is probable, provided that no significant obligations of the Company remain. Advertising service fees from direct mailings are recognized when each advertisement is sent to a target audience.

CDC Games

CDC Games revenues are principally derived from the provision of online game services in China. The Company operates its MMORPGs under two models. The first revenue model is the traditional subscription based pay-to-play, where users purchase PP-Cards to play for a fixed number of hours. The second revenue

model is free-to-play, under which players are able to access the games free of charge but may choose to purchase in-game merchandise or premium features to enhance their game playing experience, such purchases can only be made through the use of PP-Cards.

The end users are required to activate their PP-Cards by using access codes and passwords to exchange the value of these cards to game points and deposit into their personal accounts. They consume points for online game services by trading them either for a pre-specified length of game playing time or in-game merchandise or premium features sold at online game stores. All prepaid fees received from distributors are initially recognized as deferred revenue and revenue is recognized when the registered points are consumed for the Company’s online game services, i.e., when game playing time occurs or in-game merchandise or premium features are delivered, or when the end customers are no longer entitled to access the online game services after the expiration of the PP-Cards.

Goodwill and Intangible Assets

Our long-lived assets include goodwill and other intangible assets. Goodwill represents the excess of cost over the fair value of net intangible assets of businesses acquired. Goodwill and indefinite lived intangible assets are not amortized. All other intangible assets are amortized over their estimated useful lives.

Goodwill is assigned to reporting units based on the reporting unit classification of the entity to which the goodwill is attributable. We have determined our reporting units based on an analysis of our operating segments. In 2004, after acquiring Ross and Pivotal, we performed an assessment of our businesses and sub-divided our reporting units into additional reporting units based on (a) the nature of products and services; (b) the nature of the production process; (c) the type and class of customers; (d) the method to distribute products or provide services; and (e) the nature of regulatory environment. We reallocated goodwill among the new reporting units based on the relative fair value of each new reporting unit compared to the fair value of the reporting unit in which it was classified before the sub-division.

Intangible assets represent trademarks and service marks, uniform resource locators (“URLs”), software applications and programs, customer base and contracts, and business licenses and partnership agreements. Intangible assets are carried at cost less accumulated amortization. Amortization is computed using the straight-line method over the estimated useful lives of the respective assets.

The estimated useful lives of the intangible assets are as follows:


Trademarks		Indefinite
URLs		20 years
Software applications and programs		2 to 5 years
Customer base and contracts		1 to 10 years
Business licenses and partnership agreements		1 to 7 years

We test goodwill and intangible assets with an indefinite useful life for impairment on an annual basis as of December 31. This testing, carried out using the guidance and criteria described in SFAS No. 142, “Goodwill and Other Intangible Assets,” compares carrying values to fair values at the reporting unit level and, when appropriate, the carrying value of these assets is reduced to fair value. Factors that could trigger an impairment charge include, but are not limited to, significant changes in our overall business or in the manner or use of the acquired assets, underperformance against projected future operating results, and significant negative industry or economic trends. Any impairment losses recorded in the future could have a material adverse impact on our financial condition and results of operations for the periods in which such impairments occur.

During 2005 and 2006, we performed the required impairment tests on goodwill and intangibles with an indefinite useful life and were not required to record any impairment. Management judgment is required with respect to the identification of reporting units based on our internal reporting structure that reflects the way we

manage our business or operations, assigning assets and liabilities to reporting units, and assigning goodwill to reporting units. Significant judgment is also required to estimate the fair value of reporting units including estimating future cash flows, determining appropriate discount rates, estimating the applicable tax rates, projecting future industry trends and market conditions, and making other assumptions. The use of different estimates and assumptions could materially affect the determination of fair value for each reporting unit. If we change our estimates and assumptions in the future based on changes in our overall business or in the manner or use of the acquired assets, underperformance against projected future operating results, or significant negative industry or economic trends, such changes might result in an impairment charge.

We also annually review and adjust the carrying value of amortized intangible assets if facts and circumstances suggest they may be impaired. If this review indicates that amortized intangible assets may not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the carrying value of intangible assets will be reduced by the estimated shortfall in discounted cash flows. Management judgment is required in the assessment of useful lives of amortized intangibles, and our estimates of future cash flows require judgment based on our historical and anticipated results and are subject to many factors including our assessment of the discount rate used and the amounts and timing of future cash flows. During 2005 and 2006, we performed the required impairment reviews and were not required to record any material impairment on amortized intangible assets. The use of different estimates and assumptions might have resulted in an impairment charge, or might result in an impairment charge in the future. As of December 31, 2006, $96.1 million of our identifiable intangible assets were subject to amortization.

Business Combinations

We have made a number of acquisitions and may make strategically important acquisitions in the future. When recording an acquisition, we allocate the purchase price of the acquired company to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. For significant acquisitions we have obtained independent appraiser valuation reports to assist in determining the fair values of identifiable intangibles, including acquired technology, customer lists and trademarks. These valuations require us to make significant estimates and assumptions which include future expected cash flows from license sales and customer contracts and acquired technologies, discount rates, and assumptions regarding the period of time the acquired technology or customer relationships will continue. Such assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions and estimates.

In addition, acquired deferred revenue is recognized at fair value to the extent it represents a legal obligation assumed by us in accordance with EITF 01-03, “Accounting in a Business Combination for Deferred Revenue of an Acquiree.” We consider service contracts and post-contract customer support contracts to be legal obligations of the acquired entity. We estimate the fair value of acquired deferred revenue based on prices paid by willing participants in recent exchange transactions. At December 31, 2005 and 2006 we had deferred revenue balances of $37.2 million and $46.0 million, respectively, which are primarily related to our acquisitions during 2005 and 2006. Management judgment is also required in determining an appropriate fair value for deferred revenue. If the fair values we determined for deferred revenues acquired in prior years were lower, our revenue for the year would have been lower.

Capitalization of Software Costs

We capitalize computer software product development costs incurred in developing a product once technological feasibility has been established and until the product is available for general release to customers in accordance with SFAS No. 86, “Accounting for the Costs of Software to be Sold, Leased, or Otherwise Marketed.” We evaluate realizability of the capitalized amounts based on expected revenues from the product over the remaining product life. Where future revenue streams are not expected to cover remaining unamortized amounts, we either accelerate amortization or expense the remaining capitalized amounts. Amortization of such costs is computed as the greater of the amount calculated based on (1) the ratio of current product revenues to projected current and future product revenues or (2) the straight-line basis over the expected economic life of the

product (not to exceed five years). Software costs related to the development of new products incurred prior to establishing technological feasibility or after general release are expensed as incurred. When technological feasibility of the underlying software is not established until substantially all product development is completed, including the development of a working model, we expense the costs of such development because the impact of capitalizing such costs would not be material.

Management judgment is required with respect to the determination of technological feasibility and the determination of the expected product revenues used to assess realizability of the capitalized amounts. If we were to determine that technological feasibility occurs at a different stage of the process, we may capitalize more or less software development costs. If our assumptions about realizability were to change, our reported operating expenses could increase in the short-term by any amounts we write off. As of December 31, 2005 and 2006, capitalized software development costs were $10.5 million and $20.9 million respectively, and related accumulated amortization totaled $1.3 million and $4.5 million respectively.

Investments

Debt and equity investments designated as available-for-sale are stated at fair value. Unrealized holding gains or losses, net of tax, on available-for-sale are reported in accumulated other comprehensive income (loss) and as a separate component of shareholders’ equity. Realized gains and losses and any declines in fair value judged to be other-than-temporary on available-for-sale securities are included in gain (loss) on disposal and impairment, respectively, in our consolidated statements of operations. Gains or losses on the sale of investments and amounts reclassified from accumulated other comprehensive income (loss) to the statement of operations are computed based upon specific identification. Interest on securities classified as available-for-sale securities is included in interest income.

Debt investments, where the Company has the positive intent and ability to hold the securities to maturity, are designated as held to maturity securities and are stated at amortized cost.

When determining whether an impairment of investments exists or a decline in value of an available-for-sale security is other-than-temporary, we evaluate evidence to determine whether the realizable value is less than the current market price for the securities. Such information may include the investment’s financial performance, the near term prospects of the investment, the current and expected future financial condition of the investment’s issuer and industry, and our investment intent. Management judgment is required in determining fair value of investments, and in determining whether an impairment is other-than-temporary. The use of different estimates and assumptions could affect the determination of fair value for each investment, and could result in an impairment charge. For investments not actively traded, the company reviews a variety of information including financial performance, comparisons to recently traded comparable securities, advice of investment professionals, and financial modeling to determine the fair market value as well as determine in the case of declines in value if the decline is an other than temporary decline in fair value.

All other equity investments for which we do not have the ability to exercise significant influence (generally, when we have an investment of less than 20% ownership and no representation on the company’s board of directors) and for which there is not a readily determinable fair value, are accounted for using the cost method. Dividends and other distributions of earnings from equity investees or investments, if any, are included in income when declared. We periodically evaluate the carrying value of our investments accounted for under the cost method of accounting and any other than temporary impairment is included in the consolidated statement of operations.

Derivative Instruments

Company’s consolidated financial statements as either assets or liabilities and recorded at fair value. Changes in the fair value of derivative financial instruments are either recognized periodically in the Company’s consolidated statement of operations or in the Company’s consolidated statement of shareholders’ equity as a component of accumulated other comprehensive income (loss) depending on the use of the derivative and whether it qualifies for hedge accounting. Changes in fair values of derivatives not qualified as hedges are reported in the Company’s consolidated statement of operations. The estimated fair values of derivative instruments are determined at discrete points in time based on the relevant market information. These estimates are calculated with reference to the market rates using the industry standard valuation techniques.

Deferred Tax Valuation Allowance

It is our policy that income taxes are determined under the liability method as required by SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). Income tax expense is based on pre-tax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance based on the amount of tax benefits that, based on available evidence, are not more likely than not to be realized.

The Company records a valuation allowance on its deferred tax assets in an amount that is sufficient to reduce the deferred tax assets to an amount that is more likely than not to be realized. In reaching this determination, the Company considers the future reversals of taxable temporary differences, future taxable income, exclusive of taxable temporary differences and carryforwards, taxable income in prior carryback years and tax planning strategies. As of December 31, 2005 and 2006, the Company has provided a valuation allowance of $77.1 million and $59.0 million, respectively, against its net deferred tax assets. For its calendar year ended December 31, 2006 the valuation allowance decreased by $18.1 million which is the result of the tax effects of the Company's operations as well as the Company's determination of the amount that will be realized. A maximum of $32.9 million of the valuation allowance for which tax benefits are subsequently recognized will be allocated to reduce the goodwill. The portion of the change in the valuation allowance resulting in a decrease in goodwill principally relates to the Company’s recovery of deferred tax assets acquired in business combinations for which a valuation allowance was recorded at the time of acquisition. One of our Canadian subsidiaries which was acquired in fiscal 2004, had a significant net operating loss carryforward with a limited carryover period at acquisition. Based on the earnings history of this subsidiary since the acquisition date, the valuation allowance established at acquisition was lowered in fiscal 2006 by approximately $18.0 million with a corresponding adjustment to goodwill. This adjustment had the most significant impact on the overall decrease in the valuation allowance. Forecasted pre-tax income for this subsidiary would have to decrease by approximately 50% of its projected income in order to impact the fiscal 2006 valuation adjustment.

Stock-based Compensation

On January 1, 2006, the Company adopted SFAS No. 123(R), “Share Based Payment” (“SFAS 123(R)”). Prior to January 1, 2006, the Company accounted for share-based employee compensation arrangements under the recognition and measurement principles of Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related Interpretations, and complied with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under APB 25, share compensation expense was recognized by utilizing the accelerated expense attribution method over the vesting period of the share options based on the difference, if any, between the fair value of the underlying the Company’s shares at the date of grant and the exercise price of the share options.

Prior to the adoption of SFAS 123(R), cash flows resulting from the tax benefit related to equity-based compensation was required to be presented in the operating cash flows, along with other tax cash flows, in accordance with the provisions of EITF 00-15, “Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option” , (“EITF 00-15”). SFAS 123(R) superseded EITF 00-15, amended SFAS No. 95, “Statement of Cash Flows”, and requires tax benefits relating to excess equity-based compensation deductions to be prospectively presented in the statement of cash flows as financing cash inflows.

The Company adopted SFAS 123(R) using the modified prospective method. SFAS 123(R) requires measurement of compensation cost for all share based awards at fair value on the date of grant and recognition of compensation over the service period for awards expected to vest. The recognized expense is net of expected forfeitures and the restatement of prior periods is not required.

disclosures under Statement of SFAS 123, as amended by SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure” (“SFAS 148”). On March 29, 2005, the Securities and Exchange Commission (“SEC”) published Staff Accounting Bulletin No. 107 (“SAB 107”), which provides the Staff’s views on a variety of matters related to share based payments. SAB 107 requires that share based compensation be classified in the same expense line items as cash compensation.

The effect of adopting SFAS 123(R) on the Company’s income from operations, income before income taxes, net income, net cash provided by operating activities, and basic and diluted earnings per share for the year ended December 31, 2006 was a reduction of $6.9 million, $6.9 million, $6.6 million, $6.6 million, $0.05 and $0.05, respectively and an increase of our net cash provided by financing activities of Nil.

Contingencies

We regularly assess the estimated impact and probability of various uncertain events, or contingencies, and account for such events in accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”). Under SFAS 5, contingent losses must be accrued if available information indicates it is probable that the loss has been or will be incurred given the likelihood of the uncertain event, and the amount of the loss can be reasonably estimated.

Management judgment is required in deciding the amount and timing of accrual of a contingency. For example, legal proceedings are inherently uncertain, and in order to determine the amount of any reserves required, we assess the likelihood of any adverse judgments or outcomes in pending and threatened litigation, as well as potential ranges of probable losses. As of December 31, 2006, we had $3.5 million accrued for legal fees and contingencies. We use internal and external experts, as necessary, to help estimate the probability that a loss has been incurred and the amount or range of the loss. A determination of the amount of loss accrual required for these contingencies is made after analysis of each individual matter. The amount of such accruals may change in the future due to changes in approach or new developments in each case.

Impact of Certain Recently Issued Accounting Standards

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140” (“SFAS 155”). It allows financial instruments that have embedded derivatives that otherwise would require bifurcation from the host to be accounted for as a whole, if the holder irrevocably elects to account for the whole instrument on a fair value basis. Subsequent changes in the fair value of the instrument would be recognized in earnings. The standard also clarifies which interest-only strips and principal-only strips are not subject to the requirement of SFAS 133; establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued by the Company after January 1, 2007. The Company is evaluating the effect of the adoption of SFAS 155. It is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109. FIN 48 clarifies the application of SFAS 109 by defining criteria that an individual tax position must meet for any part of the benefit of that position to be recognized in the financial statements. Additionally, FIN 48 provides guidance on the measurement, derecognition, classification and disclosure of tax positions, along with accounting for the related interest and penalties. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. Management is currently evaluating the impact this new standard will have on its financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (“SFAS 157”). SFAS 157 defines fair value, expands disclosures about fair value measurements, establishes a framework for measuring fair value in generally accepted accounting principles, and establishes a hierarchy that categorizes and prioritizes the sources to be used to estimate fair value. The Company is required to adopt SFAS 157 effective January 1, 2008 on a prospective basis. Management is currently evaluating the impact this new standard will have on its financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. Specifically, SAB 108 requires that public companies utilize a “dual-approach” to assessing quantitative effects of financial misstatements. This dual approach includes both an income statement focused assessment and a balance sheet focused assessment. The guidance in SAB 108 must be applied to annual financial statements for fiscal years ending after November 15, 2006. SAB 108 did not have an effect on our financial position, cash flows or results of operations for the year ended December 31, 2006.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact this new standard will have on its financial statements.

Results of Operations

In June 2007, we amended and restated our Annual Report on Form 20-F for the year ended December 31, 2005, to restate our consolidated financial statements and notes related thereto for the years ended December 31, 2003, 2004 and 2005, and provide separate financial statements and notes related thereto of Equity Pacific Limited, its subsidiaries and its variable interest entity.

All historical amounts relating to our financial information for the years ended December 31, 2003, 2004 and 2005 refer to such amended and restated amounts.

The following table summarizes our historical results of operations in U.S. dollars and as percentages of total revenues for the years ended December 31, 2004, 2005 and 2006:


	Year ended December 31,
	2004					2005					2006
	(in thousands, except percentage data)
Revenues
Software	$	107,648		59	%	$	158,804		65	%	$	175,374		57	%
Licenses		28,581		16	%		38,541		16	%		46,260		15	%
Maintenance and consulting services		79,067		43	%		120,263		49	%		129,114		42	%
Business Services		42,927		24	%		42,686		17	%		65,447		21	%
IT products		2,083		1	%		2,079		1	%		3,038		1	%
Consulting services		37,308		20	%		37,139		15	%		59,315		19	%
Advertising		3,536		2	%		3,468		1	%		3,094		1	%
Mobile Services and Applications		23,694		13	%		34,389		14	%		31,862		10	%
Internet and Media		8,183		4	%		8,995		4	%		10,064		3	%
CDC Games		—		0	%		—		0	%		26,780		9	%

		182,452		100	%		244,874		100	%		309,528		100	%

Cost of revenues
Software		(46,725	)	26	%		(68,070	)	28	%		(74,532	)	24	%
Licenses		(3,486	)	2	%		(6,750	)	3	%		(8,408	)	3	%
Maintenance and consulting services		(39,754	)	22	%		(55,792	)	23	%		(61,115	)	20	%
Amortization of purchased technologies		(3,485	)	2	%		(5,528	)	2	%		(5,009	)	2	%
Business Services		(28,076	)	15	%		(27,168	)	11	%		(45,200	)	15	%
IT products		(1,879	)	1	%		(1,671	)	1	%		(1,834	)	1	%
Consulting services		(24,871	)	14	%		(24,338	)	10	%		(42,388	)	14	%
Advertising		(1,326	)	1	%		(1,159	)	0	%		(978	)	0	%
Mobile Services and Applications		(4,597	)	3	%		(15,262	)	6	%		(13,004	)	4	%
Internet and Media		(3,319	)	2	%		(3,449	)	1	%		(4,095	)	1	%
CDC Games		—		0	%		—		0	%		(10,631	)	3	%

		(82,717	)	45	%		(113,949	)	47	%		(147,462	)	48	%

Gross margin and gross margin %		99,735		55	%		130,925		53	%		162,066		52	%
Selling, general and administrative expenses		(80,326	)	44	%		(100,549	)	41	%		(125,500	)	41	%
Research and development expenses		(13,825	)	8	%		(22,605	)	9	%		(19,981	)	6	%
Depreciation and amortization expenses		(8,919	)	5	%		(9,937	)	4	%		(10,976	)	4	%
Restructuring expenses		(3,760	)	2	%		(1,667	)	1	%		(1,974	)	1	%

Total operating expenses		(106,830	)	59	%		(134,758	)	55	%		(158,431	)	51	%

Operating income (loss)		(7,095	)	4	%		(3,833	)	2	%		3,635		1	%

Interest income		9,654		5	%		8,156		3	%		10,680		3	%
Interest expense		(1,895	)	1	%		(1,257	)	1	%		(3,038	)	1	%
Gain on disposal of available-for-sale securities		167		0	%		525		0	%		344		0	%
Gain on disposal of subsidiaries and cost investments		892		0	%		483		0	%		3,087		1	%
Other non-operating gains		—		0	%		—		0	%		—		0	%
Other non-operating losses		—		0	%		—		0	%		531		0	%
Impairment of cost investments and available-for-sale securities		(1,362	)	1	%		—		0	%		—		0	%
Share of loss in equity investees		(468	)	0	%		(1,172	)	0	%		976		0	%

Total other income		6,988		4	%		6,735		3	%		12,579		4	%

Income before income taxes		(107	)	0	%		2,902		1	%		16,214		5	%

Income tax expense		(3,375	)	2	%		(4,957	)	2	%		(3,062	)	1	%

Income (loss) before minority interests		(3,482	)	2	%		(2,055	)	1	%		13,152		4	%
Minority interests in income of consolidated subsidiaries		(925	)	1	%		(1,409	)	1	%		(2,312	)	1	%

Income (loss) from continuing operations		(4,407	)	2	%		(3,464	)	1	%		10,840		4	%

Discontinued operations
Loss from operations of discontinued subsidiaries, net of related tax benefit		(610	)	0	%		(47	)	0	%		—		0	%
Loss on disposal/dissolution of discontinued subsidiaries, net		(950	)	1	%		(3	)	0	%		—		0	%

Net income (loss)	$	(5,967	)	3	%	$	(3,514	)	1	%	$	10,840		4	%

Year ended December 31, 2006 Compared to Year ended December 31, 2005

Net Revenues

Consolidated . Consolidated net revenues increased 26%, or approximately $64.6 million, from $244.9 million in 2005 to $309.5 million in 2006. Consolidated net revenues increased primarily as a result of additional revenues received from acquired software and business services companies and increased sales volumes in certain key products discussed below. The table below sets forth the revenues from our principal business segments and revenues as percentages of our total revenues for the periods presented:


	Year ended December 31,
	2005				2006
	(in thousands, except percentage data)
Revenues
Software	$	158,804	65	%	$	175,374	57	%
Licenses		38,541	16	%		46,260	15	%
Maintenance and consulting services		120,263	49	%		129,114	42	%
Business Services		42,686	17	%		65,447	21	%
IT products		2,079	1	%		3,038	1	%
Consulting services		37,139	15	%		59,315	19	%
Advertising		3,468	1	%		3,094	1	%
Mobile Services and Applications		34,389	14	%		31,862	10	%
Internet and Media		8,995	4	%		10,064	3	%
CDC Games		—	0	%		26,780	9	%

	$	244,874	100	%	$	309,528	100	%

The following table sets forth the revenues contributed for the year ended December 31, 2006 by subsidiaries acquired in 2006, by principal business segment:


	Year ended December 31, 2006
	(in thousands)
Software - MVI, C360, JRG		3,944
Business Services - OSTI, Vis.align, DBPI, Horizon		22,664
Mobile Services and Applications - Timeheart Group		336
CDC Games - Equity Pacific		26,780

	$	53,724

Our top 10 customers accounted for 18% and 15% of our revenues for 2005 and 2006, respectively. No single customer accounted for 10% or more of the revenues during any of 2005 or 2006.

Software. Software revenues increased from $158.8 million in 2005 to $175.4 million in 2006 primarily due to increases in our customer base during 2006, additional sales of software to existing customers and the acquisitions during 2006 of MVI, c360 and JRG which contributed approximately $3.9 million of the aggregate software revenue increase of $16.6 million for 2006. As a percentage of total revenues, the software segment generated 57% of the total in 2006, decreasing from 65% in 2005.

License revenues increased from $38.5 million in 2005 to $46.3 million in 2006, an increase of $7.8 million, primarily due to increases in new license sales of our legacy products of $5.7 million and acquisitions in our software group of $3.0 million. New software sales were strong in global vertical industries including financial services, discrete and process manufacturing, and homebuilding. Maintenance and consulting services revenues

in our software segment increased from $120.3 million in 2005 to $129 million in 2006, an increase of $8.7 million, primarily associated with installation and professional services associated with a larger customer base. As a percentage of total software revenues, license revenues comprised 26% of Software revenues in 2006 compared to 24% in 2005, and maintenance and consulting services revenues comprised 74% of the total in 2006 compared to 76% in 2005.

Business Services. Business Services revenues increased from $42.7 million in 2005 to $65.4 million in 2006 primarily as a result of acquisitions in our Business Services segment made during 2006 As a percentage of total revenues, this segment generated 21% of the total in 2006, increasing from 17% in 2005 mainly due to acquisitions related to our Business Services segment.

IT product revenues increased from $2.1 million to $3.0 million in 2005 and 2006, respectively, based primarily on increases in selling hardware and software solutions in our Australian subsidiary. The Business Services segment as a whole, however, continued to focus on providing services rather than a mix of product and service sales. Consulting services revenues increased from $37.1 million in 2005 to $59.3 million in 2006, an increase of $22.2 million. This increase was primarily a result of acquisitions in our Business Services segment made during 2006. As a percentage of total Business Services revenues, IT product revenues comprised 5% of the total in 2006 compared to 5% in 2005, and consulting services revenues comprised 91% of the total in 2006 compared to 87% in 2005.

Revenues from advertising services decreased from $3.5 million to $3.1 million in 2005 and 2006, respectively, as our Business Services segment continued to focus on providing software services rather than advertising services.

Mobile Services and Applications . Mobile services and applications revenues decreased from $34.4 million in 2005 to $31.9 million in 2006, a decrease of $2.5 million, primarily due to a decrease in volume as a result of regulatory rule changes related to billing methods and other factors promulgated by China’s Ministry of Information Industry. As a percentage of total revenues, this segment generated 10% of the total in 2006, decreasing from 14% in 2005.

Internet and Media. Internet and Media segment revenues increased from $9.0 million in 2005 to $10.0 million in 2006, an increase of $1.0 million. Such increase was primarily due to the increased Portal revenue as a result of targeted investments made in 2004 to establish the Portal as an influential player in China. As a percentage of total revenues, this segment generated 3% and 4% of the total in 2006 and 2005, respectively.

CDC Games. During 2006, we had revenues of $26.8 million. We are a leading operator of online “free-to play, pay for virtual merchandise” games in China. Currently we operate one game called Yulgang which had approximately 42.9 million registered users as of Dec 31, 2006. We intend to launch additional games in this category in 2007 and beyond. There was no CDC Games revenue in 2005, as we held a minority interest in the acquired games subsidiary and therefore, used the equity method of accounting in 2005 for the games business.

Cost of Revenues

Consolidated. Consolidated cost of revenues increased 29%, or approximately $33.6 million, from $113.9 million in 2005 to $147.5 million in 2006. The increase in 2006 was primarily due to growth in revenues at existing subsidiaries and associated costs of revenues associated with these increased revenues as well as the effects of acquisitions in our various segments made during 2006. Gross margin percentage remained relatively stable and slightly increased from 53% in 2005 to 52% in 2006, due to a differing revenue mix. The following table sets forth the cost of revenues from our principal business segments and costs of revenues as a percentage of our total revenues for the periods presented:


	Year ended December 31,
	2005				2006
	(in thousands, except percentage data)
Cost of revenues
Software	$	68,070	28	%	$	74,532	24	%
Licenses		6,750	3	%		8,408	3	%
Maintenance and consulting services		55,792	23	%		61,115	20	%
Amortization of purchased technologies		5,528	2	%		5,009	2	%
Business Services		27,168	11	%		45,200	15	%
IT products		1,671	1	%		1,834	1	%
Consulting services		24,338	10	%		42,388	14	%
Advertising		1,159	0	%		978	0	%
Mobile Services and Applications		15,262	6	%		13,004	4	%
Internet and Media		3,449	1	%		4,095	1	%
CDC Games		—	0	%		10,631	3	%

	$	113,949	47	%	$	147,462	48	%

The following table sets forth the cost of revenues contributed for the years ended December 31, 2006 by subsidiaries acquired in 2006 by principal business segment:


	Year ended December 31, 2006
	(in thousands)
Software - MVI, C360, JRG	$	551
Business Services - OSTI, Vis.align, DBPI, Horizon		19,646
Mobile Services and Applications - Timeheart Group		93
CDC Games - Equity Pacific		10,631

	$	30,921

Software. Cost of revenues from software sales increased from $68.0 million in 2005 to $74.5 million in 2006, an increase of $6.5 million, principally resulting from increased Software segment revenue of $16.7 million from 2005 to 2006. Included in this cost of revenue are the cost of third party software content as well as services and support needed to implement and maintain our products.

Cost of revenues for license sales increased from $6.8 million in 2005 to $8.4 million in 2006, an increase of $1.6 million, primarily as a result of third party software license costs of $8.0 million associated with increased license revenue from 2005 to 2006. Cost of revenues for consulting services was $61.1 million in 2006, an increase of $5.3 million from $55.8 million in 2005, related to higher personnel costs. As a percentage of total license revenues, cost of license revenues comprised 18% of license revenues in 2006 compared to 17.5% in 2005. As a percentage of total maintenance and consulting services revenues, cost of maintenance and consulting services revenues comprised 47% of the total in 2006 compared to 46% in 2005.

Business Services . Cost of revenues in the Business Services segment increased from $27.2 million in 2005 to $45.2 million in 2006, an increase of $18.0 million, primarily due to acquisitions in the Business Services segment made during 2006. As a percentage of Business Services revenues, our cost of Business Services revenues increased to 69% of the total in 2006 from 64% in 2005 primarily due to the 2006 acquisition of several firms focused on IT staff augmentation, which have higher cost of revenues than our legacy business.

Cost of revenues from IT product sales increased from $1.7 million in 2005 to $1.8 million in 2006, an increase of $0.1 million, resulting from significantly higher sales of IT product at a higher gross margins than achieved in 2005. Cost of revenues for consulting services increased from $24.3 million in 2005 to $42.4 million in 2006, an increase of $18.1 million, primarily due to providing significantly higher 2006 consulting and IT augmentation services, in part due to the acquisition of additional Business Services entities in 2006. As a percentage of total IT product revenues, cost of IT product revenues comprised 60% of the total in 2006 compared to 80% in 2005. As a percentage of total consulting services revenues, cost of consulting services revenues comprised 71% of the total in 2006 compared to 66% in 2005 due to acquired entities focused principally on IT augmentation services which typically have higher cost of sales than our legacy business services revenue.

Cost of revenues from advertising services sales, decreased from $1.2 million in 2005 to $1.0 million in 2006, a decrease of $0.2 million, primarily as a result of lower volume in advertising services in 2006 compared to 2005. As a percentage of total advertising revenues, cost of advertising revenues comprised 32% of the total in 2006 compared to 33% in 2005.

Mobile Services and Applications. Cost of revenues from Mobile Services and Applications sales decreased from $15.3 million in 2005 to $13.0 million in 2006, a decrease of $2.3 million, primarily a result of decrease in revenue from 2005 to 2006. As a percentage of total Mobile Services and Applications revenues, cost of Mobile Services and Applications revenues comprised 44% of the total in 2005 compared to 41% in 2006 due to favorable cost trends associated with acquiring third party mobile content.

Internet and Media. Cost of revenues from Internet and Media sales increased from $3.4 million in 2005 to $4.1 million in 2006, an increase of $0.7 million. The rate of increase in costs of revenues in this segment was lower than the rate of revenue increase in the same segment primarily because of higher revenues from our Portal services which have higher gross margins. As a percentage of total Internet and Media revenues, cost of Internet and Media revenues comprised 38% of the total in 2005 compared to 41% in 2006.

CDC Games . We had cost of revenues of $10.6 million related to our CDC Games segment due to the purchase of Equity Pacific in 2006. As a percentage of CDC Games revenue, cost of CDC Games cost of revenue was 40% associated with hosting and operating our multiplayer game service.

Consolidated. Total operating expenses increased from $134.8 million in 2005 to $158.4 million in 2006, an increase of $23.6 million or 18%, primarily due to acquisitions in our various segments during 2006, as well as the additional selling, general and administrative, or SG&A, resources added during 2006 associated with adding personnel and systems to support a larger and more complex company. Operating expenses were also impacted by acquisition-related expenses, including amortization of acquired intangibles, restructuring expenses, and stock compensation expense.

Selling, General and Administrative, or SG&A, Expenses . SG&A expenses increased by $25.0 million, or 25%, to $125.5 million in 2006. The increase in SG&A expenses was principally a result of acquisitions in our various business segments made during 2006, increased expenditures in sales and marketing and increased personnel and systems to handle a larger a more complex operation.

As a percentage of revenues, SG&A expenses were 41% of the total in both 2006 and 2005.

Research and Development Expenses. Research and development decreased from $22.6 million in 2005 to $19.9 million in 2006, a decrease of $2.7 million or 12%. This decrease was principally as a result of the consolidation of efforts between Ross and Pivotal in 2006.

Depreciation and Amortization . Depreciation and amortization expenses were $9.9 million in 2005 compared to $11.0 million in 2006, an increase of $1.1 million or 11% principally associated with IT equipment purchases and acquisitions made in 2006.

Restructuring Expenses . Restructuring expenses were $1.7 million in 2005 compared to $2.0 million in 2006, an increase of $0.3 million or 18%. See “Note 25- Restructuring Costs” in “Item 18- Financial Statements” for further discussion of restructuring expenses.

Interest Income

Interest income increased to $10.7 million in 2006 from $8.2 million in 2005. The increase was principally the result of higher cash balances and higher interest rates.

Our treasury management program involved investments in long-term debt securities where we can still access funds through short term collateral credit facilities. Our credit facilities and related risks are further disclosed under caption “Liquidity and Capital Resources” in Item 5.B – Operating and Financial Review and Prospects. We generated nearly all of our interest income from investments in debt securities. At December 31, 2005 and 2006, we had $148.2 million and $126.4 million, respectively, in these investment debt securities.

Interest Expense

Interest expense increased to $3.0 million in 2006 from $1.3 million in 2005. This increase in interest was primarily due to the issuance of our 3.75% senior exchangeable, unsecured convertible notes.

The weighted average interest rates on short-term borrowings during the year was 3.6% in 2005 and 4.6% in 2006. The weighted average interest rates on short-term borrowings at December 31, 2005 and 2006 were 3.6% and 4.5% per annum, respectively.

Other Gains and Losses

Gain on disposal of available-for-sale securities was $0.3 million in 2006 compared to $0.5 million in 2005. We recorded a gain on disposal of subsidiaries and cost investments of $3.0 million in 2006 compared to $0.5 million in 2005. The gain in 2006 was associated with the deemed disposal of China.com shares in regards to the acquisition of the remaining interest in 17games whereby the value of the disposed shares of China.com were greater than acquired liabilities by an equivalent amount of the recorded gain. We recorded a gain of $1.0 million in 2006 related to our share of income/losses in equity investees in 2005 compared to a loss of $1.2 million in 2005. Both periods results relate to investments in which CDC has the ability to exercise significant influence, generally 20% to 50% owned investments.

Income Taxes

We recorded income tax expense of $3.1 million in 2006 as compared to $5.0 million in 2005. The Company’s total income tax provision is determined at entity by entity in each taxing jurisdiction it operations. A portion of the fluctuations in income tax expense is a result of the changes in income at the entity level. In addition, in 2006, we recorded tax benefits of $2.8 million related to a change in valuation allowance and $.8 million related to income tax credits.

We must assess the likelihood that our deferred tax assets will be recovered from future taxable income. In making this assessment, all available evidence must be considered including the current economic climate, our expectations of future taxable income and our ability to project such income and the appreciation of our investments and other assets. As of December 31, 2006, management concluded that it was more likely than not to realize a substantial portion of the existing deferred tax asset and therefore released valuation allowance of approximately $18.1 million. As of December 31, 2006, we continued to have a valuation allowance of approximately of $59.0 million relating primarily related to net operating losses

Net Income (Loss)

Our full year net income during 2006 of $10.8 million compared to a net loss of $3.5 million in 2005, which represented a $14.3 million increase from 2005. The principal factors contributing to this gain were: (i) an increase in gross profit; (ii) an increase in interest income; and (iii) non-cash gains on disposal of subsidiaries and cost investments.

Segment Profit and Loss

Software segment net income as a percentage of revenues increased from 5% in 2005 to 7% in 2006 due to higher sales by Software segment in 2006 which were not followed by higher SG&A costs in this segment. Business Services segment net income decreased from 8% in 2005 to 4% in 2006 due to decreased customer demands at our subsidiary in Australia. These sales were not immediately followed by the reduction in SG&A expenses resulting in lower net income in our business services segment. Mobile Services and Application segment net income and Internet and Media segment net income increase in 2006 as a result of a reorganization and reduction in overhead costs in these two segments. Net loss in Corporate and Other Unallocated Amounts increased from $19.0 million in 2005 to $22.4 million in 2006 resulting from higher general and administrative expense related to statutory, legal and audit compliance. Additionally, during 2006 we incurred increased corporate costs related to moving certain accounting and finance functions from Hong Kong to the United States and compliance costs related to the Sarbanes-Oxley Act of 2002. We expect these costs to remain relatively constant in 2007.

Year ended December 31, 2005 Compared to Year ended December 31, 2004

Net Revenues

Consolidated . Consolidated net revenues increased 34%, or approximately $62.4 million, from $182.7 million in 2004 to $245.0 million in 2005. Consolidated net revenues increased primarily from the inclusion of Ross, Pivotal and Go2Joy for the full year in 2005 and increased sales volumes in certain key products discussed below. The table below sets forth the revenues from our principal business segments and revenues as percentages of our total revenues for the periods presented:


	Restated ⁽¹⁾ Year ended December 31,
	2004				2005
	(in thousands, except percentage data)
Revenues
Software	$	107,648	59	%	$	158,804	65	%
Licenses		28,581	16	%		38,541	16	%
Maintenance and consulting services		79,067	43	%		120,263	49	%
Business Services		42,927	24	%		42,686	17	%
IT products		2,083	1	%		2,079	1	%
Consulting services		37,308	20	%		37,139	15	%
Advertising		3,536	2	%		3,468	1	%
Mobile Services and Applications		23,694	13	%		34,389	14	%
Internet and Media		8,173	4	%		8,995	4	%
CDC Games		10	0	%		—	0	%

	$	182,452	100	%	$	244,874	100	%

The following table sets forth the revenues contributed for the years ended December 31, 2004 and 2005 by material subsidiaries acquired in 2004, by principal business segment:


	Restated ⁽¹⁾ Year ended December 31,
	2004		2005
	(in thousands)
Software - Ross, Pivotal	$	71,821	$	119,514
Mobile Services and Applications - Go2joy		2,055		2,538

	$	73,876	$	122,052

Our top 10 customers accounted for 28%, 20% and 18% of our revenues for 2003, 2004 and 2005, respectively. No single customer accounted for 10% or more of the revenues during any of 2003, 2004 or 2005.

Software. Software revenues increased from $107.7 million in 2004 to $158.8 million in 2005 primarily due to the increased customer base during 2005 and full year inclusion of Ross and Pivotal, which were acquired in 2004. Collectively, these two companies contributed total revenues of $119.5 million in 2005. As a percentage of total revenues, this segment generated 65% of the total in 2005, increasing from 59% in 2004.

License revenues increased from $28.6 million in 2004 to $38.5 million in 2005, an increase of $9.9 million, primarily due to the increased customers base during 2005 and full year inclusion of 2004 acquisitions in the Software segment. In 2005, the Software segment signed approximately 300 new customers. New customers represented approximately 40% of total license revenues while repeat customers represented approximately 60% of license revenues. New software sales were strong in global vertical industries including financial services, discrete and process manufacturing, and homebuilding. Maintenance and consulting services revenues increased from $79.1 million in 2004 to $120.3 million in 2005, an increase of $41.2 million, also due to a full year inclusion of 2004 acquisitions. As a percentage of total software revenues, license revenues comprised 24% of Software revenues in 2005 compared to 27% in 2004, and maintenance and consulting services revenues comprised 76% of the total in 2005 compared to 73% in 2004.

Business Services. Business Services revenues slightly decreased from $42.9 million in 2004 to $42.7 million in 2005 primarily as a result of the closure of our branch in Canberra, Australia, as a major government contract that supported the branch was not renewed. The revenue stream in both hardware sales and consulting services from this contract was lost in 2005, however revenues generated by other business units in the Business Services segment increased in 2005 due to new consulting projects. As a percentage of total revenues, this segment generated 17% of the total in 2005, decreasing from 24% in 2004 mainly due to the relatively higher revenue growth in other segments compared to the Business Services segment.

IT product revenues remained relatively stable at $2.1 million in 2004 and 2005, respectively, as our Business Services segment continues to focus on providing services rather than a mix of product and service sales. Consulting services revenues decreased from $37.3 million in 2004 to $37.1 million in 2005, a decrease of $0.2 million. During 2004 and 2005, Praxa Limited increased its focus on consulting services. In 2004 and 2005 third party hardware and software sales accounted for 38% and 8% of the company’s revenues, respectively. The decision to concentrate on services was due to the reduced margin on third party sales. Large consulting contracts were established with new clients as well as with new projects with existing clients. As a percentage of total Business Services revenues, IT product revenues comprised 5% of the total in 2005 and 2004, and consulting services revenues comprised 87% of the total in 2005 and 2004.

Revenues from advertising services remained relatively stable at $3.5 million in 2004 and 2005, respectively, as our Business Services segment continues to focus on providing software services rather than advertising services.

Mobile Services and Applications . Mobile services and applications revenues increased from $23.7 million in 2004 to $34.4 million in 2005, an increase of $10.7 million, primarily due to the full year inclusion of Go2joy, which was acquired in 2004 and other factors described below. As a percentage of total revenues, this segment generated 14% of the total in 2005, increasing from 13% in 2004.

Our product mix has continued to shift in 2005 as we grow new types of services in the areas of IVR and MMS that had been introduced in 2004. In 2004, sales of SMS services generated 81% of mobile services and applications revenues while revenues from IVR, WAP and MMS provided 10%, 7% and 2%, respectively. In 2005, SMS contributed 48% of mobile services and applications revenues, while revenues from IVR, WAP and MMS provided 24%, 20% and 12% of mobile services applications revenues, respectively.

Mobile services and applications revenues were negatively impacted in the second half of 2004 by tighter regulatory controls and enforcement by the mobile operators. Various service providers, including Go2joy, were sanctioned during this period. In 2005, revenues increased primarily due to the change, as of January 1, 2005, from a net (excluding the portion of the mobile services and applications revenue paid to the mobile operators) to a gross (including the portion of the mobile services and applications revenue paid to the mobile operators as an addition to revenues and as an additional cost of revenues) basis of presentation of revenues and costs of revenues in response to significant changes in operations of the mobile services and applications business in China. On a comparable gross basis, MVAS revenues increased 45% from $23.7

million in 2004 to $34.4 million in 2005 as this segment embarked on a diversification program for its MVAS services, moving away from SMS-based MVAS services, utilizing older technology, to Advance Mobile Products, which include MMS, IVR and WAP services, which allow for more advanced service offerings demanded by customers.

Internet and Media. Internet and Media revenues increased from $8.2 million in 2004 to $9.0 million in 2005, an increase of $0.8 million, primarily due to the increased Portal revenue as a result of targeted investments made in 2004 to establish the Portal as an influential player in China. As a percentage of total revenues, this segment generated 4% of the total in both 2005 and 2004, respectively.

Others . We had no revenues from other products and services in 2005, a decrease from $0.01 million in 2004 and $2.0 million in 2003 primarily a result of scaling down the activities of under-performing and/or unprofitable businesses in this segment in 2003 and 2004.

Cost of Revenues

Consolidated. Consolidated cost of revenues increased 38%, or approximately $31.2 million, from $82.7 million in 2004 to $113.9 million in 2005. The increase in 2005 was primarily due to the full year inclusion of Ross, Pivotal and Go2joy, which were acquired in 2004. Gross margin percentage remained relatively stable and slightly decreased from 55% in 2004 to 53% in 2005.

The following table sets forth the cost of revenues from our principal business segments and costs of revenues as a percentage of our total revenues for the periods presented:


	Restated ⁽¹⁾ Year ended December 31,
	2004				2005
	(in thousands, except percentage data)
Cost of revenues
Software	$	46,725	26	%	$	68,070	28	%
Licenses		3,486	2	%		6,750	3	%
Maintenance and consulting services		39,754	22	%		55,792	23	%
Amortization of purchased technologies		3,485	2	%		5,528	2	%
Business Services		28,076	15	%		*27,168*	11	%
IT products		1,879	1	%		1,671	1	%
Consulting services		24,871	14	%		24,338	10	%
Advertising		1,326	1	%		1,159	0	%
Mobile Services and Applications		4,597	3	%		*15,262*	6	%
Internet and Media		3,319	2	%		*3,449*	1	%
Other		—	0	%		—	0	%

	$	82,717	45	%	$	113,949	47	%

The following table sets forth the cost of revenues contributed for the years ended December 31, 2004 and 2005 by material subsidiaries acquired in 2004, by principal business segment:


	Restated ⁽¹⁾ Year ended December 31,
	2004		2005
	(in thousands)
Software - Ross, Pivotal	$	27,220	$	46,954
Mobile Services and Applications - Go2joy		591		1,248

	$	27,811	$	48,202

Software. Cost of revenues from software sales increased from $46.7 million in 2004 to $68.1 million in 2005, an increase of $21.4 million, principally due to the full year inclusion of Ross, Pivotal and Go2joy, which we acquired in 2004. Collectively, cost of revenues for Ross, Pivotal and Go2joy were $48.2 million in 2005. As a percentage of software revenues, cost of revenues for software were relatively consistent at 43% of the total in 2005 and 2004.

Cost of revenues for license sales increased from $3.5 million in 2004 to $6.8 million in 2005, an increase of $3.3 million, primarily as a result of our acquisitions in the Software segment. Cost of revenues for consulting services was $55.8 million in 2005, an increase of $16.0 million from $39.8 million in 2004. Amortization of purchased technologies increased $2.0 million to $5.5 million in 2005 compared to $3.5 million in 2004 due to the full year amortization in 2005 related to companies acquired in 2004. As a percentage of total license revenues, cost of license revenues comprised 18% of license revenues in 2005 compared to 12% in 2004. As a percentage of total maintenance and consulting services revenues, cost of maintenance and consulting services revenues comprised 46% of the total in 2005 compared to 50% in 2004.

Business Services . Cost of revenues in the Business Services segment decreased from $28.1 million in 2004 to $27.2 million in 2005, a decrease of $0.9 million, primarily as a result of the decrease in consulting services revenues in this segment. As a percentage of Business Services revenues, our cost of Business Services revenues decreased to 64% of the total in 2005 from 65% in 2004.

Cost of revenues from IT product sales decreased from $1.9 million in 2004 to $1.7 million in 2005, a decrease of $0.2 million, primarily as a result of our business services companies continuing to focus on provision of services in 2005. Cost of revenues for consulting services decreased from $24.9 million in 2004 to $24.3 million in 2005, a decrease of $0.6 million, primarily as a result of the closure of the Canberra branch reducing consulting staff by 13. Also, higher reliance on contract staff rather than permanent staff to fulfill short term consultancy needs, resulted in the decreased cost of revenues from IT products sales. As a percentage of total IT product revenues, cost of IT product revenues comprised 80% of the total in 2005 compared to 90% in 2004. As a percentage of total consulting services revenues, cost of consulting services revenues comprised 66% of the total in 2005 compared to 67% in 2004.

Cost of revenues from advertising services sales, historically included in Advertising/Media segment and reclassified in this Annual Report on form 20-F/A for the comparative purposes, decreased from $1.3 million in 2004 to $1.2 million in 2005, a decrease of $0.1 million, primarily as a result of lower volume in advertising services in 2005 compared to 2004. As a percentage of total advertising revenues, cost of advertising revenues comprised 33% of the total in 2005 compared to 38% in 2004.

Mobile Services and Applications. Cost of revenues from Mobile Services and Applications sales increased from $4.6 million in 2004 to $15.3 million in 2005, an increase of $10.7 million, primarily a result of the change from net to gross presentation of revenues and cost of revenues as described above. This change also caused a decrease in gross profit percentage, although the absolute amount of gross profit did not change. As a percentage of total Mobile Services and Applications revenues, cost of Mobile Services and Applications revenues comprised 44% of the total in 2005 compared to 19% in 2004.

Internet and Media. Cost of revenues from Internet and Media sales increased from $3.3 million in 2004 to $3.4 million in 2005, an increase of $0.1 million. The rate of increase in costs of revenues in this segment was lower than the rate of revenue increase in the same segment primarily as a result of revenues from our Portal services which have higher gross margins. As a percentage of total Internet and Media revenues, cost of Internet and Media revenues comprised 38% of the total in 2005 compared to 41% in 2004.

Operating Expenses

Consolidated. Total operating expenses increased from $106.8 million in 2004 to $134.8 million in 2005, an increase of $28.0 million or 26%, primarily due to a full year of contribution from Ross, Pivotal and Go2joy. Operating expenses were also impacted by acquisition-related expenses, including amortization of acquired intangibles, restructuring expenses, and stock compensation expense.

Selling, General and Administrative Expenses (“SG&A” expenses) . SG&A expenses increased by $20.2 million, or 25%, to $100.5 million in 2005. The increase in SG&A expenses was principally a result of a full year of SG&A expenses from Ross, Pivotal and Go2joy in 2005. Collectively, Ross, Pivotal and Go2joy contributed $66.8 million of SG&A expenses in 2005.

As a percentage of revenues, SG&A expenses decreased to 41% of the total in 2005 from 44% in 2004. The decrease in SG&A expenses as a percentage of revenues in 2005 is attributable to the rationalization and integration initiatives at our corporate office and IMI and higher rate of increase in revenues compared to the rate of increase in SG&A expenses.

Research and Development Expenses . Research and development expenses increased from $13.8 million in 2004 to $22.6 million in 2005, an increase of $8.8 million or 64%, principally as a result of the acquisitions of Ross and Pivotal in 2004.

Depreciation and Amortization . Depreciation and amortization expenses increased from $8.9 million in 2004 to $9.9 million in 2005, an increase of $1.0 million or 11%, primarily as a result of the acquisitions of Pivotal, Ross and Go2joy in 2004.

Restructuring Expenses . Restructuring expenses decreased from $3.8 million in 2004 to $1.7 million in 2005, a decrease of $2.1 million or 55%. See “Note 25- Restructuring Costs” in Item 18- Financial Statements for further discussion of restructuring expenses.

Interest Income

Interest income decreased to $8.2 million in 2005 from $9.7 million in 2004. The reduction was principally the result of the following factors: (i) earn-out payments related to past acquisitions during 2005 which reduced the overall cash balance during the year as compared to 2004 and (ii) a continuation of our strategy of reducing the overall tenor of our investments in debt securities to shorter-term securities. On a quarterly basis, our interest income ranged from approximately $1.9 million to $2.1 million.

As of December 31, 2005, we had generated nearly all of our interest income from $148.2 million in debt securities.

The treasury management program in 2005 involved investments in debt securities that were funded with our credit facilities. Our credit facilities and related risks are further disclosed under caption “Liquidity and Capital Resources” in Item 5.B – Operating and Financial Review and Prospects.

Interest Expense

Interest expense decreased to $1.3 million in 2005 from $1.9 million in 2004. This decrease in interest was principally due to the decrease average balance in short-term loans outstanding during 2005.

The weighted average interest rates on short-term borrowings as of December 31, 2004 and 2005 were 2.0% and 3.6% per annum, respectively.

Other Gains and Losses

Gain on disposal of available-for-sale securities was $0.5 million in 2005 compared to $0.2 million in 2004. We recorded a gain on disposal of subsidiaries and cost investments of $0.9 million in 2004 compared to $0.5 million in 2005. We had no other non-operating gains or losses in 2004 or 2005. We recorded $1.4 million in impairments on available-for-sale securities and cost investments in 2004, compared to no such impairments in 2005. We recorded a loss of $0.5 million for our share of losses in equity investees in 2004 compared to $1.0 million in 2005.

Income Taxes

We recorded $5.0 million in income tax expenses in 2005, compared to $3.4 million in 2004. The change was principally a result of a pretax income in 2005 compared to a pretax loss in 2004. In addition, the fluctuations in pretax income at the entity level in various taxing jurisdictions also affected the fluctuation in income tax expense in 2005 compared to 2004.

Net Income (Loss)

We generated a full year net loss of $3.5 million in 2005 compared to a net loss of $6.0 million in 2004, which represented a $2.5 million, or 42%, decrease from 2004. The principal factors contributing to the loss were (i) expenses related to the acquisitions in 2003, 2004 and 2005, including amortization of acquired intangibles and purchased technologies, restructuring expenses, deferred tax expenses and stock compensation expenses; (ii) an increase in operating expenses primarily as a result of acquisitions; and (iii) a decrease in other income as a result of share of loss in equity investees as well as lower interest income.

In 2005, we generated a net loss from operations of discontinued operations of $0.05 million compared to $0.6 million in 2004. We recorded a net loss on disposal/dissolution of such discontinued operations of Nil million in 2005 compared to $1.0 million in 2004.

B.	Liquidity and Capital Resources

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


	Year ended December 31,
	2004		2005			2006
	(in thousands)
Net cash provided by operating activities	$	10,790	$	11,948		$	39,331
Net cash provided by (used in) investing activities		3,629		8,614			(51,022	)
Net cash provided by (used in) financing activities		40,246		(36,353	)		137,695
Effect of exchange rate changes on cash		33		(696	)		3,826
Net increase (decrease) in cash and cash equivalents		54,698		(16,487	)		129,829
Cash and cash equivalents at beginning of period		55,508		110,206			93,719
Cash and cash equivalents as at end of period	$	110,206	$	93,719		$	223,548

During 2006, we generated positive operating cash flows. Our cash and cash equivalents increased to $223.5 million as of December 31, 2006 from $93.7 million as of December 31, 2005, primarily as a result of our issuance of convertible notes in November 2006 and the positive cash flows from our operating activities. This increase in cash and cash equivalents was partly offset by the increased use of proceeds for acquisition purposes. As of December 31, 2006, we held $122.9 million in available-for-sale debt securities, which included

U.S. government-sponsored enterprises, which mature at various dates through 2009 as well as collateralized debt obligations (CDO’s) invested in both commercial loans and residential mortgages. Our total debt was $180.9 million at December 31, 2006 compared to $26.2 million at December 31, 2005.

Sources and Uses of Cash for the Year ended December 31, 2006

Operating Activities

Net cash provided by operating activities increased by $27.4 million from $11.9 million in 2005 to $39.3 million in 2006. The increased resulted from the increase in net income of $14.3 million, the increase in noncash charges of $6.8 million and the reduction in the use of cash for working capital requirements of $6.3 million. The increase in noncash charges was primarily the result of an increase in the amortization of intangible assets of $4.8 million, which can be attributed to our strategic growth plan and our numerous 2006 acquisitions, and an increase in stock compensation expenses of $6.3 million due to the adoption of FAS 123(R), offset by a decrease in deferred tax expense of $2.6 million. Working capital requirements decreased primarily as a result of the overall growth of over business, which led to increased overall expenses and accruals. Increased accounts payable and accrued expenses, were a source of cash in 2006 of $9.6 million compared to a use of cash of $3.4 million in 2005. This increase in accounts payable and accrued expenses was offset by an increase in deposits, prepayments and other receivables which were a use of cash of $6.4 million in 2006 compared to a source of cash of $1.2 million in 2005.

Net cash provided by operating activities was $10.8 million in 2004 resulting primarily from a net loss of $6.0 million, depreciation and amortization of $14.8 million, deferred income taxes of $1.7 million, stock compensation expense of $2.1 million, offset by $7.5 million related to changes in other operating assets and liabilities.

Investing Activities

Cash used in investing activities of $51.0 million in 2006 compared to cash provided by investing activities of $8.6 million in 2005, reflecting an increase in cash used in the acquisition of subsidiaries of $17.9 million and an increase in cash used to purchase marketable securities of $43.0 million. Purchases of intangible assets, including capitalized software, increased $5.7 million from $7.8 million in 2005 to $13.5 million in 2006. Cash provided by investing activities included proceeds from the disposal of marketable securities, which increased from $30.6 million in 2005 to $35.9 million in 2006, and an increase in proceeds from the disposal of cost investments of $6.5 million from $1.1 million in 2005 to $7.6 million in 2006. In addition, we generated $4.3 million in cash proceeds from the disposal of property and equipment during 2005 and $0 in 2006. Capital expenditures increased by $0.7 million to $4.4 million in 2006 from $3.7 million in 2005.

In 2004, net cash provided by investing activities was $3.6 million primarily as a result of $212.1 million generated by maturity/disposal of available for sale securities offset by $112.7 million for purchases of subsidiaries, net of cash acquired and $80.3 million related to purchases of new available for sale securities.

We anticipate capital expenditures in 2007 of approximately $5.1 million.

We do not currently anticipate any unusual future cash outlays relating to capital expenditures.

Financing Activities

Net cash provided by financing activities increased by $174.1 million to $137.7 million in 2006 from a use of cash of $36.4 million in 2005. This increase was primarily the result of the issuance of $168.0 million in convertible notes in November 2006 combined with the proceeds of purchase note agreements of $38.7 million and an increase in the issuance of share capital of $7.4 million. These increases were offset by cash used in financing activities of $28.0 million for the repurchase of 6,088,624 common shares, which were made pursuant to plans or programs approved by our board of directors.

Net cash used by financing activities was $36.4 million in 2005 primarily as a result of the repayment of $42.5 million of bank loans offset by proceeds of bank loans of $5.1 million and $1.1 million associated primarily with the issuance of shares under our stock option program.

Net cash provided by financing activities was $40.2 million in 2004 primarily as a result of proceeds of bank loans of $87.5 million and $4.1 million associated primarily with the issuance of shares under our stock option program offset by the repayment of $51.4 million of bank loans.

Future cash requirements and sources of liquidity

Future cash requirements

In the future, we expect that our primary cash requirements will be to fund working capital including payment of contractual obligations and research and development expenses, repay debts, and fund contingent consideration payable for certain of our acquisitions.

The following table summarizes our contractual obligations as of December 31, 2006:


	Payments due by period, in thousands
	Total		Less than 1 year		1 – 3 years		3-5 years		5 years
Operating lease obligations (1)	$	37,679	$	9,658	$	13,764	$	9,773	$	4,484
Short-term debt obligations		18,991		18,991		—		—		—
Interest on short-term debt obligations		286		286		—		—		—
Convertible notes		168,000		—		—		—		168,000
Interest on convertible notes		30,660		6,300		12,600		11,760		—
Purchase considerations (2)		6,878		4,443		2,435		—		—

(1)	Operating lease obligations consist of future minimum payments under non-cancelable operating leases.

(2)	Purchase consideration includes fixed payments and adjustable payments contingent upon meeting certain performance requirements. Excludes future payments of up to $24.2 million which are based on total future revenue.

Future sources of liquidity

We believe that cash flows from operating activities, combined with our existing cash and cash equivalents of $223.5 million and our available-for-sale debt securities of $126.4 million as of December 31, 2006, the majority of which will mature at various dates through 2009, will be sufficient to meet our future cash requirements described above.

The following table summarizes the expected maturity dates of our debt securities as of December 31, 2006:


	Expected maturities, in thousands
	Total		Less than 1 year		1–3 years
Unsecured fixed rate debt securities	$	83,905	$	10,869	$	73,036
Secured fixed rate debt securities		30,504		30,504		—

Total	$	114,409	$	41,373	$	73,036

Our ability to meet our expected cash requirements will depend on our ability to generate cash in the future, which is subject to financial, competitive, economic, regulatory and other factors that are beyond our control. If we do not generate sufficient cash from operations or do not otherwise have sufficient cash and cash equivalents, we may need to borrow against our lines of credit or issue other long- or short-term debt or equity, if the market and the terms of our existing debt instruments permit.

Financing Agreements

In 2006 in connection with the purchase of certain CDO investments, we and our majority owned subsidiary, China.com Inc. entered into separate and independent financing agreements with two financial

institutions, collectively referred to as the “Bank”, in the aggregate amount of $38.7 million. We entered into a credit facility agreements with the Banks pursuant to which the Banks agreed to lend us the aggregate amount of $38.7 million for payment of the purchase price of the CDO’s. We have pledged certain held-to-maturity U.S. agency bonds as collateral for payments due under the financing agreements. As these securities mature, a portion of the loan is settled with the cash proceeds. At December 31, 2006, the aggregate balance of the financing agreements was $18.7 million and the total amount of securities pledged at December 31, 2006, was $30.5 million, all of which is classified as a restricted investment.

Credit Line Agreements

Under the line of credit arrangements with a financial institution, we may borrow up to $100.0 million on such terms as we and the financial institution mutually agree upon. Interest is payable upon the maturity of each advance and is calculated using the London Inter-Bank Offered Rate (“LIBOR”) for the applicable interest rate period plus 0.2%. Except for loans of $10.0 million that were repaid in 2006, this arrangement does not have a termination date but is reviewed annually for renewal. At December 31, 2005 and 2006, the unused portion of the credit lines was $90.0 million and $100.0 million, respectively.

During 2006, we discontinued a $250.0 million line of credit agreement with a financial institution. This line of credit consisted of a repurchase agreement pursuant to which we sold certain debt securities to the financial institution at a discounted price, and the financial institution agreed to sell the same debt securities back to us at the same price at the termination of the agreement. Throughout the term of the agreement the financial institution would pay to us any income associated with the debt securities and we would pay to the financial institution interest calculated using the LIBOR plus 0.2% per annum. Loans of $16.2 million were repaid in 2006 prior to the line of credit being discontinued. At December 31, 2005, the unused portion of the credit line was $234.0 million.

In 2004, we entered into a collateralized credit facility agreement with a bank, under which we deposit debt securities as collateral in exchange for cash. During the term of the agreement, the bank maintains a charge on such debt securities. The bank will pay to us any income associated with the collateralized debt securities and we shall pay to the bank interest calculated using the LIBOR plus 0.3% per annum. In February 2005, this rate was renegotiated to LIBOR plus 0.2% per annum.

In connection with the credit lines granted to us, we maintained compensating balances of $1.9 million and $2.0 million, in restricted cash at December 31, 2005 and 2006, respectively, pledged available-for-sale debt securities with a net book value of $32.3 million and Nil at December 31, 2005 and 2006, respectively and held-to-maturity debt securities with a net book value of Nil and $30.5 million at December 31, 2005 and 2006, respectively.

The maturities of long-term debt for the five years subsequent to December 31, 2006 are as follows: 2007 - Nil; 2008 - Nil; 2009 - Nil; 2010 - Nil; and 2011 - $168.0 million.

The weighted average interest rate on short-term borrowings during the year was 2.0% in 2004, 3.6% in 2005 and 4.6% in 2006. The weighted average interest rates on short-term borrowings at December 31, 2005 and 2006 were 3.6% and 4.5% per annum, respectively.

Restrictions on our Liquidity

While we have cash and cash equivalents of $223.5 million and total securities of $126.4 million as of December 31, 2006, $107.7 million of the cash and cash equivalents and $97.5 million of the total securities are held at China.com, as of April 2007, a 77% owned subsidiary listed on the Growth Enterprise Market of the Hong Kong Stock Exchange. Although we have the ability to appoint a majority of the board of directors of China.com, the board of directors of China.com owes fiduciary duties to the shareholders of China.com to act in the best interests of and use the assets of China.com, including the cash and cash equivalents balance and

securities, for the benefit of such shareholders. As a result, aside from the board of directors of China.com declaring a dividend to its shareholders for which we would receive a pro rata portion as an 77% shareholder of China.com or a related party inter-company loan or similar transaction from China.com to us which would likely require the approval of the minority shareholders of China.com, we have limited ability to transfer or move the cash, cash equivalents and securities balance to, or to use the amounts of the cash, cash equivalents and securities balance for the benefit of, CDC Corporation at the parent entity level or our other subsidiaries outside of the China.com chain of subsidiaries.

Substantially all of the revenues and operating expenses of our CDC Games and China.com business, are denominated in Renminbi. The Renminbi is currently convertible to foreign exchange with respect to “current account” transactions, but not with respect to “capital account” transactions. Current account transactions include ordinary course import/export transactions, payments for services rendered and payments of license fees, royalties, interest on loans and dividends. Capital account transactions include cross-border investments and repayments of principal of loans. Currently, our PRC subsidiaries may purchase foreign exchange for settlement of “current account transactions,” including payment of dividends to us and payment of license fees to content licensors, without the approval of the State Administration for Foreign Exchange, or SAFE. Our PRC subsidiaries may also retain foreign exchange in their current accounts, subject to a ceiling approved by SAFE, to satisfy foreign exchange liabilities or to pay dividends. However, the relevant PRC governmental authorities may limit or eliminate the ability for our PRC subsidiaries to purchase and retain foreign currencies in the future. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from or registration with SAFE. This could affect our PRC subsidiaries’ ability to obtain debt or equity financing from outside the PRC, including by means of loans or capital contributions from us.

In addition to $223.5 million of cash and cash equivalents at December 31, 2006, we hold $2.0 million in restricted cash which is pledged for banking facilities. Restricted debt securities comprise $30.5 million of our total securities of $157.0 million at December 31, 2006 as such securities are pledged as collateral pursuant to drawdowns under our credit and repurchase facilities.

Uncertainties regarding our liquidity

We believe the following uncertainties are the most significant uncertainties regarding our liquidity:

•

Ability to Grow Revenues and Manage Costs – Both our revenue and cost base have increased significantly as a result of the acquisition activity in 2004 and 2006. If we are unable to continue to grow our revenues or experience a decline in revenues, or if we are unable to manage costs and reduce operating expenses, our ability to generate positive cash flows from operating activities in a sufficient amount to meet our cash needs would be adversely affected.

•

Integrating the Operations of Acquired Businesses – Integration of our acquired businesses could affect our liquidity as continuing integration of the businesses and operations into ours may require significant cash resources.

•

Future Acquisitions – Our existing cash and cash equivalents and net cash provided by operating activities may be insufficient if we face unanticipated cash needs such as the funding of a future acquisition. In addition, if we acquire a business in the future that has existing debt, our cash requirements for servicing debt may increase.

Fair value of Financial Instruments

The total fair values of available-for-sale equity securities in listed companies as of December 31, 2005 and 2006 were $0.7 million and $3.5 million, respectively, based on the market values of publicly traded shares as of December 31, 2005 and 2006.

The total fair values of our available-for-sale debt securities as of December 31, 2005 and 2006 were $148.2 million and $73.0 million, respectively, based on the market values of publicly traded debt securities and the estimated fair values of unlisted debt securities, as determined by management having regard to the prices of the most recent reported sales and purchases of the securities as of December 31, 2005 and 2006.

The Company currently intends to hold the CDO investments as long term investments, not to be traded in the near term. As the aforementioned investments are not publicly traded and have no active market, fair value as of December 31, 2006 was determined by the respective brokers and validated by management based on expected cash flow returns discounted by rates consistent with rate of returns offered on comparable investments with comparable risks. These valuations represent management’s best estimate of fair value of these investments at December 31, 2006 and may or may not represent the ultimate value of these investments.

In conjunction with the purchase of the CDOs, the Company pledged certain held-to-maturity U.S. agency bonds as collateral under multiple note purchase agreements. The pledged U.S. agency bonds are being used to repay the debt when such U.S. agency bonds mature. The total amount of securities pledged at December 31, 2006 was $30.5 million, all of which is classified as a restricted investment.

The carrying amount of cash and cash equivalents, restricted cash, accounts receivable, deposits, prepayments and other receivables, accounts payable, other payables, purchase consideration payable, accrued liabilities, short-term debts and long-term debt approximate their fair values because of their short maturity.

The fair value of our $25.0 million loan to Symphony, see Item 10.C. – “Additional Information – Material Contracts – Symphony Note”, was estimated at $25.2 million and $26.3 million at December 31, 2005 and 2006, respectively, based on discounting the future cash flows, considering borrowing rates available for loans with similar terms and maturity.

The carrying amount of the variable portion of our variable long-term bank loans approximate their fair value because the interest rates of the loans are close to the prevailing bank interest rate.

C.	Research and Development, Patents and Licenses, etc.

In 2005 and 2006, after acquiring Ross and Pivotal, we incurred significant research and development expenses. As discussed in Item 5.A – “Operating and Financial Review and Prospects – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates – Capitalization of software costs”, we capitalize certain software development costs and expense others. As part of our overall strategy to develop and introduce more proprietary products to sell across our business lines and service offerings, we anticipate that our research and development costs may increase on an absolute basis, but not as a percentage of overall revenues.

D.	Trend Information

Our focus on the enterprise software and mobile services and applications industries has positioned us within industry sectors which continued to undergo rapid change over the course of fiscal 2006.

In our CDC Software business unit, we made progress during 2006 in our continued integration and focus on operational improvements in relation to our acquisitions of Pivotal and Ross made in 2005. Pivotal’s CRM front-office software and Ross’s comprehensive, modular suite of enterprise software have enlarged our product portfolio; however, we believe it will take several more quarters for us to leverage the synergies that we consider are inherent within our enlarged software businesses. We will continue to execute our software strategy through targeted acquisitions and investments in our CDC Software business unit and through entering strategic partnerships with leading software vendors.

In our China.com Inc business unit, the operating environment for the MVAS sector continued to be challenging in 2006, with sanctions and new policies imposed by the regulators and mobile operators. Our Short Message Service (SMS) business continued to be seriously impacted in 2006. We expect regulatory volatility to

remain a characteristic of China’s mobile and communications industry for some time to come, so being nimble and able to proactively manage risks are essential factors of business sustainability. The addition in June 2005 of Shenzhen KK Technology Ltd, a MVAS provider in China, has broadened our service offerings and platform capabilities in nation-wide WAP businesses. Further, we continue to execute our online games strategy through the buy-out of 100% of Equity Pacific Limited (which holds Beijing 17Game Network Technology Co. Ltd) in 2006, a leading massive multiplayer online role-playing games provider with a track record in launching and distributing online games in the China market. In the future, we may add investments in online game and mobile services and applications related companies which will allow us to broaden our service offerings, subscriber base, or platform capabilities.

In 2007, we expect continued growth in revenue in the software, business services, mobile services and applications, and internet and media segments as a result of targeted acquisitions and investments, developing strategic partnerships, product development and organic growth.

In light of the many risks and uncertainties surrounding our company and the geographies and markets in which we operate, shareholders, investors and prospective investors should keep in mind that we cannot guarantee that the forward-looking statements described in this Annual Report will or can materialize.

E.	Off-balance Sheet Arrangements

We have the following which qualify as derivative financial instruments:

Horizon

In February 2006, Software Galeria Inc., our 51% owned subsidiary (“SGI”), acquired the IT consulting services business of Horizon, which offers outsourced information technology professional services in the U.S. and Canada, utilizing India-based resources. Under the terms of the agreement, we paid $608 in cash at closing and paid an additional $0.6 million of cash consideration in installments during 2006. We also agreed to pay additional cash consideration of $1.0 million in 2007 and 2008 based on earnings before interest, taxes, depreciation and amortization (“EBITDA”). In addition, we agreed to issue to the sellers up to a 20% equity interest in the entity formed to acquire the assets purchased from Horizon in the event the EBITDA generated from the purchased business exceeds specified targets during each of 2006, 2007 and 2008. The sellers have the right to put their equity interest back to us between April 2009 and April 2011 at a predetermined and fixed cash consideration. See “Note 3- Business Combinations” in “Item 18- Financial Statements” for further discussion on Horizon.

Symphony Note

In conjunction with the Company’s investment in Cayman in 2003, it became a 51% owner of Indutri-Matematik International Corp. (“IMI”). The Company then entered into a put option agreement with Symphony, where Symphony has an option to sell to the Company all of its 49% interest in IMI at any time during the twelve months following the occurrence of unpermitted changes in the composition of IMI’s executive committee being overruled by the IMI board, or modifications to the rights, powers or responsibilities of IMI’s executive committee without the approval of the directors appointed by Symphony. The purchase price for Symphony’s interest in IMI is based on the financial performance of IMI, and is set at a fixed multiple of IMI’s annual revenues. This put option agreement meets the definition of a derivative and the Company determined that it did not require any accounting recognition at the inception date or at the end of each of the reporting period presented based on the insignificant fair market value assigned to the derivative.

In conjunction with the Symphony Note, the Company entered into certain written arrangements with Symphony that meet the definition of a derivative. The Company determined that such derivatives did not require any accounting recognition at the inception date or at the end of each of the reporting period presented based on the insignificant fair market value assigned to these derivatives. See “Note 7- Note Receivable” in “Item 18- Financial Statements” for further discussion of the Symphony Note.

CDC Convertible Notes

In November 2006, the Company issued $168.0 million aggregate principal amount of 3.75% senior exchangeable, unsecured convertible notes due 2011 to a total of 12 institutional accredited investors in a private placement exempt from registration under the Securities Act.

Conversion Option. Under the terms of the notes, the holders have the right to exchange such notes into common shares of the Company or upon a qualifying initial public offering (“IPO”), common shares of two wholly-owned subsidiaries of the Company based on a predetermined exchange price and when the IPO is consummated.

The aggregate number of common shares of the Company’s common stock that the Company may deliver to the holders in connection with exchanges of the notes is capped at a maximum of 19.99% of the number of shares of the Company’s common stock outstanding as of the issue date of the note. The aggregate number of common shares of each subsidiary that the Company is required to deliver to holders in connection with exchanges of the notes is capped at a maximum of 33.33% of the number of shares of each subsidiary’s common stock outstanding as of the time of the exchange.

Upon the occurrence of an IPO of either subsidiary and if the holders of the notes decide to convert the notes into the respective subsidiary’s shares, the Company has agreed to satisfy the conversion option by delivering the existing shares of its investment into the subsidiary. The investors have agreed to a lock-up period of up to 180 days following the date of an IPO prospectus during which the investors will refrain from selling any of each subsidiary’s respective common shares. See “Note 12- Financing Arrangements” in “Item 18- Financial Statements” for further discussion of Convertible Notes.

In addition, we had the following variable interest in an unconsolidated entity:

Collateralized Debt Obligations

In 2006, the Company acquired an equity interest in two collateralized debt obligations (“CDOs”) coupled with a U.S. treasury strip for an aggregate nominal amount of $38.7 million (Note 6). These investments are subject to variability as there is no stated coupon rate and the equity interest in these investments are subject to changes in returns on the collateralized debt backing the interest. Although the principal amount in these investments are backed by U.S. treasury strips, our equity holding in the CDOs, which represents approximately 55% of the investment value at December 31, 2006, has significant risk of loss should the collateralized debt underlying the investment deteriorate in quality.

The Company is in the process of assessing the existence of embedded derivatives in these investments upon adoption of SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140” (“SFAS 155”), which is effective January 1, 2007.

F.	Tabular Disclosure of Contractual Obligations

See Item 5.B – “Operating and Financial Review and Prospects – Liquidity and Capital Resources – Future cash requirements and sources of liquidity” above.

G.	Safe Harbor

See “General Introduction – Forward-Looking Statements”.

ITEM 8.

FINANCIAL INFORMATION

A.	Consolidated Statements and Other Financial Information

The consolidated financial statements of CDC Corporation were included as pages F-1 to F-63 of the Annual Report. The amended and restated consolidated financial statements of CDC Corporation are included as pages F-1 to F-84 of this Amendment No. 1.

B.	Significant Changes

Not applicable.

PART II

ITEM 15T.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As required by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, management has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2006. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports filed or submitted by the Company under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding the Company’s required disclosure.

As described below, material weaknesses were identified in the Company’s internal control over financial reporting. A material weakness is defined as a significant deficiency, or a combination of significant deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As a result of the material weaknesses identified, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2006, the end of the period covered by this report, the Company’s disclosure controls and procedures were not effective.

Internal Controls over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting refers to a process designed by, or under the supervision of, the Company’s Chief Executive Officer and Chief Financial Officer and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (GAAP) and includes those policies and procedures that:

•

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets;

•

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and members of the Company’s board of directors; and

•

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 using the framework set forth in the report of the Treadway Commission’s Committee of Sponsoring Organizations (COSO), “Internal Control—Integrated Framework.”

As a result of management’s evaluation of the Company’s internal control over financial reporting, management has concluded that, as of December 31, 2006, material weaknesses existed in the Company’s internal control over financial reporting. The Company has identified material weaknesses relating to insufficient resources with the appropriate level of expertise in the accounting and finance organizations to ensure appropriate application of GAAP, particularly in the areas of accounting for income taxes, foreign currency translation adjustments related to goodwill and intangible assets and the accounting for certain of the Company’s nonroutine transactions. The material weaknesses were originally noted in conjunction with the restatement of the 2005 financial statements as documented in the Company’s Form 20-F/A to the 2005 Annual Report.

As a result of the material weaknesses described above, management has concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2006 based on the “Internal Control—Integrated Framework” set forth in COSO.

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, excluded the companies acquired after January 1, 2006. The total assets of these acquisitions represented 11% of consolidated total assets and 18% of consolidated total revenues of the Company as of and for the year ended December 31, 2006. If adequately disclosed, companies are allowed to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition while integrating the acquired company under guidelines established by the U.S. Securities and Exchange Commission.

Remediation Plans for Material Weaknesses

Since the material weaknesses were identified in conjunction with the restatement of the Company’s 2005 financial statements, the Company has implemented, or plans to implement, certain measures to remediate the identified material weaknesses and to enhance the Company’s internal control over its financial reporting processes. As of the date of the filing, the Company has implemented, or is in the process of implementing, the following measures:

•

Increased the size, expertise and training of its finance and accounting staff to include adequate resources for ensuring GAAP compliance, particularly in the areas of accounting for income taxes, foreign currency translation adjustments and the accounting for certain of its non-routine transactions.

•

Assigned individuals with significant industry experience and increased the involvement of its senior finance team members in the preparation and review of financial statements.

•

Integrated financial reporting and internal controls, including the continued implementation of its standard accounting information system across all locations.

•

Enhanced its accounting policies and procedures to provide adequate, sufficient, and useful guidance to its staff in the area of routine and non-routine transactions.

•

Corrected its methodologies with respect to calculating the provision for income taxes and foreign currency translation adjustments.

•

Increased the level of interdepartmental communication in a way that will foster information sharing between its finance staff and operational personnel.

•

Improved its financial organization and control environment.

The Company believes that these remediation actions represent ongoing improvement measures. While the Company has taken steps to remediate its material weaknesses, the Company believes that, as of December 31, 2006, these steps were not yet implemented to the extent required to fully remediate those material weaknesses and additional measures were required. The effectiveness of these additional remediation efforts will not be known until the Company performs a test of these additional controls in connection with management’s tests of internal controls over financial reporting that the Company will undertake as of December 31, 2007.

As of December 31, 2006, the company was considered an “accelerated foreign filer” as defined in the rules promulgated by the U.S. Securities and Exchange Commission. Accordingly, this annual report does not include an attestation report of the company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered

Changes in Internal Control over Financial Reporting

In response to the material weaknesses described above, during 2006 the Company made the following changes in internal control over financial reporting:

•

Increased the size, expertise and training of its finance and accounting staff.

•

Assigned individuals with significant industry experience and increased the involvement of its senior finance team members in the preparation and review of financial statements.

•

Improved its financial organization and control environment.

While these changes occurred during 2006, the changes were not implemented to the extent required to remediate the material weaknesses. Other than as set forth above, there have not been any changes in internal control over financial reporting that occurred during the period covered by this annual report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART III

ITEM 18.

FINANCIAL STATEMENTS

We have appended our Consolidated Financial Statements as of and for the year ended December 31, 2006 on pages F-1 to F-84 of this Annual Report.

Additionally, the audited financial statements of Equity Pacific Limited for the five months ended December 31, 2004 and the full year ended December 31, 2005, and the unaudited financial statements of Equity Pacific Limited for the three months ended March 31, 2006 are attached as an exhibit to our annual report on Form 20-F in the year ended December 31, 2006.

ITEM 19.

EXHIBITS


No.		Description
1.1		Amended and Restated Articles of Association and Memorandum of Association of the Company, together with amendments thereto. y y

2(a).1		1999 Employee Stock Option Plan, as amended. *

2(a).2		2004 Employee Share Purchase Plan. ***

2(a).3		Ross Systems, Inc. 1998 Incentive Stock Plan (assumed by CDC Corporation). **

2(a).4		CDC Corporation 2005 Stock Incentive Plan, as amended. ****

2(a).5		CDC Software Corporation 2007 Stock Incentive Plan. y y

2(a).6		CDC Games Corporation 2007 Stock Incentive Plan. y y

2.(b).1		Note Purchase Agreement, dated as of November 10, 2006, between CDC Corporation and each of the investors listed therein relating to the issuance and sale of $168 million aggregate principal amount of 3.75% Senior Exchangeable Convertible Notes due 2011. y y

2.(b).2		Form of 3.75% Senior Exchangeable Convertible Note due 2011 issued by CDC Corporation. y y

2.(b).3		Registration Rights Agreement, dated as of November 10, 2006, among CDC Corporation, CDC Games Corporation and CDC Software Corporation. y y

2.(b).4		Promissory Note by and between CDC Games Corporation and China.com Limited, dated as of December 29, 2006. y y

4.(a).1		Share Purchase Agreement among CDC Mobile Media Corporation, Unitedcrest Investments Limited, Shenzhen KK Technology Limited, CC Mobile Media Corporation, Zheng Hui Lan, Ye Yong Ning, Liang Yan, Ma Zhi Qiang, Zhang Zhi Gang and Palmweb Inc dated June 27, 2005. ****



4.(a).2		Supplementary Agreement relating to Share Purchase Agreement among CDC Mobile Media Corporation, Unitedcrest Investments Limited, Shenzhen KK Technology Limited, CC Mobile Media Corporation, Zheng Hui Lan, Ye Yong Ning, Liang Yan, Ma Zhi Qiang, Zhang Zhi Gang and Palmweb Inc dated June 29, 2005. ****

4(a).3		Stock Purchase Agreement, dated as of June 1, 2006, among CDC Business Solutions Corporation, DB Professionals, Inc., Shankar Viswanathan and Prabha Ananthanarayana. y y

4(a).4		Addendum No. 1 to Stock Purchase Agreement by and among CDC Business Solutions Corporation, DB Professionals, Inc., Shankar Viswanathan and Prabha Ananthanarayana, dated as of March 13, 2007. y y

4(a).5		Share Purchase Agreement dated as of July 25, 2006 by and among CDC Mobile Media Corporation, TimeHeart Science Technology Limited, Beijing TimeHeart Information Technology Limited, Fresh Earn Holdings Limited, Ms. Fang Xiu Qin, Mr. Sun Kun Shan, Mr. Wang Bin, Mr. Sui Hai Gang, Ms. Fang Xiu Qin, Mr. Sun Kun Shan and Palmweb, Inc. y y

4(a).6		Amendment to Share Purchase Agreement dated as of October 5, 2006 by and among CDC Mobile Media Corporation, TimeHeart Science Technology Limited, Beijing TimeHeart Information Technology Limited, Fresh Earn Holdings Limited, Ms. Fang Xiu Qin, Mr. Sun Kun Shan, Mr. Wang Bin, Mr. Sui Hai Gang, Ms. Fang Xiu Qin, Mr. Sun Kun Shan and Palmweb, Inc. y y

4(a).7		Amendment to Share Purchase Agreement dated as of November 9, 2006 by and among CDC Mobile Media Corporation, TimeHeart Science Technology Limited, Beijing TimeHeart Information Technology Limited, Fresh Earn Holdings Limited, Ms. Fang Xiu Qin, Mr. Sun Kun Shan, Mr. Wang Bin, Mr. Sui Hai Gang, Ms. Fang Xiu Qin, Mr. Sun Kun Shan and Palmweb, Inc. y y

4(a).8		Stock Purchase Agreement, dated as of October 6, 2006, among Ross Systems Inc., Advantage Growth Fund, John Caines, Siobhan Sutcliffe, Mark Sutcliffe, Rob Archer, Robin Wight, Steve Massey, Alistair Norman, Richard Tester, Roy Thomas, John Clement, Richard Craig, Phil Hignett, Colin Downes, Dan Saunders, Robin West, James Wood, James Cutter, Andy Neilson, Sarah Weston and Di Judd related to the acquisition of MVI Holdings Limited. y y

4(a).9		Guaranty Agreement dated as of October 6, 2006 by CDC Corporation. y y

4(a).10		Stock Purchase Agreement by and between CDC Games Corporation and China.com Corp., Limited, dated as of November 11, 2006. y y

4(a).11		Merger Agreement, dated as of December 1, 2006, among China.com Corporation, CDC Mergerco Corporation and Vis.align, Inc. and the Stockholders’ Representative appointed thereby related to the acquisition of Vis.align, Inc. y y

4(a).12		Senior Secured Loan Agreement by CDC Mobile Media Corporation to BBMF Group, Inc. dated as of January 12, 2007. y y

4(a).13		Share Purchase Agreement dated as of February 16, 2007 among Ross Systems, Inc., 3i plc, The Parkmeade Group plc, James Heavey, Cathal Naughton and Michael Breare related to the acquisition of Respond Group Limited. y y

4(a).14		Merger Agreement dated as of April 16, 2007 by and among CDC Software Inc., a Delaware corporation, CDC Merger Sub, Inc., a California corporation, Saratoga Systems Inc., a California corporation, Mark R. Elconin and Alvin W. Smith. y y



4(c).1		Termination and Release Agreement between CDC Corporation and Asia Pacific Online Limited effective July 15, 2005. ****

4(c).2		Option Transfer Agreement between CDC Corporation, Asia Pacific Online Limited and Peter Yip effective July 15, 2005. ****

4(c).3		Termination and Release Agreement by and between CD Corporation and Dr. Raymond Kuo-Fung Ch’ien effective August 30, 2005. ****

4(c).4		Executive Services (CEO) Agreement between CDC Corporation Limited and Asia Pacific Online Limited effective as of April 12, 2006. Y

6.		Details of how EPS information is calculated can be found in Note 18 to our Consolidated Financial Statements.

8.		List of principal subsidiaries of the Company. y y

12.1		Certification of Chief Executive Officer required by Rule 13a-14(a). ^

12.2		Certification of Chief Financial Officer required by Rule 13a-14(a). ^

13(a).1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ^

13(a).2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ^

15(a).1		Consent of Deloitte & Touche LLP. y y

15(a).2		Consent of Ernst & Young. y y

15(a).3		Consent of Deloitte Touche Tohmatsu. y y

15(a).4		Audited financial statements of Equity Pacific Limited for the five months ended December 31, 2004 and the full year ended December 31, 2005, and the unaudited financial statements of Equity Pacific Limited for the three months ended March 31, 2006. y y

15(a).5		Consent of Deloitte & Touche LLP dated June 30, 2008. ^

15(a).6		Consent of Ernst & Young dated June 30, 2008. ^

15(a).7		Consent of Deloitte Touche Tohmatsu dated June 30, 2008. ^

15(a).8		Consent of Deloitte Touche Tohmatsu dated June 21, 2006. ****

*	Incorporated by reference to Post-Effective Amendment to our registration statement on Form S-8 (Reg. No. 333-11288) filed with the Commission on December 7, 2000.

**	Incorporated by reference to our registration statement on Form S-8 (Reg. No. 333-118619) filed with the Commission on August 27, 2004.

***	Incorporated by reference to our registration statement on Form S-8 (Reg. No. 333-123666) filed with the Commission on March 30, 2005.

****	Incorporated by reference to our annual report on Form 20-F filed with the Commission on June 21, 2006.

Y	Incorporated by reference to our current report on Form 6-K filed with the Commission on August 10, 2006.

y y	Incorporated by reference to our annual report on Form 20-F filed with the Commission on July 2, 2007.

^	Filed herewith.

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F/A and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf on this 30 ^th day of June, 2008.


CDC CORPORATION
(Registrant)

By:		/s/ Peter Yip
		Peter Yip
		Chief Executive Officer

INDEX TO EXHIBITS


No.		Description
1.1		Amended and Restated Articles of Association and Memorandum of Association of the Company, together with amendments thereto. y y

2(a).1		1999 Employee Stock Option Plan, as amended. *

2(a).2		2004 Employee Share Purchase Plan. ***

2(a).3		Ross Systems, Inc. 1998 Incentive Stock Plan (assumed by CDC Corporation). **

2(a).4		CDC Corporation 2005 Stock Incentive Plan, as amended. ****

2(a).5		CDC Software Corporation 2007 Stock Incentive Plan. y y

2(a).6		CDC Games Corporation 2007 Stock Incentive Plan. y y

2.(b).1		Note Purchase Agreement, dated as of November 10, 2006, between CDC Corporation and each of the investors listed therein relating to the issuance and sale of $168 million aggregate principal amount of 3.75% Senior Exchangeable Convertible Notes due 2011. y y

2.(b).2		Form of 3.75% Senior Exchangeable Convertible Note due 2011 issued by CDC Corporation. y y

2.(b).3		Registration Rights Agreement, dated as of November 10, 2006, among CDC Corporation, CDC Games Corporation and CDC Software Corporation. y y

2.(b).4		Promissory Note by and between CDC Games Corporation and China.com Limited, dated as of December 29, 2006. y y

4.(a).1		Share Purchase Agreement among CDC Mobile Media Corporation, Unitedcrest Investments Limited, Shenzhen KK Technology Limited, CC Mobile Media Corporation, Zheng Hui Lan, Ye Yong Ning, Liang Yan, Ma Zhi Qiang, Zhang Zhi Gang and Palmweb Inc dated June 27, 2005. ****

4.(a).2		Supplementary Agreement relating to Share Purchase Agreement among CDC Mobile Media Corporation, Unitedcrest Investments Limited, Shenzhen KK Technology Limited, CC Mobile Media Corporation, Zheng Hui Lan, Ye Yong Ning, Liang Yan, Ma Zhi Qiang, Zhang Zhi Gang and Palmweb Inc dated June 29, 2005. ****

4(a).3		Stock Purchase Agreement, dated as of June 1, 2006, among CDC Business Solutions Corporation, DB Professionals, Inc., Shankar Viswanathan and Prabha Ananthanarayana. y y

4(a).4		Addendum No. 1 to Stock Purchase Agreement by and among CDC Business Solutions Corporation, DB Professionals, Inc., Shankar Viswanathan and Prabha Ananthanarayana, dated as of March 13, 2007. y y

4(a).5		Share Purchase Agreement dated as of July 25, 2006 by and among CDC Mobile Media Corporation, TimeHeart Science Technology Limited, Beijing TimeHeart Information Technology Limited, Fresh Earn Holdings Limited, Ms. Fang Xiu Qin, Mr. Sun Kun Shan, Mr. Wang Bin, Mr. Sui Hai Gang, Ms. Fang Xiu Qin, Mr. Sun Kun Shan and Palmweb, Inc. y y



4(a).6		Amendment to Share Purchase Agreement dated as of October 5, 2006 by and among CDC Mobile Media Corporation, TimeHeart Science Technology Limited, Beijing TimeHeart Information Technology Limited, Fresh Earn Holdings Limited, Ms. Fang Xiu Qin, Mr. Sun Kun Shan, Mr. Wang Bin, Mr. Sui Hai Gang, Ms. Fang Xiu Qin, Mr. Sun Kun Shan and Palmweb, Inc. y y

4(a).7		Amendment to Share Purchase Agreement dated as of November 9, 2006 by and among CDC Mobile Media Corporation, TimeHeart Science Technology Limited, Beijing TimeHeart Information Technology Limited, Fresh Earn Holdings Limited, Ms. Fang Xiu Qin, Mr. Sun Kun Shan, Mr. Wang Bin, Mr. Sui Hai Gang, Ms. Fang Xiu Qin, Mr. Sun Kun Shan and Palmweb, Inc. y y

4(a).8		Stock Purchase Agreement, dated as of October 6, 2006, among Ross Systems Inc., Advantage Growth Fund, John Caines, Siobhan Sutcliffe, Mark Sutcliffe, Rob Archer, Robin Wight, Steve Massey, Alistair Norman, Richard Tester, Roy Thomas, John Clement, Richard Craig, Phil Hignett, Colin Downes, Dan Saunders, Robin West, James Wood, James Cutter, Andy Neilson, Sarah Weston and Di Judd related to the acquisition of MVI Holdings Limited. y y

4(a).9		Guaranty Agreement dated as of October 6, 2006 by CDC Corporation. y y

4(a).10		Stock Purchase Agreement by and between CDC Games Corporation and China.com Corp., Limited, dated as of November 11, 2006. y y

4(a).11		Merger Agreement, dated as of December 1, 2006, among China.com Corporation, CDC Mergerco Corporation and Vis.align, Inc. and the Stockholders’ Representative appointed thereby related to the acquisition of Vis.align, Inc. y y

4(a).12		Senior Secured Loan Agreement by CDC Mobile Media Corporation to BBMF Group, Inc. dated as of January 12, 2007. y y

4(a).13		Share Purchase Agreement dated as of February 16, 2007 among Ross Systems, Inc., 3i plc, The Parkmeade Group plc, James Heavey, Cathal Naughton and Michael Breare related to the acquisition of Respond Group Limited. y y

4(a).14		Merger Agreement dated as of April 16, 2007 by and among CDC Software Inc., a Delaware corporation, CDC Merger Sub, Inc., a California corporation, Saratoga Systems Inc., a California corporation, Mark R. Elconin and Alvin W. Smith. y y

4(c).1		Termination and Release Agreement between CDC Corporation and Asia Pacific Online Limited effective July 15, 2005. ****

4(c).2		Option Transfer Agreement between CDC Corporation, Asia Pacific Online Limited and Peter Yip effective July 15, 2005. ****

4(c).3		Termination and Release Agreement by and between CD Corporation and Dr. Raymond Kuo-Fung Ch’ien effective August 30, 2005. ****

4(c).4		Executive Services (CEO) Agreement between CDC Corporation Limited and Asia Pacific Online Limited effective as of April 12, 2006. Y

6.		Details of how EPS information is calculated can be found in Note 18 to our Consolidated Financial Statements.



8.		List of principal subsidiaries of the Company. y y

12.1		Certification of Chief Executive Officer required by Rule 13a-14(a). ^

12.2		Certification of Chief Financial Officer required by Rule 13a-14(a). ^

13(a).1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ^

13(a).2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ^

15(a).1		Consent of Deloitte & Touche LLP. y y

15(a).2		Consent of Ernst & Young. y y

15(a).3		Consent of Deloitte Touche Tohmatsu. y y

15(a).4		Audited financial statements of Equity Pacific Limited for the five months ended December 31, 2004 and the full year ended December 31, 2005, and the unaudited financial statements of Equity Pacific Limited for the three months ended March 31, 2006. y y

15(a).5		Consent of Deloitte & Touche LLP dated June 30, 2008. ^

15(a).6		Consent of Ernst & Young dated June 30, 2008. ^

15(a).7		Consent of Deloitte Touche Tohmatsu dated June 30, 2008. ^

15(a).8		Consent of Deloitte Touche Tohmatsu dated June 21, 2006. ****

*	Incorporated by reference to Post-Effective Amendment to our registration statement on Form S-8 (Reg. No. 333-11288) filed with the Commission on December 7, 2000.

**	Incorporated by reference to our registration statement on Form S-8 (Reg. No. 333-118619) filed with the Commission on August 27, 2004.

***	Incorporated by reference to our registration statement on Form S-8 (Reg. No. 333-123666) filed with the Commission on March 30, 2005.

****	Incorporated by reference to our annual report on Form 20-F filed with the Commission on June 21, 2006.

Y	Incorporated by reference to our current report on Form 6-K filed with the Commission on August 10, 2006.

y y	Incorporated by reference to our annual report on Form 20-F filed with the Commission on July 2, 2007.

^	Filed herewith.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


		Pages

Report of Independent Registered Public Accounting Firm		F-2 –F-4

Consolidated Balance Sheets as of December 31, 2005 and 2006		F-5

Consolidated Statements of Operations for the years ended December 31, 2004, 2005 and 2006		F-6

Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2005 and 2006		F-7

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2004, 2005 and 2006		F-8 – F-10

Notes to Consolidated Financial Statements		F-11 – F-84

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

CDC Corporation

We have audited the accompanying consolidated balance sheets of CDC Corporation and subsidiaries (the “Company”) as of December 31, 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit 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 Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit 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 Company’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 audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of CDC Corporation and subsidiaries as of December 31, 2006, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Notes 2 and 23, the Company adopted Statement of Financial Accounting Standards No. 123R, “Share Based Payment,” effective January 1, 2006. As discussed in Note 27 Segment Information, the accompanying footnote disclosure of segment net income (loss) for fiscal year ended December 31, 2006 has been restated. Also, as discussed in Note 2, the Consolidated Statement of Cash Flows for 2006 has been restated.

/s/ Deloitte & Touche LLP

Atlanta, Georgia

June 30, 2007 (June 30, 2008 as to the effects

of the restatements discussed in Notes 2 and 27)

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

CDC Corporation

We have audited the accompanying consolidated balance sheet of CDC Corporation and subsidiaries as of December 31, 2005, and the related consolidated statements of operations, cash flows and shareholders’ equity for each of the two years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the consolidated financial statements of China.com Inc., an 81% owned subsidiary, and its subsidiaries for the period ended December 31, 2005 which statements reflect total assets constituting 34.6% and total revenues constituting 17.7% of the related 2005 consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for China.com Inc. and its subsidiaries, is based solely on the report of the other auditors.

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. We were not engaged to perform an audit of the Company’s 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 Company’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, and evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CDC Corporation and subsidiaries at December 31, 2005, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2005, in conformity with United States generally accepted accounting principles.

As more fully described in Note 2, the Company restated its consolidated financial statements for each of the two years in the period ended December 31, 2005.

/s/ Ernst & Young

Hong Kong

June 20, 2006, except for the restatement described in Note 2, as to which the date is July 2, 2007.

F-3

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of China.com Inc.:

We have audited the accompanying consolidated balance sheet of China.com Inc. and subsidiaries (the “Company”) as of December 31, 2005, and the related consolidated statements of operations, cash flows and shareholders’ equity and comprehensive income for the year ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit 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 Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit 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 Company’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 audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of China.com Inc. and subsidiaries at December 31, 2005, and the results of their operations and their cash flows for the year ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.

/s/ DELOITTE TOUCHE TOHMATSU

Certified Public Accountants

Hong Kong

June 16, 2006

F-4

CDC Corporation

CONSOLIDATED BALANCE SHEETS

(in thousands U.S. dollars, except share and per share data)


		December 31,
	Notes	2005			2006
ASSETS
Current assets:
Cash and cash equivalents		$	93,719		$	223,548
Restricted cash	4		1,886			1,996
Accounts receivable (net of allowance of $4,112 and $5,373 in 2005 and 2006, respectively)	5		47,489			64,437
Note receivable	7		—			25,000
Deposits, prepayments and other receivables			8,536			18,525
Available-for-sale securities	6		23,777			14,401
Restricted held-to-maturity securities	6		—			30,504
Restricted available-for-sale securities	6		11,838			—
Deferred tax assets	17		1,474			5,061

Total current assets			188,719			383,472

Note receivable	7		25,000			—
Interest receivable			1,628			—
Property and equipment, net	8		6,226			9,540
Goodwill	9		200,663			205,050
Intangible assets	10		73,574			104,069
Investments in equity investees			5,999			—
Investments under cost method			220			217
Available-for-sale securities	6		92,763			112,045
Restricted available-for-sale securities	6		20,432			—
Deferred tax assets	17		12,833			34,689
Other assets			4,975			8,351


Total assets		$	633,032		$	857,433


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	12,520		$	24,163
Other payables			3,089			2,740
Purchase consideration payables			1,229			5,626
Accrued liabilities			24,369			36,787
Restructuring accruals, current portion	25		3,183			2,411
Accrued pension liability, current portion	24		1,673			—
Short-term bank loans			26,249			18,991
Deferred revenue			37,178			46,033
Income tax payable			2,579			4,202
Deferred tax liabilities			1,203			1,641

Total current liabilities			113,272			142,594

Deferred tax liabilities	17		16,451			16,041
Convertible notes	12		—			161,859
Embedded derivatives related to convertible notes	12		—			5,786
Restructuring accruals, net of current portion	25		4,171			3,599
Other liabilities			439			419

Total liabilities			134,333			330,298

Minority interests			52,201			72,512

Contingencies and commitments	27

Shareholders’ equity:
Preferred shares, $0.001 par value; 5,000,000 shares authorized, no shares issued			—			—
Class A common shares, $0.00025 par value; 800,000,000 shares authorized; 111,364,999 and 114,092,737 shares issued as of December 31, 2005 and 2006, respectively; 109,762,262 and 106,401,376 shares outstanding as of December 31, 2005 and 2006, respectively			28			28
Additional paid-in capital			676,003			692,143
Common stock held in treasury; 1,602,737 and 7,691,361 shares at December 31, 2005 and 2006, respectively			(4,032	)		(32,102	)
Accumulated deficit			(228,130	)		(217,290	)
Accumulated other comprehensive income	13		2,629			11,844

Total shareholders’ equity			446,498			454,623


Total liabilities and shareholders’ equity		$	633,032		$	857,433

The accompanying notes form an integral part of these consolidated financial statements.

F-5

CDC Corporation

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands U.S. dollars, except share and per share data)


		Years ended December 31,
	Notes	2004			2005			2006
Revenues:
Software
Licenses		$	28,581		$	38,541		$	46,260
Maintenance and consulting services			79,067			120,263			129,114
Business Services
IT products			2,083			2,079			3,038
Consulting services			37,308			37,139			59,315
Advertising			3,536			3,468			3,094
Mobile Services and Applications			23,694			34,389			31,862
Internet and Media			8,183			8,995			10,064
CDC Games			—			—			26,780

Total revenues			182,452			244,874			309,528

Cost of revenues:
Software
Licenses			(3,486	)		(6,750	)		(8,408	)
Maintenance and consulting services			(39,754	)		(55,792	)		(61,115	)
Amortization of purchased technologies			(3,485	)		(5,528	)		(5,009	)
Business Services
IT products			(1,879	)		(1,671	)		(1,834	)
Consulting services			(24,871	)		(24,338	)		(42,388	)
Advertising			(1,326	)		(1,159	)		(978	)
Mobile Services and Applications			(4,597	)		(15,262	)		(13,004	)
Internet and Media			(3,319	)		(3,449	)		(4,095	)
CDC Games			—			—			(10,631	)

Total cost of revenues			(82,717	)		(113,949	)		(147,462	)

Gross profit			99,735			130,925			162,066

Operating expenses:
Selling, general and administrative expenses			(80,326	)		(100,549	)		(125,500	)
Research and development expenses			(13,825	)		(22,605	)		(19,981	)
Depreciation and amortization expenses			(8,919	)		(9,937	)		(10,976	)
Restructuring expenses	25		(3,760	)		(1,667	)		(1,974	)

Total operating expenses			(106,830	)		(134,758	)		(158,431	)

Operating income (loss)			(7,095	)		(3,833	)		3,635

Other income (expenses):
Interest income			9,654			8,156			10,680
Interest expense			(1,895	)		(1,257	)		(3,038	)
Gain on disposal of available-for-sale securities			167			525			344
Gain on disposal of subsidiaries and cost investments			892			483			3,087
Gain on change in fair value of derivatives			—			—			531
Impairment of cost investments and available-for-sale securities			(1,362	)		—			—
Share of income (losses) in equity investees			(468	)		(1,172	)		976

Total other income			6,988			6,735			12,579

Income (loss) before income taxes			(107	)		2,902			16,214
Income tax expense	17		(3,375	)		(4,957	)		(3,062	)


Income (loss) before minority interests			(3,482	)		(2,055	)		13,152
Minority interests in income of consolidated subsidiaries			(925	)		(1,409	)		(2,312	)

Income (loss) from continuing operations			(4,407	)		(3,464	)		10,840
Discontinued operations:
Loss from operations of discontinued subsidiaries	19		(610	)		(47	)		—
Loss on disposal/dissolution of discontinued subsidiaries, net	19		(950	)		(3	)		—


Net income (loss)		$	(5,967	)	$	(3,514	)	$	10,840


Basic earnings (loss) per share from continuing operations	18	$	(0.04	)	$	(0.03	)	$	0.10

Diluted earnings (loss) per share from continuing operations	18	$	(0.04	)	$	(0.03	)	$	0.10

Basic and diluted earnings (loss) per share	18	$	(0.06	)	$	(0.03	)	$	0.10

Diluted earnings (loss) per share	18	$	(0.06	)	$	(0.03	)	$	0.10

The accompanying notes form an integral part of these consolidated financial statements.

F-6

CDC Corporation

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands U.S. dollars, except share and per share data)


	Years Ended, December 31,
	2004			2005			2006
OPERATING ACTIVITIES:
Net (loss) income	$	(5,967	)	$	(3,514	)	$	10,840
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Minority interests in income of consolidated subsidiaries		925			1,409			2,312
Loss (gain) on disposal/write-off of property and equipment		1,055			(1,179	)		137
Gain on disposal of available-for-sale securities		(167	)		(525	)		(344	)
Loss (gain) on disposal of subsidiaries and cost investments		401			(483	)		(3,087	)
Amortization of intangible assets		11,088			13,238			18,002
Depreciation		3,721			3,866			4,385
Stock compensation expenses		2,051			1,421			7,700
Share of income (losses) in equity investees		468			1,172			(976	)
Impairment of cost investments and available-for-sale securities		1,362			—			—
Deferred provision for income taxes		1,731			3,698			(1,082	)
Expenses settled by issuance of shares		1,612			—			—
Interest (income) expense		—			(390	)		273
Fair market value adjustment of derivative instruments		—			—			(531	)
Changes in operating assets and liabilities:
Accounts receivable		(12,485	)		(5,024	)		(6,402	)
Deposits, prepayments and other receivables		3,545			1,210			(6,353	)
Other assets		200			(1,500	)		306
Accounts payable		88			(419	)		3,185
Accrued liabilities		(6,159	)		(2,971	)		6,445
Other payables		(444	)		(956	)		(453	)
Deferred revenue		6,483			3,822			4,347
Income tax payable		1,644			(609	)		1,567
Accrued pension liability		(683	)		(707	)		(1,673	)
Other liabilities		321			389			732


Net cash provided by operating activities	$	10,790		$	11,948		$	39,330


INVESTING ACTIVITIES:
Purchases of subsidiaries, net of cash acquired	$	(112,724	)	$	(15,537	)	$	(33,428	)
Purchases of property and equipment		(3,661	)		(3,730	)		(4,403	)
Acquisition of equity investees		(4,000	)		(3,500	)		—
Purchases of securities		(80,314	)		—			(43,067	)
Purchases of intangible assets		(4,705	)		(7,802	)		(13,487	)
Proceeds from disposal of securities		212,053			30,611			35,892
Proceeds from disposal of property and equipment		663			4,315			—
Proceeds (cash disbursements) from disposal of subsidiaries		(529	)		1,140			—
Proceeds from disposal of cost investments		494			1,117			7,581
Decrease (increase) in restricted cash		(3,648	)		2,000			(110	)


Net cash provided (used) in investing activities	$	3,629		$	8,614		$	(51,022	)


FINANCING ACTIVITIES:
Issuance of share capital, net of offering costs	$	4,061		$	1,052		$	8,512
Proceeds from bank loans		87,537			5,075			—
Repayment of bank loans		(51,352	)		(42,480	)		(45,987	)
Proceeds from sale of convertible notes		—			—			168,000
Debt issuance costs		—			—			(3,460	)
Proceeds of purchase note agreements		—			—			38,700
Purchases of treasury stock		—			—			(28,070	)


Net cash provided by (used in) financing activities	$	40,246		$	(36,353	)	$	137,695

Effect of exchange differences on cash		33			(696	)		3,826

Net increase (decrease) in cash and cash equivalents	$	54,698		$	(16,487	)	$	129,829
Cash and cash equivalents at beginning of year		55,508			110,206			93,719

Cash and cash equivalents at end of year	$	110,206		$	93,719		$	223,548


Interest paid	$	1,348		$	955		$	592
Income taxes paid	$	—		$	695		$	1,988
Non-cash activities:
Class A common shares issued for settlement of other payables	$	3,036		$	—		$	—
Reissuance of treasury stock for the acquisition of subsidiaries	$	—		$	—		$	—
Class A common shares and stock options issued as consideration for the acquisition of subsidiaries	$	49,610		$	54		$	741

The accompanying notes form an integral part of these consolidated financial statements.

F-7

CDC Corporation

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands U.S. dollars, except share and per share data)


	Number of shares	Common shares		Additional paid-in capital		Treasury stock			Comprehensive income (loss)			Accumulated other comprehensive income (loss)			Accumulated deficit			Total shareholders’ equity
	(‘000)
Balance at January 1, 2004	101,588	$	25	$	614,721	$	(4,067	)	$	—		$	3,671		$	(218,649	)		395,701
Exercise of employee stock options	1,068		1		4,060		—			—			—			—			4,061
Issuance of shares for non-cash transactions	8,237		2		50,455		—			—			—			—			50,457
Stock compensation expenses on options granted	—		—		4,240		—			—			—			—			4,240
Unrealized losses, net of unrealized gains on available-for-sale securities	—		—		—		—			(593	)		(593	)		—			(593	)
Minority interests’ share of unrealized losses, net of unrealized gains on available-for-sale securities	—		—		—		—			53			53			—			53
Foreign currency translation adjustments	—		—		—		—			1,750			1,750			—			1,750
Less: reclassification adjustment for losses, net of gains included in net loss	—		—		—		—			274			274			—			274
Net loss for the year	—		—		—		—			(5,967	)		—			(5,967	)		(5,967	)

Comprehensive loss	—		—		—		—		$	(4,483	)		—			—			—

Balance at December 31, 2004	110,893	$	28	$	673,476	$	(4,067	)				$	5,155		$	(224,616	)	$	449,976

The accompanying notes form an integral part of these consolidated financial statements.

F-8

CDC Corporation

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands U.S. dollars, except share and per share data)


	Number of shares	Common shares		Additional paid-in capital		Treasury stock			Comprehensive income (loss)			Accumulated other comprehensive income (loss)			Accumulated deficit			Total shareholders’ equity
	(‘000)
Balance at January 1, 2005	110,893	$	28	$	673,476	$	(4,067	)	$	—		$	5,155		$	(224,616	)	$	449,976
Exercise of employee stock options	282		—		583		—			—			—			—			583
Employee stock purchase plan	178		—		469		—			—			—			—			469
Issuance of shares for non-cash transactions	12		—		54		—			—			—			—			54
Reissuance of treasury stock for non-cash transactions	—		—		—		35			—			—			—			35
Stock compensation expenses on options granted	—		—		1,421		—			—			—			—			1,421
Unrealized losses, net of unrealized gains on available-for-sale securities	—		—		—		—			(2,534	)		(2,534	)		—			(2,534	)
Minority interests’ share of unrealized losses, net of unrealized gains on available-for-sale securities	—		—		—		—			217			217			—			217
Foreign currency translation adjustments	—		—		—		—			(355	)		(355	)		—			(355	)
Less: reclassification adjustment for losses, net of gains included in net loss	—		—		—		—			146			146			—			146
Net loss for the year	—		—		—		—			(3,514	)		—			(3,514	)		(3,514	)

Comprehensive loss	—		—		—		—		$	(6,040	)		—			—

Balance at December 31, 2005	111,365	$	28	$	676,003	$	(4,032	)				$	2,629		$	(228,130	)	$	446,498

The accompanying notes form an integral part of these consolidated financial statements.

F-9

CDC Corporation

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands U.S. dollars, except share and per share data)


	Number of shares	Common shares		Additional paid-in capital		Treasury stock			Comprehensive income (loss)			Accumulated other comprehensive income (loss)			Accumulated deficit			Total shareholders’ equity
	(‘000)
Balance at January 1, 2006	111,365	$	28	$	676,003	$	(4,032	)	$	—		$	2,629		$	(228,130	)	$	446,498
Exercise of employee stock options	2,401		—		7,963		—			—			—			—			7,963
Employee stock purchase plan	161		—		549		—			—			—			—			549
Issuance of shares for non-cash transactions	166		—		741		—			—			—			—			741
Purchase of treasury stock	—		—		—		(28,070	)		—			—			—			(28,070	)
Stock compensation expenses on options granted	—		—		6,887		—			—			—			—			6,887
Unrealized losses, net of unrealized gains on available-for-sale securities	—		—		—		—			681			681			—			681
Minority interests’ share of unrealized losses, net of unrealized gains on available-for-sale securities	—		—		—		—			11			11			—			11
Foreign currency translation adjustments	—		—		—		—			8,528			8,528			—			8,528
Less: reclassification adjustment for losses, net of gains included in net income	—		—		—		—			(5	)		(5	)		—			(5	)
Net income for the year	—		—		—		—			10,840			—			10,840			10,840

Comprehensive income	—		—		—		—		$	20,055			—			—

Balance at December 31, 2006	114,093	$	28	$	692,143	$	(32,102	)				$	11,844		$	(217,290	)	$	454,623

The accompanying notes form an integral part of these consolidated financial statements.

F-10

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

1.	ORGANIZATION AND BUSINESS OPERATIONS

CDC Corporation (together with its subsidiaries, the “Company” or “CDC”), with facilities in the People’s Republic of China (“PRC”), North America, Europe and Australia, is a global provider of enterprise software, mobile services and applications, internet and media services and the development and operation of online games. The Company was incorporated in the Cayman Islands in June 1997 as a limited liability company.

The Company offers the following products and services to customers in Hong Kong, Taiwan and the PRC (the “Greater China”) and other parts of Asia, Australia, New Zealand, North America, South America, the United Kingdom and the rest of Europe. The Company has the following operating segments:

•

Software . The Company offers a broad range of software solutions for mid-sized enterprises. The software suite includes Enterprise Resource Planning (“ERP”), Customer Relationship Management (“CRM”), Supply Chain Management (“SCM”), Order Management Systems (“OMS”), Human Resources and Payroll Management (“HRM”) and Business Intelligence (“BI”) products.

•

Business Services . The Company’s business services offering includes information technology services, eBusiness consulting, web development and outsourcing in Hong Kong, Australia, Korea, and the United States of America (the “U.S.”), and a marketing database and marketing support service offered principally in Australia and New Zealand. The Company’s business services companies provide program management, outsourcing services, application development and ongoing support services using a wide range of technologies.

•

Mobile Services and Applications . The Company’s mobile services and applications business provides news and mobile applications services targeting the consumer market in China. It offers wireless services including Short Message Service (“SMS”), Interactive Voice Response (“IVR”), Multimedia Message Service (“MMS”) and Wireless Application Protocol (“WAP”).

•

Internet and Media . The Company’s internet and media business encompasses a range of businesses, including a portal network, and a Singapore-based travel trade publisher and trade exhibition organizer.

•

CDC Games . The Company’s online games business is principally engaged in the development and operation of online games in the PRC.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying consolidated financial statements include the accounts of the Company and its majority-owned or controlled subsidiaries that are not considered variable interest entities and all variable interest entities for which the Company is the primary beneficiary (Note 16), after eliminations of all material intercompany accounts, transactions and profits.

F-11

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(a) Principles of Consolidation and Basis of Presentation (continued)

(b) Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, the Company evaluates its estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates and assumptions.

(c) Cash and Cash Equivalents

The Company considers all cash held in banks and investments with an original maturity of three months or less when purchased to be cash equivalents. Except for the restricted cash disclosed in Note 4, none of the Company’s cash and cash equivalents are restricted as to withdrawal or use.

Cash Flow Correction . Subsequent to the filing of the Company’s 2006 20-F, the Company noted that the deferred tax expense adjustment and the change in other liabilities on the 2006 Statement of Cash Flows was incorrect. The amount of deferred tax adjustment, an additive net income adjustment of $1,082, should have been presented as a subtractive adjustment to operating cash flows in the amount of $(1,082), and the amount of other liabilities, which was originally reported as a use of funds in the amount of $(1,430) should have reported as a source of funds in the amount of $732. The Company corrected these errors, and such amounts were off-set within cash provided by operating activities with no net impact on total cash provided by operating activities.

(d) Property and Equipment and Depreciation

Buildings, leasehold improvements, furniture and fixtures, office equipment, computer equipment and motor vehicles are stated at cost less accumulated depreciation. Maintenance, repairs and minor renewals are expensed as incurred. Depreciation is computed using the straight-line method over the assets’ estimated useful lives. The estimated useful lives of the property and equipment are as follows:


Leasehold improvements		Over the lesser of the lease term or the estimated useful life
Furniture and fixtures		1 to 10 years
Office equipment		3 to 5 years
Computer equipment		1 to 3 years
Motor vehicles		3 to 5 years

(e) Software Development Costs

The Company capitalizes computer software product development costs incurred in developing a product once technological feasibility has been established and until the product is available for general release to customers. The Company evaluates realizability of the capitalized amounts based on expected revenues from the product over the remaining product life. Where future revenue streams are not expected to cover remaining unamortized amounts, the Company either accelerates the amortization or expenses the remaining capitalized amounts. The amortization of such costs is computed as the greater of the amount calculated based on (i) the ratio of current product revenues to projected current and future product revenues or (ii) the straight-line basis over the expected economic life of the product (not to exceed five years). Software costs related to the development of new products incurred prior to establishing technological feasibility or after general release are expensed as incurred. When technological feasibility of the underlying software is not established until substantially all product development is completed, including the development of a working model, the Company expenses the costs of such development because the impact of capitalizing such costs would not be material.

F-12

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(e) Software Development Costs (continued)

As of December 31, 2005 and 2006, capitalized computer software development costs were $10,491 and $20,897, respectively, and related accumulated amortization totaled $1,300 and $4,512, respectively. The amortization of capitalized software is included in Cost of Revenues – Software—Licenses totaling $228, $1,049 and $3,347 in 2004, 2005 and 2006, respectively.

(f) Goodwill and Intangible Assets

Goodwill represents the excess of cost over the fair value of the net assets of businesses acquired. Statement of Financial Accounting Standards (“SFAS”) 142, “Goodwill and Other Intangible Assets”, requires companies to test goodwill for impairment on an annual basis or an interim basis if an event occurs that might reduce the fair value of a reporting unit below its carrying value. SFAS 142 also requires that an identifiable intangible asset which is determined to have an indefinite useful economic life not to be amortized, but to be tested separately for impairment using a fair value based approach. All other intangible assets are amortized over their estimated useful lives.

The Company’s intangible assets represent trademarks, uniform resource locators (“URLs”), software applications and programs, customer base and contracts, and business licenses and partnership agreements. Definite lived intangible assets are carried at cost less accumulated amortization. Amortization is computed using the straight-line method over the estimated useful life of the respective asset. The estimated useful lives of the intangible assets are as follows:


Trademarks		Indefinite
URLs		20 years
Software applications and programs		2 to 5 years
Customer base and contracts		1 to 10 years
Business licenses and partnership agreements		1 to 7 years

The Company evaluates the long-lived assets of identifiable business activities for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. The Company tests goodwill and intangible assets with indefinite useful lives for impairment utilizing a combination of valuation techniques including the expected present value of future cash flows approach. The Company performed its annual goodwill and indefinite lived intangible assets test on December 31 as required by SFAS 142 and determined that there was no impairment for the years ended December 31, 2004, 2005 and 2006.

(g) Investments

Debt and equity investments designated as available-for-sale securities are stated at fair value. Unrealized holding gains or losses, net of tax, on available-for-sale securities are reported in accumulated other comprehensive income (loss) and as a separate component of shareholders’ equity. Realized gains and losses and any declines in fair value judged to be other-than-temporary on available-for-sale securities are included in gain (loss) on disposal and impairment, respectively, in the Company’s consolidated statements of operations. Gains or losses on the sale of investments and amounts reclassified from accumulated other comprehensive income (loss) to the consolidated statements of operations are computed based upon specific identification. Interest on securities classified as available-for-sale securities is included in interest income.

F-13

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(g) Investments (continued)

Debt investments where the Company has the positive intent and ability to hold the securities to maturity are designated as held to maturity securities and are stated at amortized cost.

When determining whether an impairment of investments exists or a decline in the value of an available-for-sale or held-to-maturity security is other-than-temporary, the Company evaluates evidence to support a realizable value in excess of the current market price for the securities. Such information may include the investment’s financial performance (including such factors as earnings trends, dividend payments, asset quality and specific events), the near term prospects of the investment, the current and expected financial condition of the investment’s issuer, and the Company’s investment intent.

The Company’s investments in equity investees for which its ownership exceeds 20% or for which the Company owns less than 20% but has the ability to exercise significant influence, but which are not majority-owned, are accounted for using the equity method. Under the equity method, the Company’s proportionate share of each equity investee’s net income or loss and the amortization of any identifiable intangible assets arising from the investment is included in share of income and losses in equity investees in the accompanying consolidated statements of operations.

All other investments for which the Company does not have the ability to exercise significant influence (generally, when the Company has an investment of less than 20% ownership and no representation on the company’s Board of Directors) and for which there is not a readily determinable fair value, are accounted for using the cost method. Dividends and other distributions of earnings from investees, if any, are included in income when declared. The Company periodically evaluates the carrying value of its investments accounted for under the cost method of accounting and any impairment is included in the Company’s consolidated statement of operations.

(h) Impairment of Long-lived Assets

Long-lived assets (other than goodwill and indefinite lived intangible assets) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset (other than goodwill and indefinite lived intangible assets) exceeds the sum of the undiscounted cash flows expected to result from the asset’s use and eventual disposition. An impairment loss is measured as the amount by which the carrying amount exceeds the fair value of the asset.

(i) Foreign Currency Translation

The financial statements of the Company’s foreign operations have been translated into United States dollars (“U.S. dollars”) from their local functional currencies in accordance with SFAS No. 52, “Foreign Currency Translation” (“SFAS 52”). Under SFAS 52, all assets and liabilities are translated at year end exchange rates. Income statement items are translated at an average exchange rate for the year. Translation adjustments are not included in determining net income, but are accumulated and reported as a component of shareholders’ equity as accumulated other comprehensive income (loss). Realized and unrealized gains and losses, which result from foreign currency transactions, are included in determining net income (loss), except for intercompany foreign currency transactions that are of a long term investment nature which are reported as translation adjustments.

F-14

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(i) Foreign Currency Translation (continued)

During the years ended December 31, 2004, 2005 and 2006, $ 429, $380 and Nil, respectively, were reclassified from cumulative foreign currency translation adjustment and included in the consolidated statement of operations as a result of the sale or liquidation of an investment in a foreign operation.

(j) Advertising Expenses

Advertising expenses are charged to expenses when incurred and are included in selling, general and administrative expenses in the accompanying consolidated statement of operations.

(k) Shipping and Handling

Shipping and handling costs are included in cost of revenues in the accompanying consolidated statements of operations for all the periods presented. Shipping and handling costs are not separately billed to customers.

(l) Revenue Recognition

The Company generally recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectibility is probable. If an acceptance period is required, revenues are recognized upon the earlier of customer acceptance or the expiration of the acceptance period. The Company’s agreements with its customers, resellers and distributors do not contain product return rights. If the fee is not fixed or determinable due to the existence of extended payment terms, revenue is recognized periodically as payments become due, provided all other conditions for revenue recognition are met.

The specific literature that the Company follows in connection with its revenue recognition policy includes the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin 104, “Revenue Recognition”, the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, “Software Revenue Recognition”, as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions”, Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force (“EITF”) 00-21, “Revenue Arrangements with Multiple Deliverables”, EITF 00-3 “Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware”, and in certain instances EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent”, and SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts”.

In addition to these basic criteria, there are specific revenue recognition policies for each major stream of revenue by reportable segment.

Software

Revenue from the sale of software products often includes a combination of software licenses, consulting and integration services, and the provision of training and maintenance services. Consulting and integration services consist of programming, installation and implementation services. Vendor Specific Objective Evidence (“VSOE”) of fair value for each of the above noted elements are determined as follows.

F-15

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(l) Revenue Recognition (continued)

Software. The Company generally does not sell software or software licenses to its customers on a stand alone basis; therefore, allocation of fees to the software component of multiple element arrangements is determined using the residual method. According to this method, the Company measures the amount of the arrangement fee allocated to the delivered elements based on the difference between the arrangement fee and the VSOE of fair value of the undelivered elements. The amount allocated to the software license is calculated by subtracting the VSOE of fair value for maintenance, consulting and integration services, and training services from the total arrangement fee in accordance with paragraph 12 of SOP 97-2. For those agreements that provide for significant services or custom development that are essential to the software’s functionality, the software license and contracted services are recognized under the percentage of completion method as prescribed by the provisions of ARB 45 and SOP 81-1.

For the vast majority of software license sales, the Company determined VSOE of fair value for each element in its multiple element transactions as stated above. In multiple element arrangements, where an element has not been previously sold separately, VSOE of fair value for that element may be established by management having the relevant authority. In very limited situations where our multiple element arrangement includes a new software product which has not been previously introduced to the marketplace, VSOE of fair value for the new software license is established by management having the relevant authority if it is determined to be probable that the price, once established, will not change before the separate introduction of the new software product into the marketplace. In all such license sales the period of time until such element is sold separately is less than 6 months and in all cases, the price on the subsequent stand alone sales is not changed.

When software licenses incorporating third-party software products are sold or software licenses are sold with third-party products that complement the software, the Company recognizes the gross amount of sales of third-party products as revenue.

In addition, the Company offers its customers hosting services for some of its products. Under these subscription based contracts, revenue is recognized ratably over the contract period commencing, generally, when the product has been installed. Revenues from hosting services are included in licenses in the accompanying consolidated financial statements.

Consulting, Integration Services and Training. Consulting and integration services include programming, installation and implementation of the software products. VSOE of fair value for programming, consulting and integration services and for training services, respectively, is determined based on transactions where such services are rendered on a stand alone basis to customers.

Historically, a substantial majority of the Company’s stand alone programming, consulting and integration services and stand alone training services are priced within a narrow range of the median value of the stand alone sales. Variation in pricing for such services is due to differences in transaction volume and type of arrangement (beta site versus established sites). VSOE of fair value for consulting, integration and training services is established by region by an analysis of stand alone sales of services over the preceding one year period. In a multiple element arrangement, if the stated rates for such services falls outside of the established VSOE of fair value, then revenue from the delivered elements is deferred accordingly and recognized as the services are delivered, assuming all other criteria for revenue recognition have been met.

F-16

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(l) Revenue Recognition (continued)

Many of the Company’s software arrangements include consulting implementation services sold separately under consulting engagement contracts. Consulting revenues from these arrangements are generally accounted for separately from new software license revenues because the arrangements qualify as service transactions as defined in SOP 97-2. The more significant factors considered in determining whether the revenue should be accounted for separately include the nature of services (i.e., consideration of whether the services are essential to the functionality of the licensed product), degree of risk, availability of services from other vendors, timing of payments and impact of milestones or acceptance criteria on the realizability of the software license fee. Revenues for consulting services are generally recognized as the services are performed. If there is a significant uncertainty about the project completion or receipt of payment for the consulting services, revenue is deferred until the uncertainty is sufficiently resolved. Contracts with fixed or “not to exceed” fees are recognized on a proportional performance basis.

If an arrangement does not qualify for separate accounting of the software license and consulting transactions then new software license revenue is generally recognized together with the consulting servies based on contract accounting using either the percentage-of-completion or completed-contract method. Contract accounting is applied to any arrangements: (1) that include milestones or customer specific acceptance criteria that may affect collection of the software license fees; (2) where services include significant modification or customization of the software; (3) where significant consulting services are provided for in the software license contract without additional charge or are substantially discounted; or (4) where the software license payment is tied to the performance of consulting services.

Maintenance. VSOE of fair value for maintenance services is determined based on the contractual renewal rate. The maintenance renewal rates are always priced based on a percentage of the software license fee. Maintenance renewal rates as percentage of license fee is set at a fixed rate for each geographical area in which the Company operates. Maintenance renewal rates may be different for the same basic product sold in different geographical areas due to different market variables such as competitors’ pricing and distribution channels. Substantially all maintenance renewals are priced at a standard percentage of software license fee and therefore the Company determined that it has established a VSOE of fair value for maintenance. The Company’s policy and business practice is for customers to renew their maintenance services at the stated rate indicated in the contract. Revenues related to maintenance are deferred and recognized ratably over the terms of the maintenance agreements which are normally one year.

Arrangements with Value-added Resellers (“VARs”) and Distributors. The Company enters into software license arrangements with certain established VARs in which the VARs agree to sell the Company’s software to end-users. In vast majority of these arrangements, the VARs are obligated to pay the Company only as and if sales are made to the end-users. The fee received is calculated on a stipulated percentage of the individual sales earned by the VARs which is stated in the sales contract. Pursuant to SOP 97-2, the fee relating to VARs transactions are not fixed or determinable until the software is sold by the VARs to the end users. Consequently the Company does not recognize any revenue for VARs transactions until all the criteria specified under paragraph 8 of SOP 97-2 are met which coincides with the sell-through to the end-users because at that point, the Company has persuasive evidence of an arrangement (signed contract with VARs), the fee is fixed or determinable, delivery has occurred and collection is reasonably assured. VARs and distributors do not have rights of return, price protections, rotation rights, or other features that would preclude revenue recognition. The Company does not typically earn any portion of fees for services provided by the distributor to the end-user. The Company earns maintenance fees based upon an agreed upon percentage of the maintenance fees that the distributor earns from the end-user.

F-17

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(l) Revenue Recognition (continued)

VARs have a sole discretion and responsibility to determine and negotiate the sales price of the Company’s software with the end-users. VARs are also responsible for billing and collecting from the end-users and assume all credit risks.

Business Services

Revenues from time and materials outsourcing contracts are recognized as the services are delivered assuming all other basic criteria for revenue recognition have been met.

The Company provides database and marketing support services including list rental, database development and supply, data analysis and call center services in Australia and New Zealand in its Business Services Segment. In these single element arrangements, the Company maintains the databases as a source of marketing intelligence on medium and large companies and organizations in Australia and New Zealand. Direct marketers and other customers can use this data to develop and execute marketing campaigns, measure market penetration and analyze marketing opportunities. Revenue from the Company’s advertising and marketing services is recognized upon the delivery of a specified customer list and other data from the Company’s databases to its customers. The delivery is in the form of a flat file of data which is delivered to the customer by email. These services are priced based on a pricelist. The price is determined based on the number of contacts and the amount of data supplied for each contact. The Company does not recognize revenues from this type of arrangement until all criteria in SAB 104 have been met which coincides with the delivery of the customer list to the customer because at that point, the Company has persuasive evidence of the arrangement, the fee is fixed and determinable, delivery has occurred and collection is reasonably assured. The completed performance method is appropriate because the delivery of the data is of such significance to the customer that substantial performance has not taken place until the data is delivered.

Advertising and marketing consulting services revenues for fixed price contracts are recognized using the proportional performance method based on hours incurred. Revenues from time and materials outsourcing contracts are recognized as the services are delivered, assuming all other basic criteria for revenue recognition have been met.

The Company provides design and development services which encompass eBusiness consulting, development of mobile phone interfaces and web development services and the modification, re-configuration, and testing of customers’ information systems to enhance customers’ internal financial reporting systems to customer specifications. These projects are priced on a fixed fee basis. Customers’ needs and specification are documented in the statement of work which is attached to the agreement. For such arrangements the Company is able to make reasonable estimates, based on the Company’s historical experience with similar transactions, of the total costs, fees and progress to completion. The vast majority of these agreements do not include customer acceptance provisions. The Company recognizes revenues for these projects using the percentage of completion method in accordance with SOP 81-1. For arrangements containing customer specific acceptance clauses, the Company accounts for revenues based on the completed contract method by deferring the recognition of revenue until it obtains formal acceptance because the unique nature of customer acceptance terms which require that the functionality of the product passes a predetermined acceptance test as designed by the customer.

Revenues from Internet web site maintenance agreements are deferred and recognized ratably over the terms of the related agreements which are usually for periods of six months or one year.

F-18

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(l) Revenue Recognition (continued)

Mobile Services and Applications (“MVAS”)

MVAS revenues are recognized when services are provided. The Company records revenues on a monthly basis based upon confirmations from the network operators. At the end of each reporting period, where an operator fails to provide the Company with a monthly statement confirming the amount of charges billed to its mobile phone users for that month, the Company uses information generated from its own internal system and historical financial data to make estimates of the billing reconciliation rate and collectible mobile services and applications fees, and revenues are accrued accordingly.

Internet and Media

CDC Games

Revenue from CDC Games is principally derived by providing online game services in the Peoples Republic of China. CDC Games operates its Massively Multiplayer Online Role-Playing Games (“MMORPGs”) under two models. The first revenue model is the traditional subscription based pay-to-play, where users purchase pre-paid cards (the “PP-Cards”) to play for a fixed number of hours. The second revenue model is free-to-play, under which players are able to access the games free of charge, but may choose to purchase in-game merchandise or premium features to enhance their game playing experience. Such purchases can only be made through the use of PP-Cards.

End users are required to activate their PP-Cards by using access codes and passwords to exchange the value of these cards into game points, which are then deposited into their personal accounts. Points are consumed for online game services by trading them either for a pre-specified length of game playing time, in-game merchandise or premium features sold at online game stores.

All prepaid fees received by CDC Games from distributors are initially recognized as deferred revenue and revenue is recognized when the registered points are consumed for online game services, i.e., when game playing time occurs, in-game merchandise or premium features are delivered, or when the end customers are no longer entitled to access the online game services after keeping their accounts inactive for a certain period of time or upon the expiration of the PP-Cards. Distributors are permitted to return unsold PP-Cards under certain circumstances, including the termination of the game and the disqualification of distributor status. Returns of PP-Cards during 2006 were not material.

(m) Deferred Revenue

Deferred revenue represents cash received for software, business services, advertising and marketing services and online games in advance of services being rendered. The Company reports deferred revenue as a liability on the balance sheet when there is a contractual obligation as at the balance sheet date to provide services or software product to the customer but the services or software have not yet been completed or the product has not yet been delivered, and thus no recognition of revenue has taken place.

F-19

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(n) Income Taxes

Income taxes are determined under the liability method as required by SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). Income tax expense is based on pre-tax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance based on the amount of tax benefits that, based on available evidence, are not more likely than not to be realized.

(o) Stock Compensation Expenses

CDC Corporation

Prior to the adoption of SFAS 123(R), cash flows resulting from the tax benefit related to equity-based compensation was required to be presented in the operating cash flows, along with other tax cash flows, in accordance with the provisions of EITF 00-15, “Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option” , (“EITF 00-15”). SFAS 123(R) superseded EITF 00-15, amended SFAS No. 95, “Statement of Cash Flows” (“SFAS 95”), and requires tax benefits relating to excess equity-based compensation deductions to be prospectively presented in the statement of cash flows as financing cash inflows.

The fair value of restricted shares is determined based on the number of shares granted and the quoted market price of the Company’s common shares. SFAS 123(R) did not change the accounting guidance for share-based payment transactions with parties other than employees as originally issued by EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” (“EITF 96-18”). The fair value of options is determined using the Black-Scholes valuation model, which is consistent with the Company’s valuation techniques previously utilized for options in footnote disclosures under SFAS 123, as amended by SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure” (“SFAS 148”). On March 29, 2005, the SEC published Staff Accounting Bulletin No. 107 (“SAB 107”), which provides the Staff’s views on a variety of matters related to share based payments. SAB 107 requires that share based compensation be classified in the same expense line items as cash compensation.

F-20

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(o) Stock Compensation Expenses (continued)

The effect of adopting SFAS 123(R) on the Company’s income from operations, income before income taxes, net income, net cash provided by operating activities, and basic and diluted earnings per share for the year ended December 31, 2006 was a reduction of $6,887, $6,887, $6,867, $6,867, $0.05 and $0.05, respectively and an increase of the Company’s net cash provided by financing activities of Nil.

Prior to its adoption of SFAS 123(R), the Company accounted for equity-based compensation under the provisions and related interpretations of SFAS 148 and APB 25. Accordingly, the Company was not required to record compensation expense when stock options were granted to its employees as long as the exercise price was not less than the fair market value of the stock at the grant date. Also, the Company was not required to record compensation expense when the Company issued common stock under its Employee Stock Purchase Plan as long as the purchase price was not less than 85% of the fair market value of the Company’s common stock on the grant date.

Had compensation cost for the Company’s and China.com Inc.’s share-based compensation plans been determined based on the fair value at the grant dates for awards under those plans in accordance with the provisions of SFAS 123, the Company’s net loss and net loss per share for the years ended December 31, 2004 and 2005 would have been as follows:


	Year ended December 31, 2004			Year ended December 31, 2005
Net income (loss):
As reported	$	(5,967	)	$	(3,514	)
Add: Stock compensation expense included in net income (loss)		2,051			1,421
Deduct: Stock compensation expense determined under fair value method		(14,706	)		(11,594	)


Pro forma	$	(18,622	)	$	(13,687	)


Basic earnings (loss) per share:
As reported	$	(0.06	)	$	(0.03	)
Pro forma	$	(0.18	)	$	(0.12	)


Diluted earnings (loss) per share:
As reported	$	(0.06	)	$	(0.03	)
Pro forma	$	(0.18	)	$	(0.12	)

For the purpose of the pro forma disclosures above, the estimated fair value of the options is amortized to expense over the options’ vesting period.

F-21

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(o) Stock Compensation Expenses (continued)

As further discussed in Note 22, on December 29, 2005, the Company accelerated the vesting of approximately 1.7 million unvested share options with exercise prices equal to or greater than $3.50 per share. The closing price of the Company’s common shares on December 28, 2005, the last trading day before the acceleration, was $3.14 per share. The acceleration was effective as of December 29, 2005. The options had a range of exercise prices of $3.79 to $7.38 and a weighted average exercise price of $4.32. The purpose of the acceleration was to enable the Company to avoid recognizing compensation expense associated with these options upon the adoption of SFAS 123(R) in January 2006. The Company also believed that because the options that were accelerated had exercise prices in excess of the current market value of it’s common stock, the options had limited economic value and were not fully achieving their original objective of employee retention and incentive compensation. Included in the computation of pro forma net loss and net loss per share for the period ended December 31, 2005 is $4,433 in share compensation expense related to the accelerated options.

Under SFAS 123(R), the fair value of share-based awards is calculated through the use of the option-pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from the Company’s option grants. These models also require subjective assumptions, including future share price volatility and expected lives of each option grant.

The fair value for each option grant was estimated on the grant date using the Black-Scholes option-pricing model based on the following assumptions:


	Year ended December 31, 2004	Year ended December 31, 2005	Year ended December 31, 2006
Range of U.S. risk-free interest rates	2.08% to 6.77%	4.12% to 4.76%	4.50% to 4.76%
Weighted expected life of options	5 years	5 years	6 years
Range of volatility	75% to 165%	58% to 69%	55% to 58%
Dividend yield	Nil	Nil	Nil

China.com Inc.

The Company’s China.com Inc. subsidiary maintains its own separate stock compensation plans (Note 22). On January 1, 2006, China.com Inc. adopted SFAS 123(R). Prior to January 1, 2006, China.com Inc. accounted for share-based employee compensation arrangements under the recognition and measurement principles of APB 25 and related Interpretations, and complied with the disclosure provisions of SFAS 123. Under APB 25, share compensation expense was recognized by utilizing the accelerated expense attribution method over the vesting period of the share options based on the difference, if any, between the fair value of the underlying China.com Inc.’s shares at the date of grant and the exercise price of the share options.

Prior to the adoption of SFAS 123(R), cash flows resulting from the tax benefit related to equity-based compensation was required to be presented in the operating cash flows, along with other tax cash flows, in accordance with the provisions of EITF 00-15. SFAS 123(R) superseded EITF 00-15, amended SFAS 95, and requires tax benefits relating to excess equity-based compensation deductions to be prospectively presented in the statement of cash flows as financing cash inflows.

F-22

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(o) Stock Compensation Expenses (continued)

China.com Inc. adopted SFAS 123(R) using the modified prospective method. SFAS 123(R) requires measurement of compensation cost for all share based awards at fair value on the date of grant and recognition of compensation over the service period for awards expected to vest. The recognized expense is net of expected forfeitures and the restatement of prior periods is not required.

The fair value of restricted shares is determined based on the number of shares granted and the quoted market price of China.com Inc.’s common shares. SFAS 123(R) did not change the accounting guidance for share-based payment transactions with parties other than employees as originally issued by EITF 96-18. The fair value of options is determined using the Black-Scholes valuation model, which is consistent with China.com Inc.’s valuation techniques previously utilized for options in footnote disclosures under SFAS 123, as amended by SFAS 148. On March 29, 2005, the SEC published SAB 107, which provides the Staff’s views on a variety of matters related to share based payments. SAB 107 requires that share based compensation be classified in the same expense line items as cash compensation.

Prior to its adoption of SFAS 123(R), China.com Inc. accounted for equity-based compensation under the provisions and related interpretations of SFAS 148 and APB 25. Accordingly, China.com Inc. was not required to record compensation expense when stock options were granted to its employees as long as the exercise price was not less than the fair market value of the stock at the grant date.

Under SFAS 123(R), the fair value of share-based awards is calculated through the use of the option-pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from China.com Inc.’s option grants. These models also require subjective assumptions, including future share price volatility and expected lives of each option grant.

The fair value for each option grant was estimated on the grant date using the Black-Scholes option-pricing model based on the following assumptions:


	Year ended December 31, 2004	Year ended December 31, 2005	Year ended December 31, 2006
Risk-free rate	2.73% to 3.42%	3.53% to 4.24%	4.00% to 4.69%
Weighted expected life of options	5 years	5 years	5 years
Range of volatility	76% to 77%	68% to 73%	70% to 73%
Dividend yield	Nil	Nil	Nil

F-23

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(p) Earnings (Loss) Per Share

The Company computes earnings (loss) per share in accordance with SFAS No. 128, “Earnings Per Share” (“SFAS 128”). The Company’s convertible notes (Note 11) meet the definition of a participating security in accordance with EITF 03-6 “Participating Securities and the Two-Class Method under SFAS No. 128”. Therefore, the convertible notes are included in basic earnings per share using the two-class stock method and in diluted earnings per share using the more dilutive of the if-converted method or two-class method. Under the provisions of SFAS 128, basic earnings or loss per share is computed by dividing the net income or loss available to common shareholders for the year by the weighted average number of common shares outstanding during the year. Diluted earnings or loss per share is computed by dividing the net income or loss available to common shareholders for the year, adjusted for any impact to net income or loss by dilutive common equivalent shares, by the weighted average number of common and common equivalent shares outstanding during the year. Common equivalent shares, composed of incremental common shares issuable upon the exercise of stock options, are included in diluted earnings or loss per share to the extent that such shares are dilutive.

(q) Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are carried at their original amount less an estimate made for uncollectible amounts. The Company does not charge interest on receivables.

(r) Notes Receivable

Notes receivable (Note 7) are stated at amortized cost less the allowance for note losses, note origination fees (net of direct costs), commitment fees and purchase premiums or discounts. Interest on notes is credited to income as it is earned. Premiums are amortized and discounts are accreted over the lives of the notes using the interest method.

(s) Comprehensive Income (Loss)

Comprehensive income (loss) includes net earnings or loss as well as additional other comprehensive income (loss) items. The Company’s other comprehensive income (loss) consists of unrealized gains and losses on available-for-sale securities, unrealized gains and losses on held-to-maturity securities and foreign currency translations, all recorded net of tax.

(t) Gain on Issuance of Shares by Subsidiaries

When a subsidiary sells its shares to unrelated parties at a price in excess of its book value, the Company’s net investment in that subsidiary increases. If at that time the subsidiary is not a newly-formed, non-operating entity, nor a research and development, start-up or development stage company, nor is there question as to the subsidiary’s ability to continue in existence, the Company records the increase as a non-operating gain in the Company’s consolidated statement of operations. Otherwise, the increase is reflected in the Company’s consolidated statement of shareholders’ equity.

(u) Retirement Costs

Retirement costs relating to defined benefit plans are actuarially determined based on assumptions concerning the future events that will determine the amount and timing of the benefit payments. Contributions relating to defined contribution plans are made based on a percentage of the employees’ salaries and are included in the Company’s consolidated statement of operations as they become payable.

F-24

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(v) Derivative Instruments

SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), as modified by SFAS No. 149, “Amendment of SFAS 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”), requires all contracts which meet the definition of a derivative to be recognized in the Company’s consolidated financial statements as either assets or liabilities and recorded at fair value. Changes in the fair value of derivative financial instruments are either recognized periodically in the Company’s consolidated statement of operations or in the Company’s consolidated statement of shareholders’ equity as a component of accumulated other comprehensive income (loss) depending on the use of the derivative and whether it qualifies for hedge accounting. Changes in fair values of derivatives not qualified as hedges are reported in the Company’s consolidated statement of operations. The estimated fair values of derivative instruments are determined at discrete points in time based on the relevant market information. These estimates are calculated with reference to the market rates using the industry standard valuation techniques.

(w) Business Restructuring Charges and Related Expenses

The Company accounts for exit or disposal activities in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”) and SFAS No. 112, “Employers’ Accounting for Postemployment Benefits” (“SFAS 112”). In accordance with SFAS 146, a business restructuring is defined as an exit activity that includes but is not limited to a program that is planned and controlled by management, and materially changes either the scope of a business or the manner in which that business is conducted. Business restructuring charges include (i) one-time termination benefits related to employee separations, (ii) contract termination costs, and (iii) other costs associated with consolidating or closing of facilities. SFAS 112 prescribes the accounting for the estimated cost of benefits provided by an employer to former or inactive employees after employment but before retirement.

A liability is recognized and measured at its fair value for one-time termination benefits once the plan of termination is communicated to employees and it meets all of the following criteria: (i) management commits to a plan of termination, (ii) the plan identifies the number of employees to be terminated, their job classifications or functions, locations and the expected completion date, (iii) the plan establishes the terms of the benefit arrangement, and (iv) it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. Contract termination costs include costs to terminate a contract or costs that will continue to be incurred under the contract without benefit to the Company. A liability is recognized and measured at its fair value when the Company either terminates the contract or ceases using the rights conveyed by the contract. A liability is recognized and measured at its fair value for other associated costs in the period in which the liability is incurred.

F-25

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(x) Recent Accounting Pronouncements

In February 2006, the FASB issued SFAS 155. It allows financial instruments that have embedded derivatives that otherwise would require bifurcation from the host to be accounted for as a whole, if the holder irrevocably elects to account for the whole instrument on a fair value basis. Subsequent changes in the fair value of the instrument would be recognized in earnings. The standard also clarifies which interest-only strips and principal-only strips are not subject to the requirement of SFAS 133; establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued by the Company after January 1, 2007. The Company is evaluating the effect of the adoption of SFAS 155. It is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS 109. FIN 48 clarifies the application of SFAS 109 by defining criteria that an individual tax position must meet for any part of the benefit of that position to be recognized in the financial statements. Additionally, FIN 48 provides guidance on the measurement, derecognition, classification and disclosure of tax positions, along with accounting for the related interest and penalties. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. Management is currently evaluating the impact this new standard will have on its financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. Specifically, SAB 108 requires that public companies utilize a “dual-approach” to assessing quantitative effects of financial misstatements. This dual approach includes both an income statement focused assessment and a balance sheet focused assessment. The guidance in SAB 108 must be applied to annual financial statements for fiscal years ending after November 15, 2006. SAB 108 did not have an effect on the Company’s financial position, cash flows or results of operations for the year ended December 31, 2006.

F-26

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(x) Recent Accounting Pronouncements (continued)

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact this new standard will have on its financial statements.

3.	BUSINESS COMBINATIONS

(a) Pivotal Corporation (“Pivotal”)

On February 25, 2004, the Company acquired a 100% equity interest in Pivotal through the acquisition of the entire issued share capital of Pivotal. In accordance with SFAS No. 141, “Business Combinations” (“SFAS 141”), this acquisition has been accounted for under the purchase method of accounting and the results of Pivotal’s operations have been included in the Company’s consolidated financial statements since the date of acquisition. Pivotal is a developer of CRM software solutions in Canada. The acquisition of Pivotal provided a complement to the Company’s existing portfolio of proprietary software solutions.

The total purchase price comprised of $35,925 in cash, 1,846,429 CDC Class A common shares valued at $21,363 at the commitment date, CDC stock options issued in exchange for vested in-the-money Pivotal stock options with a total value of $481, and transaction costs of $348.

(b) Group Team Investments Ltd. (“Group Team”)

On May 20, 2004, the Company acquired a 100% equity interest in Group Team through the acquisition of its entire issued share capital. The principal assets of Group Team are its investment in Beijing He He IVR Mobile Technology Limited (“Beijing He He IVR”), which is held through another wholly-owned subsidiary, and its interest in Beijing He He Technology Co., Ltd. (“Beijing He He”). Group Team, through Beijing He He IVR and Beijing He He, is engaged in the provision of MVAS to mobile phone subscribers in the PRC. In accordance with SFAS 141, this acquisition has been accounted for under the purchase method of accounting and the results of Group Team’s consolidated operations have been included in the Company’s consolidated financial statements since the date of acquisition. The Group Team acquisition expanded the Company’s MVAS operations in the PRC.

F-27

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

3.	BUSINESS COMBINATIONS (continued)

(b) Group Team Investments Ltd. (“Group Team”) (continued)

The components of the purchase price were: (i) an initial cash consideration of $9,600; and (ii) an earn-out cash consideration which is equal to the aggregate of (a) an amount equal to the audited net income of Group Team’s consolidated operations for the year ended December 31, 2004 multiplied by 9.9 at 50% (“First Earnout Payment”) and (b) an amount equal to the audited net income of Group Team’s consolidated operations for the year ended December 31, 2005 multiplied by 9.9 at 15% (“Second Earnout Payment”). The total purchase consideration is not to exceed $60,000.

The initial cash consideration of $9,600 was paid in April 2004. The estimated First Earnout Payment of $12,559 was accrued for at December 31, 2004. During 2005, the First Earnout payment was adjusted to $12,978 and was paid in April 2005. The Company did not pay the Second Earnout Payment because Group Team had a net loss in 2005.

Subsequent to the acquisition, on August 18, 2004, the investment was transferred to China.com Inc., a 77% owned subsidiary of the Company. This deemed disposal resulted in a gain on deemed disposal of $253 for the year ended December 31, 2004.

(c) Ross Systems, Inc. (“Ross”)

On August 26, 2004, the Company acquired a 100% equity interest in Ross through the acquisition of the entire issued share capital of Ross. In accordance with SFAS 141, this acquisition has been accounted for under the purchase method of accounting and the results of Ross’ operations have been included in the Company’s consolidated financial statements since the date of acquisition. Ross’ core business is the provision of enterprise software products to mid-market clients. The Ross acquisition expanded the Company’s enterprise software product portfolio.

The total purchase price comprised of $40,707 in cash, 6,111,117 CDC Class A common shares valued at $26,584 at the commitment date (120,848 shares valued at $526 remained unpaid as of December 31, 2004), CDC stock options issued in exchange for vested in-the-money Ross stock options with a total value of $1,708, and transaction costs of $1,129.

(d) Equity Pacific

In August 2004, China.com Inc. entered into an acquisition agreement to acquire an 11.11% equity interest in Equity Pacific and its subsidiaries (the “17game Group”). In November 2004, China.com Inc., through the conversion of certain convertible loans to the 17game Group, further increased its interest in 17game Group to 36.5%. In August 2005, China.com Inc. acquired an additional 11.5% interest in 17game Group through the purchase of shares from other shareholders and subscription of new shares, increasing its interest in 17game Group to 48%. These acquisitions resulted in a total consideration of $6,618 and were accounted for using the equity method.

On March 17, 2006, China.com Inc. acquired the remaining 52% of 17game Group. In accordance with SFAS 141, this acquisition has been accounted for under the purchase method of accounting. 17game Group will continue to be operated under CDC Games Limited (“CDC Games”) and has facilitated CDC Games’ integration of its online game business and solidified CDC Games’ position as one of the leading MMORPG operators in China.

F-28

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

3.	BUSINESS COMBINATIONS (continued)

(d) Equity Pacific (continued)

The remaining 52% of 17game Group was acquired for an aggregate total consideration of $18,000 with approximately $4,800 being paid in cash and $13,000 being paid in restricted China.com Inc. shares with the restrictions lapsing over a period of two years with 25% lapsing on the first six (6) months anniversary of closing and 12.5% lapsing on each subsequent three (3) month anniversaries of closing.

The purchase price for 17game Group has been allocated to the assets acquired and liabilities assumed based on management’s preliminary estimate of their respective fair values as of the date of the acquisition. Final allocations will be performed when estimates are finalized. The company expects no significant changes in fair value pending the completion of the fair value analyses by management. The preliminary allocation of the purchase price of $24,618, including direct expenses related to the acquisition was as follows:


				Useful Life
Current assets	$	6,668
Goodwill		14,765
Customer base		1,510		1 years
Contract backlog		6,850		4 years
Developed technologies		16		1-5 years

Total assets acquired		29,809


Current liabilities		(4,699	)
Deferred tax liabilities		(492	)

Total liabilities assumed		(5,191	)


Net assets acquired	$	24,618

The goodwill was assigned to the CDC Games segment and such goodwill is not deductible for tax purposes.

(e) DB Professionals, Inc. (“DBPI”)

On July 7, 2006, CDC Business Solutions, Inc, a wholly owned subsidiary of the Company, acquired a 100% equity interest in DBPI through the acquisition of its entire issued share capital. In accordance with SFAS 141, this acquisition has been accounted for under the purchase method of accounting and the results of DBPI’s operations have been included in the Company’s consolidated financial statements since the date of acquisition. DBPI’s core business is outsourced information technology support and consulting services. The acquisition of DBPI extended the Company’s business services operations on the west coast of the U.S.

The Company acquired the business of DBPI for a total purchase price of $10,467 comprising of cash consideration of $8,850 payable upon closing, fixed payment of $1,400 payable on December 31, 2007 and $217 in direct expenses related to the acquisition. In addition, the Company also agreed to pay additional cash consideration of $1,400, payable April 30, 2008, based on a specified financial target, subject to an upward or downward adjustment. The contingent cash payment is also subject to adjustment in the event of breaches of representations and warranties.

F-29

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

3.	BUSINESS COMBINATIONS (continued)

(e) DB Professionals, Inc. (“DBPI”) (continued)

The purchase price for DBPI has been allocated to the assets acquired and liabilities assumed based on management’s preliminary estimate of their respective fair values as of the date of the acquisition. Final allocations will be performed when estimates are finalized. The company expects no significant changes in fair value pending the completion of the fair value analyses by management. The preliminary allocation of the purchase price of $10,467, including direct expenses related to the acquisition was as follows:


				Useful Life
Current assets	$	3,308
Property and equipment, net		51
Goodwill		4,285
Customer base		3,000		8 years
Work force		400		2-75 years
Trade Name		320		3 years

Total assets acquired		11,364


Deferred tax liabilities		(897	)

Total liabilities assumed		(897	)


Net assets acquired	$	10,467

The goodwill was assigned to the Business Services segment and such goodwill is deductible for tax purposes.

(f) TimeHeart Science Technology Limited (the “TimeHeart Group”)

On November 28, 2006, China.com Inc. acquired a 100% equity interest in the TimeHeart Group through the acquisition of its entire issued share capital. In accordance with SFAS 141, this acquisition has been accounted for under the purchase method of accounting and the results of the TimeHeart Group’s operations have been included in the Company’s consolidated financial statements since the date of acquisition. TimeHeart Group’s core business is value-added telecom services. The acquisition of the TimeHeart Group complements the Company’s current mobile services and applications platform and provides the Company with the opportunity to further expand its market share.

The components of the purchase price were: (i) cash consideration of $2,113; (ii) 27,320,490 restricted shares of China.com Inc. valued at $1,605 at the commitment date; (iii) 10% of the issued share capital of CDC Mobile Media Corporation, a subsidiary of the Company, valued at $1,794 at the date of acquisition; and (iv) contingent consideration which is based on a formula set out in the Agreement which will vary based on the performance of the TimeHeart Group in the fourth quarter of 2006 and in the year 2007. The contingent consideration is in the form of restricted shares of China.com Inc., equivalent to a maximum amount of $2,080. As of December 31, 2006, this contingent consideration had not been earned and accordingly, no adjustment for the contingent payment has been recorded in the consolidated financial statements.

F-30

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

3.	BUSINESS COMBINATIONS (continued)

(f) TimeHeart Science Technology Limited (the “TimeHeart Group”)

The purchase price for TimeHeart Group has been allocated to the assets acquired and liabilities assumed based on management’s preliminary estimate of their respective fair values as of the date of the acquisition. Final allocations will be performed when estimates are finalized. The company expects no significant changes in fair value pending the completion of the fair value analyses by management. The preliminary allocation of the purchase price of $5,512, including direct expenses related to the acquisition was as follows:


				Useful Life
Current assets	$	1,728
Property and equipment, net		168
Goodwill		372
Customer base		3,000		1 year
Contract backlog		901		2-2.5 years
Developed technologies		1,080		4 years

Total assets acquired		6,495


Current liabilities		(722	)
Deferred tax liabilities		(261	)

Total liabilities assumed		(983	)


Net assets acquired	$	5,512

The goodwill was assigned to the Mobile Services and Applications segment and such goodwill is not deductible for tax purposes.

(g) Vis.align, Inc. (“Vis.align”)

On December 1, 2006, CDC Software acquired a 100% equity interest in Vis.align through merger. In accordance with SFAS 141, this acquisition has been accounted for under the purchase method of accounting and the results of Vis.align’s operations have been included in the Company’s consolidated financial statements since the date of acquisition. Vis.align’s core business is providing worldwide IT support and managed services. The acquisition of Vis.align expands the Company’s services portfolio, generates cross-selling opportunities and offers customers additional end-to-end enterprise solutions and services.

The Company acquired the business of Vis.align for a cash payment of approximately $4,650. In addition to the fixed cash payment, a contingent payment of up to $7,520 is payable, partly in cash and partly in Class A common shares of the Company, based upon 2007 and 2008 revenues. Revenues of Vis.align must exceed $20,000 during each annual period for any additional consideration to be payable for that period. Management has determined that these contingent payments are not probable; therefore, no accrual has been recorded at December 31, 2006.

F-31

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

3.	BUSINESS COMBINATIONS (continued)

( g) Vis.align, Inc. (“Vis.align”) (continued)

The purchase price for Vis.align has been allocated to the assets acquired and liabilities assumed based on management’s preliminary estimate of their respective fair values as of the date of the acquisition. Final allocations will be performed when estimates are finalized. The company expects no significant changes in fair value pending the completion of the fair value analyses by management. The preliminary allocation of the purchase price of $4,650, including direct expenses related to the acquisition was as follows:


				Useful Life
Property and equipment, net		261
Goodwill		1,838
Customer base		3,900		4 years
Contract backlog		860		2.1 years
Trade Name		230		5 years

Total assets acquired		9,642

Current liabilities		(4,759	)
Deferred tax liabilities		(233	)

Total liabilities assumed		(4,992	)

Net assets acquired	$	4,650

The goodwill was assigned to the Software segment and such goodwill is not deductible for tax purposes.

(h) Unaudited pro forma consolidated financial information

The following unaudited pro forma consolidated information reflects the Company’s consolidated results of operations for the years ended December 31, 2005 and 2006 as if the acquisitions of 17game Group, DBPI, the TimeHeart Group and Visalign had occurred at January 1, 2005 and January 1, 2006, respectively. These pro forma results have been prepared for information purposes only and do not purport to be indicative of what the Company’s consolidated results of operations would have been had the acquisitions of these subsidiaries actually taken place on January 1, 2005 and 2006, respectively, and may not be indicative of future results of operations.


	Year ended December 31,
	2005			2006
Revenues	$	298,965		$	390,270
Net (loss) income from continuing operations	$	(6,297	)	$	16,781
Net (loss) income per common share—basic	$	(0.04	)	$	0.16
Net (loss) income per common share—diluted	$	(0.04	)	$	0.16

F-32

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

3.	BUSINESS COMBINATIONS (continued)

During 2006, the Company acquired the following individually insignificant entities for a total cost of $11,550 which was paid primarily in cash. In accordance with SFAS 141, these acquisitions have been accounted for under the purchase method of accounting and the results of each respective acquisition’s operations have been included in the Company’s consolidated financial statements since the date of acquisition.

In conjunction with individually insignificant acquisitions the Company acquired the following intangible assets by major class with the following weighted-average useful lives:


			Useful Life
Customer base:	$	9,790	4-10 years
Developed technologies:	$	3,120	6-7 years
Trade Names:	$	470	1-5 years
Total:	$	13,380	7.7 years

(i) Horizon IT Outsourcing Business (“Horizon”)

In February 2006, Software Galeria Inc., the Company’s 51% owned subsidiary (“SGI”), acquired the IT consulting services business of Horizon, which offers outsourced information technology professional services in the U.S. and Canada, utilizing India-based resources. The acquisition enabled the Company to enhance the Business Services segment through growth of outsourced information technology professional services line of business. Under the terms of the agreement, the Company paid $608 in cash at closing and paid an additional $608 of cash consideration in installments during 2006. The Company also agreed to pay additional cash consideration of $1,000 in 2007 and 2008 based on earnings before interest, taxes, depreciation and amortization (“EBITDA”) and 2007 EBITDA generated from the purchased business was, in each such year, at least $1,350. The additional consideration payments are subject to upward and downward adjustment, dollar-for-dollar, in the event 2006 EBITDA and 2007 EBITDA is less than or greater than the targeted EBITDA amounts. The additional consideration payments are also subject to adjustment in the event of breaches of representations and warranties. In accordance with EITF 95-08 “Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination” (“EITF 95-08”), the Company has accounted for these additional contingent payments as compensation because in accordance with the purchase agreement the payment is automatically forfeited if employment terminates and it was probable that certain performance criteria were going to be met. The Company has accrued $1,400 at December 31, 2006. Related to these additional consideration payments. In addition, the Company agreed to issue to the sellers up to a 20% equity interest in the entity formed to acquire the assets purchased from Horizon in the event the EBITDA generated from the purchased business exceeds specified targets during each of 2006, 2007 and 2008. No equity was issued to the sellers in 2008. The sellers have the right to put their equity interest back to the Company between April 2009 and April 2011 at a predetermined and fixed cash consideration. The fair value of this put was determined to be a nominal amount.

(j) c360 Solutions Incorporated (“c360”)

In April 2006, a subsidiary of the Company acquired 100% of the shares in c360, a global provider of CRM add-on products, industry-specific CRM solutions, and CRM development tools for Microsoft Dynamics CRM. The acquisition enabled the Company to expand globally through channel sales partners, and complements its market strategy to target mid-to-large sized organizations. Under the terms of the agreement, the Company paid $1,250 of cash and the Company issued 50,000 of its unregistered Class A common shares at closing. The 50,000 shares were valued as of the commitment date at $225. In addition, the Company paid $875 of additional cash consideration in January 2007 and agreed to pay $875 of additional cash consideration on the eighteen month anniversary of closing. The Company also agreed to issue to the sellers an additional 350,000 unregistered Class A common shares to be issued in 50,000 share increments every three months through the twenty-one month anniversary of closing. The 350,000 shares were valued as of the commitment date at $1,572. An additional 200,000 unregistered Class A common shares may be earned by the seller based upon certain performance targets through 2009. In accordance with EITF 95-08, the Company has accounted for these additional contingent shares as compensation because in accordance with the purchase agreement the payment is automatically forfeited if employment terminates and it was probable that certain performance criteria were going to be met. The Company has accrued $153 at December 31, 2006. Related to these additional consideration payments.

F-33

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

3.	BUSINESS COMBINATIONS (continued)

(j) c360 Solutions Incorporated (“c360”)

Through June 25, 2007, an additional 250,000 unregistered Class A common shares of the Company had been issued. In addition, the Company has agreed to issue up to an aggregate of 200,000 additional unregistered Class A common shares of the Company between the twenty-four and thirty-three month anniversary of closing in the event c360 achieves certain revenue targets. Approximately $475 of the purchase price is subject to adjustment for breaches of representations and warranties.

(k) OST International, Inc. (“OSTI”)

In June 2006, the Company acquired OSTI. OSTI is a preferred third party vendor of consulting and outsourced IT services to many Fortune 500 companies, which expanded the Company’s business offerings to the Midwest region of the U.S. Under the terms of the agreement, the Company paid $3,000 in cash at closing. A cash payment in the amount of $280 was made on March 31, 2007 for the net tangible assets of the Company. In addition, the Company agreed to issue to the selling shareholder $330 worth of its unregistered Class A common shares prior to June 15, 2008 and an additional $220 worth of its unregistered Class A common shares prior to June 15, 2009. The Company also agreed to pay additional cash consideration in the amounts of $300 and $400 in the event 2007 EBITDA and 2008 EBITDA for OSTI is $1,350 and $1,450, respectively. The additional consideration payments are subject to upward and downward adjustment, dollar-for-dollar, in the event 2007 EBITDA and 2008 EBITDA are less than or greater than the targeted EBITDA amounts. The additional consideration payments are also subject to adjustment in the event of breaches of representations and warranties.

(l) MVI Technology (“MVI”)

In October 2006, the Company acquired MVI. MVI is a developer of a Real-time Performance Management solutions specifically designed for the food and beverage and consumer products industries that enables manufacturers to merge automated shop floor data, quality process control and manufacturing performance dashboards. Under the terms of the agreement, the Company paid approximately $5,273 of cash at closing. In addition, the Company agreed to pay up to a maximum of $12,000 of additional consideration based upon the revenues of MVI between months 1 through 12, 13 through 24 and 25 through 36 following the closing. Revenues must exceed $6,000 during each 12 month period for any additional consideration to be payable for that period. Any additional consideration will be paid in the form of cash. The additional consideration payments are subject to adjustment in the event of breaches of representations and warranties, and various other adjustments. In accordance with EITF 95-08, the Company has accounted for these additional contingent payments as compensation because in accordance with the purchase agreement the payment is automatically forfeited if employement terminates and it was probable that certain performance criteria were going to be met. The Company has accrued $164 at December 31, 2006 related to these additional consideration payments.

Goodwill recognized in conjunction with these individually insignificant acquisitions amounted to $2,520 and $1,578 and was assigned to the Software segment and Business Services segment, respectively; $1,578 of such goodwill is expected to be deductible for tax purposes.

In 2005 and 2006, the Company paid $2,059 and $752, respectively, in additional earn-out considerations related to the acquisitions that were made before January 1, 2005. The Company will not be required to pay any additional earn-out considerations related to pre January 1, 2005 acquisitions.

F-34

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

4.	RESTRICTED CASH

At December 31, 2005 and 2006, cash of $1,886 and $1996, respectively, was pledged for banking facilities of the Company.

5.	ACCOUNTS RECEIVABLE


	December 31, 2005			December 31, 2006
Accounts receivable:
Amounts billed	$	45,724		$	62,781
Unbilled		5,877			7,029

		51,601			69,810
Allowance for doubtful accounts		(4,112	)		(5,373	)

Net	$	47,489		$	64,437


	Year ended December 31, 2004			Year ended December 31, 2005			Year ended December 31, 2006
Allowance for doubtful accounts:
Balance at beginning of year	$	2,816		$	4,011		$	4,112
Additions		4,834			1,450			2,890
Write-offs, net of recoveries		(3,639	)		(1,349	)		(1,629	)

Balance at end of year	$	4,011		$	4,112		$	5,373

Unbilled receivables represent the recognized sales value of performance relating to the Software and Business Services segments and these amounts had not been billed and were not billable to the customers at the balance sheet date. The balances will be billed upon the fulfillment of certain conditions agreed between the parties.

6.	INVESTMENTS

In 2006, the Company acquired an equity interest in preference shares in two collateralized debt obligations (“CDOs”) coupled with a U.S. treasury strip for an aggregate nominal amount of $38,700. These investments are subject to variability as there is no stated coupon rate and the equity interest in these investments are subject to changes in returns on the collateralized debt backing the interest. Although the principal amount in these investments are backed by U.S. treasury strips, our equity holding in the CDOs, which represents approximately 55% of the investment value at December 31, 2006, has significant risk of loss should the collateralized debt underlying the investment deteriorate in quality (Note 20).

F-35

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

6.	INVESTMENTS (continued)

In conjunction with the purchase of the CDOs, the Company pledged certain held-to-maturity U.S. agency bonds as collateral under multiple note purchase agreements (Note 11). The pledged U.S. agency bonds are being used to repay the debt when such U.S. agency bonds mature. The total amount of securities pledged at December 31, 2006 was $30,504, all of which is classified as a restricted investment.

At December 31, 2004, 2005 and 2006, the Company evaluated the length of time and extent to which the fair market value of certain of its securities had been less than their cost, as well as the financial condition and performance of the issuer and the Company’s intention and ability to hold such securities to recovery or maturity. The Company records an impairment loss on securities for which the decrease in fair value of the debt securities was determined to be other-than-temporary. At December 31, 2005 and 2006, none of the Company’s securities were determined to have an other-than-temporary impairment.

Available-for-sale securities consist of the following:


	December 31, 2005
	Estimated Fair Value		Gains in Accumulated Other Comprehensive Income		Losses in Accumulated Other Comprehensive Income
Current:
Corporate securities	$	10,003	$	—	$	(192	)
U.S. government securities		24,953		21		(342	)

Total debt securities		34,956		21		(534	)

Common Stock		659		251		(14	)

Total equity securities		659		251		(14	)

Less: restricted securities pledged for banking facilities		11,838		—		342

Total current non-restricted available-for-sale securities		23,777		272		(206	)

Noncurrent:
U.S. government securities		113,195		—		(2,840	)

Total debt securities		113,195		—		(2,840	)

Less: restricted securities pledged for banking facilities		20,432		—		505

Total noncurrent non-restricted available-for-sale securities		92,763		—		(2,335	)

Total non-restricted available-for-sale securities	$	116,540	$	272	$	(2,541	)

F-36

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

6.	INVESTMENTS (continued)


	December 31, 2006
	Estimated Fair Value		Gains in Accumulated Other Comprehensive Income		Losses in Accumulated Other Comprehensive Income
Current:
U.S. government securities	$	10,869	$	—	$	(187	)

Total debt securities		10,869		—		(187	)

Common Stock		3,532		1		(936	)

Total equity securities		3,532		1		(936	)

Total current non-restricted available-for-sale securities		14,401		1		(1,123	)

Noncurrent:
U.S. government securities		73,036		—		(1,946	)
CDOs		39,009		—		(692	)

Total debt securities		112,045		—		(2,638	)

Total noncurrent non-restricted available-for-sale securities		112,045		—		(2,638	)

Total non-restricted available-for-sale securities	$	126,446	$	1	$	(3,761	)

The gross realized gains on sales of available-for-sale securities totaled $384, $584 and $392, in 2004, 2005 and 2006, respectively. The gross realized losses on sales of available-for-sale debt securities totaled $217, $59 and $224, in 2004, 2005 and 2006, respectively.

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2005 and 2006.


	December 31, 2005
	Less Than 12 Months				12 Months or Greater				Total
Description of securities	Fair value		Unrealized loss		Fair value		Unrealized loss		Fair value		Unrealized loss
U.S. Treasury obligations	$	9,814	$	187	$	133,102	$	3,187	$	142,916	$	3,374
CDOs		—		—		—		—		—		—
Marketable equity securities		70		14		—		—		70		14

Total	$	9,884	$	201	$	133,102	$	3,187	$	142,986	$	3,388


	December 31, 2006
	Less Than 12 Months				12 Months or Greater				Total
Description of Securities	Fair value		Unrealized loss		Fair value		Unrealized loss		Fair value		Unrealized loss
U.S. Treasury obligations	$	—	$	—	$	114,423	$	2,372	$	114,423	$	2,372
CDOs		39,009		692		—		—		39,009		692
Marketable equity securities		3,047		61		—		—		3,047		61

Total	$	42,056	$	753	$	114,423	$	2,372	$	156,479	$	3,125

F-37

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

6.	INVESTMENTS (continued)

The unrealized losses on the Company’s investments in U.S. Treasury obligations were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2005 and 2006.

The unrealized losses on the Company’s CDOs were caused by speculation of potential future asset deterioration and the difference in the rate of returns offered on comparable investments with comparable risks at December 31, 2006. The Company has evaluated the near-term prospects of the underlying collateralized debt and determined that it has had zero defaults and is passing all of its overcollateralization ratio tests. Based on that evaluation and the Company’s ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2006.

The Company’s investments in marketable equity securities consist primarily of investments in common stock. The Company has evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation and the Company’s ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2006.

Prior to 2005, the Company considered all debt and equity securities with a sustained decline in market values for six months or more to be other than temporarily impaired because the Company did not have the ability and intent to hold those investments until a recovery of fair value. In 2004, the Company recorded impairment losses on certain available-for-sale debt securities of $990.

The Company did not have any securities classified as held-to-maturity at December 31, 2005. The following table summarizes the Company’s held-to-maturity securities as of December 31, 2006:


	December 31, 2006
	Net Carrying Amount		Unrecognized Holding Gains		Unrecognized Holding Losses			Estimated Fair Value
Current:
U.S. government securities	$	30,504	$	—	$	(341	)	$	30,163
Less: restricted securities pledged for banking facilities		30,504		—		341			30,163

Total current non-restricted securities	$	—	$	—	$	—		$	—

For the years ended December 31, 2004, 2005 and 2006, the Company did not record any gross realized gains or gross realized losses on sales of held-to-maturity securities.

At December 31, 2006, all the available-for-sale securities were carried at market value and all held-to-maturity securities were carried at amortized cost. Temporary unrealized gains and losses at December 31, 2006 related to the available-for-sale securities were reported in accumulated other comprehensive income (loss).

F-38

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

6.	INVESTMENTS (continued)

All available-for-sale and held-to-maturity securities held by the Company have maturity terms ranging from one to ten years. At December 31, 2005 and 2006, the Company’s debt securities had maturity dates falling due as follows:


	December 31, 2005		December 31, 2006
Maturity date:
Available-for-sale
One year or less	$	34,956	$	10,869
Within one year to five years		113,195		73,036
Within five years to ten years		—		—

	$	148,151	$	83,905

Held-to-maturity
One year or less		—		30,504
Within one year to five years		—		—
Within five years to ten years		—		—

	$	—	$	30,504

Included in the total available-for-sale debt securities as of December 31, 2005 and 2006 were debt securities with a market value of $32,270 and Nil, respectively, which were segregated and secured in accordance with the Company’s lines of credit as further discussed in Note 11.

Included in the total held-to-maturity debt securities as of December 31, 2005 and 2006 were debt securities with a market value of Nil and $30,504, respectively, which were segregated and secured in accordance with the Company’s note purchase agreements as further discussed in Note 11.

F-39

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

7.	NOTE RECEIVABLE

In connection with the Company’s 51% ownership interest in Cayman First Tier (“Cayman”), an investment holding company organized in the Cayman Islands, the Company invested $25,000 into Cayman, and has also allowed Cayman to loan to Symphony Enterprise Solutions, S.ar.L. (“Symphony”), the 49% minority owner of Cayman, $25,000 (“Symphony Note”). All the funds provided to Cayman were used primarily for further expansion in the supply chain management software sector via acquisitions, strategic investments and organic growth. The loan bears interest at 3% per annum and is repayable in November 2007. Accrued interest is payable quarterly in the event Symphony’s net worth falls below the amount outstanding under the Symphony Note. Symphony has the option of prepaying borrowed amounts at any time upon three business days’ notice without penalty or premium, in increments of $100. Symphony’s obligations under the promissory note are secured by a pledge from Symphony in favor of Cayman of all of Symphony’s rights, title and interest in Symphony’s 49% interest in Cayman. The promissory note allows Cayman to declare the note immediately due and payable upon the occurrence of events of default typical for such promissory notes including payment defaults, Symphony’s inability to pay its debts as they become due or insolvency, or the failure to create a valid lien on the collateral to secure the loan.

F-40

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

8.	PROPERTY AND EQUIPMENT


	December 31, 2005			December 31, 2006
Leasehold improvements	$	2,133		$	2,160
Furniture and fixtures		747			761
Office equipment		1,649			1,303
Computer equipment		26,312			28,869
Motor vehicles		320			151

		31,161			33,244
Less: Accumulated depreciation		(24,935	)		(23,704	)

Property and Equipment, net	$	6,226		$	9,540

Depreciation expense was $3,721, $3,866 and $4,385 for the years ended December 31, 2004, 2005 and 2006, respectively.

9.	GOODWILL

The changes in the carrying amount of goodwill for the years ended December 31, 2005 and 2006 are as follows:


	Software			Business Services			Mobile Services and Applications			Internet and Media			CDC Games		Total
Balance as of December 31, 2004	$	114,204		$	18,474		$	63,401		$	5,659		$	—	$	201,738
Reallocation of goodwill		—			362			—			(362	)		—		—
Foreign currency adjustment		(3,781	)		(443	)		1,552			138			—		(2,534	)
Goodwill acquired during the year		—			2,048			1,521			—			—		3,569
Purchase accounting adjustments		(3,241	)		712			419			—			—		(2,110	)

Balance as of December 31, 2005		107,182			21,153			66,893			5,435			—		200,663
Foreign currency adjustment		2,886			493			2,412			183			—		5,974
Goodwill acquired during the year		4,358			5,863			2,246			—			14,765		27,232
Subsequent realization of tax benefit from acquired companies		(27,362	)		(1,006	)		(451	)		—			—		(28,819	)
Purchase accounting adjustments		—			—			—			—			—		—

Balance as of December 31, 2006	$	87,064		$	26,503		$	71,100		$	5,618			14,765	$	205,050

F-41

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

10.

INTANGIBLE ASSETS

The following table summarizes the Company’s amortized intangible assets as of December 31:


	2005							2006
	Gross carrying amount		Accumulated amortization			Net		Gross carrying amount		Accumulated amortization			Net
URLs	$	16,956	$	(3,390	)	$	13,566	$	16,950	$	(4,238	)	$	12,712
Software applications and programs		46,374		(12,984	)		33,390		61,057		(20,726	)		40,331
Customer base and contracts		26,126		(10,277	)		15,849		47,593		(17,413	)		30,180
Business licenses and partnership agreements		5,290		(2,462	)		2,828		18,137		(6,092	)		12,045
Other		—		—			—		1,020		(160	)		860

Intangible Assets	$	94,746	$	(29,113	)	$	65,633	$	144,757	$	(48,629	)	$	96,128

These intangible assets are amortized on the straight-line basis over the estimated economic lives of the assets. The Company had trademarks not subject to amortization with carrying values of $7,941 as of December 31, 2005 and 2006.

Amortization expense was $11,496, $13,433 and $18,002 for the years ended December 31, 2004, 2005 and 2006, respectively. The following table summarizes the estimated amortization expense for each of the following five years based on the current amount of intangible assets subject to amortization:


Year ended December 31:
2007	$	22,384
2008	$	19,729
2009	$	11,419
2010	$	9,382
2011 and thereafter	$	33,214

F-42

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

11.

FINANCING ARRANGEMENTS

Financing arrangements at December 31, 2005 and 2006 was as follows:


	December 31, 2005		December 31, 2006
Convertible notes	$	—	$	161,859
Credit line agreements	$	26,249	$	—
Financing agreements	$	—	$	18,700

(a) Convertible Notes

In November 2006, the Company issued $168,000 aggregate principal amount of 3.75% senior exchangeable, unsecured convertible notes due 2011 to a total of 12 institutional accredited investors in a private placement exempt from registration under the Securities Act.

The aggregate number of common shares of each subsidiary that the Company is required to deliver to holders in connection with exchanges of the notes is capped at a maximum of 33.33% of the number of shares of each subsidiary’s common stock outstanding as of the time of the exchange.

The investors have agreed to a lock-up period of up to 180 days following the date of an IPO prospectus during which the investors will refrain from selling any of each subsidiary’s respective common shares.

F-43

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

11.

FINANCING ARRANGEMENTS (continued)

(a) Convertible Notes (continued)

Contingent Written Put Option 1. If a qualified IPO (defined as gross proceeds before underwriting discounts, commissions and fees, to the Company and any of its selling shareholders are at least $100,000, provided that the total gross proceeds to all selling shareholders is not in excess of 30% of the total proceeds from the IPO) by either of the two wholly-owned subsidiaries of the Company has not occurred within the first three years of issuance of the notes, the holder has the right to force the Company to repurchase all or any portion of an outstanding note in cash for an amount equal to the sum of (i) the principal of the note, (ii) all accrued and unpaid interest and (iii) any additional amounts. The accrued and unpaid interest amount will be based on an interest premium of 12.5% applied retroactively as of the issue date. The additional amounts refers to the event in which the taxing jurisdiction of the U.S., Cayman Islands or the PRC were to require the Company to withhold or deduct a tax from any of the payments it is contractually obligated to make to the holder under the terms of the note agreement. The Company is required to bifurcate this put option pursuant to SFAS 133.

Contingent Written Put Option 2. If the Company or either of the two wholly-owned subsidiaries undergoes a change of control (defined as (i) a person or group obtaining 50% or more of the total voting power of all classes of capital stock, (ii) current members of the Board of Directors cease to constitute a majority of that board or (iii) consolidation into or merger with another entity or disposition of substantially all of the Company’s or the two wholly-owned subsidiaries assets, the holder has the right to force the Company to repurchase all or any portion of the outstanding note in cash for an amount equal to the sum of (i) the principal of the note, (ii) all accrued and unpaid interest, (iii) any additional amounts and (iv) a premium of 5% of the principal. The accrued and unpaid interest amount will be based on an interest premium of 12.5% applied retroactively as of the issue date. The additional amounts refers to the event in which the taxing jurisdiction of the U.S., Cayman Islands or the PRC were to require the Company to withhold or deduct a tax from any of the payments it is contractually obligated to make to the holder under the terms of the note agreement. The Company is required to bifurcate this put option pursuant to SFAS 133.

Contingent Written Put Option 3. If the Company sustains an event of default (defined as (i) failure to pay when due any principal and/or interest due on the note, (ii) default or breach in the performance of any material covenants in the note agreement or failure to timely file with the SEC all reports required to be filed pursuant to the Securities Exchange Act of 1934, as amended, (iii) default or breach in the performance of any of the material covenants in the registration rights agreement or payment of any liquidated damages under such agreement as and when due, (iv) bankruptcy, insolvency or the appointment of receivership of the Company or any of its material subsidiaries, (v) court decree that it is illegal for the Company or either of the two wholly-owned subsidiaries to comply with any of its material obligations under the note agreement and related agreements, (vi) any default of indebtedness of the Company or any of its subsidiaries that individually or in the aggregate exceeds $5,000 and such default results in the redemption or acceleration of such indebtedness, or (vii) judgment against the Company or any of its material subsidiaries for payment of money in excess of $5,000, which is not discharged within 60 days) the

F-44

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

11.

FINANCING ARRANGEMENTS (continued)

(a) Convertible Notes (continued)

holder has the right to force the Company to repurchase all or any portion of the outstanding note in cash for an amount equal to the sum of (i) the principal of the note, (ii) all accrued and unpaid interest and (iii) any additional amounts. The accrued and unpaid interest amount will be based on the lower of 18% or the highest rate permitted by applicable law, applied retroactively as of the issue date. The additional amounts refers to the event in which the taxing jurisdiction of the U.S., Cayman Islands or the PRC were to require the Company to withhold or deduct a tax from any of the payments it is contractually obligated to make to the holder under the terms of the note agreement.

Contingent Payment 1. If a qualified IPO has not occurred by the maturity of the notes and assuming the notes are still outstanding at that time, the interest rate on a note will increase from 3.75% to 12.5%, applied retroactively to the principal of the note as of the issue date. The Company is required to bifurcate this contingent payment right pursuant to SFAS 133.

Contingent Payment 2. If a qualified IPO has occurred prior to the maturity of the notes and assuming the notes are still outstanding at maturity, the interest rate on a note will increase from 3.75% to 7.5%, applied retroactively to the principal of the note as of the issue date. The Company is required to bifurcate this contingent payment right pursuant to SFAS 133.

Contingent Payment 3. If an event of default has occurred and continues for 45 days, the interest rate on a note will increase from 3.75% to the lower of 18% or the highest rate permitted by applicable law and will be in effect from the date of the event of default to the earlier of (i) the date the event of default is cured or (ii) the date on which the put price with respect to Contingent Written Put Option 3 is fully paid. The Company is required to bifurcate this contingent payment right pursuant to SFAS 133.

Contingent Payment 4. The Company has entered into a registration rights agreement with respect to each of the common shares deliverable upon an exchange of the notes. Under the terms of the registration rights agreement, the Company and the two wholly-owned subsidiaries of the Company have agreed to file a registration statement covering the resale of the respective common shares within 45 days after the consummation of the IPO, and to use its reasonable best efforts to have such registration statement become effective no later than the later of 60 days following the filing date or the date on which the lock-up period expires. The Company has agreed to maintain the effectiveness of the registration statement until the later of such time as all of the respective common shares which may be delivered upon exchange may be re-sold pursuant to Rule 144(k) or May 13, 2012. In the event of any of the following: (i) the registration statement is not declared effective by the applicable deadlines; (ii) after the registration statement has been declared effective, sales cannot be made by a holder under the registration statement (except for limited exceptions related to allowed delays or suspensions described below); or (iii) an amendment to the registration statement required to be filed is not filed by the required date, the Company has agreed to pay the holders an amount of cash equal to 0.5% of the aggregate principal amount of notes then held by such holder, and for each month thereafter in which the default exists, an amount of cash equal to 1%, subject to a cap for each individual default of 6%, of the aggregate principal amount of the notes outstanding.

The Company is permitted to suspend without penalty the availability of the registration statement as a result of delaying the disclosure of material, nonpublic information concerning the Company for a maximum of 20 consecutive days and no more than 60 days in any period of 365 days.

F-45

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

11.

FINANCING ARRANGEMENTS (continued)

(a) Convertible Notes (continued)

The registration rights agreement represents a contingent obligation of the Company to make future payments under a registration payment arrangement. The Company accounts for the registration rights agreement in accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”) and FASB Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss”. At December 31, 2006, the Company did not accrue for contingent obligation related to the registration rights agreement because of the remote likelihood that it will incur a loss under the registration rights agreement.

Contingent Payment 5. If any of the taxing jurisdictions of the U.S., Cayman Islands or the PRC were to compel the Company to withhold or deduct a tax with respect to any amounts to be paid by the Company under the note, the Company is obligated to pay such additional amounts on behalf of the note holders. The Company is required to bifurcate this contingent payment right pursuant to SFAS 133.

Dividends Participation Right. The holder of a note participates in any distributions of cash or other assets that the Company or either of the two wholly-owned subsidiaries makes to the holders of the Company or the two wholly-owned subsidiaries common stock, respectively. Specifically, upon declaration/payment of any such dividends, the holder can elect to either (i) received the same amount and type of consideration as the underlying common shareholders on an as-converted basis into which the note is convertible based on the applicable conversion price then in effect or (ii) reduce the conversion price then in effect by multiplying it by a ratio that is designed to maintain the value of the conversion option.

The Company recorded debt issuance costs of $3,460 in conjunction with the convertible notes. In accordance with FAS 133 the Company aggregated and accounted for the embedded derivatives as one compound derivate and allocated $6,317 of the net proceeds of $168,000 to the compound embedded derivative liability which was comprised of the bifurcated contingent written put options 1-2, contingent payments 1-3 and contingent payment 5 and $161,683 to the convertible notes. The resulting discount on the convertible notes is being amortized over the five year term using the effective interest method. Changes in the fair value of the compound embedded derivative are recognized at each reporting date and are classified as gain (loss) on change in value of derivatives in the statements of operations.

At December 31, 2006, the fair value of the convertible notes and the compound embedded derivative liability was $161,859 and $5,786, respectively. The change in fair value of the derivative liabilities was a gain of $531 for the year ended December 31, 2006 and is included in the accompanying consolidated statement of operations.

Details of the convertible notes as of December 31, 2006 are as follows:


	December 31, 2006
Proceeds from issuance of convertible notes	$	168,000
Less: discount on debt		6,141

Convertible notes	$	161,859

Fair value of compound derivative related to convertible notes	$	5,786

F-46

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

11.

FINANCING ARRANGEMENTS (continued)

(b) Financing Agreements

In 2006 in connection with the purchase of certain CDO investments (Note 6) the Company and China.com Inc. entered into separate and independent financing agreements with two financial institutions, collectively referred to as the “Bank”, in the aggregate nominal amount of $38,700. The Company entered into a credit facility agreement with the Bank pursuant to which the Bank agreed to pay the Company the aggregate amount of $38,700 for payment of the purchase price of the collateralized debt obligations. The Company has pledged certain held-to-maturity U.S. agency bonds as collateral for payments due under the financing agreements. These pledged securities all have maturity dates within 12 months and have interest rates ranging from 2.58% to 3.2%. As these securities mature a portion of the loan is settled with the cash proceeds. At December 31, 2006, the aggregate balance of the financing agreements was $18,700 and the total amount of securities pledged at December 31, 2006, was $30,504, all of which is classified as a restricted investment. The weighted average interest rate on these agreements during 2006 and at December 31, 2006 was 5.6%.

(c) Credit Line Agreements

Under the line of credit arrangement with a financial institution, the Company may borrow up to $100,000 on such terms as the Company and the financial institution mutually agree upon. Interest is payable upon the maturity of each advance and is calculated using the London Inter-Bank Offered Rate (“LIBOR”) for the applicable interest rate period plus .2% (3.66% at December 31, 2005). Except for loans of $10,000 that were repaid in 2006, this arrangement does not have a termination date but is reviewed annually for renewal. At December 31, 2005 and 2006, the Company had $10,000 and Nil outstanding, respectively and the unused portion of the credit line was $90,000 and $100,000, respectively.

During 2006, the Company discontinued a $250,000 line of credit agreement with a financial institution. This line of credit consisted of a repurchase agreement pursuant to which the Company sold certain debt securities to the financial institution at a discounted price, and the financial institution agreed to sell the same debt securities back to the Company at the same price at the termination of the agreement. Throughout the term of the agreement the financial institution paid to the Company any income associated with the debt securities and the Company paid to the financial institution interest calculated using LIBOR plus 0.2% per annum (3.71% at December 31, 2005). Loans of $16,249 were repaid in 2006 prior to the line of credit being discontinued. At December 31, 2005, the unused portion of the credit line was $234,000.

In 2004, the Company entered into a collateralized credit facility agreement with a bank, under which the Company deposits debt securities as collateral in exchange for cash. During the term of the agreement, the bank maintains a charge on such debt securities. The bank paid to the Company any income associated with the collateralized debt securities and the Company paid to the bank interest calculated using the LIBOR plus 0.3% per annum. In February 2005, this rate was renegotiated to LIBOR plus 0.2% per annum. This agreement was discontinued during 2005.

In connection with the credit lines granted to the Company, the Company maintained compensating balances of $1,886 and $1,996, in restricted cash at December 31, 2005 and 2006, respectively, pledged available-for-sale debt securities with a net book value of $32,270 and Nil at December 31, 2005 and 2006, respectively and held-to-maturity debt securities with a net book value of Nil and $30,504 at December 31, 2005 and 2006, respectively.

The maturities of long-term debt for the five years subsequent to December 31, 2006 are as follows: 2007 - Nil; 2008 - Nil; 2009 - Nil; 2010 - Nil; and 2011 - $168,000.

F-47

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

11.

FINANCING ARRANGEMENTS (continued)

12.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The components of accumulated other comprehensive income (loss) are as follows:


	Unrealized gains (losses) on available- for-sale securities			Foreign currency translation adjustments			Total
Balance at December 31, 2004	$	(417	)	$	5,572		$	5,155
Unrealized losses, net of unrealized gains on available-for-sale securities		(2,534	)		—			(2,534	)
Minority interests’ share of unrealized losses, net of unrealized gains on available-for-sale securities		217			—			217
Foreign currency translation adjustments		—			(355	)		(355	)
Less: reclassification adjustment for losses, net of gains included in net loss		146			—			146

Balance at December 31, 2005	$	(2,588	)	$	5,217		$	2,629

Unrealized losses, net of unrealized gains on available-for-sale securities		681			—			681
Minority interests’ share of unrealized losses, net of unrealized gains on available-for-sale securities		11			—			11
Foreign currency translation adjustments		—			8,528			8,528
Less: reclassification adjustment for losses, net of gains included in net loss		(5	)		—			(5	)

Balance at December 31, 2006	$	(1,901	)	$	13,745		$	11,844

13.

SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION

The Company incurred the following expenses which are classified as selling, general and administrative expenses in the consolidated statements of operations:


	Year ended December 31, 2004		Year ended December 31, 2005		Year ended December 31, 2006
Minimum rental expenses under operating leases	$	9,630	$	10,042	$	11,100
Advertising expenses	$	2,249	$	5,050	$	10,573
Defined contribution retirement plans expenses	$	3,459	$	2,148	$	2,122

F-48

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

14.

RELATED PARTY TRANSACTIONS

The Company had the following material transactions with related parties during the years ended December 31, 2004, 2005 and 2006.

(a) BBMF Group Inc. (“BBMF”). In January 2007, the Company announced that its subsidiary, CDC Mobile, entered into a letter of intent with BBMF, to make a strategic investment in BBMF. Under the proposal, CDC Mobile would look to invest $20,000 in convertible bonds issued by BBMF, and the two companies would form a strategic alliance in operations to jointly target 3G markets in Japan and China. CDC Mobile would have a first right of refusal to distribute BBMF’s 3G products and services in China, subject to terms to be agreed between the parties.

As part of the proposed investment, in January 2007, the Company entered into a senior secured loan agreement with BBMF pursuant to which the Company provided a $3,000 loan to BBMF, for working capital purposes and to accelerate the business expansion of BBMF. All outstanding principal amounts outstanding together with interest accrued thereon, is due and payable by BBMF on the earliest of: (i) January 12, 2008; (ii) the occurrence of an event of default; or (iii) the date upon which a convertible loan agreement for an amount of not less than $20,000 is executed between CDC Mobile Corporation and BBMF on the terms and conditions as set forth in the letter of intent between the parties. The note bears interest at the rate which is equal to the LIBOR for a 12 month loan, plus 3%. Upon the occurrence of an event of default, the note bears interest at a rate of 15% per annum during the continuance of the event of default, compounded annually. The note is secured by the assets of BBMF and personal guarantees of the CEO and President of BBMF.

BBMF is owned 32.5% by Outerspace Investments Limited, an entity in which Ms. Nicola Chu is the ultimate beneficial owner. Ms. Chu is the spouse of Mr. Peter Yip, the chief executive officer of the Company. In addition, Mr. Antony Yip serves as the president and a director of BBMF. Antony Yip is the son of Peter Yip. In addition, Mr. Antony Yip serves as a director of CDC Games Corporation, a 100% owned subsidiary of CDC Corporation.

(b) Golden Tripod Limited (“Golden Tripod”). For the years ended December 31, 2004, 2005 and 2006, the Company paid management fees of $132, $77 and $77, respectively, to Golden Tripod, an entity affiliated with Xinhua, one of the Company’s shareholders, for the provision of general management services to the Company, including consultancy fees of consultants provided by Golden Tripod.

(c) Dr. Raymond Ch’ien (“Dr. Ch’ien”). Effective August 30, 2005, Dr. Ch’ien resigned from his position as the Company’s Chief Executive Officer and Executive Chairman but continues to serve on the Board of Directors as its Chairman. In connection with his resignation, the Company entered into an agreement with Dr. Ch’ien which governs the terms and conditions of his resignation. Among other things, the agreement provides for the following:

•

The Company agreed to give Dr. Ch’ien until December 31, 2005 in which to exercise 300,000 options that were granted to Dr. Ch’ien on May 11, 2004 at an exercise price of $7.77 pursuant to his executive services agreements and that had vested as of August 30, 2005. All of such options were cancelled on December 31, 2005;

•

The Company agreed that 879,167 options granted to Dr. Ch’ien that had vested as of August 30, 2005 with exercise prices ranging from $2.6860 to $6.8125 per share shall not expire as long as Dr. Ch’ien remains on the Board of Directors, or until the relevant option termination date. As of May 31, 2007, Dr. Ch’ien had exercised 377,500 of such options and an additional 546,667 options remain outstanding;

F-49

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

14.

RELATED PARTY TRANSACTIONS (continued)

•

The Company agreed to grant, and did grant to Dr. Ch’ien, on January 1, 2006, 45,000 options under the 1999 Stock Option Plan. These exercise price of these options is $3.22 and such options vest in 3 equal semi-annual installments over an 18 month period from the date of grant; and

The Company agreed to continue to maintain a health insurance policy for Dr. Ch’ien, his spouse and immediate family with terms and conditions similar to that available to the Company’s other Hong Kong based executives for as long as Dr. Ch’ien remains on the Board of Directors.

(d) Asia Pacific Online Limited (“APOL”). APOL is a Cayman Islands company that is 50% owned by the spouse of Peter Yip, who acted as the chief executive officer of the Company for the year ended December 31, 2004 and between January and February 2005, and 50% owned by a trust set up for the benefit of Mr. Yip’s children.

Effective April 12, 2006, the Company entered into an agreement with APOL, pursuant to which APOL would provide the services of Mr. Peter Yip as the Company’s Chief Executive Officer and Vice Chairman. The agreement has an initial term of three years, and is automatically renewable for successive terms of one year each.

In consideration of providing the services of Mr. Yip, the Company agreed to pay APOL cash remuneration of $.001 per annum; grant APOL options to purchase 2.4 million shares of the Company’s Class A common stock at an exercise price of $3.99 per share, which shall vest quarterly over a three year period, the “Quarterly Vest Options”; and grant of options to purchase up to 2,399,999 of the Company’s Class A common stock at an exercise price of $3.99 per share, which shall vest in installments upon the achievement of specified milestones, which include the following, the “Contingent Options”:

•

a public listing of the Company’s software related business;

•

a listing of China.com Inc. outside of Hong Kong or moving China.com Inc.’s listing to the main board of the Hong Kong Stock Exchange;

•

a public listing of the Company’s online games business;

•

a public listing of any other business acquired by the Company after the date of this agreement or the acquisition of at least 20% of a company listed on a recognized stock exchange; and

•

a public listing of any other business of the Company’s.

The consideration paid to APOL will be reviewed at the end of the initial term.

If the agreement with APOL is terminated for any reason other than cause, Mr. Yip’s death or by APOL by giving six (6) months advance notice, the Quarterly Vest Options accelerate and fully vest. In addition, in the event that Mr. Yip’s death or disability is tangibly related to the performance of the duties by Mr. Yip for the Company, then the Quarterly Vest Options shall accelerate and fully vest.

F-50

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

14.

RELATED PARTY TRANSACTIONS (continued)

In the event a change of control of the Company occurs and the agreement is terminated for a reason other than cause, Mr. Yip’s death or by APOL giving six (6) months advance notice of termination, then the Quarterly Vest Options and the Contingent Options shall accelerate and fully vest. In addition, in the event a change of control of the Company occurs, and Mr. Yip remains in good standing with us or the Company’s successor through the first anniversary of such change in control, then the Quarterly Vest Options and the Contingent Options shall accelerate and fully vest. A change of control shall be deemed to occur in the event any person, other than us or APOL, becomes the owner of 20% or more of the combined voting power of the Company’s outstanding securities.

Under the terms of the agreement, the Company also agreed to reimburse APOL for Mr. Yip’s reasonable expenses incurred in the performance of his duties related to travel and entertaining, including duties performed on behalf of us, in accordance with the Company’s internal policies.

In addition, as long as APOL holds at least 5% of the Company’s shares, APOL will be entitled to nominate one director to the Board of Directors, subject to the shareholders electing such nominee as a director at the next general meeting of shareholders. APOL and Mr. Yip have also agreed to a non-competition period of twelve (12) months after the termination of the agreement. In addition, the Company has agreed to reimburse all medical expenses incurred by Mr. Yip and his immediate family during the 36 months prior to the agreement.

As of December 31, 2006, APOL is the owner of 11,927,653 Class A common shares of the Company and had outstanding options to purchase additional 6,044,999 Class A common shares of the Company, of which 1,130,626 options were exercisable at December 31, 2006. Included in APOL’s outstanding option total were 600,000 Class A common shares of the Company, which were originally issued on March 25, 2004 with an exercise price of $8.25 per share, but were cancelled on January 3, 2006 and were replaced by a new grant with an exercise price of $3.22 per share. In addition, Mr Yip has exercisable options to purchase 190,000 Class A common shares of the Company. Mr. Yip’s spouse also owns 3,660,636 Class A common shares of the Company.

(e) Harry Edelson lawsuit against the Company. In connection with Harry Edelson, a former director of the Company, lawsuit against the Company, the Company is paying the costs of outside counsel retained to represent Dr. Raymond Ch’ien and Peter Yip in this matter (Note 27). For the years ended December 31, 2004, 2005 and 2006, the Company paid $201, $53 and Nil, respectively, for such fees.

15.

VARIABLE INTEREST ENTITIES

The MVAS and Internet content services are subject to foreign ownership restrictions in the PRC. To comply with the PRC laws and regulations that prohibit or restrict foreign ownership of telecommunications and other information services within the PRC, the Company provides substantially all of its MVAS and Internet portal services through its variable interest entities (“VIEs”). These VIEs are owned by certain employees of the Company who are PRC citizens (the “Nominees”). The Company funds the capital invested in these companies via interest-free loans to these PRC employees. These loans are eliminated in consolidation along with the capital of the VIEs. As of December 31, 2005 and 2006, the total amount of interest-free loans to the Nominees were approximately $6,195 and $8,236, respectively. The Company has not pledged any assets as collateral for the obligations of any of the VIEs and the creditors of the VIEs do not have recourse to the general credit of the Company.

F-51

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

15.

VARIABLE INTEREST ENTITIES (continued)

The Company has entered into various contractual arrangements with the Nominees. Such contractual arrangements establish and facilitate the Company’s control over the operations of each of these VIEs. Under these contractual arrangements, each of the Nominees declares and undertakes that he or she holds equity interests in the relevant VIEs in trust for the Company. Each of these Nominees also undertakes to transfer his or her ownership in these entities to designees of the Company at any time for the amount of loans outstanding. These Nominees are also required to execute proxies to the designated representatives of the Company at the request of the Company to enable such representatives to attend and vote at shareholders’ meetings of these VIEs. Through these contractual arrangements, the Company is able to cause the individuals designated by it to be appointed as the directors and senior management of each of the VIEs.

The Company has also entered into exclusive technical service agreements with the VIEs under which the Company provides technical and other services to the VIEs in exchange for substantially all the net income of the VIEs. The technical services provided by the Company to the VIEs, as the case may be, relate to, among others, technologies in respect of MVAS and Internet content services, application software for network servers, system solutions, technical training and content development and design.

The following is a summary of the VIEs of the Company at December 31, 2006. All have been consolidated by the Company in accordance with FIN 46(R) because the Company is the primary beneficiary. The entities mentioned below have been organized under the laws of the PRC with Chinese names and do not have official English names.

(a) Beijing Newpalm Information Technology Co., Ltd. Beijing Newpalm Information Technology Co., Ltd. (“Beijing Newpalm”) is a PRC company which provides MVAS services in Mainland China via third party network operators under its telecommunications value-added services license. Beijing Newpalm is 50% owned by a director of China.com Inc., and 50% owned by a PRC employee of the Company. The registered capital of Beijing Newpalm is $1,281.

(b) Beijing Wisecom Information Technology Co., Ltd. Beijing Wisecom Information Technology Co., Ltd. (“Beijing Wisecom”) is a PRC company which provides MVAS services in Mainland China via third party network operators under its telecommunications value-added services license. Beijing Wisecom is 50% owned by a director of China.com Inc., and 50% owned by a PRC employee of the Company. The registered capital of Beijing Wisecom is $1,281.

(c) Beijing China.com Inc. Technology Services Co., Ltd. Beijing China.com Inc. Technology Services Co., Ltd. (“Beijing China.com Inc.”) is a PRC company which operates the portal “www.China.com“ under its Internet content company license and sells the online advertising space to advertisers or their agents. Beijing China.com Inc. is 40% owned by a director of China.com Inc., who is the general manager of Beijing China.com Inc., and the remaining 60% is owned by two PRC employees of the Company who own 40% and 20%, respectively. The registered capital of Beijing China.com Inc. is $1,281.

(d) Beijing He He Technology Co., Ltd. Beijing He He Technology Co., Ltd. (“Beijing He He”) is a PRC company which provides MVAS services in Mainland China via third party network operators under its telecommunications value-added services license. Beijing He He is owned by two PRC employees of the Company who own 50% each. The registered capital of Beijing He He is $1,281.

F-52

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

15.

VARIABLE INTEREST ENTITIES (continued)

(e) Shenzhen KK Technology Ltd. Shenzhen KK Technology Ltd. (“SZ KK”) is a PRC company which provides MVAS services in Mainland China via third party network operators under its telecommunications value-added services license. SZ KK is owned by two PRC employees of the Company who own 50% each. The registered capital of SZ KK is $1,281.

(f) Beijing TimeHeart Information Technology Ltd. Beijing TimeHeart Information Technology Ltd. (“TimeHeart”) is a PRC company which provides MVAS services in Mainland China via third party network operators under its telecommunications value-added services license. TimeHeart is owned by two PRC employees of the Company who own 50% each. The registered capital of TimeHeart is $1,281.

(g) Beijing Hulian Jingwei Technology Development Co., Ltd. Beijing Hulian Jingwei Technology Development Co., Ltd. (“Hulian Jingwei”) is a PRC company which provides online game publishing services in Mainland China. Hulian Jingwei is owned by two PRC employees of the Company who own 70% and 30%, respectively. The registered capital of Hulian Jingwei is $1,281.

(h) Beijing Xianda Hulian Technology Development Co., Ltd. Beijing Xianda Hulian Technology Development Co., Ltd. (“Xianda Hulian”) is a PRC company which provides online game publishing services in Mainland China. Xianda Hulian is owned by two PRC employees of the Company who own 50% each. The registered capital of Hulian Jingwei is $1,281.

16.

INCOME TAXES

Under the current tax laws of the Cayman Islands, the Company and its subsidiaries are not subject to tax on income or capital gains, and no Cayman Islands withholding tax is imposed upon payments of dividends by the Company to its shareholders. The subsidiaries in all geographical regions are governed by the respective local income tax laws with statutory tax rates ranging from 0% to 40%.

F-53

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

16.

INCOME TAXES (continued)

Significant components of the provision for income taxes are as follows:


	Year ended December 31, 2004		Year ended December 31, 2005			Year ended December 31, 2006
Current tax expense allocated to:
Continuing operations	$	1,644	$	1,307		$	4,144
Discontinued operations		—		—			—

		1,644		1,307			4,144

Deferred tax expense (benefit) allocated to:
Realization of tax benefits of acquired entities reflected as a reduction of goodwill		1,731		3,780			5,857
Operations		—		(130	)		(6,939	)

Continuing operations		1,731		3,650			(1,082	)

Total income tax expense	$	3,375	$	4,957		$	3,062


	Year ended December 31, 2004		Year ended December 31, 2005		Year ended December 31, 2006
International:
Current	$	1,568	$	741	$	2,774
Deferred		1,517		1,871		3,744

U.S.:
Current		76		518		1,370
Deferred		214		1,827		(4,826	)

Total income tax expense	$	3,375	$	4,957	$	3,062

Income before provision for income taxes consists of the following:


	Year ended December 31, 2004			Year ended December 31, 2005			Year ended December 31, 2006
International	$	(904	)	$	(1,900	)	$	20,292
U.S.		797			4,802			(4,078	)

Income (loss) before income taxes	$	(107	)	$	2,902		$	16,214

F-54

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

16.

INCOME TAXES

Deferred tax liabilities and assets comprise of the following:


	December 31, 2005			December 31, 2006
Deferred tax liabilities:
Short-term
Other	$	(1,203	)	$	(1,641	)

Total short-term deferred tax liabilities		(1,203	)		(1,641	)

Long-term
Acquired intangible assets		(12,553	)		(10,700	)
Capitalized software		(954	)		(1,477	)
Indefinite lived assets		(2,944	)		(2,764	)
Other		—			(1,100	)

Total long-term deferred tax liabilities		(16,451	)		(16,041	)

Total deferred tax liabilities		(17,654	)		(17,682	)


	December 31, 2005			December 31, 2006
Deferred tax assets:
Short-term
Deferred revenue		3,345			3,652
Accruals and reserves		3,597			4,968
Other		2,475			3,949
Valuation allowance		(7,943	)		(7,508	)

Net short-term deferred tax liabilities		1,474			5,061

Long-term
Net operating loss carryforwards		66,391			77,727
Net capital loss carryforwards		3,902			3,902
Book and tax base differences on assets		6,541			2,172
Alternative minimum tax credit		227			385
Research and development		3,806			1,963
Deferred compensation		1,140			1
Valuation allowance		(69,174	)		(51,461	)

Net long-term deferred tax liabilities		12,833			34,689

Total net deferred tax assets		14,307			39,750

Net deferred tax asset (liability)	$	(3,347	)	$	22,068

F-55

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

16.

INCOME TAXES (continued)

The reconciliation of income taxes computed at the respective statutory tax rates to the effective income tax provision recorded is as follows:


	Year ended December 31, 2004			Year ended December 31, 2005			Year ended December 31, 2006
Income tax expense computed at the respective statutory rates	$	3,217		$	2,679		$	5,038
Changes in tax rates		(79	)		875			94
Tax holiday concession		(4,077	)		(2,551	)		(5,052	)
Non-deductible items		4,038			2,594			3,288
Prior year true-up		—			—			(34	)
Other		—			—			129
Non-taxable items		(752	)		(1,938	)		—
Change in valuation allowance affecting provision for income taxes		1,028			3,298			(401	)

Total income tax expense from continuing operations	$	3,375		$	4,957		$	3,062

The Company considers itself to be permanently reinvested with respect to its investment in its foreign subsidiaries. Accordingly no deferred income tax liability related to its foreign subsidiaries unremitted earnings have included in the Company’s provision for income taxes. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to income taxes and withholding taxes payable in various non-Cayman jurisdictions, which could potentially be offset by foreign tax credits. Determination of the amount of unrecognized deferred income tax liability is not practicable because of the complexities associated with the hypothetical calculation.

At December 31, 2006, the Company had world wide net operating loss carryforwards of approximately $293,387 for income tax purposes, $122,011 of which will expire from 2007 to 2027 and $171,376 of which can be carried forward indefinitely. In the U.S., the Company had federal and state net operating loss carryovers of $51,699 of which $36,465 are subject to significant limitation provisions. The Company also had a U.S. net capital loss carryover of $10,279 which will expire in 2008 and are subject to significant limitation provisions. The limitation provisions which are imposed by the U.S. Internal Revenue Service significantly restrict the Company’s ability to realize the benefits of these U.S. carryovers. In addition to the net operating losses described above, the company has approximately $2,994 of additional deductions related to equity based compensation awards, the tax benefit of which will be allocated to additional paid in capital when the company recognizes the actual cash tax benefit.

F-56

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

16.

INCOME TAXES (continued)

Newpalm (China) Information Technology Company Limited (“Newpalm”), a subsidiary of Palmweb Inc. established in the PRC, is governed by the Income Tax Laws of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws (the “PRC Income Tax Laws”). Pursuant to the PRC Income Tax Laws, Newpalm is subject to corporate income tax at a rate of 33% (30% state income tax plus 3% local income tax). Under the PRC Income Tax Laws, foreign investment enterprises satisfying certain criteria receive preferential tax treatment. Because Newpalm has obtained the status of “manufacturing enterprise”, it is entitled to a reduced corporate income tax rate of 15%. During the year ended December 31, 2005, Newpalm received a confirmation from the relevant tax authorities that it would be fully exempt from PRC corporate income tax for the 2004 fiscal year and is entitled to a 50% tax reduction from 2005 to 2007 fiscal years. The tax concessions were $2,443 and $1,470 for the years ended December 31, 2005 and 2006, respectively, and the per share effects were approximately $0.02 and Nil for the years ended December 31, 2005 and 2006, respectively.

Beijing He He established in the PRC, is governed by the PRC Income Tax Laws. Under the PRC Income Tax Laws, enterprises satisfying certain criteria receive preferential tax treatment. Because Beijing He He has obtained the status of “new high technology enterprise” and is registered and operating in the Beijing Zhongguancun Science Park, it is entitled to a reduced corporate income tax rate of 15% upon expiry of its tax holiday period. Beijing He He was granted a “tax holiday” for exemption of PRC corporate income tax for three years starting from 2003 and is entitled to a 50% tax reduction, subject to official approval from the relevant PRC tax authority, for three consecutive years starting from 2006. The tax concession was Nil and $90 for the years ended December 31, 2005 and 2006, respectively, and the per share effect was approximately Nil and Nil for the years ended December 31, 2005 and 2006.

Pivotal Bangalore Software Development Private Limited (“Pivotal India”), a subsidiary of Pivotal Corporation established in India, is subject to Indian corporate income tax at a rate of 35%. Upon fulfilling certain criteria, Pivotal India is entitled to certain Indian corporate income tax exemptions due to its status as a “100% Software Export Oriented Unit” located in the Bangalore Software Technology Park. Management believes that the necessary criteria for tax exemption have been met for the full year of 2004 and 2005 and accordingly, no provision for Indian corporate income tax has been made for the years. The tax concessions were $108 and $289 for the years ended December 31, 2005 and 2006, respectively, and the per share effect was Nil and Nil for the years ended December 31, 2005 and 2006. The corporate income tax exemption is available until March 31, 2009. Management believes that Pivotal India will fulfill the necessary criteria for tax exemption in future periods. The effect of the future tax exemptions will be recognized when the fulfillment of such criteria is ascertained.

F-57

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

17.

BASIC AND DILUTED EARNINGS (LOSS) PER SHARE

Basic and diluted earnings (loss) per share for the years ended December 31, 2004, 2005, and 2006, are calculated using the two-class stock method, which is an earnings allocation formula that determines earnings (loss) per share for each class of common stock and participating security according to participation rights in undistributed earnings. Basic earnings (loss) per share is calculated by dividing net earnings available to common stockholders by weighted-average common shares outstanding during the period. Diluted earnings (loss) per common share are calculated by dividing net earnings available to common stockholders by weighted-average common shares outstanding during the period plus dilutive potential common shares. Dilutive potential common shares are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all options are used to repurchase common stock at market value. The amount of shares remaining after the proceeds are exhausted represents the potentially dilutive effect of the securities.

The following table sets forth the computation of basic and diluted earnings (loss) per share:


	2004						2005						2006
	Basic			Diluted			Basic			Diluted			Basic			Diluted
Numerator for basic and diluted earnings (loss) per share:
CDC Corporation net income (loss)	$	(5,967	)	$	(5,967	)	$	(3,514	)	$	(3,514	)	$	10,840		$	10,840
Net adjustments ^(a)		1,565			1,530			50			46			—			(9	)

Adjusted earnings (loss) available from continuing operations		(4,402	)		(4,437	)		(3,464	)		(3,468	)		10,840			10,831
Amount allocated to convertible noteholders		—			—			—			—			(223	)		(225	)

Net earnings (loss) available to common stockholders from continuing operations		(4,402	)		(4,437	)		(3,464	)		(3,468	)		10,617			10,606
Earnings (loss) available from discontinued operations		(1,560	)		(1,560	)		(50	)		(50	)		—			—

Net earnings (loss) available to common stockholders for per-share calculation	$	(5,962	)	$	(5,997	)	$	(3,514	)	$	(3,518	)	$	10,617		$	10,606


Denominator for basic and diluted earnings (loss) per share:
Weighted average number of shares after adjusting for share splits		105,898,392			105,898,392			111,085,657			111,085,657			107,950,544			107,950,544
Employee compensation related shares, including stock options ^(b)		—			—			—			—			—			1,128,848

Total weighted average number of shares		105,898,392			105,898,392			111,085,657			111,085,657			107,950,544			109,079,391


Per share amounts:
Earnings (loss) from continuing operations	$	(0.04	)	$	(0.04	)	$	(0.03	)	$	(0.03	)	$	0.10		$	0.10
Earnings (loss) from discontinued operations		(0.01	)		(0.01	)		(0.00	)		(0.00	)		—			—

Net earnings (loss) per share	$	(0.06	)	$	(0.06	)	$	(0.03	)	$	(0.03	)	$	0.10		$	0.10

(a)

Includes the basic and dilutive effects of subsidiary-issued stock-based awards

(b)

The computation of diluted earnings (loss) per share did not assume the conversion of the Company’s stock options for 2004 and 2005 because their inclusion would have been antidilutive.

Income has been allocated to the common stock and convertible notes based on their respective rights to share in dividends. 2,263,642 weighted average shares related to the convertible notes were not included in the 2006 diluted earnings per share calculation because to do so would have been antidilutive.

Earnings-per-share amounts are computed independently for earnings (loss) from continuing operations, earnings (loss) from discontinued operations and net earnings (loss). As a result, the sum of per-share amounts from continuing operations and discontinued operations may not equal the per-share amounts for net earnings.

During the year ended December 31, 2006, the Company agreed to issue 343,617 Class A common shares in future years as additional purchase consideration for acquired subsidiaries. All of these shares have been included in the Company’s weighted average basic and diluted earnings per share calculation for the year ended December 31, 2006.

F-58

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

18.

DISCONTINUED OPERATIONS

The Company reviews all business units monthly and analyzes the (i) cash flow performance; (ii) profitability; and (iii) viability of the business units.

These reviews are conducted in the context of the overall strategic direction of the Company. If a business unit is not profitable, has negative cash flows, does not appear to have growth potential or a path to profitability, and does not fit with the Company’s overall strategy, management may discontinue it either through sale to a third party (“disposal”) or liquidation/closure (“dissolution”) of the business.

During 2004, the Company sold and closed certain unprofitable subsidiaries, primarily in the Software and Internet and Media segments, while certain discontinued subsidiaries were included in the Others segment. During 2005 and 2006, the Company did not have material discontinued operations.

The following table sets forth the balance sheet and statement of operations information, including the Company’s net loss on disposal/dissolution, for operations discontinued during the years ended December 31, 2004, 2005 and 2006:


	Year ended December, 31 2004			Year ended December, 31 2005			Year ended December, 31 2006
Total assets as of the date of disposal/dissolution	$	2,177		$	4		$	—
Total liabilities as of the date of disposal/dissolution	$	418			—		$	—

Revenues	$	864			—		$	—
Pre-tax loss	$	(610	)	$	(47	)	$	—
Net loss	$	(610	)	$	(47	)	$	—
Net loss on disposal/dissolution	$	(950	)	$	(3	)	$	—

19.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The total fair value of available-for-sale equity securities in listed companies as of December 31, 2005 and 2006 were $659 and $3,532, respectively, based on the market values of publicly traded shares as of December 31, 2005 and 2006.

The total fair value of the CDO investments as of December 31, 2005 and 2006 were Nil and $39,009, respectively, based on the determination by the respective brokers and validated by management based on expected cash flow returns discounted by rates consistent with rate of returns offered on comparable investments with comparable risks as of December 31, 2005 and 2006.

The total fair value of available-for-sale debt securities as of December 31, 2005 and 2006 were $148,151 and $83,905, respectively, based on the market values of publicly traded debt securities and the estimated fair values of unlisted debt securities, as determined by management of the Company having regard to the prices of the most recent reported sales and purchases of the securities as of December 31, 2005 and 2006.

F-59

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

19.

FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

The total fair value of held-to-maturity debt securities as of December 31, 2005 and 2006 were Nil and $30,504, respectively, based on the market values of publicly traded debt securities and the estimated fair values of unlisted debt securities, as determined by management of the Company having regard to the prices of the most recent reported sales and purchases of the securities as of December 31, 2005 and 2006.

The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, deposits, prepayments and other receivables, accounts payable, other payables, purchase consideration payable, accrued liabilities, short-term debts and long-term debt approximate to their fair values because of their short maturities.

The fair value of the Company’s $25,000 note receivable from Symphony (Note 7) was estimated at $25,235 and $26,320 at December 31, 2005 and 2006, respectively, based on discounted future cash flows, considering borrowing rates available for notes with similar terms and maturities.

20.

CONCENTRATION OF RISKS

The Company is exposed to market risk from changes in foreign currency exchange rates and to a lesser extent, interest rates which could affect its future results of operations and financial condition. The Company manages the exposure to these risks through its operating and financing activities.

Risks Related to CDO Investments (Note 6)

The equity portion of the Company’s investment in CDOs represents preference shares in the residual value of the underlying securities in the CDO. The underlying securities in the CDO are debt obligations of varying quality and risk. The preference shares are subject to the following types of risk:

Illiquidity and Market Value Volatility Risk

There can be no assurance of a liquid secondary market for our CDO investments. Our investment in preference shares could be particularly exposed to both liquidity and market value volatility risk if a CDO is required to liquidate assets and is forced to accept sales prices less than those paid for the assets or less than what the collateral manager may consider to be their fair value. The collateral consists primarily of securities not registered under the Securities Act of 1933 and should be considered illiquid. As a result, should a default or event of default occur under the CDO Indenture which would permit or require liquidation of the collateral, there is no assurance that a ready market will exist for the collateral and the proceeds of such sale may not be sufficient to repay the preference shares in full.

Prepayment Risk

The amount and frequency of payments of amounts due to the holders of preference shares in a CDO investment will depend on, among other things, the level of LIBOR, treasury yields and spreads, returns with respect to eligible investments, the extent to which portfolio collateral becomes defaulted portfolio collateral and scheduled payments of principal or retirement prior to the stated maturity of the underlying collateral through mandatory or optional redemption, sale, maturity or other liquidation or disposition. In addition, the redemption (upon a mandatory redemption) or other payment of principal of the underlying collateral, which will depend in part on the foregoing factors, will result in reduced leverage and may affect the yield to holders of the preference shares.

F-60

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

20.

CONCENTRATION OF RISKS

Default and Yield Risk

Preference shares in a CDO investment typically bear the risk of loss or other shortfalls prior to any classes of securities which are senior to them, and as a consequence are extremely sensitive to the delinquency and loss performance of the underlying assets. Any such losses and other shortfalls with respect to the collateral will be borne first by the holders of the preference shares and then by the holders of the most junior class of notes then outstanding. Further, the rate at which principal payments will be received on the securities will be dependent on the rate of principal payments (including prepayments) on the underlying assets and may fluctuate significantly over time. Such fluctuations will affect the yield to the issuer, as holder of such securities. The entities housing these CDO investments are VIEs, however, as our ownership in each does not constitute a primary beneficiary interest, we have not consolidated either entity.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risks consist principally of cash and cash equivalents, investments, accounts receivable, notes receivable and other receivables. The maximum amount of loss would be $119,845 if the counterparties for non-government sponsored entity security investments, accounts receivable, notes receivable and other receivables failed to perform.

The Company maintains cash and cash equivalents and investments with various financial institutions in the countries in which it operates. The Company has its policy to limit exposure to any one institution. The Company performs periodic evaluations of the relative credit standing of those financial institutions that are considered in the Company’s investment strategy. The Company does not require collateral on these financial instruments.

Concentration of credit risk with respect to accounts receivable is limited due to the large number of entities comprising the Company’s customer base. The Company generally does not require collateral for accounts receivable.

Concentration of Business Risk

Revenue has been derived from a number of clients that use the Company’s services. The top 10 customers accounted for 20%, 18% and 15% of the Company’s revenue for the years ended December 31, 2004, 2005 and 2006, respectively.

Dependence on Mobile Telecommunication Operators

The Company offers mobile services and applications to customers primarily through the two mobile network operators in the PRC, China Mobile Communications Corporation and China United Telecommunications Corporation, which serve most of the PRC’s mobile subscribers. Such dominant market position limits the Company’s negotiating leverage with these network operators. If the Company’s various contracts with either network operator are terminated or adversely altered, it may be impossible to find appropriate replacement operators with the requisite licenses and permits, infrastructure and customer base to offer the services, and the business would be significantly impaired. For the year ended December 31, 2006, the Company derived 10.2% of its total revenues from mobile services and applications business, a substantial portion of which was derived using the networks of the mobile network operators.

F-61

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

20.

CONCENTRATION OF RISKS (continued)

Current Vulnerability due to Certain Concentrations

The Company’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC. The PRC government has been pursuing economic reform policies for the past 20 years, however, the PRC government may discontinue or alter such policies especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC’s political, economic and social conditions. Additionally, the PRC government’s pursuit of economic reforms may not be consistent or effective.

The PRC has recently enacted new laws and regulations governing Internet access and the provision of online business, economic and financial information. Current or proposed laws aimed at limiting the use of online services to transmit certain materials could, depending upon their interpretation and application, result in significant potential liability to the Company, as well as additional costs and technological challenges in order to comply with any statutory or regulatory requirements imposed by such legislation. Additional legislation and regulations that may be enacted by the PRC government could have an adverse effect on the Company’s business, financial condition and results of operations.

The Renminbi (“RMB”), is not freely convertible into foreign currencies. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted daily by the People’s Bank of China. However, the unification of the exchange rates does not imply the convertibility of RMB into U.S. dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts.

21.

SHARE CAPITAL

Pursuant to its articles of association, the Company is authorized to issue up to 800,000,000 shares of Class A common shares and up to 5,000,000 shares of preferred shares. The holder of each Class A Common Share is entitled to one vote on all matters upon which the Class A Common Share is entitled to vote. The Board of Directors is authorized, without further action by the shareholders, to issue preferred shares in one or more series and to fix the designations, powers, preference, privileges and relative participatory, optional or special rights and the qualifications, limitation or restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights of common shares. At December 31, 2005 and 2006, there are no preferred shares outstanding.

F-62

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

21.

SHARE CAPITAL (continued)

The following table sets forth the number and price range of shares issued during the years ended December 31, 2004, 2005 and 2006 from the exercise of stock options granted to employees, and the number and price range of shares repurchased and retired during the years ended December 31, 2004, 2005 and 2006:


	Year ended December 31, 2004		Year ended December 31, 2005		Year ended December 31, 2006
Class A common shares issued for exercise of stock options		1,068,473		281,523		2,400,796
Range of purchase prices per share	$	0.43 to $7.00	$	0.43 to $3.49	$	0.43 to $8.34

Class A common shares issued for exercise of employee stock purchase plan		—		177,873		161,232
Range of purchase prices per share		—	$	2.58 to $2.67	$	4.49 to $9.07

Class A common shares repurchased		—		—		6,088,624
Range of repurchase prices per share		—		—	$	3.91 to $5.67

Repurchased Class A common shares retired		—		—		—
Range of retirement prices per share		—		—		—

During the year ended December 31, 2004, 7,836,698 Class A common shares of the Company were issued at prices ranging from $4.35 to $11.57 per share for the acquisition of subsidiaries.

During the year ended December 31, 2004, 400,000 Class A common shares of the Company were issued at $7.59 per share for the settlement of claims.

During the year ended December 31, 2005, 12,423 Class A common shares of the Company were issued at $4.35 per share for the acquisition of Ross.

During the year ended December 31, 2006, 15,710 Class A common shares of the Company were issued at prices ranging from $4.14 to $5.73 per share in connection with the acquisition of Ross.

During the year ended December 31, 2006, 150,000 Class A common shares of the Company were issued at prices ranging from $3.95 to $6.15 per share for the acquisition of c360.

During the year ended December 31, 2006, the Company agreed to issue 343,617 Class A common shares during future years as additional purchase consideration for acquired subsidiaries.

F-63

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

22.

STOCK-BASED COMPENSATION PLANS

CDC Corporation

2005 Stock Incentive Plan

On November 4, 2005, the Company’s shareholders approved the 2005 Stock Incentive Plan (the “2005 Plan”). The purpose of the 2005 Plan is to make available incentives, including alternatives to stock options, that will assist the Company to attract and retain key employees and to encourage them to increase their efforts to promote the business of the Company and its subsidiaries. These incentives include stock options, stock appreciation rights, restricted stock awards, restricted unit awards, performance shares and performance cash.

Subject to adjustments under certain conditions, the maximum aggregate number of Class A Common Shares (“Shares”) which may be issued pursuant to all awards under the 2005 Plan is the aggregate number of Shares available for future grants and Shares subject to awards which expire or are cancelled or forfeited under the 1999 Stock Option Plan (the “1999 Plan”). As of December 31, 2006, of the 20 million Shares reserved for grant under the 1999 Plan, 1,546,570 Shares remain available for future grant, and there are 15,830,332 Shares to be issued upon the exercise of outstanding options under the 1999 Plan. The 2005 Plan is administered by a committee of the Board of Directors, which will determine, at its discretion, the number of shares subject to each option granted and the related exercise price and option period.

1999 Plan

The Company’s 1999 Plan was replaced by the 2005 Plan described above. Upon adoption of the 1999 Plan, 12 million Shares were reserved for issuance to employees of, consultants and advisors to the Company and its subsidiaries. During 2000, options for the purchase of an additional 8 million Shares were made available, which increased the options available for grants for the purchase of Shares to 20 million. Options granted under the 1999 Plan vest ratably over a period of 1 to 4 years, and have terms of 10 years.

On December 29, 2005, the Company’s Compensation Committee approved the acceleration of vesting of certain unvested and “out of the money” stock options with exercise prices equal to or greater than $3.50 per share which were previously awarded to employees, including executive officers and directors, under the 1999 Plan. The acceleration was effective as of December 29, 2005. Options to purchase approximately 1.7 million shares of common stock, or 37 % of the Company’s outstanding unvested options were subject to the acceleration. The options had a range of exercise prices of $3.79 to $7.38 and a weighted average exercise price of $4.32. The purpose of the acceleration was to enable the Company to avoid recognizing compensation expense associated with these options upon the adoption of SFAS 123(R) in January 2006. The Company also believed that because the options that were accelerated had exercise prices in excess of the current market value of the Company’s common stock, the options had limited economic value and were not fully achieving their original objective of employee retention and incentive compensation.

F-64

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

22.

STOCK-BASED COMPENSATION PLANS (continued)

The following table summarizes information concerning outstanding options and stock appreciation rights at December 31, 2006.


Exercise price range	Shares	Weighted- average remaining contractual life (in years)	Weighted- average exercise price per share		Aggregate Intrinsic Value
$0.43-$0.95	54,436	7.64	$	0.53	$	488
$1.06-$1.98	116,403	6.77	$	1.80		897
$2.05-$2.99	1,696,606	6.34	$	2.85		11,278
$3.02-$3.80	3,117,046	6.29	$	3.28		19,398
$3.95-$5.00	8,010,038	7.42	$	4.28		41,851
$5.06-$9.94	2,545,744	6.88	$	6.13		8,579
$10.66-$19.19	70,979	4.00	$	14.71		—
$21.62-$29.92	174,300	3.39	$	24.44		—
$32.13-$48.41	22,860	3.21	$	38.33		—
$58.56-$68.81	21,920	3.26	$	61.58		—

December 31, 2006 outstanding	15,830,332				$	82,491

The following table summarizes information concerning exercisable options and stock appreciation rights at December 31, 2006.


Exercise price range	Shares	Weighted- average remaining contractual life (in years)	Weighted- average exercise price per share		Aggregate Intrinsic Value
$0.43-$0.95	54,194	7.64	$	0.53	$	486
$1.06-$1.98	112,783	6.74	$	1.80		868
$2.05-$2.99	1,338,211	5.72	$	2.83		8,928
$3.02-$3.80	1,123,634	5.98	$	3.35		6,911
$3.95-$5.00	3,292,539	5.00	$	4.67		15,892
$5.06-$9.94	1,035,750	6.47	$	6.15		3,468
$10.66-$19.19	70,979	4.00	$	14.71		—
$21.62-$29.92	174,300	3.39	$	24.44		—
$32.13-$48.41	22,860	3.21	$	38.33		—
$58.56-$68.81	21,920	3.26	$	61.58		—

December 31, 2006 exercisable	7,247,170				$	36,553

F-65

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

22.

STOCK-BASED COMPENSATION PLANS (continued)

The following table summarizes information concerning options and stock appreciation rights expected to vest at December 31, 2006.


Exercise price range	Shares	Weighted- average remaining contractual life (in years)	Weighted- average exercise price per share		Aggregate Intrinsic Value
$0.43-$0.95	174	7.65	$	0.43	$	2
$1.06-$1.98	2,606	7.65	$	1.66		20
$2.05-$2.99	267,669	8.66	$	2.94		1,755
$3.02-$3.80	1,569,656	7.52	$	3.23		9,835
$3.95-$5.00	2,228,600	9.20	$	4.00		12,255
$5.06-$9.94	1,087,196	7.16	$	6.12		3,680
$10.66-$19.19	—	—	$	—		—
$21.62-$29.92	—	—	$	—		—
$32.13-$48.41	—	—	$	—		—
$58.56-$68.81	—	—	$	—		—

December 31, 2006 expected to vest	5,155,902				$	27,547

A summary of the Company’s stock option and stock appreciation rights activities and related information for the years ended December 31, 2004, 2005 and 2006 is as follows:


	2004
	Options Outstanding			Weighted- average exercise price
Outstanding at the beginning of the year		8,127,578		$	5.94
Granted		6,742,407		$	5.55
Forfeited		(1,270,215	)	$	9.07
Exercised		(1,068,473	)	$	3.80

Outstanding at the end of the year		12,531,297		$	5.60

Exercisable at the end of the year		6,641,577

Weighted-average grant-date fair value of options granted during the year	$	4.35

Intrinsic value of options exercised during the year	$	5,287

F-66

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

22.

STOCK-BASED COMPENSATION PLANS (continued)


	2005
	Options Outstanding			Weighted- average exercise price
Outstanding at the beginning of the year		12,531,297		$	5.60
Granted		2,629,500		$	3.03
Forfeited		(3,212,136	)	$	6.12
Exercised		(281,523	)	$	1.33

Outstanding at the end of the year		11,667,138		$	4.98

Exercisable at the end of the year		9,523,610

Weighted-average grant-date fair value of options granted during the year	$	1.67

Intrinsic value of options exercised during the year	$	363


	2006
	Options Outstanding			Weighted- average exercise price
Outstanding at the beginning of the year		11,667,138		$	4.98
Granted		9,252,999		$	4.15
Forfeited		(2,597,132	)	$	7.15
Exercised		(2,492,673	)	$	3.18

Outstanding at the end of the year		15,830,332		$	5.19

Exercisable at the end of the year		7,247,170		$	5.11

Weighted-average grant-date fair value of options granted during the year	$	2.51

Intrinsic value of options exercised during the year	$	7,934

Included in the number of options are 2,713,619 stock appreciation rights outstanding at December 31, 2006. The Company accounts for stock appreciation rights in accordance with SFAS 123(R). Stock appreciation rights are settled in shares and have similar characteristics as stock options. The Company issued no stock appreciation rights in 2004 and 2005 and 2,878,000 in 2006.

Compensation expense charged to operations during the year ended December 31, 2006 relating to stock options and stock appreciation rights was $3,902. As of December 31, 2006, the Company had unrecognized compensation expense of $13,386 before taxes, related to stock option awards and stock appreciation rights. The unrecognized compensation expense is expected to be recognized over a total weighted average period of 2.4 years.

F-67

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

22.

STOCK-BASED COMPENSATION PLANS (continued)

The fair value of options that vested during the years ended December 31, 2004, 2005 and 2006 was not significantly different that the amount of stock compensation expense that was charged to operations during the year ended December 31, 2006 or that would have been charged to operations during the years ended December 31, 2004 and 2005 under SFAS 123(R) as disclosed within Note 2. Net cash proceeds from the exercise of stock options during the years ended December 31, 2004, 2005 and 2006 were $4,061, $1,052 and $8,512, respectively.

2004 Employee Share Purchase Plan

During 2004, the Company established and implemented an employee share purchase plan, which qualified as a non-compensatory plan under Section 423 of the U.S. Internal Revenue Code. The plan allows qualified employees to purchase Class A common shares during the relevant six-month plan period. Qualifying employees are allowed to purchase up to 1,000 Class A common shares for each plan period. The maximum number of Class A common shares, issuable under the plan is 2,000,000, and a maximum of 300,000 shares will be available for issuance during each plan period. Compensation expense charged to operations during the year ended December 31, 2006 relating to the employee share purchase plan was $324.

China.com Inc.

The Company’s China.com Inc. subsidiary is registered on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (“GEM”) and maintains certain stock based compensation plans in addition to those maintained by the Company. China.com Inc. adopted a pre-IPO share option plan (the “Pre-IPO Plan”) and post-IPO share option plan (the “Post-IPO Plan”) on February 25, 2000 which will remain in force for 10 years. On April 30, 2002, the Company adopted a 2002 share option plan (the “2002 Plan”) which has an option life of 10 years. The Pre-IPO Plan and the Post-IPO Plan were operated for the purpose of recognizing the contributions of certain directors, employees, consultants and advisors of China.com Inc. and employees of the Company to the growth of China.com Inc. and/or the listing of shares of China.com Inc. on the GEM, while the 2002 Plan was operated for providing incentives and rewards to eligible participants who contribute to the success of China.com Inc.’s operations. Eligible participants of the Pre- IPO Plan and the Post-IPO Plan include China.com Inc.’s directors, employees, consultants and advisors of China.com Inc. and employees of China.com Inc. The eligible participants of the 2002 Plan include China.com Inc.’s directors, full-time and part-time employees, advisors, consultants, vendors and suppliers of China.com Inc. and employees of the Company (as defined in the 2002 Plan).

The maximum number of shares which can be granted under the Pre-IPO Plan and the Post-IPO Plan must not exceed 10% of the issued share capital of China.com Inc. as at the date of listing of the shares on the GEM. For the 2002 Plan, the maximum number of shares which can be granted must not exceed 10% of the issued shares of China.com Inc. at the date of approval of such plan. At December 31, 2006, the number of shares issuable under the Pre-IPO Plan, the Post-IPO Plan and the 2002 Plan was 12,038,120, 2,115,547 and 348,112,320, respectively, which represented approximately 8.27% in aggregate of China.com Inc.’s shares in issue at that date. Pursuant to the Pre-IPO Plan and the Post-IPO Plan (the “Plans”), no participant shall be granted an option which, if accepted and exercised in full, would result in such participant’s maximum entitlement exceeding 25% of the aggregate number of shares of China.com Inc. subject to the Plans. The maximum number of shares issuable as share options to each eligible participant in the 2002 Plan in any 12-month period up to and including the date of the grant to such participant shall not exceed 1% of the issued share capital of China.com Inc. from time to time. Any further grant of options in excess of this 1% limit must be subject to shareholders’ approval with that participant and associates abstaining from voting.

F-68

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

22.

STOCK-BASED COMPENSATION PLANS (continued)

Share options granted to a director, chief executive, management shareholder or substantial shareholder of China.com Inc., or to any of their associates, are subject to approval in advance by the independent non-executive directors. In addition, any share options granted to a substantial shareholder or an independent non-executive director of China.com Inc., or to any of their associates, in excess of 0.1% of the shares of China.com Inc. in issue at any time or with an aggregate value (based on the closing price of China.com Inc.’s shares at the date of the grant) in excess of $641, within any 12-month period, are subject to shareholders’ approval in advance in a general meeting.

The offer of a grant of share options under the Plans must be accepted within 14 days from the date of the offer, upon payment of a nominal consideration of $.0001 in total by the grantee. For the 2002 Plan, the offer of a grant of share options must be accepted with 7 days from the date of the offer upon payment of a nominal consideration of $.0001 in total by the grantee. The exercise period of the share options granted is determinable by the directors. However, for the Plans, each of the grantees of the options is not allowed to exercise in aggregate in excess of 25%, 50% and 75% of shares comprised in the options granted within the first, second and third years from one year after the date of grant of options, respectively. All option shares must be exercised within 10 years from the date of grant of options.

The exercise price for the Pre-IPO Plan is determined by the final Hong Kong dollar price per share at which the shares are subscribed pursuant to the placing of 640,000,000 shares by China.com Inc. to professional and institutional investors and other persons made on the terms of the prospectus issued by China.com Inc. on 28th February, 2000 ($.24 per share).

The exercise price of the Post-IPO Plan and the 2002 Plan share options is determinable by the directors, but may not be less than the higher of (i) the closing price of China.com Inc.’s shares on the Stock Exchange on the date of grant of the share options; (ii) the average Stock Exchange closing price of China.com Inc.’s shares for the five trading days immediately preceding the date of the grant of the share options; and (iii) the nominal value of the share.

The share options do not confer rights on the holders to dividends or to vote at shareholders’ meetings.

At December 31, 2006, the remaining life of the Plans is three years and two months and the remaining life of the 2002 Plan is five years and four months.

F-69

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

22.

STOCK-BASED COMPENSATION PLANS (continued)

The following table summarizes information concerning outstanding options at December 31, 2006.


Exercise price range	Shares	Weighted- average remaining contractual life (in years)	Weighted- average exercise price per share		Aggregate Intrinsic Value
$0.022-$0.026	71,038	5.87	$	0.02	$	2
$0.037-$0.044	868,755	4.33	$	0.04		18
$0.065-$0.092	349,191,202	9.30	$	0.06		153
$0.11	96,872	3.63	$	0.11		—
$0.24	12,038,120	3.18	$	0.24		—

December 31, 2006 outstanding	362,265,987				$	173

The following table summarizes information concerning exercisable options at December 31, 2006.


Exercise price range	Shares	Weighted- average remaining contractual life (in years)	Weighted- average exercise price per share		Aggregate Intrinsic Value
$0.022-$0.026	71,038	5.87	$	0.02	$	2
$0.037-$0.044	868,755	4.33	$	0.04		18
$0.065-$0.092	37,261,790	8.24	$	0.07		9
$0.11	96,872	3.63	$	0.11		—
$0.24	12,038,120	3.18	$	0.24		—

December 31, 2006 exercisable	50,336,575				$	29

The following table summarizes information concerning options expected to vest at December 31, 2006.


Exercise price range	Shares	Weighted- average remaining contractual life (in years)	Weighted- average exercise price per share		Aggregate Intrinsic Value
$0.022-$0.026	—	—		—	$	—
$0.037-$0.044	—	—		—		—
$0.065-$0.092	277,617,177	9.42	$	0.06		129
$0.11	—	—		—		—
$0.24	—	—		—		—

December 31, 2006 expected to vest	277,617,177				$	129

F-70

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

22.

STOCK-BASED COMPENSATION PLANS (continued)

A summary of China.com Inc.’s stock option activities and related information for the years ended December 31, 2005 and 2006 is as follows:


	2005
	Options Outstanding			Weighted- average exercise price
Outstanding at the beginning of the year		183,321,129		$	0.16
Granted		86,666,667		$	0.07
Forfeited		(16,068,534	)	$	0.18
Exercised		(26,579,592	)	$	0.04

Outstanding at the end of the year		227,339,670		$	0.14

Exercisable at the end of the year		114,609,023

Weighted-average grant-date fair value of options granted during the year	$	0.05

Intrinsic value of options exercised during the year	$	709


	2006
	Options Outstanding			Weighted- average exercise price
Outstanding at the beginning of the year		227,339,670		$	0.14
Granted		316,056,507		$	0.06
Forfeited		(181,091,442	)	$	0.14
Exercised		(38,748	)	$	0.03

Outstanding at the end of the year		362,265,987		$	0.07

Exercisable at the end of the year		50,336,575		$	0.11

Weighted-average grant-date fair value of options granted during the year	$	0.04

Intrinsic value of options exercised during the year	$	2

Compensation expense charged to operations during the year ended December 31, 2006 relating to stock options was $3,474. As of December 31, 2006, China.com Inc. had unrecognized compensation expense of $3,519 before taxes, related to stock option awards. The unrecognized compensation expense is expected to be recognized over a total weighted average period of 2.3 years.

F-71

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

23.

EMPLOYEE BENEFIT PLANS

IMI, a subsidiary of the Company acquired in 2003, provides retirement benefits for substantially all employees in the U.S. and in foreign locations. In the U.S., the United Kingdom and the Netherlands, IMI sponsors defined contribution plans. In addition, IMI’s Swedish subsidiary (“IMAB”) has a supplemental defined contribution plan for certain key management employees. Contributions by IMI relating to its defined contribution plans for the years ended December 31, 2005 and 2006 amounted to $978 and $2,611, respectively.

IMAB also participates in several employee benefit plans (non-contributory for employees) which cover substantially all employees of its Swedish operations. The plans are in accordance with a nationally-agreed standard plan administered by a national organization, Pensionsregisteringsinstitute (“PRI”). These plans have been frozen and moved to the Swedish government for administration and distribution. Benefits are not paid by IMAB, but by the Swedish government. The level of benefits and actuarial assumptions used to account for these pension plans are calculated and established by the PRI and are solely based on the fully funded value of the predetermined pension payoff amount that was prescribed when the plans were transferred to the Swedish government during 2001, accordingly, IMAB will not change benefit levels or actuarial assumptions. In addition, since the actuarial assumptions are not disclosed to IMAB, no such disclosure is provided herein. The Company accounts for pensions in accordance with SFAS No. 87, “Employers’ Accounting for Pensions” and SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits (Revised)” (“SFAS 132(R)”). During 2006, the Company paid $1,336 to satisfy the remaining liability under the IMI Benefit Plan and has subsequently been released from making future contributions to PRI related to this benefit plan.

The net periodic benefit cost for IMAB’s defined benefit pension plans in Sweden includes the following components:


	Year ended December 31, 2005		Year ended December 31, 2006
Service cost	$	—	$	—
Interest cost		73		28

Net periodic benefit cost	$	73	$	28

F-72

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

23.

EMPLOYEE BENEFIT PLANS (continued)

The following table sets forth the change in the benefit obligations for IMAB’s defined benefit plans in Sweden:


	Year ended December 31, 2005			Year ended December 31, 2006
Benefit obligations at beginning of year/at date of acquisition	$	2,387		$	1,673
Interest cost		73			28
Actuarial gains		(283	)		(469	)
Settlements		(570	)		(1,336	)
Effect of foreign currency exchange rate changes		66			104

Benefit obligations at end of year	$	1,673		$	—

The following table sets forth the plans’ funded status and the actuarial present value of benefit obligations as of December 31, 2005 and 2006:


	December 31, 2005		December 31, 2006
Unfunded status	$	1,673	$	—
Comprised of:
Long-term liability portion	$	—	$	—
Short-term liability portion	$	1,673	$	—

24.

RESTRUCTURING COSTS

As a result of the Company’s ongoing plan to rationalize, integrate and align its resources, the Company incurred certain restructuring costs of $3,760, $1,667 and $1,974 for the years ended December 31, 2004, 2005 and 2006, respectively. Restructuring costs are included in restructuring expenses in the consolidated statements of operations.

In connection with the acquisition of IMI and Pivotal in 2003 and 2004, respectively, the Company assumed and included in the purchase price allocations certain preexisting restructuring accruals.

For the year ended December 31, 2004, the restructuring costs related to IMI, Pivotal and Praxa. At IMI, restructuring costs of $2,862 comprised of $1,866 related to employee termination costs, $482 for write-off of acquired software, $414 related to closure of offices, and $100 in other costs. At Pivotal, restructuring costs of $373 related to lease facility closure costs. At Praxa, restructuring costs of $525 comprised of $345 related to employee termination costs, $129 in contract exit fees, and $51 in other costs.

For the year ended December 31, 2005, the Company incurred and charged to expense $3,055 in restructuring costs principally at the Company’s corporate office, Pivotal, Ross and IMI. In 2005, the restructuring liability at Pivotal was reduced by $1,354 due to a change in estimate relating to lease facility closure costs.

F-73

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

24.

RESTRUCTURING COSTS (continued)

For the year ended December 31, 2006, the Company incurred and charged to expense $2,943 in restructuring costs principally at IMI and Praxa. At IMI, restructuring costs were $2,288 comprised of $732 related to employee termination costs and $1,556 for closure of offices. At Praxa, restructuring costs were $323 comprised of $132 related to employee termination costs and $191 in other costs. In 2006, the restructuring liability at IMI was reduced by $711 due to a change in estimate relating to workforce reduction and by $353 due to a change in estimate relating to a lease termination.

At December 31, 2005 and 2006, the Company had a total of $7,354 and $6,010, respectively, in accruals relating to the business restructuring activities. Pivotal, Ross and IMI are included in the Software segment. Praxa is included in the Business Services segment.

The changes in the accrued liability balance associated with the exiting costs for the year ended December 31, 2004, is as follows:


	Workforce Reduction			Lease Termination			Other Exit Costs			Total
Balance at January 1, 2004	$	791		$	7,329		$	555		$	8,675
Expensed in 2004		2,211			917			632			3,760
Amounts paid		(2,211	)		(543	)		(632	)		(3,386	)

Balance at December 31, 2004	$	791		$	7,703		$	555		$	9,049

The changes in the accrued liability balance associated with the exiting costs for the year ended December 31, 2005, is as follows:


	Workforce Reduction			Lease Termination			Other Exit Costs			Total
Balance at January 1, 2005	$	791		$	7,703		$	555		$	9,049
Expensed in 2005		2,047			416			591			3,054
Adjustments to income		—			(1,354	)		(34	)		(1,388	)
Amounts paid		(960	)		(1,575	)		(826	)		(3,361	)

Balance at December 31, 2005	$	1,878		$	5,190		$	286		$	7,354

F-74

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

24.

RESTRUCTURING COSTS (continued)

The changes in the accrued liability balance associated with the exiting costs for the year ended December 31, 2006, is as follows:


	Workforce Reduction			Lease Termination			Other Exit Costs			Total
Balance at January 1, 2006	$	1,878		$	5,190		$	286		$	7,354
Expensed in 2006		1,183			1,556			204			2,943
Adjustments to income		(711	)		(173	)		(85	)		(969	)
Amounts paid		(2,115	)		(965	)		(238	)		(3,318	)

Balance at December 31, 2006	$	235		$	5,608		$	167		$	6,010

25.

PROPERTIES HELD FOR SALE

At December 31, 2004, the Company classified a building and the related land with a carrying amount of $2,992 as held for sale and such assets were stated at carrying value which was less than fair value less cost to sell. The land and building were sold in 2005 resulting in a gain of $1,181.

26.

CONTINGENCIES AND COMMITMENTS

Contingencies

As of May 31, 2007, other than as set forth below, there is no material litigation pending against the Company. The Company and its subsidiaries are a party to other litigation and claims incident to the ordinary course of business. While the results of such litigation and claims cannot be predicted with certainty, the Company believes that the final outcome of such other matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

(a) Vertical Computer Systems, Inc./NOW Solutions LLC (“Vertical” or “NOW”). In February 2003, Vertical Computer Systems (on behalf of itself and on behalf of NOW Solutions) filed a civil action against a Company’s subsidiary, Ross and others alleging, among other things, breach of contract, claims under contractual indemnifications and fraud arising from the sale of Ross’s HR/Payroll division to NOW in an amount of $3,500. Ross filed a motion for summary judgment in October 2004. The court denied this motion and converted Ross’ motion papers into a complaint. Other motions filed by Ross for dismissing NOW’s counterclaims were granted in February 2005. In May 2006, both Ross and Vertical filed summary motions against each other, which motions were denied by the Court in November 2006, finding that facts issues existed to be resolved at trial. In April 2007, the Court issued a directed verdict against the Company. The Company is awaiting the issuance of the final order and judgment by the Court, at which time the Company will determine if it will file an appeal. As a result of the directed verdict, the Company accrued $300 and $2,900 at December 31, 2005 and 2006, respectively.

F-75

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

26.

CONTINGENCIES AND COMMITMENTS (continued)

Contingencies (continued)

(b) Harry Edelson. In October 2003, Harry Edelson, a former member of the Board of Directors, brought an action at the District Court for the Northern District of Illinois against the Company and Dr. Raymond Ch’ien and Mr. Peter Yip, two members of the Board of Directors, seeking injunctive relief and monetary damages in connection with alleged violations of the Securities Exchange Act of 1934, as amended, in connection with his failure to be re-elected to the board at the Company’s 2003 annual general meeting. In February 2004, Mr. Edelson filed an appeal to a decision by the District Court to dismiss the action. The appeal was denied in April 2005 by the Courts of Appeal for the Seventh Circuit. In May 2005, Mr. Edelson petitioned for a re-hearing en banc at the Courts of Appeals. The petition was subsequently denied. In October 2005, Mr. Edelson petitioned to the Supreme Court for a Writ of Certiorari to the Courts of Appeal’s decision and in February 2006 the Supreme Court denied to hear the petition. In February 2004, Mr. Edelson brought an amended action at the District Court against the Company based upon the same allegations seeking monetary damages. In June 2005, the Company filed a motion for summary judgment at the District Court, and in November 2005, the motion was granted in the Company’s favor. The Company believes that this action is without merit. Management of the Company considers the outcome of any judgment on the lawsuit with respect to the Company to be uncertain and the amount of any expenditure from the lawsuit is not estimable.

(c) Class Action Lawsuit. A class action lawsuit was filed in the United States District Court, Southern District of New York on behalf of purchasers of the Company’s securities between July 12, 1999 (the date of the Company’s IPO) and December 6, 2000, inclusive. The complaint charges the Company and the underwriters in the Company’s IPO with violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaint alleges that the prospectus used in the Company’s IPO was materially false and misleading because it failed to disclose, among other things, that (i) the underwriters had solicited and received excessive and undisclosed commissions from certain investors, in exchange for which the underwriters allocated to those investors material portions of the restricted numbers of the Company’s shares issued in connection with the IPO; and (ii) the underwriters had entered into agreements with customers whereby the underwriters agreed to allocate the Company’s shares to those customers, in exchange for which the customers agreed to purchase additional shares in the aftermarket at pre-determined prices.

In June 2003, the plaintiffs in the consolidated IPO class action lawsuits currently pending against the Company and over 300 other issuers who went public between 1998 and 2000, announced a proposed settlement with the Company and the other issuer defendants. The proposed settlement provides that the insurers of all settling issuers will guarantee that the plaintiffs recover $1,000,000 from non-settling defendants, including the investment banks that acted as underwriters in those offerings. In the event that the plaintiffs do not recover $1,000,000, the insurers for the settling issuers will make up the difference. Under the proposed settlement, the maximum amount that could be charged to the Company’s insurance policy in the event that the plaintiffs recovered nothing from the investment banks would be approximately $3,900. The Company believes that it has sufficient insurance coverage to cover the maximum amount that the Company may be responsible for under the proposed settlement. The independent members of the Board of Directors approved the proposed settlement at a meeting held in June 2003. As of March 2005, outside counsel advised that the court has granted preliminary approval of the settlement, subject to certain conditions. The Company is awaiting final approval of the settlement, pending satisfaction and waiver of such conditions, although the timing of such final approval is uncertain. Management of the Company considers the outcome of any judgment on the lawsuit with respect to the Company to be quite uncertain and any expenditure from the lawsuit is not estimable. Consequently, no provision has been made for any expenses that might arise as a result of the class action lawsuit.

F-76

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

26.

CONTINGENCIES AND COMMITMENTS (continued)

Contingencies (continued)

(d) Lam, Po Chiu Mark. In December 2003, Mr. Mark Lam filed a civil action in the High Court of Hong Kong against a Company subsidiary Ion Global (BVI) Limited alleging breach of contract in relation to a put option agreement under a share purchase agreement in an amount of $742. Pleadings closed in April 2004 when Mr. Lam filed his reply to the defense filed by Ion Global. The case was largely dormant until late 2005 when the plaintiff sought and was granted leave to amend his statement of claim and to join the Company as a party. The Company was joined in July 2006. In January 2007, Mr. Lam also joined a member of the Board of Directors, Mr. Peter Yip, to the proceedings. The Company believes that this action is without merit and it intends to vigorously defend such action. Management of the Company considers the outcome of any judgment on the lawsuit with respect to the Company to be quite uncertain and any expenditure from the lawsuit is not estimable. Consequently, no provision has been made for any expenses that might arise as a result of the class action lawsuit.

(e) Herkemij & Partners Knowledge (“Herkemij Knowledge”) . In April 2004 Herkemij Kowledge, filed a civil action against the Company’s subsidiaries Ross and Ross Nederland alleging Ross and Ross Nederland developed a software program named iProject using documentation and source code from Herkemij Knowledge’s copyrighted Project Administration and Control System. The action includes counts for copyright infringement, misappropriation of trade secrets, and unfair competition and seeks, among other things, injunctive relief, damages totaling $5,000 to $10,000, and payment of royalties. In September 2004, the case against Ross Nederland was dismissed for lack of personal jurisdiction, and in February 2005, a hearing was held in which the judge refused to dismiss the case against Ross, but transferred the case to the Northern District Court of Georgia in Atlanta. In August 2005 the Northern District Court of Georgia granted Herkemij’s motion to amend the complaint. Based on representations of Ross made to the Court in October 2005, Herkemij sought to dismiss all claims without prejudice. Ross then filed its response seeking dismissal with prejudice and costs. In late 2006 the Court dismissed the case without prejudice and ordered Herkemji to reimburse Ross for part of its legal costs.

(f) Adding Value to Business Pty Ltd trading as Countrywide Systems Network (“Adding Value”). In December 2004, Adding Value filed a civil action against a Company’s subsidiary Praxa Limited, alleging breach of contract, misleading and deceptive conduct, and seeking various equitable remedies and damages. In June 2007, the action was fully settled without admission of liability on either party pursuant to a deed of settlement.

(g) Mantech International Corporation and ManTech Australia International Inc. (“ManTech”). In October 2005, ManTech filed a civil action against the Company’s subsidiaries CDC Australia Limited and CDC Australia (Praxa) Pty Ltd, collectively “CDC Australia” alleging that CDC Australia failed to pay $3,662 that was retained as part of the consideration for the acquisition of Praxa Limited. In late 2005, CDC Australia filed and served a request for further and better particulars of the statement of claim and a request for the filing of security of costs. The plaintiffs answered the requests for further and better particulars, and further directions as to the conduct of the action were given by the Court soon after plaintiff made payment of security for costs in January 2007. Discovery and interrogatories are due to be filed and served by July 2007. The Company believes that the $3,662 was rightfully retained by CDC Australia in accordance with the terms of the acquisition agreement, and the action is without merit. The Company intends to vigorously defend such action. Management of the Company considers the outcome of any judgment on the lawsuit with respect to the Company to be uncertain and the amount of any expenditure from the lawsuit is not estimable. Consequently, no provision has been made for any expenses that might arise as a result of the class action lawsuit.

F-77

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

26.

CONTINGENCIES AND COMMITMENTS (continued)

Contingencies (continued)

(h) James Avery Craftsman Inc. (“James Avery”). In November 2006, James Avery filed a civil action against the Company’s subsidiaries Ross and Pivotal, alleging that Ross and Pivotal had breached a software license and professional service agreement and related agreements, and had misrepresented their abilities to perform services and deliver products. Ross and Pivotal answered James Avery’s petition filed in the action, removed the action to the United States District Court for the Western District of Texas, San Antonio Division, and asserted defenses and denials to James Avery’s claims. Subsequently, on or about March 2, 2007, Ross and Pivotal threatened to assert Counterclaims against James Avery in the Action for breach of contract, quantum merit and unjust enrichment. The Parties participated in mediation in March 2007, and executed a settlement and release agreement with respect to these matters in May 2007. The Company has evaluated this claim in conjunction with SFAS 5 and has determined that judgment against the Company is both probable and estimatible. Accordingly, the Company has accrued Nil and $600 at December 31, 2005 and 2006, respectively.

Commitments

As of December 31, 2006, the Company had future minimum lease payments under non-cancelable operating leases falling due as follows:


Year ended December 31,
2007	$	9,658
2008	$	7,745
2009	$	6,019
2010	$	5,160
2011	$	4,613
Thereafter	$	4,484

	$	37,679

The Company recorded rental expense of $9,630, $10,042, and $12,825 and sublease income of $2,986, $1,728, and $1,484 for the years ended December 31, 2004, 2005 and 2006, respectively. As of December 31, 2006, the Company had future minimum rentals to be received under subleases of $14,910.

27.

SEGMENT INFORMATION

Description of Products and Services by Segment

In 2005, the Company reported its operating results in four operating segments, “Software”, “Business Services”, “Mobile Services and Applications” and “Internet and Media”. In April 2006, in conjunction with the acquisition of 52% interest in Equity Pacific Limited (“Equity Pacific”) (Note 3(d)), the Company added “CDC Games” operating segment. Historically the Company accounted for the results of CDC Games under the equity basis and has included its proportionate share of losses in CDC Games in share of gains (losses) in equity investees in the accompanying consolidated statements of operations. Refer to Note 1 for a description of products and services offered by each segment.

F-78

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

27.

SEGMENT INFORMATION (continued)

Information about Segment Profit or Loss and Segment Assets

The Company evaluates performance and allocates resources based on revenues and segment net income (loss). The following items are included in the evaluation of segment performance: revenues from external customers, depreciation and amortization, net interest income and expense, income tax benefit (expense) and net income (loss). The Company also uses segment net income (loss) as the measure of segment profitability and excludes purchase intangible assets amortization and other acquisition related expenses from its reportable segments and includes such items in the reconciling line for corporate and other unallocated amounts. In addition to these items, the Company includes the following items on the corporate and other unallocated amounts line: corporate general and administrative expenses related to statutory, legal and audit compliance, interest expense related to Corporate level debt, amortization of debt discount and gain (loss) on the change in fair value of derivatives related to the Company’s convertible notes, interest income and gain (loss) on the disposal of corporate held securities, and minority interest in the earnings or losses of consolidated investees. Information about assets and liabilities other than the total segment assets is not reported separately for each segment because this information is not produced internally. The accounting policies of the reportable segments are the same as those described in Note 2.

Factors Management Used to Identify the Enterprise’s Reportable Segments

The Company’s reportable segments are business units that offer different services. The reportable segments are each managed separately and are evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance.

The Company’s segment information is as follows:


	Year ended December 31, 2004		Year ended December 31, 2005		Year ended December 31, 2006
Segment revenues from external customers:
Software	$	107,648	$	158,804	$	175,374
Business Services		42,927		42,686		65,448
Mobile Services and Applications		23,694		34,389		31,862
Internet and Media		8,183		8,995		10,064
CDC Games		—		—		26,780

Total consolidated revenues	$	182,452	$	244,874	$	309,528


	Year ended December 31, 2004		Year ended December 31, 2005		Year ended December 31, 2006
Segment depreciation and amortization expenses:
Software	$	8,590	$	12,845	$	14,654
Business Services		2,426		803		1,905
Mobile Services and Applications		2,232		1,818		815
Internet and Media		368		366		1,517
CDC Games		—		—		2,822

		13,616		15,832		21,713
Corporate and other unallocated amounts		1,193		1,272		675

Total consolidated depreciation and amortization expenses	$	14,809	$	17,104	$	22,388

F-79

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

27.

SEGMENT INFORMATION (continued)


	Year ended December 31, 2004			Year ended December 31, 2005		Year ended December 31, 2006
Segment interest income (expense), net:
Software	$	585		$	713	$	646
Business Services		36			126		(15	)
Mobile Services and Applications		168			253		337
Internet and Media		(2	)		16		30
CDC Games		—			—		58

		787			1,108		1,056
Corporate and other unallocated amounts		6,971			5,791		6,410

Total consolidated net interest income	$	7,758		$	6,899	$	7,466


	Year ended December 31, 2004			Year ended December 31, 2005			Year ended December 31, 2006
Segment income tax expense (benefit):
Software	$	(3,639	)	$	(405	)	$	588
Business Services		410			1,422			791
Mobile Services and Applications		(392	)		710			515
Internet and Media		39			113			273
CDC Games		—			—			—

		(3,582	)		1,840			2,167
Corporate and other unallocated amounts		6,957			3,117			895

Total consolidated tax expense:	$	3,375		$	4,957		$	3,062


	Year ended December 31, 2004			Year ended December 31, 2005			Year ended December 31, 2006 (Restated)
Segment net income (loss):
Software	$	12,562		$	8,232		$	16,811
Business Services		572			3,253			(3,887	)
Mobile Services and Applications		11,562			4,904			(2,367	)
Internet and Media		(197	)		(949	)		528
CDC Games		—			—			12,160

		24,505			15,440			31,019
Corporate and other unallocated amounts		(30,472	)		(18,954	)		(20,179	)

Total consolidated net (loss) income	$	5,967		$	(3,514	)	$	10,840

Restatement

The Company concluded that the financial statement footnote disclosure of segment net income (loss) for fiscal year ended December 31, 2006 contained two accounting errors related to the allocation of expenses among the Company’s business segments. First, an aggregate of approximately $6.3 million of purchased intangibles amortization expense related to certain acquisitions was improperly allocated to the Software and Business Services segments. Purchased intangible amortization should have been included in the measurement of Corporate segment net income (loss). Second, an inter-company consolidation adjustment within the Mobile Services and Applications segment of approximately $8.5 million was improperly allocated to the Corporate segment.

The amounts set forth below under Segment net income (loss) for the year ended December 31, 2006 have been restated as follows:



	As Previously Disclosed			As Restated			Difference
	Year ended December 31, 2006
Segment net income (loss):
Software	$	11,878		$	16,811		$	4,933
Business Services		2,565			3,887			1,322
Mobile Services and Applications		6,152			(2,367	)		(8,519	)
Internet and Media		528			528			—
CDC Games		12,160			12,160			—

		33,283			31,019			(2,264	)
Corporate and other unallocated amounts		(22,443	)		(20,179	)		2,264

Total consolidated net (loss) income	$	10,840		$	10,840		$	—

Consolidated net income for the Company for the year ended December 31, 2006 remained unchanged.

F-80

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

27.

SEGMENT INFORMATION (continued)


	Year ended December 31, 2005		Year ended December 31, 2006
Segment assets:
Software	$	88,497	$	294,511
Business Services		18,145		106,694
Mobile Services and Applications		32,551		130,320
Internet and Media		9,862		23,163
CDC Games		—		83,590

		149,055		638,278
Corporate and other unallocated amounts		483,977		219,155

Total consolidated assets	$	633,032	$	857,433

The Company’s segment information by geographical segment is as follows. Revenues are attributed to countries based on the location of customers.


	Year ended December 31, 2004		Year ended December 31, 2005		Year ended December 31, 2006
Segment revenues from external customers:

North America	$	59,830	$	100,987	$	129,537
Europe, Middle East and Africa (“EMEA”)		50,033		63,805		81,612
Asia-Pacific		71,912		75,927		98,379
Others		677		4,155

Total consolidated revenues	$	182,452	$	244,874	$	309,528


	Year ended December 31, 2005			Year ended December 31, 2006
Segment long-lived assets:

North America	$	57,022		$	67,683
EMEA		1,780			12,907
Asia-Pacific		21,676			33,019
Others		(678	)		—

Total consolidated long-lived assets	$	79,800		$	113,609

F-81

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

28.

SUBSEQUENT EVENTS

BBMF Senior Secured Loan Agreement . In January 2007, the Company entered into a senior secured loan agreement with BBMF pursuant to which the Company provided a $3,000 loan to BBMF, for working capital purposes and to accelerate the business expansion of BBMF (Note 15).

Respond Group Ltd . (“Respond”). In February 2007, the Company acquired 100% of the shares of Respond, a provider of enterprise class complaints, feedback and customer service solutions. Under the terms of the share purchase agreement, the Company paid approximately $15,000 at closing, subject to various adjustments. In addition, the Company agreed to pay up to a maximum of $14,000 of additional consideration based upon 2007, 2008 and 2009 revenues. Revenues must exceed $12,000 during each annual period for any additional consideration to be payable for that period. Any additional consideration will be paid in the form of cash. The additional compensation payments are subject to holdback in the event of breaches of representations and warranties, and various other adjustments.

Saratoga S ystems Inc. (“Saratoga”). In April 2007, the Company entered into an agreement to acquire through a merger Saratoga, a provider of enterprise CRM and wireless CRM applications. Under the terms of the agreement, the Company agreed to pay not more than $35,000 in cash in connection with the merger, with $30,000 paid at closing and $5,000 placed into escrow for an 18 month period and subject to holdback in the event of breaches of representations and warranties and various other adjustments.

Vectra Corporation (“Vectra”). In May 2007, a subsidiary of the Company, completed the acquisition of a majority interest in Vectra, a provider of information security consulting services, managed services and enterprise security solutions. Under the terms of a share purchase agreement, the Company paid approximately $144 in cash at closing for such majority interest in Vectra.

CDC Games Studio . In March 2007, the Company formed CDC Games Studio which represented an expansion of an online games developer program announced in August 2006. CDC Games Studio seeks to make strategic investments with selected game developers and also support emerging game developers with the resources they need to develop innovative new games. CDC Games Studio seeks to attract talented games development companies around the world, including in Korea, the U.S., Europe and the PRC, which may already have operations in the PRC or are seeking to relocate or expand into the PRC to take advantage of the market demand for new games, talent in the PRC available for games development and tax incentives available to companies developing games for domestic distribution as well as for export. CDC Games Studio looks to fund the creation of new online games, as well as acquire rights to develop game titles in the PRC, with the goal of publishing and distributing them on a global scale. As of March 31, 2007, CDC Games has entered into definitive agreements for three investments under this program.

F-82

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

28.

SUBSEQUENT EVENTS (continued)

•

Gorilla Banana Entertainment Corp. (“Gorilla Banana”) . In December 2006, the Company entered into a subscription agreement pursuant to which it agreed to make an investment of $1,600, payable in two installments, in Gorilla Banana, an independent online games development company in Korea. This investment, which was subject to certain regulatory approvals, was closed, and consideration was exchanged, upon receipt these required approvals in first quarter of 2007. In connection with this investment, the Company acquired a minority equity stake in Gorilla Banana and options to increase its minority stake in Gorilla Banana during the 18 month period following closing. Furthermore, the Company also acquired the exclusive right to distribute Gorilla Banana’s game, Red Blood, based on a popular comic book series in Korea, in India and the PRC, in exchange for the payment of a royalty on gross revenues the Company may receive for this game. In addition, the Company also entered into a shareholders’ agreement with the existing shareholders of Gorilla Banana pursuant to which the parties agreed to certain uses of funding, preemptive and maintenance rights, rights of first refusal, restrictions on share transfers and sales, board representation rights, information rights and other matters. The founders and executives of Gorilla Banana are experienced developers and executives, including former game directors at NCsoft, one of the largest online game publishers in South Korea, the founding chairman of the Korea Game Developers Association from 1999 to 2005, and former executives at Grigon Entertainment.

•

Auran . In March 2007, the Company entered into a subscription agreement pursuant to which it made an investment of approximately $3,000 in Auran, a leading developer of online games in Australia. In connection with this investment, the Company acquired a minority equity stake in Auran and options to increase its minority stake in Auran during the 6 month period following closing. Under the Company’s agreements with Auran, it paid approximately $1,500 in cash at closing in exchange for 50% of its minority stake and is required to pay, in exchange for the final 50% of its minority stake, approximately $1,500 within 15 days of the occurrence of Open Beta testing (as defined therein) for Fury. The Company also entered into: (i) a facilitation agreement pursuant to which it obtained rights to receive, for a period of 8 years from the Effective Date (as defined therein) a percentage of net revenues received by Auran relating to its online game, Fury, which is being developed, or any XBLA game (Microsoft’s Xbox Live Arcade) developed by Auran, in exchange for the Company providing certain advisory services to Auran; and (ii) a shareholders’ agreement with the existing shareholders of Auran pursuant to which the parties agreed to certain uses of funding, restrictions on share issuances and transfers, pre-emptive rights, rights of first refusal, board representation rights, information rights and other matters. Fury is an innovative game that blends MMORPG and FPS (first person shooter) genres.

F-83

CDC Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands U.S. dollars, except share and per share data)

28.

SUBSEQUENT EVENTS (continued)

•

MGame Corporation (“MGame”) . In March 2007, the Company entered into a subscription agreement pursuant to which it made an investment of approximately $5,000 in MGame, one of South Korea’s leading developers of online games, including the Company’s current game, Yulgang. In connection with this investment, the Company acquired a minority equity stake in MGame, for which it paid MGame $5,000 at closing. The Company also obtained rights relating to its access to information on MGame, observation rights on MGame’s board of directors, pre-emptive and anti-dilution rights, as well as a right for the Company to consent prior to the issuance of new debt by MGame over certain monetary thresholds. Additionally, in March 2007, the Company entered into an exclusive game license agreement with MGame pursuant to which the Company received exclusive rights to distribute the simplified Chinese version of MGame’s next MMORPG, Wind Forest Fire Mountain, in the PRC (including Hong Kong and Macau) until 2010. In consideration thereof, the Company will make cash payments to MGame totaling $5,000 within one year.

F-84

Cdc Corp. (MM) (NASDAQ:CHINA)
Historical Stock Chart
From Jun 2024 to Jul 2024

Click Here for more Cdc Corp. (MM) Charts.

Cdc Corp. (MM) (NASDAQ:CHINA)
Historical Stock Chart
From Jul 2023 to Jul 2024

Trending Now

Toplists

Market Data

News

Trading Tools

Markets

Discover

Hot Features

Follow Feed

Options Flow

Monitor

CHINA Cdc Corp. (MM)

Latest CHINA Messages

Loading Messages....

Cdc Corp News

Loading Messages....

Your Recent History

Company

Business

Popular