TOM Group Limited - Proxy Solicitation & Information Statement 2007

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult your stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in TOM (as defined herein), you should at once hand this circular to the purchaser or the transferee or to the bank, stockbroker or other agent through whom the sale was effected for transmission to the purchaser or the transferee.

The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this circular, makes no representation as to its accuracy or completeness, and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

This circular appears for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for securities of TOM or TOM Online.

If you are also a holder of TOM Online Shares or ADSs, this circular is not, and should not be construed to be, a solicitation or request for votes or proxies in respect of such securities. You should expect to receive a Scheme Document for such purposes in due course in the event the Proposals are made.

To the extent the offers referred to in this circular are being or to be made into the United States, they are being made or to be made directly by TOM. References in this circular to offers being made or to be made by Goldman Sachs on behalf of TOM should be construed accordingly.

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(Stock code: 2383)

MAJOR TRANSACTION AND CONNECTED TRANSACTION

PROPOSED CONDITIONAL POSSIBLE PRIVATISATION OF TOM ONLINE INC. BY WAY OF A SCHEME OF ARRANGEMENT (UNDER SECTION 86 OF THE COMPANIES LAW) AT THE CANCELLATION PRICE OF HK$1.520 PER SCHEME SHARE (INCLUDING SCHEME SHARES UNDERLYING ADSs) AND POSSIBLE CONDITIONAL OPTION PROPOSAL

Financial adviser to TOM Group Limited

Goldman Sachs (Asia) L.L.C.

Independent Financial Adviser to the TOM Independent Board Committee and the TOM Independent Shareholders

Evolution Watterson Securities Limited

A letter of recommendation from the TOM Independent Board Committee to the TOM Independent Shareholders and a letter of advice from Evolution Watterson Securities Limited to the TOM Independent Board Committee and the TOM Independent Shareholders are set out respectively on page 25 and pages 26 to 29 of this circular.

A notice convening the TOM EGM (as defined herein) to be held at the Conference Room, Regus Conference Centre, 35th Floor, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong on Wednesday, 25 April 2007 at 3:00 p.m. is set out on pages 225 to 226 of this circular. Whether or not you will be able to attend the TOM EGM, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the principal place of business of TOM at 48th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding the TOM EGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the TOM EGM or any adjourned meeting if you so wish.

for identification purpose

11 April 2007

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the TOM Board
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
2. Terms of the Share Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
3. Conditions of the Share Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
4. The Option Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	12
5. Shareholding structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
6. Reasons for and benefits of the Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
7. Information on TOM Online . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	20
8. Information on TOM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	21
9. Listing Rules implication on TOM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	21
10. Precautionary language regarding forward-looking statements . . . . . . . . . . . . . . . . . . . . . . . .	22
11. The TOM EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
12. Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
13. Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
Letter from the TOM Independent Board Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	25
Letter from Evolution Watterson Securities Limited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	26
Appendix I – Unaudited pro forma financial information . . . . . . . . . . . . . . . . . . . . . . . . . . .	30
Appendix II – Financial information on the TOM Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . .	35
Appendix III – Financial information on TOM Online. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	107
Appendix IV – Management discussion and analysis on TOM Online . . . . . . . . . . . . . . . . . .	168
Appendix V – General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	197
Notice of TOM EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	225

DEFINITIONS

In this circular, the following expressions have the following meanings, unless the context requires otherwise:

“acting in concert”	has the meaning ascribed to such expression under the Takeovers
	Code
“ADSs”	American depositary share(s) of TOM Online, which are issued
	by Citibank N.A. and quoted on NASDAQ, each representing
	ownership of 80 TOM Online Shares
“ADS Deposit Agreement”	the Deposit Agreement dated as of 11 March 2004, by and among
	TOM, the ADS Depositary and all holders and beneficial owners
	of ADSs
“ADS Depositary”	Citibank, N.A., a US national banking association organised under
	the laws of the United States acting in its capacity as depositary
“ADS Holders”	holders of ADS
“Announcement”	the announcement dated 9 March 2007 issued jointly by TOM
	and TOM Online relating to, inter alia, the Proposals
“Announcement Date”	9 March 2007, being the date of the Announcement
“associate(s)”	has the meaning ascribed to such expression under the Takeovers
	Code
“Authorisations”	all the necessary authorisations, registrations, filings, rulings,
	consents, permissions, approvals, waivers or exemptions in
	connection with the Share Proposal
“Cancellation Price”	the cancellation price of HK$1.520 per Scheme Share payable in
	cash by TOM to the Scheme Shareholders
“CKH”	Cheung Kong (Holdings) Limited, a company incorporated in Hong
	Kong with limited liability, the shares of which are currently listed
	on the Main Board of the Stock Exchange
“Companies Law”	the Companies Law Cap. 22 (Law 3 of 1961), as consolidated and
	revised of the Cayman Islands
“connected person”	has the meaning ascribed to such expression under the Listing
	Rules

DEFINITIONS

“Court Meeting”
a meeting of the Scheme Shareholders to be convened at the direction of the Grand Court at which the Scheme will be voted upon
“Cranwood” Cranwood Company Limited, a company incorporated in the Republic of Liberia and wholly-owned by Ms. Chau Hoi Shuen
“Devine Gem” Devine Gem Management Limited, a company incorporated in the British Virgin Islands and which is indirectly wholly-owned by Ms. Chau Hoi Shuen
“Easterhouse” Easterhouse Limited, a company incorporated in the British Virgin Islands and an indirect wholly-owned subsidiary of HWL
“Enlarged Group” TOM Group plus additional equity interests in TOM Online to be acquired pursuant to the Proposals
“Evolution Watterson” Evolution Watterson Securities Limited, the independent financial adviser appointed to advise the TOM Independent Board Committee and the TOM Independent Shareholders, Evolution Watterson is a licensed corporation under the SFO, licensed to carry out Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities
“Exchange Act” The US Securities Exchange Act of 1934, as amended, including the related rules and regulations promulgated thereunder
“Exchange Rate” US$1.00 to HK$7.8155, being the noon buying rates in New York in US dollars for cable transfers payable in HK$ as certified by the Federal Reserve Bank of New York in effect on the Latest Practicable Date
“Executive” the Executive Director of the Corporate Finance Division of the SFC or any delegate thereof
“GEM”
the Growth Enterprise Market of the Stock Exchange
“Goldman Sachs”
Goldman Sachs (Asia) L.L.C., the financial adviser to TOM in connection with the Proposals. Goldman Sachs is a licensed corporation under the SFO, licensed to carry out Type 1 (dealing in securities), Type 4 (advising on securities), Type 5 (advising on futures contracts), Type 6 (advising on corporate finance) and Type 9 (asset management) regulated activities

DEFINITIONS

“Goldman Sachs Group” Goldman Sachs and other members of its group which are presumed to be acting in concert with TOM in relation to the Share Proposal under the Takeovers Code “Grand Court” Grand Court of the Cayman Islands “Handel” Handel International Limited, a company incorporated in the British Virgin Islands which is owned as to 95% by Cranwood “HK$” or “HK dollars” Hong Kong dollar(s), the lawful currency of Hong Kong

“HKGAAP” the accounting principles generally accepted by Hong Kong
“Hong Kong” the Hong Kong Special Administrative Region of the PRC “HWL” Hutchison Whampoa Limited, a company incorporated in Hong Kong with limited liability, the shares of which are currently listed on the Main Board of the Stock Exchange
“Latest Practicable Date” 2 April 2007, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained in this circular
“Listing Rules” the Rules Governing the Listing of Securities on the Stock Exchange
“Inland Revenue Ordinance” the Inland Revenue Ordinance (Chapter 112 of the Laws of Hong Kong)
“NASDAQ” The NASDAQ Stock Market, Inc. in the United States

“Option” an option to subscribe for TOM Online Shares pursuant to the TOM Online Pre-IPO Share Option Plan or the TOM Online Share Option Scheme

“Optionholder(s)” holder(s) of Outstanding TOM Online Share Options

“Option Proposal” the conditional offer to be made by Goldman Sachs, on behalf of TOM, to the Optionholders on the terms and subject to the conditions to be contained in the Scheme Document and the Option Proposal Letters

“Option Proposal Letters” the letters setting out terms and conditions of the Option Proposal which will be sent separately to the relevant Optionholders

DEFINITIONS

“Option Proposal Price”
“Outstanding TOM Online Share Options”
“PRC”
“Proposals”
“Record Date”
“Relevant Authorities”
“Romefield”
“Scheme”
“Scheme Document”
“Scheme Shareholder(s)”
“Scheme Share(s)”
“Schumann”
“SEC”

the price per Outstanding TOM Online Share Option payable in cash by TOM to the Optionholders on the terms and subject to the conditions of the Option Proposal, details of which are set out in the section headed “The Option Proposal” below

the outstanding share options granted under the TOM Online PreIPO Share Option Plan and TOM Online Share Option Scheme

the People’s Republic of China

the Share Proposal and the Option Proposal

the record date for determining entitlements under the Proposals

appropriate governments and/or governmental bodies, regulatory bodies, courts or institutions
Romefield Limited, a company incorporated in the British Virgin Islands and an indirect wholly-owned subsidiary of CKH
a scheme of arrangement under Section 86 of the Companies Law involving the cancellation of all the Scheme Shares
a scheme document of TOM Online containing, inter alia, further details of the Proposals and the Scheme, the expected timetable, an explanatory memorandum as required under the Companies Law and the Rules of the Grand Court, information regarding TOM Online, recommendations from the independent board committee of TOM Online with respect to the Proposals and the Scheme and the advice of the independent financial adviser to the independent board committee of TOM Online, a notice of the Court Meeting and a notice of an extraordinary general meeting of TOM Online, together with proxies in relation thereto, which will be sent to the shareholders of TOM Online and, through the ADS Depositary, the ADS Holders
TOM Online Shareholders other than TOM, Cranwood, Handel, Schumann and Devine Gem

TOM Online Share(s) held by the Scheme Shareholders

Schumann International Limited, a company incorporated in the British Virgin Islands which is owned as to 95% by Cranwood

the US Securities and Exchange Commission

DEFINITIONS

the Securities and Futures Commission of Hong Kong

“SFC” the Securities and Futures Commission of Hong Kong “SFO” the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) “Share Proposal” the proposal for the privatisation of TOM Online by TOM by way of the Scheme “Stock Exchange” The Stock Exchange of Hong Kong Limited

“Takeovers Code” The Code on Takeovers and Mergers of Hong Kong

“TOM” TOM Group Limited, a company incorporated in the Cayman Islands with limited liability, the shares of which are currently listed on the Main Board of the Stock Exchange

“TOM Board” the board of directors of TOM

“TOM Directors” the directors of TOM
“TOM EGM” an extraordinary general meeting of TOM to be held at the Conference Room, Regus Conference Centre, 35th Floor, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong on Wednesday, 25 April 2007 at 3:00 p.m. to consider and, if thought fit, approve the Proposals and the transactions contemplated thereunder, notice of which is set out on pages 225 to 226 of this circular or any adjournment thereof
“TOM Group”
TOM and its subsidiaries (including the existing 65.733% equity interests in TOM Online Group)
“TOM Independent Board Committee”
the independent board committee comprising Mr. Henry Cheong, Ms. Anna Wu and Mr. James Sha, all being independent nonexecutive directors of TOM established by the TOM Board
“TOM Independent Shareholders”
the shareholders of TOM other than those who are required under the Listing Rules to abstain from voting at the TOM EGM on the proposed resolution in relation to the Proposals
“TOM Online”
TOM Online Inc., a company incorporated in the Cayman Islands with limited liability, the shares of which are currently listed on GEM
“TOM Online Group”

TOM Online and its subsidiaries

“TOM Shares(s)”
shares of HK$0.10 each in the capital of TOM

DEFINITIONS

“TOM Online Independent Shareholders”
“TOM Online Pre-IPO Share Option Plan”
“TOM Online Share Option Scheme”
“TOM Online Shareholders”
“TOM Online Shares”
“TOM Shareholders”
“trading day”
“United States” or “US”
“US$” or “US dollars”
TOM Online Shareholders other than TOM and parties acting in concert with them (the parties presumed under the Takeovers Code to be so acting in concert in relation to the Share Proposal include Romefield, Easterhouse, Cranwood, Handel, Schumann, Devine Gem and Mr. Wang Lei Lei (if he exercises any outstanding share options granted under the TOM Online Pre-IPO Share Option Plan and becomes a Shareholder)

the Pre-IPO Share Option Plan adopted by TOM Online on 12 February 2004

the Share Option Scheme adopted by TOM Online on 12 February 2004

the shareholders of TOM Online

shares of HK$0.01 each in the share capital of TOM Online

the shareholders of TOM

a day on which the Stock Exchange is open for the business of dealings in securities

the United States of America, its territories and possessions, any State of the United States, and the District of Columbia

US dollars, the lawful currency of the United States

LETTER FROM THE TOM BOARD

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(Stock code: 2383)

Directors: Frank Sixt (Chairman) Tommei Tong (Chief Executive Officer) Angela Mak Henry Cheong[#] Anna Wu[#] James Sha[#] Debbie Chang Susan Chow Edmond Ip Angelina Lee Wang Lei Lei

* Non-executive Directors

# Independent non-executive Directors

Registered office: P.O. Box 309 Ugland House South Church Street George Town Grand Cayman Cayman Islands British West Indies

Head office and principal place of business: 48th Floor, The Center 99 Queen’s Road Central Central Hong Kong

11 April 2007

To the TOM Shareholders

Dear Sir or Madam,

MAJOR TRANSACTION AND CONNECTED TRANSACTION

PROPOSED CONDITIONAL POSSIBLE PRIVATISATION OF TOM ONLINE INC. BY WAY OF A SCHEME OF ARRANGEMENT (UNDER SECTION 86 OF THE COMPANIES LAW) AT THE CANCELLATION PRICE OF HK$1.520 PER SCHEME SHARE (INCLUDING SCHEME SHARES UNDERLYING ADSs) AND POSSIBLE CONDITIONAL OPTION PROPOSAL

1. INTRODUCTION

As disclosed in the Announcement, on 3 March 2007, a letter was sent by TOM to inform TOM Online that TOM was considering making a proposal to take TOM Online private by way of a scheme of arrangement under Section 86 of the Companies Law. On 9 March 2007, TOM requested the board of

for identification purpose

LETTER FROM THE TOM BOARD

directors of TOM Online to put forward the Share Proposal to the Scheme Shareholders regarding a privatisation of TOM Online by way of a scheme of arrangement. TOM is the controlling shareholder of TOM Online, holding 2,800,000,000 TOM Online Shares, representing approximately 65.733% of the issued share capital of TOM Online as at the Latest Practicable Date.

The Proposals will be made only if the Proposals and the transactions contemplated thereunder have been approved at the TOM EGM and an announcement will be made by TOM in relation to the voting results of the TOM EGM.

TOM has appointed Goldman Sachs as its financial adviser in connection with the Proposals.

The purpose of this circular is to provide you with further information with regard to the Proposals which constitute a major transaction and a connected transaction for TOM under the Listing Rules.

2. TERMS OF THE SHARE PROPOSAL

The Scheme will provide that the Scheme Shares (including Scheme Shares underlying ADSs) be cancelled and, in consideration thereof, each Scheme Shareholder will be entitled to receive HK$1.520 in cash for each Scheme Share held, as described below:

For each Scheme Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .HK$1.520 in cash For each ADS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HK$121.60 in cash*

* Equivalent to US$15.559 in cash calculated on the basis of the Exchange Rate (being US$1.00 to HK$7.8155)

As the ADSs are governed by the ADS Deposit Agreement and not Cayman Islands law, implementation of the Scheme will not result in and of itself in cancellation of the ADSs. Instead, upon the Scheme becoming effective, the Scheme Shares underlying the ADSs will be cancelled along with all other Scheme Shares, and the cash received by the ADS Depositary (as registered owner of the Scheme Shares underlying the ADSs) upon cancellation of such Scheme Shares will be converted into US dollars by the ADS Depositary in accordance with the ADS Deposit Agreement and distributed (less permitted fees, expenses of the ADS Depositary and withholding taxes, if any) to the holders of ADS pro rata to their holdings upon surrender of their ADSs, in accordance with the provisions of the ADS Deposit Agreement.

The Cancellation Price will not be increased, and TOM does not reserve the right to do so. Under the Scheme, the total consideration payable for the Scheme Shares will be payable by TOM.

LETTER FROM THE TOM BOARD

The Cancellation Price of HK$1.520 per Scheme Share represents:

a premium of approximately 117.2% to the audited consolidated net asset value per TOM Online Share of approximately HK$0.6999 as at 31 December 2006;
a premium of approximately 33.3% over the closing price of HK$1.140 per TOM Online Share as quoted on GEM on 2 March 2007 (being the last trading day in the TOM Online Shares prior to the suspension of trading in the TOM Online Shares on GEM pending the issue of the Announcement);
a premium of approximately 23.2% over the average closing price of approximately HK$1.234 per TOM Online Share based on the daily closing prices as quoted on GEM for the 5 trading days up to and including 2 March 2007;
a premium of approximately 20.5% over the average closing price of approximately HK$1.261 per TOM Online Share based on the daily closing prices as quoted on GEM for the 10 trading days up to and including 2 March 2007;
a premium of approximately 13.0% over the average closing price of approximately HK$1.345 per TOM Online Share based on the daily closing prices as quoted on GEM for the 30 trading days up to and including 2 March 2007;
a premium of approximately 5.7% over the average closing price of approximately HK$1.439 per TOM Online Share based on the daily closing prices as quoted on GEM for the 60 trading days up to and including 2 March 2007; and
a premium of approximately 11.33% over the average closing price of approximately HK$1.365 per TOM Online Share based on the daily closing prices as quoted on GEM for the 180 trading days up to and including 2 March 2007.

If the Share Proposal is made, TOM will make (or procure to be made on its behalf) an appropriate offer to the holders of the Outstanding TOM Online Share Options in accordance with the Takeovers Code and Rule 14d-1(c) under the Exchange Act, such option offer to be conditional upon the Scheme becoming effective. Please refer to the paragraph headed “The Option Proposal” below for further details on the Option Proposal.

On the basis of the Cancellation Price of HK$1.520 per Scheme Share and 4,259,654,528 TOM Online Shares in issue as at the Latest Practicable Date, of which 1,033,766,075 were Scheme Shares as at the Latest Practicable Date, the Scheme Shares are valued at approximately HK$1,571 million. Save for the Outstanding TOM Online Share Options, there are no outstanding options, warrants, derivatives or other securities issued by TOM Online that carried a right to subscribe for or which are convertible into TOM Online Shares.

LETTER FROM THE TOM BOARD

Under the Scheme, the share capital of TOM Online will, on the effective date of the Scheme, be reduced by cancelling and extinguishing the Scheme Shares. Forthwith upon such reduction, the share capital of TOM Online will be increased to its former amount before the reduction by the issue of the same number of TOM Online Shares as is equal to the Scheme Shares cancelled. The credit arising in TOM Online’s books of account as a result of the capital reduction will be applied in paying up in full at par the new TOM Online Shares so issued, credited as fully paid, to TOM or a subsidiary of TOM as TOM may direct.

The total amount of cash required to effect the Proposals is approximately HK$1,571 million if none of the Outstanding TOM Online Share Options is exercised prior to the Record Date and none of the holders of Outstanding TOM Online Share Options which have not been vested as at the Record Date accept the Option Proposal. This amount would increase to an aggregate of approximately HK$1,778 million if all Outstanding TOM Online Share Options which have been vested as at the Record Date are exercised prior to the Record Date and all holders of Outstanding TOM Online Share Options which have not been vested as at the Record Date accept the Option Proposal.

TOM intends to finance the cash required for the Proposals by borrowings from financial institutions.

3. CONDITIONS OF THE SHARE PROPOSAL

The Proposals will be made only if the Share Proposal, the Option Proposal and the transactions contemplated thereunder have first been approved at the TOM EGM. Further, the Scheme will become effective and binding on TOM Online and all TOM Online Shareholders subject to the fulfilment or waiver (as applicable) of the following conditions:

(a) the approval of the Scheme (by way of poll) by a majority in number of the TOM Online Independent Shareholders present and voting either in person or by proxy at the Court Meeting representing not less than three-fourths in value of the Scheme Shares that are voted either in person or by proxy by the TOM Online Independent Shareholders at the Court Meeting, provided that the Scheme is not disapproved (by way of poll) by TOM Online Independent Shareholders at the Court Meeting holding more than 10% in value of all the TOM Online Shares held by the TOM Online Independent Shareholders;
(b) the passing of a special resolution by a majority of not less than three-fourths of the votes cast by the TOM Online Shareholders present and voting in person or by proxy at an extraordinary general meeting of TOM Online to approve and give effect to (i) the reduction of the share capital of TOM Online by cancelling and extinguishing the Scheme Shares and (ii) the immediate increase of the issued share capital of TOM Online to the amount prior to the cancellation of the Scheme Shares and (iii) the application of the reserve created as a result of the aforesaid cancellation of the Scheme Shares to pay up in full the issue to TOM (or a subsidiary of TOM as TOM may direct) such number of new TOM Online Shares as is equal to the number of Scheme Shares cancelled as a result of the Scheme;
(c) the undertaking by each of Cranwood, Handel, Schumann, Devine Gem, Romefield, Easterhouse and Mr. Wang Lei Lei (if he exercises any outstanding share options granted under the TOM Online Pre-IPO Share Option Plan and becomes a TOM Online Shareholder) to the Grand Court that each of them respectively will be bound by the Scheme;

LETTER FROM THE TOM BOARD

(d) the Grand Court’s sanction of the Scheme (with or without modifications) and its confirmation of the reduction of the share capital of TOM Online, and the delivery to the Registrar of Companies in the Cayman Islands of a copy of the order of the Grand Court for registration;
(e) compliance, to the extent necessary, with the procedural requirements and conditions, if any, under Sections 15 and 16 of the Companies Law in relation to the reduction of the issued share capital of TOM Online;
(f) all Authorisations in connection with the Share Proposal and the Scheme having been obtained or made from, with or by (as the case may be) the Relevant Authorities, in the Cayman Islands, Hong Kong, the United States and any other relevant jurisdictions;
(g) all Authorisations remaining in full force and effect without variation, and all necessary statutory or regulatory obligations in all relevant jurisdictions having been complied with and no requirement having been imposed by any Relevant Authorities which is not expressly provided for, or is in addition to requirements expressly provided for, in relevant laws, rules, regulations or codes in connection with the Share Proposal or any matters, documents (including circulars) or things relating thereto, in each aforesaid case up to and at the time when the Scheme becomes effective;
(h) all necessary consents which may be required under any existing contractual obligations of TOM Online being obtained; and
(i) if required, the obtaining by TOM of such other necessary consent, approval, authorisation, permission, waiver or exemption which may be required from any Relevant Authorities or other third parties which are necessary or desirable for the performance of the Scheme under the applicable laws and regulations.

TOM reserves the right to waive conditions (c), (f), (g), (h) and (i) either in whole or in part in respect of any particular matter. Conditions (a), (b), (d) and (e) cannot be waived in any event. All of the above conditions will have to be fulfilled or waived, as applicable, on or before 31 December 2007 (or such later date as TOM and TOM Online may agree or, to the extent applicable, as the Grand Court may direct), failing which the Scheme will lapse. TOM Online has no right to waive any of the conditions.

Warning:

TOM Shareholders and/or potential investors should be aware that the Proposals will be made only if the approval by the TOM Independent Shareholders at the TOM EGM has been obtained, and that the implementation of the Share Proposal, the Scheme and the Option Proposal is subject to the conditions as set out above being fulfilled or waived, as applicable, and thus the Proposals may or may not be made and the Scheme may or may not become effective. TOM Shareholders and potential investors should therefore exercise caution when dealing in the shares in TOM.

LETTER FROM THE TOM BOARD

4. THE OPTION PROPOSAL

TOM would make an appropriate offer to the holders of the Outstanding TOM Online Share Options in accordance with the Takeovers Code and Rule 14d-1(c) under the Exchange Act.

In accordance with the terms of the TOM Online Pre-IPO Share Option Plan and the TOM Online Share Option Scheme, holders of the Outstanding TOM Online Share Options are entitled to exercise their vested options in full or in part at any time from the date of despatch of the notice of the Court Meeting until the expiry of the period commencing with such date and ending on the earlier of (i) the date two months thereafter; and (ii) the date on which the Scheme is sanctioned by the Grand Court, but any such exercise of an option shall be conditional upon the Scheme being sanctioned by the Grand Court and becoming effective. In the event that any of the Outstanding TOM Online Share Options are exercised on or prior to the Record Date in accordance with the relevant provisions of the TOM Online Pre-IPO Share Option Plan and the TOM Online Share Option Scheme, any TOM Online Shares issued as a result of the exercise of such Outstanding TOM Online Share Options will be subject to and eligible to participate in the Scheme. Outstanding TOM Online Share Options which are not exercised or exercisable in accordance with the terms of the TOM Online Pre-IPO Share Option Plan and the TOM Online Share Option Scheme, and to the extent to which the Option Proposal is not accepted, will lapse upon the Scheme becoming effective.

If the Scheme does not become effective, all unexercised Outstanding TOM Online Share Options will remain unaffected and will be exercisable during their relevant exercise periods pursuant to the terms of the TOM Online Pre-IPO Share Option Plan and the TOM Online Share Option Scheme.

The Option Proposal, which is conditional on the Share Proposal becoming effective and binding, will be made by Goldman Sachs, on behalf of TOM, to the Optionholders on the terms and subject to the conditions to be contained in the Scheme Document and the Option Proposal Letters.

LETTER FROM THE TOM BOARD

The Option Proposal will provide that any Outstanding TOM Online Share Options (to the extent not exercised on or prior to the Record Date) will lapse upon the Scheme becoming effective, and each relevant Optionholder who accepts the Option Proposal and lodges an acceptance of the Option Proposal by the prescribed deadline will be entitled to receive an Option Proposal Price as follows if the Option Proposal becomes unconditional:–

Exercise price of Outstanding TOM Online Share Options that Option Proposal Price are vested as at the Record Date for each Option HK$1.50 HK$0.02 HK$1.204 HK$0.316

The Option Proposal Price above represents the “see-through” price of that Outstanding TOM Online Share Option, being the amount by which HK$1.52 (being the Cancellation Price under the Share Proposal) exceeds the exercise price of that Outstanding TOM Online Share Option. Each holder of Outstanding TOM Online Share Options, and who has Outstanding TOM Online Share Options that are vested and unexercised as at the Record Date, may elect whether to accept the Option Proposal.

Each holder of unvested Outstanding TOM Online Share Options as at the Record Date who accepts the Option Proposal and lodges an acceptance of the Option Proposal by the prescribed deadline will be entitled to receive an Option Proposal Price as follows if the Option Proposal becomes unconditional: –

Exercise price of Outstanding TOM Online Share Options that are Option Proposal Price not vested as at the Record Date for each Option HK$1.50 HK$0.01 HK$1.204 HK$0.01

As at the Latest Practicable Date, there were 181,048,929 outstanding share options granted under the TOM Online Pre-IPO Share Option Plan, of which 52,500,000 outstanding share options are not vested and not exercisable and 18,000,000 outstanding share options granted under the TOM Online Share Option Scheme, of which 15,300,000 outstanding share options are not vested and not exercisable. The Option Proposal Price in respect of the unvested Outstanding TOM Online Share Options is at a nominal sum of HK$0.01 because the relevant share options are unvested and not exercisable and will, without the Option Proposal, lapse upon the Scheme becoming effective. Each holder of unvested Outstanding TOM Online Share Options as at the Record Date may elect whether to accept the Option Proposal. In the event that any Outstanding TOM Online Share Options that have not been vested as at the Latest Practicable Date but will be vested on or before the Record Date, these Outstanding TOM Online Share Options will be treated as vested Outstanding TOM Online Share Options and the relevant Optionholders will be entitled to receive the Option Proposal Price in accordance with the relevant exercise price of Outstanding TOM Online Share Options that are vested as at the Record Date as set out in the table above if they accept the Option Proposal and the Option Proposal becomes effective.

LETTER FROM THE TOM BOARD

All payments in respect of the Option Proposal Price will be made in HK dollars.

5. SHAREHOLDING STRUCTURES

TOM

The table below sets out the shareholding structure of TOM as at the Latest Practicable Date:

*TOM Shareholders* Easterhouse Romefield Cranwood (including Schumann and Handel) Mr. Wang Lei Lei Ms. Angela Mak Other TOM Shareholders Total	As at the Latest Practicable Date Number of shares in TOM % 952,683,363 24.470 476,341,182 12.235 928,006,363 23.836 300,000 0.008 44,000 0.001 1,535,895,650 39.450 3,893,270,558 100.000	As at the Latest Practicable Date Number of shares in TOM % 952,683,363 24.470 476,341,182 12.235 928,006,363 23.836 300,000 0.008 44,000 0.001 1,535,895,650 39.450 3,893,270,558 100.000
		100.000

LETTER FROM THE TOM BOARD

TOM Online

On the assumption that no Outstanding TOM Online Share Options is exercised before the Scheme becomes effective and the assumption that there is no other change in shareholding, the table below sets out the shareholding structure of TOM Online as at the Latest Practicable Date and immediately upon completion of the Proposals:

*TOM Online Shareholders* TOM_(Note 1) Cranwood(Note 2) Devine Gem(Note 2) Romefield(Notes 3 and 5) Easterhouse(Notes 3 and 5) Ms. Angela Mak(Notes 4 and 5) Aggregate number of TOM Online Shares of TOM and parties presumed to be acting in concert with TOM in relation to the Share Proposal under the Takeovers Code TOM Online Independent Shareholders(Notes 6 and 10)_ Total	As at the Latest Practicable Date Number of TOM Online Shares % 2,800,000,000 65.733 212,958,118 4.999 212,930,335 4.999 4,763,411 0.112 9,526,833 0.224 2,508 0.000 3,240,181,205 76.067 1,019,473,323 23.933 4,259,654,528 100.000	Upon completion of the Proposals (Note 7) Number of TOM Online Shares % 3,833,766,075 90.002 212,958,118 4.999 212,930,335 4.999 – – – – – – – – – – 4,259,654,528 100.000	Upon completion of the Proposals (Note 7) Number of TOM Online Shares % 3,833,766,075 90.002 212,958,118 4.999 212,930,335 4.999 – – – – – – – – – – 4,259,654,528 100.000
			– –
			100.000

LETTER FROM THE TOM BOARD

On the assumption that all Outstanding TOM Online Share Options vested as at the Latest Practicable Date are exercised before the Scheme becomes effective and the assumption that there is no other change in shareholding, the table below sets out the shareholding structure of TOM Online before the completion of the Proposals and immediately upon completion of the Proposals:

Assuming that all Outstanding TOM Online Share Options vested as at the Latest Practicable Date are exercised before the Scheme becomes effective and no other change in shareholding before completion of the Proposals Number of TOM Online *TOM Online Shareholders* Shares % TOM_(Note 1) 2,800,000,000 63.768 Cranwood(Note 2) 212,958,118 4.850 Devine Gem(Note 2) 212,930,335 4.849 Romefield(Notes 3 and 5) 4,763,411 0.108 Easterhouse(Notes 3 and 5) 9,526,833 0.217 Mr. Wang Lei Lei 89,764,000 2.044 Ms. Angela Mak(Notes 4 and 5) – – Aggregate number of TOM Online Shares of TOM and parties presumed to be acting in concert with TOM in relation to the Share Proposal under the Takeovers Code 3,329,942,697 75.837 TOM Online Independent Shareholders(Notes 6, 8 and 10)_ 1,060,960,760 24.163 Total 4,390,903,457 100.000	Upon completion of the Proposals (Note 9) Number of TOM Online Shares % 3,965,015,004 90.301 212,958,118 4.850 212,930,335 4.849 – – – – – – – – – – – – 4,390,903,457 100.000	Upon completion of the Proposals (Note 9) Number of TOM Online Shares % 3,965,015,004 90.301 212,958,118 4.850 212,930,335 4.849 – – – – – – – – – – – – 4,390,903,457 100.000
		– –
		100.000

LETTER FROM THE TOM BOARD

Notes:

The TOM Online Shares in which TOM is interested will not form part of the Scheme Shares and will not be cancelled.
All of the TOM Online Shares in which Cranwood (including those held by Cranwood through its non wholly-owned subsidiaries, Handel and Schumann) and Devine Gem are respectively interested will not form part of the Scheme Shares and will not be cancelled.
Romefield and Easterhouse are presumed to be parties acting in concert with TOM in relation to the Share Proposal under the Takeovers Code.
Ms. Angela Mak is an executive director of TOM and a non-executive director of TOM Online and therefore is presumed to be a party acting in concert with TOM in relation to the Share Proposal under the Takeovers Code. Ms. Angela Mak has undertaken to make or procure a donation to a charitable body exempt under the Inland Revenue Ordinance of her 2,508 TOM Online Shares before the Court Meeting.
All of the TOM Online Shares in which Romefield and Easterhouse are respectively interested as set out in this table (other than interest through TOM) and the TOM Online Shares which Ms. Angela Mak is currently interested will form part of the Scheme Shares.
As Dr. Lo Ka Shui and Ms. Elaine Feng are not presumed to be acting in concert with TOM in relation to the Share Proposal under the Takeovers Code, the TOM Online Shares of the TOM Online Independent Shareholders shown here include the 4,700,000 TOM Online Shares in which Dr. Lo Ka Shui, an independent non-executive director of TOM Online, is deemed to be interested under the SFO as a founder of a discretionary trust, and the 786,000 TOM Online Shares held by Ms. Elaine Feng, an executive director of TOM Online, which will form part of the Scheme Shares and will be cancelled.
Under the Scheme, the share capital of TOM Online will, on the effective date of the Scheme, be reduced by cancelling and extinguishing the Scheme Shares. On the assumption that no Outstanding TOM Online Share Options is exercised before the Scheme becomes effective and the assumption that there is no other change in shareholding, forthwith upon such reduction, the share capital of TOM Online will be increased to HK$42,596,545.28 divided into 4,259,654,528 TOM Online Shares by the issue of 1,033,766,075 TOM Online Shares and the credit arising in TOM Online’s books of account as a result of the capital reduction will be applied in paying up in full at par the 1,033,766,075 new TOM Online Shares so issued, credited as fully paid, to TOM or a subsidiary of TOM as TOM may direct.
As the directors of TOM Online (a subsidiary of TOM) are not presumed to be acting in concert with TOM in relation to the Share Proposal under the Takeovers Code, the TOM Online Shares of the TOM Online Independent Shareholders shown here include the TOM Online Shares held by Mr. Jay Chang, Mr. Peter Schloss, Ms. Elaine Feng, Mr. Fan Tai and Mr. Wu Yun if they exercise all Outstanding TOM Online Share Options vested as at the Latest Practicable Date.
Under the Scheme, the share capital of TOM Online will, on the effective date of the Scheme, be reduced by cancelling and extinguishing the Scheme Shares. On the assumption that all Outstanding TOM Online Share Options vested as at the Latest Practicable Date are exercised before the Scheme becomes effective and the assumption that there is no other change in shareholding, forthwith upon such reduction, the share capital of TOM Online will be increased to HK$43,909,034.57 divided into 4,390,903,457 TOM Online Shares by the issue of 1,165,015,004 TOM Online Shares and the credit arising in TOM Online’s books of account as a result of the capital reduction will be applied in paying up in full at par the 1,165,015,004 new TOM Online Shares so issued, credited as fully paid, to TOM or a subsidiary of TOM as TOM may direct.
Pursuant to an internal restructuring effected on 26 March 2007, the positions held by the Goldman Sachs Group as at that date, on a proprietary or discretionary basis, in long 2,760 ADSs (0.005%), short 1,620 ADSs (0.003%), long 8,900 ADS options and short 1,800 ADS options, were transferred to Goldman, Sachs & Co., an exempt principal trader, which is expressly excluded as a party acting in concert with TOM in relation to the Proposals under the Takeovers Code. Accordingly, as at the Latest Practicable Date, the Goldman Sachs Group was not interested in any TOM Online Shares, ADSs or ADS options.

LETTER FROM THE TOM BOARD

Following the effective date of the Scheme and the withdrawal of listing of the TOM Online Shares on GEM and the withdrawal of the listing of the ADSs on NASDAQ, TOM Online will be owned by TOM as to approximately 90.002%, by Cranwood as to approximately 4.999% and by Devine Gem as to approximately 4.999% (on the assumption that no Outstanding TOM Online Share Options are exercised).

As at the Latest Practicable Date, the authorised share capital of TOM Online is HK$100,000,000 divided into 10,000,000,000 TOM Online Shares and the issued share capital of TOM Online is HK$42,596,545.28 divided into 4,259,654,528 TOM Online Shares.

As at the Latest Practicable Date, there were 181,048,929 outstanding share options granted under the TOM Online Pre-IPO Share Option Plan, of which 160,582,000 outstanding share options were held by existing directors of TOM Online and the remaining were held by employees of TOM Online (including ex-employees and a past director of TOM Online) and 18,000,000 outstanding share options granted under the TOM Online Share Option Scheme which were held by a director of TOM Online. As at the Latest Practicable Date, Mr. Wang Lei Lei, a non-executive director of TOM and an executive director of TOM Online, held 139,264,000 outstanding share options granted under the TOM Online Pre-IPO Share Option Plan (of which 89,764,000 outstanding share options have been vested as at the Latest Practicable Date) and is presumed to be a party acting in concert with TOM in relation to the Share Proposal under the Takeovers Code. If the Share Proposal is made, TOM will make an appropriate offer to the holders of the Outstanding TOM Online Share Options in accordance with the Takeovers Code and Rule 14d-1(c) under the Exchange Act, such option offer to be conditional upon the Scheme becoming effective. In the event that any of the outstanding share options granted under the TOM Online Pre-IPO Share Option Plan and/or the TOM Online Share Option Scheme are exercised on or prior to the expiry of the period referred to in the TOM Online Pre-IPO Share Option Plan and/or the TOM Online Share Option Scheme in accordance with the relevant provisions thereof, any TOM Online Shares issued as a result of the exercise of such outstanding share options will be subject to and eligible to participate in the Scheme.

Save as aforesaid, there were no options, warrants or convertible securities in respect of the TOM Online Shares held by TOM or parties acting in concert with it or outstanding derivatives in respect of the TOM Online Shares entered into by TOM or parties acting in concert with it as at the Latest Practicable Date and TOM Online does not have any warrants, options, derivatives, convertible securities or other securities in issue.

6. REASONS FOR AND BENEFITS OF THE PROPOSALS

For Scheme Shareholders

On 3 March 2007, TOM communicated the following reasons for and benefits of the Share Proposal for Scheme Shareholders to the board of directors of TOM Online:

TOM believes that TOM Online has established itself as the leading wireless value added service (“WVAS”) provider in the PRC since its initial public offering (“IPO”) in March 2004. However, this leadership position that TOM Online has built has at the same time increased TOM

LETTER FROM THE TOM BOARD

Online’s reliance on the WVAS business. WVAS revenues accounted for 94.0% and 91.4% of TOM Online’s total revenues for the year ended 31 December 2005 and for the nine months ended 30 September 2006, respectively, as compared to 72.4% for the year ended 31 December 2003, immediately prior to the IPO.

Against this backdrop, the operating environment in respect of WVAS has changed significantly since TOM Online’s IPO. The mobile telephone operators in the PRC (“Mobile Operators”) have introduced a number of policy initiatives in attempts to ensure that high standards of services can be maintained and that greater customer satisfaction can be achieved. These initiatives include blocking certain content that the Mobile Operators deem inappropriate and imposing more stringent requirements on subscription acquisition, billing and termination of dormant accounts. Furthermore, on 7 July 2006, China Mobile Communications Corporation introduced another set of changes, requiring, among other things, mandatory one-month free trial period for all WVAS services, double reminders for new subscribers and reminder messages to be sent to all existing subscribers to confirm their desire to continue their subscriptions.

These changes, TOM believes, have reduced the short to medium term financial prospects for TOM Online, similar to others in the WVAS industry. The impact of the changes also affected TOM Online’s financial performance. For the three months ended 30 September 2006, TOM Online’s net revenues and net income declined by 15% and 59%, respectively, as compared to the same period a year earlier. These declines serve, in TOM’s view, to illustrate the uncertainty and volatility inherent in the business models of WVAS service providers like TOM Online.

Since then, TOM Online’s management has began to broaden TOM Online’s business beyond its core business of WVAS offerings into other new media segments with the objective of improving TOM Online’s future financial stability and performance. On 19 December 2006, TOM Online and eBay Inc. (“eBay”) announced a joint venture agreement whereby eBay contributed its Chinabased subsidiary eBay EachNet (eBay International AG’s online platform and operations for the PRC) to the joint venture. The formation of the joint venture marked TOM Online’s foray into the Chinese e-commerce market and is expected to foster synergies among online user communities and distribution channels, enhance rapid product innovation on a local platform, and promote mobile integration. Most importantly, the addition of EachNet also provides TOM Online with a future conduit for growth beyond WVAS.

TOM believes that market reaction, while initially positive, has since become muted. The reaction amongst the equity research community, based on what TOM has seen, has been mixed. These mixed opinions reflect the time and investment required for TOM Online to build its new broadened businesses, and the short- and medium-term uncertainty that such initiatives could produce for the TOM Online Shareholders. TOM expects TOM Online to need to continue to undertake significant business restructuring and additional capital investments to broaden and expand TOM Online’s business which could result in high share price volatility to the TOM Online Shareholders, as visibly demonstrated by TOM Online’s share price following the formation of joint venture between TOM Online and eBay joint venture announcement. While TOM remains confident in the future prospects for TOM Online’s WVAS business and its additional new media initiatives, TOM is of the view that the short- and medium-term volatility and potential uncertain financial performance for TOM Online make TOM Online poorly suited to remain a publicly listed entity. Accordingly, TOM is offering the Scheme Shareholders an alternative in the form of the Share Proposal.

LETTER FROM THE TOM BOARD

For TOM

TOM Online represents a substantial portion of TOM’s business, contributing 50.5% and 81.2% to TOM’s revenue and earnings before interest, tax, depreciation and amortisation, respectively, in the first half of 2006. Accordingly, TOM Online’s long term success and financial performance are both of paramount importance to TOM.

As referenced above, TOM considers that TOM Online will require substantial investments in order to broaden its business beyond WVAS and to ensure that it is ideally positioned strategically in the long run. Such investments could result in uncertain short- and medium-term financial performance due to the uncertain time horizon before the financial benefits are realised.

TOM Online, after the proposed privatisation, would be able to make decisions pertaining to such investments focused on the long-term benefits they bring to TOM Online’s business and free from the short- and medium-term pressure associated with being a standalone publicly-listed company.

TOM accordingly considers that the Share Proposal would be, if made, in the interests of TOM and its shareholders as it will simplify the group structure, facilitate the realisation of synergies between TOM Online and TOM’s other media businesses and will bring about more flexibility to take the businesses of TOM Online forward in an efficient and sustainable manner.

If the Scheme is not approved or the Proposals are not made or implemented, TOM intends that TOM Online will continue with its existing nature of business.

7. INFORMATION ON TOM ONLINE

TOM Online is an internet company in the PRC providing value-added multimedia products and services. It delivers its products and services from its Internet portal to its users both through their mobile phones and through its websites. Its primary business activities include wireless value-added services, online advertising and commercial enterprise solutions.

LETTER FROM THE TOM BOARD

A summary of the audited consolidated results of TOM Online for the two financial years ended 31 December 2005 and 2006, which have been prepared in accordance with accounting principles generally accepted in the United States is set out below:

	For the year ended	For the year ended
	31 December
	2006	2005
		(as restated)
	US$’000	US$’000
Turnover	168,365	168,068
Operating income	29,723	40,785
Income from continuing operations before taxation	33,529	44,910
Income from continuing operations after taxation
(but before minority interests)	33,669	44,973
Income from continuing operations	33,704	45,007
Income attributable to TOM Online Shareholders	28,655	45,006

As at 31 December 2006, the audited consolidated net assets of TOM Online were approximately US$381,458,000 or approximately US$0.09 per Share (or approximately HK$0.6999 per Share, on the basis of the Exchange Rate) or approximately US$7.2 per ADS.

8. INFORMATION ON TOM

TOM (HKSE stock code: 2383) is listed on the Main Board of the Stock Exchange. A leading Chinese-language media group in the Greater China region, the Group has diverse business interests in five key areas: Internet (TOM Online) (Hong Kong GEM stock code: 8282, Nasdaq stock symbol: TOMO), outdoor media, publishing, sports, television and entertainment across markets in Mainland China, Taiwan and Hong Kong. TOM held approximately 65.733% interest in the issued share capital of TOM Online as at the Latest Practicable Date.

9. LISTING RULES IMPLICATION ON TOM

As at the Latest Practicable Date, TOM held 2,800,000,000 TOM Online Shares, representing approximately 65.733% of the issued share capital of TOM Online, and TOM will hold approximately 90.002% of the issued share capital of TOM Online upon the Scheme becoming effective (on the assumption that no Outstanding TOM Online Share Options are exercised). As a result of such increase, if the Share Proposal is completed and the Scheme becomes effective, it will constitute a major transaction for TOM under the Listing Rules. As one of the relevant applicable percentage ratios (as defined in Rule 14.04(9) of the Listing Rules) in respect of the Share Proposal will exceed 25% but will be less than 75%, the Share Proposal will constitute a major transaction for TOM under the Listing Rules and will be subject to the notification, publication and shareholders’ approval requirements under Chapter 14 of the Listing Rules.

The Proposals will be made only if the Share Proposal, the Option Proposal and the transactions contemplated thereunder have been approved at the TOM EGM.

LETTER FROM THE TOM BOARD

As at the Latest Practicable Date, Romefield and Easterhouse were substantial shareholders of TOM, Ms. Angela Mak was an executive director of TOM and a non executive director of TOM Online, Dr. Lo Ka Shui was an independent non-executive director of TOM Online and Ms. Elaine Feng was an executive director of TOM Online. Each of Romefield, Easterhouse, Ms. Angela Mak, Dr. Lo Ka Shui and persons who were directors of TOM or TOM Online in the preceding 12 months is a connected person of TOM under the Listing Rules. Thus, if the Share Proposal is made, the aggregate payment by TOM of the Cancellation Price of approximately HK$30 million to Romefield, Easterhouse, a discretionary trust in which Dr. Lo Ka Shui is deemed to be interested as a founder and Ms. Elaine Feng in consideration for the cancellation of their respective interest in TOM Online Shares (and any payment of a similar nature to persons who were directors of TOM or TOM Online in the preceding 12 months) will constitute a connected transaction for TOM under the Listing Rules and will be subject to the reporting and announcement requirements under Chapter 14A of the Listing Rules as the relevant applicable percentage ratios (as defined in Rule 14.04(9) of the Listing Rules) in respect of such aggregate payment by TOM of the Cancellation Price to them will exceed 0.1% but will be less than 2.5%. Ms. Angela Mak has undertaken to make or procure a donation to a charitable body exempt under the Inland Revenue Ordinance of her 2,508 TOM Online Shares before the Court Meeting.

Furthermore, Mr. Wang Lei Lei is a non-executive director of TOM and an executive director of TOM Online, Mr. Jay Chang, Mr. Peter Schloss, Ms. Elaine Feng and Mr. Fan Tai are executive directors of TOM Online and Mr. Wu Yun was a director of TOM Online within the preceding 12 months. Each of Mr. Wang Lei Lei, Mr. Jay Chang, Mr. Peter Schloss, Ms. Elaine Feng, Mr. Fan Tai and Mr. Wu Yun is a connected person of TOM under the Listing Rules. If any of Mr. Wang Lei Lei, Mr. Jay Chang, Mr. Peter Schloss, Ms. Elaine Feng, Mr. Fan Tai, Mr. Wu Yun or any other connected persons of TOM exercises any Outstanding TOM Online Share Options and becomes a TOM Online Shareholder, the payment by TOM of the Cancellation Price to any of them will constitute a connected transaction for TOM under the Listing Rules. Further, if Mr. Wang Lei Lei, Mr. Jay Chang, Mr. Peter Schloss, Ms. Elaine Feng, Mr. Fan Tai, Mr. Wu Yun or any other connected persons of TOM retains any Outstanding TOM Online Share Options and accepts the Option Proposal to be made by TOM in accordance with the Takeovers Code if the Share Proposal is made, the payment by TOM of the Option Proposal Price to any of them will also constitute a connected transaction for TOM under the Listing Rules. Assuming that these connected persons of TOM exercise all of their outstanding share options granted under the TOM Online Pre-IPO Share Option Plan and/or the TOM Online Share Option Scheme before the Scheme becoming effective, the relevant applicable percentage ratios (as defined in Rule 14.04(9) of the Listing Rules) in respect of such aggregate payment by TOM of the Cancellation Price to them will exceed 2.5% and such payment will be subject to the reporting, announcement and independent shareholders’ approval requirements under Chapter 14A of the Listing Rules.

10. PRECAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS

This circular includes certain “forward-looking statements”. These statements are based on the current expectations of the management of TOM and/or TOM Online and are naturally subject to uncertainty and changes in circumstances. The forward-looking statements contained in this circular include statements about the expected effects on TOM Online of the Proposals, the expected timing and scope of the Proposals, and all other statements in this circular other than historical facts. Forward-looking statements include, without limitation, statements typically containing words such as “intends”, “expects”, “anticipates”, “targets”, “estimates”, “envisages” and words of similar import. By their nature, forward-

LETTER FROM THE TOM BOARD

looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements. These factors include, but are not limited to, the obtaining of approval of the making of the Proposals at the TOM EGM, the satisfaction of the conditions to the Share Proposal, as well as additional factors, such as changes in the relationships of TOM or TOM Online with telecommunication operators in the PRC and elsewhere, the effect of competition on the demand for the price of TOM Online’s services, changes in customer demand and usage preference for TOM Online’s products and services, changes in the regulatory policies by relevant government authorities, any changes in telecommunications and related technology and applications based on such technology, and changes in political, economic, legal and social conditions in the PRC, India and other countries where TOM or TOM Online conducts business operations, including, without limitation, the Chinese government’s policies with respect to economic growth, foreign exchange, foreign investment and entry by foreign companies into the PRC’s telecommunications market. Other unknown or unpredictable factors could cause actual results to differ materially from those in the forwardlooking statements. For further discussion of factors that could cause actual results to differ from expectations, you should read TOM Online’s filings and submissions to the SEC, including TOM Online’s most recent Annual Report on Form 20-F and other materials furnished to the SEC under Form 6-K.

All subsequent written and oral forward-looking statements attributable to TOM or TOM Online or persons acting on behalf of either of them are expressly qualified in their entirety by the cautionary statements above. The forward-looking statements included herein are made only as of the date of this circular. Except as required by the Takeovers Code, neither TOM nor TOM Online intend, or undertake any obligation, to update these forward-looking statements.

This circular is for informational purposes only and does not constitute an offer to sell or an invitation to purchase any securities or the solicitation of an offer to buy any securities, pursuant to the Proposals or otherwise. This circular also does not constitute a Solicitation/Recommendation Statement under the rules and regulations of the SEC.

11. THE TOM EGM

A notice convening the TOM EGM is set out on pages 225 to 226 of this circular. At the TOM EGM, an ordinary resolution will be proposed to the TOM Independent Shareholders to consider and, if thought fit, approve the Proposals and the transactions contemplated thereunder.

At the TOM EGM, votes of the TOM Independent Shareholders for the resolution will be taken on a poll. Cranwood was directly interested in 6,363 shares in TOM, Handel was interested in 348,000,000 shares in TOM and Schumann was interested in 580,000,000 shares in TOM, representing approximately 0.0002%, 8.939% and 14.898% interest in the issued share capital of TOM as at the Latest Practicable Date. Although the TOM Online Shares held by Cranwood, Handel and Schumann will not form part of the Scheme Shares and Cranwood, Handel and Schumann will not be entitled to receive the Cancellation Price, as the interest of Cranwood, Handel and Schumann in the Share Proposal may be different from other shareholders of TOM, Cranwood, Handel and Schumann will voluntarily abstain from voting in respect of the ordinary resolution to be proposed at the TOM EGM. As Ms. Angela Mak has undertaken to make or procure a donation to a charitable body exempt under the Inland Revenue Ordinance of her 2,508 TOM Online Shares before the Court Meeting and will not be entitled to receive the Cancellation

LETTER FROM THE TOM BOARD

Price, Ms. Angela Mak will not be required to abstain from voting in respect of the ordinary resolution to be proposed at the TOM EGM. Although the interest of Mr. Wang Lei Lei, a non-executive director of TOM and an executive director of TOM Online, in 139,264,000 outstanding share options granted under the TOM Online Pre-IPO Share Option Plan (of which 89,764,000 outstanding share options have been vested as at the Latest Practicable Date) is not material taking into account the option exercise price of HK$1.50 each which is very close to the Cancellation Price, he will voluntarily abstain from voting in respect of the ordinary resolution to be proposed at the TOM EGM. Further, in view of the relatively insignificant interest of Romefield and Easterhouse in TOM Online held other than through TOM, and the fact that the interest of Romefield and Easterhouse as substantial shareholders of TOM is in alignment with the interest of other shareholders of TOM, Romefield and Easterhouse will not be required to abstain from voting in respect of the ordinary resolution to be proposed at the TOM EGM.

The results of voting at the TOM EGM will be announced by TOM following the conclusion thereof.

Whether or not you will be able to attend the TOM EGM, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the principal place of business of TOM at 48th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong, as soon as possible and in any event not less than 48 hours before the time appointed for holding of the TOM EGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting at the TOM EGM or any adjourned meeting if you so wish.

12. RECOMMENDATION

The TOM Independent Board Committee comprising Mr. Henry Cheong, Ms. Anna Wu and Mr. James Sha, all being independent non-executive directors of TOM has been established by the TOM Board to make a recommendation to the TOM Independent Shareholders. None of the members of the TOM Independent Board Committee has any interest in the Share Proposal, the Option Proposal and the transactions contemplated thereunder. Your attention is drawn to its letter of recommendation set out on page 25 of this circular.

Evolution Watterson has been appointed to advise the TOM Independent Board Committee and the TOM Independent Shareholders. Your attention is drawn to its letter of advice set out on pages 26 to 29 of this circular.

13. ADDITIONAL INFORMATION

Your attention is drawn to the additional information set out in the appendices to this circular.

Yours faithfully, By Order of the Board

TOM Group Limited Tommei Tong

Chief Executive Officer and

Executive Director

LETTER FROM THE TOM INDEPENDENT BOARD COMMITTEE

==> picture [186 x 65] intentionally omitted <==

(Stock code: 2383)

11 April 2007

To the TOM Independent Shareholders

Dear Sir or Madam,

MAJOR TRANSACTION AND CONNECTED TRANSACTION

PROPOSED CONDITIONAL POSSIBLE PRIVATISATION OF TOM ONLINE INC. BY WAY OF A SCHEME OF ARRANGEMENT (UNDER SECTION 86 OF THE COMPANIES LAW) AT THE CANCELLATION PRICE OF HK$1.520 PER SCHEME SHARE (INCLUDING SCHEME SHARES UNDERLYING ADSs) AND POSSIBLE CONDITIONAL OPTION PROPOSAL

We refer to the circular of TOM to the TOM Shareholders dated 11 April 2007 (the “Circular”), of which this letter forms part. Unless the context requires otherwise, capitalised terms used in this letter will have the same meanings given to them in the section headed “Definitions” of the Circular.

We have been authorised by the TOM Board to form the TOM Independent Board Committee to advise the TOM Independent Shareholders in respect of the Option Proposal.

We wish to draw your attention to the letter of advice from Evolution Watterson Securities Limited as set out on pages 26 to 29 of the Circular and the letter from the TOM Board as set out on pages 7 to 24 of the Circular.

Having considered, among other matters, the factors and reasons considered by, and the opinion of, Evolution Watterson Securities Limited as stated in its letter of advice, we consider that the terms of the Option Proposal are fair and reasonable so far as TOM and the TOM Shareholders are concerned, and the transactions contemplated thereunder are in the interest of TOM and the TOM Shareholders as a whole.

Yours faithfully, Henry Cheong Anna Wu James Sha Independent Independent Independent non-executive director non-executive director non-executive director TOM Independent Board Committee

for identification purpose

LETTER FROM EVOLUTION WATTERSON SECURITIES LIMITED

The following is the text of the letter of advice from the independent financial adviser to the TOM Independent Board Committee and the TOM Independent Shareholders for the purpose of incorporation into this circular.

==> picture [171 x 36] intentionally omitted <==

11 April 2007

The TOM Independent Board Committee and the TOM Independent Shareholders

TOM Group Limited 48th Floor, The Centre 99 Queen’s Road Central, Hong Kong

Dear Sirs,

Re: TOM Group Limited – Connected transaction relating to Option Proposal arising from the proposed conditional possible privatization of TOM Online Inc. by way of a scheme of arrangement

We refer to our appointment as independent financial adviser to the TOM Independent Board Committee and the TOM Independent Shareholders in relation to the above captioned subject as described in the letter from the Board contained in the circular dated 11 April 2007 to TOM Shareholders (the “Circular”). Our letter is made for incorporation into the Circular. Capitalised terms used in this letter have the same meanings as defined in the Circular unless the context otherwise requires.

As at the Latest Practicable Date, there were 181,048,929 Outstanding TOM Online Share Options granted under the TOM Online Pre-IPO Share Option Plan, of which 160,582,000 outstanding share options were held by existing directors of TOM Online and the remaining were held by employees of TOM Online (including ex-employees and a past director of TOM Online), and 18,000,000 outstanding share options granted under the TOM Online Share Option Scheme which were held by a director of TOM Online, making a total of 199,048,929 Outstanding TOM Online Share Options. Of the above total, it is currently expected that, as at the Record Date, not more than 135,748,929 share options will be vested whereas the remaining 63,300,000 share options will remain unvested and thus not exercisable. If any of the above connected persons accepts the Option Proposal to be made by TOM in accordance with the Takeovers Code, the payment by TOM of the Option Proposal Price to any of them will constitute a connected transaction for TOM under the Listing Rules. Our role as independent financial adviser to TOM is to assess whether the terms of the Option Proposal offered to the above connected persons are fair and reasonable so far as TOM Independent Shareholders are concerned.

In putting forth our recommendation in respect of the above possible connected transaction, we have relied on TOM to provide us with all relevant information relating to the Option Proposal. We have also assumed that statements and opinions made by the TOM Directors in relation to the business development of TOM Online in the Circular are accurate.

LETTER FROM EVOLUTION WATTERSON SECURITIES LIMITED

We consider that we have sufficient information to reach an informed view and to provide a reasonable basis for our recommendation.

The TOM Directors have also confirmed to us that no material facts have been omitted from the information supplied, and we have no reason to suspect that any material information has been withheld by TOM or are misleading. We have not, however, for the purpose of this exercise, conducted any form of detailed investigation or audit into the businesses or affairs of either TOM or TOM Online.

PRINCIPAL FACTORS AND REASONS CONSIDERED IN RELATION TO THE OPTION PROPOSAL

In arriving at our opinion on the Option Proposal to the connected persons mentioned above, we have taken into consideration the following factors and reasons:

Terms of the Option Proposal

Theoretically, Optionholders who wish to sell out their positions could exercise their Outstanding TOM Online Share Options on or prior to the Record Date to get Scheme Shares for which they are entitled to and then tender to TOM for cancellation in order to participate in the Share Proposal. However, we are of the view that the likelihood of the Optionholders doing so is minimal, given that the result between (1) exercising their respective Options for the Scheme Shares which they can then tender for cancellation under the Scheme and (2) accepting their respective Option Proposal Price is the same so far as the Optionholders are concerned. It should be noted that in order to exercise the Options, there is a need for the Optionholders to pay their respective exercise prices first before they can get their funds (representing their respective exercise prices) back from TOM, plus an amount equivalent to the Option Proposal Price (being the difference between the Cancellation Price under the Share Proposal and the exercise price). Consequently, doing so would be impracticable from the Optionholders’ perspective. Given the above, we focus our opinion on the terms of the Option Proposal.

With the exception of Mr. Jay Chang whose subscription price under the Outstanding TOM Online Share Options is HK$1.204 per share, the subscription price for all other connected persons (being Mr. Wang Lei Lei, Mr. Peter Schloss, Ms. Elaine Feng, Mr. Fan Tai and Mr. Wu Yun) under the Outstanding TOM Online Share Options is HK$1.50 per share.

As part of the Scheme, TOM is required under the Takeovers Code to make an appropriate offer for the Outstanding TOM Online Share Options. Under the Listing Rules, we are required to opine on, amongst other things, whether the Option Proposal as a connected transaction is in the ordinary and usual course of business of TOM. We are of the opinion that while the Option Proposal has to be made by TOM in order to comply with the Takeovers Code, the Option Proposal itself is not in the ordinary and usual course of business of TOM.

LETTER FROM EVOLUTION WATTERSON SECURITIES LIMITED

It is currently proposed that the Option Proposal Price for each vested Option and each unvested Option are as follows:

Exercise price of Outstanding TOM Online Share Option Proposal Options for each Option that is vested HK$1.50 HK$0.02 HK$1.204 HK$0.316 Exercise price of Outstanding TOM Online Share Option Proposal Options for each Option that is not vested HK$1.50 HK$0.01 HK$1.204 HK$0.01

It is noted that the Option Proposal Price for those vested share options held by Mr. Jay Chang will be HK$0.316 for each share option held by him; whereas the Option Proposal Price for those held by all other connected persons will be HK$0.02 per share option. The total consideration payable for the Option Proposal in respect of all the vested share options will amount to approximately HK$4.85 million.

The above Option Proposal Price represents the respective “see-through” price of the Outstanding TOM Online Share Options, being the amount by which HK$1.52 (being the Cancellation Price under the Share Proposal) exceeds the exercise price of their respective Outstanding TOM Online Share Options. We are of the view that the basis for calculating the intrinsic value of the Outstanding TOM Online Share Options, which is derived from the difference between the Cancellation Price and the Option Price, is market practice for privatization schemes in Hong Kong; and as such the Option Proposal is made on normal commercial terms.

Based on the above, we are of the opinion that the terms of the Option Proposal with respect to the vested Outstanding TOM Online Share Options are fair and reasonable so far as the TOM Independent Shareholders are concerned and in the interest of TOM and its shareholders as a whole.

The Option Proposal Price for those unvested share options will be at a nominal price HK$0.01 for each Option and the total consideration payable in respect of all such unvested share options will amount to approximately HK$0.63 million. We note the Option Proposal Price in respect of such unvested Options, which are yet to be exercisable, is at a nominal sum of HK$0.01 only due to the fact that such unvested Options will lapse upon the Scheme becoming effective. Consequently, we are of the view that the terms of the Option Proposal with respect to the unvested Outstanding TOM Online Share Options are fair and reasonable so far as TOM is concerned.

LETTER FROM EVOLUTION WATTERSON SECURITIES LIMITED

ADVICE

Having considered the above principal factors and reasons, we are of the opinion that while the Option Proposal itself is made to fulfill TOM’s obligation under the Takeovers Code but not made in the ordinary course of business of TOM, the Option Proposal offered to the connected persons of TOM is made on normal commercial terms and is fair and reasonable so far as the TOM Independent Shareholders are concerned as well as in the interest of TOM and its shareholders as a whole. Accordingly, we would recommend the TOM Independent Board Committee to advise the TOM Independent Shareholders to vote in favour of the ordinary resolution to approve the above connected transaction at the upcoming TOM EGM.

Yours faithfully, For and on behalf of

Evolution Watterson Securities Limited David Tsang Managing Director

UNAUDITED PRO FORMA FINANCIAL INFORMATION

APPENDIX I

For illustrative purpose only, set out below is the unaudited pro forma financial information of Enlarged Group. The unaudited pro forma financial information is prepared in accordance with Paragraph 4.25, Paragraph 4.29(1) and Paragraph 14.67(4)(a)(ii) of the Listing Rules to illustrate the effect of the Proposals on TOM Group’s financial information.

(A) UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The following is an illustrative and pro forma statement of assets and liabilities of TOM Group which has been prepared on the basis of the notes (a) to (f) set out on page 32 for the purpose of illustrating the effect of the Proposals as if they had taken place on 31 December 2006. This unaudited pro forma financial information has been prepared for illustrative purposes only and because of its hypothetical nature, it may not give a true picture of the financial position of the Enlarged Group had the Proposals been completed as at 31 December 2006 or at any future date.

UNAUDITED PRO FORMA FINANCIAL INFORMATION

APPENDIX I

The unaudited pro forma statement of assets and liabilities of the TOM Group is prepared based on the audited consolidated balance sheet of TOM Group as at 31 December 2006 extracted from the annual report of TOM for the year ended 31 December 2006 and adjusted for the transaction resulting from the Proposals.

Unadjusted balances as at 31 December 2006 HK$’000 ASSETS AND LIABILITIES Non-current assets Fixed assets 302,314 Goodwill 2,719,455 Other intangible assets 104,316 Interests in jointly controlled entities 14,171 Interests in associated companies 231,093 Available-for-sale financial assets 1,986,388 Loans and receivables 2,091 Deferred tax assets 42,896 Other non-current assets 19,501 5,422,225 --------------- Current assets Assets classified as held for sale 93,973 Inventories 130,068 Trade and other receivables 988,133 Restricted cash 37,546 Bank balances and cash 1,618,778 2,868,498 --------------- Current liabilities Liabilities classified as held for sale 7,920 Consideration payables 129,220 Trade and other payables 816,689 Taxation payable 56,858 Long-term bank loans – current portion 265,786 Short-term bank loans 727,569 2,004,042 --------------- Net current assets/(liabilities) 864,456 --------------- Total assets less current liabilities 6,286,681 --------------- Non-current liabilities Deferred tax liabilities 11,617 Other non-current liabilities 1,953,286 1,964,903 --------------- Net assets 4,321,778	Pro forma adjustments HK$’000 – 971,298(d) – – – – – – – 971,298 --------------- – – – – 201,492(c) 201,492 --------------- – – – – – 1,828,296(e) 1,828,296 --------------- (1,626,804) --------------- (655,506) --------------- – – – --------------- (655,506)	Unaudited pro forma adjusted HK$’000 302,314 3,690,753 104,316 14,171 231,093 1,986,388 2,091 42,896 19,501 6,393,523 --------------- 93,973 130,068 988,133 37,546 1,820,270 3,069,990 --------------- 7,920 129,220 816,689 56,858 265,786 2,555,865 3,832,338 --------------- (762,348) --------------- 5,631,175 --------------- 11,617 1,953,286 1,964,903 --------------- 3,666,272

UNAUDITED PRO FORMA FINANCIAL INFORMATION

APPENDIX I

(a) The unaudited pro forma financial information has been prepared based on the assumptions that the Outstanding TOM Online Share Options vested as at the Record Date had been exercised as at 31 December 2006 and each holder of the unvested Outstanding TOM Online Share Options would elect to accept the Option Proposal before the Record Date.
(b) Based on the assumptions as set out in note (a) above, the consideration attributable to the acquisition of the 135,748,929 maximum Outstanding TOM Online Share Options that would have been vested as at the Record Date is approximately HK$206,339,000. The consideration for the acquisition of the unvested Outstanding TOM Online Share Options represents an expense arising from the cancellation of the unvested Outstanding TOM Online Share Options.
(c) This represents the cash received assuming that the vested Outstanding TOM Online Share Options as at the Record Date had been exercised as at 31 December 2006.
(d) This represents the goodwill arising from the excess of consideration of approximately HK$1,827,663,000 paid for:
(i) the acquisition of Scheme Shares at the Latest Practicable Date of HK$1,571,324,000;
(ii) the acquisition of shares from Optionholders (assuming that the vested Outstanding TOM Online Share Options as at the Record Date had been exercised as at 31 December 2006) of approximately HK$206,339,000; and
(iii) other costs directly attributable to the acquisitions as set out in (i) and (ii) above

over the value of net assets of TOM Online acquired from minority interests of approximately HK$856,365,000 as of 31 December 2006.

(e) The TOM Group intends to finance the cash required for the Proposals of HK$1,828,296,000, including HK$633,000 paid for the cancellation of the 63,300,000 unvested Outstanding Tom Online Share Options, through external financing and has obtained a committed loan facility of approximately US$230 million (approximately HK$1,794 million) from a financial institution. The TOM Group will also utilise certain existing banking facilities to finance the consideration and the direct costs attributable to the Proposals.
(f) No adjustments have been made to reflect any trading results or other transactions of TOM Group and TOM Online Group entered into subsequent to 31 December 2006.

UNAUDITED PRO FORMA FINANCIAL INFORMATION

APPENDIX I

The following is the text of a report, prepared for the sole purpose of inclusion in this circular, received from PricewaterhouseCoopers, Certified Public Accountants, Hong Kong. As described in the section headed “Documents available for inspection” in Appendix V to this circular, a copy of the following report is available for inspection.

(B) REPORT FROM ACCOUNTANTS ON UNAUDITED PRO FORMA FINANCIAL INFORMATION TO THE DIRECTORS OF TOM

REPORT FROM ACCOUNTANTS ON UNAUDITED PRO FORMA FINANCIAL INFORMATION TO THE DIRECTORS OF TOM GROUP LIMITED

We report on the unaudited pro forma financial information set out on pages 30 to 32 under the heading of “Unaudited Pro Forma Financial Information” (the “Unaudited Pro Forma Financial Information”) in Appendix I of the circular dated 11 April 2007 (the “Circular”) of TOM Group Limited (the “Company”), in connection with the proposed conditional possible privatisation of TOM Online Inc. and the possible conditional offers to be made to the holders of outstanding share options of TOM Online Inc. (the “Transaction”) by the Company. The Unaudited Pro Forma Financial Information has been prepared by the directors of the Company, for illustrative purposes only, to provide information about how the Transaction might have affected the relevant financial information of the Company and its subsidiaries, including the existing 65.733% equity interests in TOM Online Inc., (hereinafter collectively referred to as the “Group”) had the Transaction been taken place on 31 December 2006 (the “Enlarged Group”). The basis of preparation of the Unaudited Pro Forma Financial Information is set out on page 32 of the Circular.

Respective Responsibilities of Directors of the Company and Reporting Accountants

It is the responsibility solely of the directors of the Company to prepare the Unaudited Pro Forma Financial Information in accordance with rule 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “MB Listing Rules”) and Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

It is our responsibility to form an opinion, as required by rule 4.29(7) of the MB Listing Rules, on the Unaudited Pro Forma Financial Information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Unaudited Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

UNAUDITED PRO FORMA FINANCIAL INFORMATION

APPENDIX I

Basis of Opinion

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars” issued by the HKICPA. Our work, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unadjusted balances as at 31 December 2006 with the audited consolidated financial statements of the Company for the year ended 31 December 2006, approved by the board of the Company on 20 March 2007, considering the evidence supporting the adjustments and discussing the Unaudited Pro Forma Financial Information with the directors of the Company.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Unaudited Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to rule 4.29(1) of the MB Listing Rules.

The Unaudited Pro Forma Financial Information is for illustrative purposes only, based on the judgements and assumptions of the directors of the Company, and, because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of the financial position of the Enlarged Group as at 31 December 2006 or any future date.

Opinion

In our opinion:

a) the Unaudited Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated;
b) such basis is consistent with the accounting policies of the Group; and
c) the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to rule 4.29(1) of the MB Listing Rules.

PricewaterhouseCoopers Certified Public Accountants Hong Kong, 11 April 2007

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

(A) SHARE CAPITAL

(i) Shares

The authorised and issued share capital of the Company as at the Latest Practicable Date are as follows:

Authorised: 5,000,000,000 TOM Shares Issued: 3,893,270,558 TOM Shares	HK$ 500,000,000.00

	389,327,055.80

As at the Latest Practicable Date, all the existing Shares rank pari passu in all respects including as to dividends, voting and interests in capital.

(ii) Convertible bonds

On 28 November 2003, TOM Holdings Limited, a wholly-owned subsidiary of TOM, issued convertible bonds (“Convertible Bonds”) in the aggregate principal amount of US$150,000,000. The Convertible Bonds, bearing interest at the rate of 0.50% per annum, are convertible into TOM Shares at an initial conversion price of HK$3.315 per TOM Share (subject to adjustment) from and including 8 January 2004 up to the close of business on 14 November 2008. The Convertible Bonds were listed on the Luxembourg Stock Exchange on 28 November 2003. Furthermore, the bond holders have the right to require TOM Holdings Limited to redeem all or some only of the Convertible Bonds on 28 November 2006 at 102.31% of the principal amount.

Convertible Bonds were bought back by TOM Group or early redeemed by bondholders in previous years. As at Latest Practicable Date, no Convertible Bonds have been converted into TOM Shares and the outstanding Convertible Bonds are convertible into a maximum of 60,658,824 TOM Shares based on the initial conversion price of HK$3.315 per TOM Share.

(iii) Options

As at the Latest Practicable Date, options to subscribe for an aggregate of 84,856,000 TOM Shares granted pursuant to the pre-IPO share option plan of TOM and the share option scheme of TOM (adopted on 11 February 2000) were outstanding, details of which are set out in Appendix V of this circular.

Save as disclosed herein, except for the options granted under the pre-IPO share option plan and the share option scheme of TOM which are outstanding, TOM has no outstanding securities convertible into TOM Shares, and no other share or loan capital of TOM has been put under option or agreed conditionally or unconditionally to be put under option.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

(B) AUDITED CONSOLIDATED RESULTS FOR THE TOM GROUP

(i) Consolidated Profit & Loss Account

Set out below are the audited consolidated profit and loss accounts for the years ended 31 December 2004, 2005 and 2006 and the summary of assets and liabilities as at 31 December 2004, 2005 and 2006 of the TOM Group extracted from the audited accounts of the TOM Group for the relevant years. For accounting period commencing on 1 January 2005, TOM Group has adopted the new Hong Kong Financial Reporting Standards (“HKFRS”) and the comparatives for the year ended 31 December 2004 have been restated as required in the Group’s consolidated accounts for the year ended 31 December 2005. These restated figures have been adopted for the purpose of this summary.

Year
2006
HK$’000
Turnover
2,910,914
Cost of sales
(1,796,010)
Interest income
109,405
Selling and marketing expenses
(324,905)
Administrative expenses
(258,172)
Other operating expenses
(349,987)
Provision for receivables, net
–
Gain on early redemption and buy-back
of Convertible Bonds
20,669
Provision for impairment of assets
(47,044)
Provision for contracts termination
–
Listing expenses
–
Share of losses of jointly controlled entities
(758)
Share of profits less losses of associated companies
8,977
Operating profit/(loss) before net gain on
deemed disposals of interests in subsidiaries
273,089
Net gain on deemed disposals of
interests in subsidiaries
24,601
Operating profit
297,690
Finance costs
(145,070)
Profit before taxation
152,620
Taxation
(33,005)
Profit after taxation
119,615
Attributable to:
Minority interests
87,654
Equity holders of TOM
31,961
Earnings per share for profit attributable to equity
holders of TOM during the year
Basic
HK0.82 cents
Diluted
HK0.82 cents

ended 31 December
2005
2004
(As restated)
HK$’000
HK$’000
3,105,317
2,595,245
(1,919,292)
(1,509,070)
88,088
83,179
(332,192)
(268,307)
(275,746)
(259,216)
(347,733)
(410,737)
(7,271)
(22,476)
2,852
–
–
(85,128)
–
(134,315)
–
(19,812)
(138)
(367)
21,229
11,044
335,114
(19,960)
160,335
979,476
495,449
959,516
(103,973)
(65,801)
391,476
893,715
(40,178)
(28,532)
351,298
865,183
91,772
91,735
259,526
773,448
HK6.67 cents
HK19.90 cents
HK6.67 cents
HK19.45 cents

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

(ii) Assets and Liabilities

Total assets Total liablilites Minority interests Shareholders’ funds	As at 31 December 2006 2005 HK$’000 HK$’000 8,290,723 7,790,270 (3,968,945) (3,882,987) (1,394,021) (1,017,497) 2,927,757 2,889,786	2004 (As restated) HK$’000 7,872,941 (4,536,354) (709,655) 2,626,932

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

(iii) Audited Accounts

Set out below is a summary of the audited consolidated profit and loss accounts of the TOM Group for the two years ended 31 December 2005 and 2006, the audited consolidated balance sheets of the TOM Group as at 31 December 2005 and 2006, the audited balance sheets of TOM as at 31 December 2005 and 2006 and the audited consolidated statement of recognised income and expenses and audited consolidated cash flow statement of the TOM Group for the two years ended 31 December 2005 and 2006, together with the relevant notes to the accounts as extracted from the audited accounts of the TOM Group for the year ended 31 December 2006.

Consolidated Profit & Loss Account

Note
Turnover
4
Cost of sales
Interest income
4
Selling and marketing expenses
Administrative expenses
Other operating expenses
Provision for receivables, net
5
Gain on early redemption and buy-back
of Convertible Bonds
Provision for impairment of assets
6
Share of losses of jointly controlled entities
Share of profits less losses of
associated companies
Operating profit before net gain on
deemed disposals of interests in subsidiaries
Net gain on deemed disposals of interests
in subsidiaries
7
Operating profit
8
Finance costs
9
Profit before taxation
Taxation
10
Profit after taxation
Attributable to:
Minority interests
Equity holders of TOM
Earnings per share for profit attributable
to equity holders of TOM during the year
13
Basic
Diluted

Year ended 31 December
2006
2005
HK$’000
HK$’000
2,910,914
3,105,317
(1,796,010)
(1,919,292)
109,405
88,088
(324,905)
(332,192)
(258,172)
(275,746)
(349,987)
(347,733)
–
(7,271)
20,669
2,852
(47,044)
–
(758)
(138)
8,977
21,229
273,089
335,114
24,601
160,335
297,690
495,449
(145,070)
(103,973)
152,620
391,476
(33,005)
(40,178)
119,615
351,298
87,654
91,772
31,961
259,526
HK0.82 cents
HK6.67 cents
HK0.82 cents
HK6.67 cents

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

Consolidated Balance Sheet

Note
ASSETS AND LIABILITIES
Non-current assets
Fixed assets
16
Goodwill
17
Other intangible assets
18
Interests in jointly controlled entities
20
Interests in associated companies
21
Available-for-sale financial assets
22
Loans and receivables
23
Deferred tax assets
35(a)
Other non-current assets
24
Current assets
Assets classified as held for sale
32
Inventories
25
Trade and other receivables
26
Restricted cash
27
Bank balances and cash
Current liabilities
Liabilities classified as held for sale
32
Consideration payables
28
Trade and other payables
29
Taxation payable
Long-term bank loans – current portion
31(a)
Short-term bank loans
30
Net current assets
Total assets less current liabilities
Non-current liabilities
Deferred tax liabilities
35(b)
Other non-current liabilities
31
Net assets
EQUITY
Share capital
36
Reserves
38
Own shares held
39
Shareholders’ funds
Minority interests
40
Total equity

As at 31 December
2006
2005
HK$’000
HK$’000
302,314
315,592
2,719,455
2,514,896
104,316
91,873
14,171
14,876
231,093
238,124
1,986,388
2,053,207
2,091
3,839
42,896
38,086
19,501
47,572
5,422,225
5,318,065
93,973
–
130,068
117,080
988,133
1,199,269
37,546
74,350
1,618,778
1,081,506
2,868,498
2,472,205
7,920
–
129,220
246,093
816,689
861,664
56,858
50,422
265,786
64,340
727,569
75,213
2,004,042
1,297,732
864,456
1,174,473
6,286,681
6,492,538
11,617
9,720
1,953,286
2,575,535
1,964,903
2,585,255
---------------
---------------
4,321,778
3,907,283
389,328
389,328
2,544,673
2,506,702
(6,244)
(6,244)
2,927,757
2,889,786
1,394,021
1,017,497
4,321,778
3,907,283

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

Balance Sheet

Note
ASSETS AND LIABILITIES
Non-current assets
Interests in subsidiaries
19
Loans and receivables
23
Other non-current assets
24
Current assets
Other receivables
26
Bank balances and cash
Current liabilities
Consideration payables
28
Other payables
29
Short-term loans
30
Net current liabilities
Net assets
EQUITY
Share capital
36
Reserves
38
Own shares held
39
Shareholders’ funds

As at 31 December
2006
2005
HK$’000
HK$’000
2,356,499
2,374,160
–
899
3,980
–
2,360,479
2,375,059
---------------
---------------
14,153
22,198
3,195
19,402
17,348
41,600
---------------
---------------
35,671
116,496
19,151
9,982
315,900
–
370,722
126,478
---------------
---------------
(353,374)
(84,878)
---------------
---------------
2,007,105
2,290,181
389,328
389,328
1,624,021
1,907,097
(6,244)
(6,244)
2,007,105
2,290,181

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

Consolidated Statement of Recognised Income and Expense

Revaluation surplus/(deficit) on available-for-sale
financial assets
Net actuarial (loss)/gain on defined benefit plans
Exchange translation differences
Net income/(expense) recognised directly in equity
Profit for the year
Total recognised income and expense for the year
Attributable to:
Minority interests
Equity holders of TOM
Effect of change in accounting policies:
Attributable to:
Minority interests
Equity holders of TOM

Year ended 31 December
2006
2005
HK$’000
HK$’000
7,293
(51,413)
(6,491)
5,204
125,152
8,442
125,954
(37,767)
119,615
351,298
245,569
313,531
132,875
87,790
112,694
225,741
–
(11,091)
–
(65,424)
–
(76,515)

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

Consolidated Cash Flow Statement

Note
Net cash inflow from operations
42(a)
Interest paid
Hong Kong profits tax paid
Overseas taxation paid
Net cash generated from operating activities
Investing activities
Interest received
Capital expenditure
Sale of fixed assets
Settlement of consideration payable for
acquisition of subsidiaries in prior years
Acquisition of interests in subsidiaries
42(b)
Proceeds from deemed disposal of
interests in subsidiaries
42(c)
Disposal of a subsidiary/interests in subsidiaries
42(d)
Purchase of an associated company
Disposals of interests in an associated company
Proceeds from disposal of/maturity
of available-for-sale financial assets
Loans to investee companies
Dividends received
Reclassification of cash to assets held for sale
32
Net cash used in investing activities
Net cash generated/(used) before financing activities
Financing activities
New bank and other loans, net of financing costs
42(e)
Loan repayments
42(e)
Buy-back and early redemption of convertible bonds
Contribution from minority shareholders
Dividends paid to minority shareholders
Reduction/(addition) of restricted cash
27
Net cash generated from financing activities
Increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
Cash and cash equivalents represent:
Bank balances and cash

Year ended 31 December
2006
2005
HK$’000
HK$’000
622,719
251,432
(111,303)
(59,739)
–
(199)
(31,539)
(57,485)
479,877
134,009
---------------
---------------
119,073
104,207
(132,314)
(184,291)
378
166
(214,727)
(679,099)
(143,625)
(164,666)
202,800
31,072
(8,344)
(2,473)
–
(53,611)
–
48,360
79,049
326,663
(179)
(1,547)
21,062
2,834
(23,049)
–
(99,876)
(572,385)
---------------
---------------
380,001
(438,376)
---------------
---------------
1,431,211
522,069
(379,022)
(41,469)
(959,002)
(29,335)
58,705
37,945
(31,425)
(14,062)
36,804
(62,659)
157,271
412,489
---------------
---------------
537,272
(25,887)
1,081,506
1,107,393
1,618,778
1,081,506
1,618,778
1,081,506

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

Notes to the Accounts

1 Principal Accounting Policies

The principal accounting policies adopted in the preparation of these accounts are set out below:

(a) Basis of preparation

The accounts have been prepared in accordance with accounting principles generally accepted in Hong Kong and comply with Hong Kong Financial Reporting Standards (“HKFRS”, which term collectively includes Hong Kong Accounting Standards (“HKAS”) and Interpretations (“HKINT”)) issued by the Hong Kong Institute of Certified Public Accountants and the disclosure requirements of Appendix 16 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”). They have been prepared under the historical cost convention except that, as set out in note (e) below, available-for-sale financial assets are stated at fair value.

The preparation of these accounts in conformity with HKFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated accounts, are disclosed in note 3.

(i) Standards and interpretations to existing standards that are not yet effective and have not been early adopted by the Group

The following standards/interpretations to existing standards have been published that are mandatory for the Group’s accounting periods with effect from the next financial year that the Group has not early adopted:

HKFRS 7, Financial instruments: Disclosures, and the complementary Amendment to HKAS 1, Presentation of Financial Statements – Capital Disclosures, are effective for annual periods beginning on or after 1 January 2007. HKFRS 7 introduces new disclosures relating to financial instruments. This standard does not have any impact on the classification and valuation of the Group’s financial instruments.
HK(IFRIC)-Int 8, Scope of HKFRS 2 (effective for annual periods beginning on or after 1 May 2006). HK(IFRIC)-Int 8 requires consideration of transactions involving the issuance of equity instruments – where the identifiable consideration received is less than the fair value of the equity instruments issued – to establish whether or not they fall within the scope of HKFRS 2. The Group will apply HK(IFRIC)-Int 8 from 1 January 2007, but it is not expected to have any impact on the Group’s consolidated accounts; and
HK(IFRIC)-Int 9, Reassessment of embedded derivatives (effective for annual periods beginning on or after 1 June 2006). HK(IFRIC)-Int 9 requires an entity to assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. The Group will adopt HK(IFRIC)-Int 9 from 1 January 2007. As none of the group entities have changed the terms of their contracts, HK(IFRIC)-Int 9 is not expected to have any significant impact on the Group’s consolidated accounts.
HK(IFRIC)-Int 10, Interim Financial Reporting and Impairment (effective for annual periods beginning on or after 1 November 2006). HK(IFRIC)-Int 10 prohibits the impairment losses recognised in an interim period on goodwill, investments in equity instruments and investments in financial assets carried at cost to be reversed at a subsequent balance sheet date. The Group will apply HK(IFRIC)-Int 10 from 1 January 2007, but it is not expected to have any impact on the Group’s consolidated accounts.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

HK(IFRIC)-Int11-HKFRS2, Group and Treasury Share Transactions (effective for annual periods beginning on or after 1 March 2007). HK(IFRIC)-Int11 states that share-based payment transactions in which an entity receives services as consideration for its own equity instruments shall be accounted for as equity settled. The Group will apply HK(IFRIC)-Int11 in the financial year beginning 1 January 2008 and it is not expected to have any significant impact on the Group’s consolidated accounts.
HKFRS 8, Operating Segments (effective for annual periods beginning on or after 1 January 2009). HKFRS 8 provides for a new mechanism in the identification of reportable segments based on management reporting system. This standard also sets out criteria for the aggregation of two or more operating segments and the quantitative thresholds for segmental disclosures. The Group will adopt HKFRS 8 in the financial year beginning 1 January 2009, and it is not expected to have any impact on the Group’s consolidated accounts.
(ii) Interpretation to existing standards that are not yet effective and not relevant for the Group’s operations

The following interpretation to existing standards have been published that are mandatory for the Group’s accounting periods with effect from the next financial year but are not relevant for the Group’s operations:

HK(IFRIC)-Int 7, Applying the Restatement Approach under HKAS 29, Financial Reporting in Hyperinflationary Economies (effective for annual periods beginning on or after 1 March 2006). HK(IFRIC)-Int 7 provides guidance on how to apply requirements of HKAS 29 in a reporting period in which an entity identifies the existence of hyperinflation in the economy of its functional currency, when the economy was not hyperinflationary in the prior period. As none of the group entities have a currency of a hyperinflationary economy as its functional currency, HK(IFRIC)-Int 7 is not relevant to the Group’s operations.
HK(IFRIC)-Int12, Service Concession Arrangements (effective for annual periods beginning on or after 1 January 2008). HK(IFRIC)-Int12 sets out general principles on recognising and measuring the obligations and related rights in service concession arrangements, which involve private sector participation in the development, financing, operation and maintenance of governmental infrastructure. Since the Group is not involved in such arrangements, HK(IFRIC)-Int12 is not relevant to the Group’s operations.
(iii) Standards, amendments and interpretations effective in 2006 but not relevant for the Group’s operations or not having significant impact on the Group’s consolidated accounts

The following standards, amendments and interpretations are mandatory for accounting periods beginning on or after 1 January 2006 but are not relevant to the Group’s operations or do not have a significant impact on the Group’s accounts:

HKAS 21 Amendment – Net Investment in a Foreign Operation;
HKAS 39 Amendment – Cash Flow Hedge Accounting of Forecast Intragroup Transactions;
HKAS 39 Amendment – The Fair Value Option;
HKAS 39 and HKFRS 4 Amendment – Financial Guarantee Contracts;
HKFRS 6, Exploration for and Evaluation of Mineral Resources;
HKFRS 1 Amendment – First-time Adoption of International Financial Reporting Standards and HKFRS 6 (Amendment), Exploration for and Evaluation of Mineral Resources;

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

HK(IFRIC)-Int 4, Determining whether an Arrangement contains a Lease;
HK(IFRIC)-Int 5, Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds; and
HK(IFRIC)-Int 6, Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment.

(b) Consolidation

The consolidated accounts include the accounts of the Company and its subsidiaries made up to 31 December. Subsidiaries are those entities in which the Group, directly or indirectly, controls more than one half of the voting power; has the power to govern the financial and operating policies; to appoint or remove the majority of the members of the board of directors; or to cast majority of votes at the meetings of the board of directors.

The results of subsidiaries acquired or disposed of during the year are included in the consolidated profit and loss account from the effective date of acquisition or up to the effective date of disposal, as appropriate.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the profit and loss account.

All significant intercompany transactions and balances within the Group are eliminated on consolidation. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

The gain or loss on the disposal of a subsidiary represents the difference between the proceeds of the sale and the Group’s share of its net assets together with the carrying value of goodwill.

Minority interests represent the interests of outside shareholders in the operating results and net assets of subsidiaries.

In the Company’s balance sheet the interests in subsidiaries are stated at cost less provision for impairment losses. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable.

(c) Jointly controlled entities

A jointly controlled entity is a contractual arrangement whereby the Group and other parties undertake an economic activity which is subject to joint control and none of the participating parties has unilateral control over the economic activity.

The consolidated profit and loss account includes the Group’s share of the results of jointly controlled entities for the year, and the consolidated balance sheet includes the Group’s share of the net assets of the jointly controlled entities and goodwill on acquisition, net of accumulated impairment losses, if any.

(d) Associated companies

An associated company is a company, not being a subsidiary and a jointly controlled entity, in which an equity interest is held for the long-term and significant influence is exercised in its management.

The consolidated profit and loss account includes the Group’s share of the results of associated companies for the year, and the consolidated balance sheet includes the Group’s share of the net assets of the associated companies, goodwill and intangible assets recognised on acquisition, net of accumulated amortisation of intangible assets other than goodwill and impairment losses, if any.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

(e) Investments

The Group classifies its investments in the following categories: loans and receivables, and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and re-evaluate this designation at every reporting date.

(i) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and with no intention of trading. They are included in current assets, except for maturities greater than 12 months after the balance sheet date which are classified as non-current assets.

(ii) Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date.

Purchases and sales of investments are recognised on trade-date, the date of which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs. Investments are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets are subsequently carried at fair value. Loans and receivables are carried at amortised cost using the effective interest method. Unrealised gains and losses arising from changes in the fair value of available-for-sale financial assets are recognised in equity. When securities classified as available-for-sale financial assets are sold or impaired, the accumulated fair value adjustments are included in the profit and loss account as gains or losses from investment securities.

The fair value of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, or discounted cash flow analysis refined to reflect the issuer’s specific circumstances. Investments in equity instruments that do not have a quoted market price in an active market and those fair value cannot be reliably measured, and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments, are measured at cost less impairment.

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss, measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit and loss account, is removed from equity and recognised in the profit and loss account. Impairment losses recognised in the profit and loss account on equity instruments are not reversed through the profit and loss account.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

(f) Fixed assets

Fixed assets are stated at cost less accumulated depreciation and impairment losses, if any.

Fixed assets are depreciated at rates sufficient to write-off their costs less accumulated impairment losses, if any, over their estimated useful lives on a straight-line basis. The principal annual rates are as follows:

Properties over the lease terms of 20 to 79 years Leasehold improvements over the shorter of their useful lives or the lease terms of 2 to 5 years Computer equipment 20% – 33[1] /3% Outdoor media assets 5% – 20% Office equipment, studio and broadcasting equipment, furniture, fixtures and motor vehicles 10% – 33[1] /3%

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are expensed in the profit and loss account during the financial period in which they are incurred.

The asset’s residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

The gain or loss on disposal of a fixed asset is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognised in the profit and loss account.

(g) Intangible assets

(i) Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary, jointly controlled entity or associated company at the date of acquisition. Goodwill on acquisition of jointly controlled entities and associated companies is included in interests in jointly controlled entities and interests in associated companies, respectively. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying value of goodwill relating to the entity sold.

Goodwill is allocated to cash-generating units (“CGUs”) for the purpose of impairment testing.

(ii) Other intangible assets

Other intangible assets including concession rights, copyrights, licence rights and royalties, publishing rights, purchased programme and film rights, software, customer base and technology know-how. Cost of other intangible assets are initially recognised and measured at fair value. Other intangible assets with definite useful lives are amortised on a straightline basis over the respective period of the operating right. Other intangible assets with indefinite useful lives are not subject to amortisation and are tested annually for impairment.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

Principal annual rates are as follows:

Concession rights 5% – 33[1] /3% Licence rights and royalties 28% Publishing rights 6% – 50% Software, customer base and technical know-how 20% – 100%

Purchased programme and film rights are amortised on an individual basis based on the amount of revenues earned in proportion to management’s estimate of the actual revenue in respect to the purchased programme and film rights.

(h) Impairment of assets

Assets that have an indefinite useful life are not subject to amortisation, and are at least tested annually for impairment, and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (i.e. cash-generating units).

(i)

Operating leases

Leases where substantially all the risks and rewards of ownership of assets remain with the leasing company are accounted for as operating leases. Payments made under operating leases net of any incentives received from the leasing company are charged to the profit and loss account on a straight-line basis over the lease periods.

(j) Inventories

Inventories are stated at the lower of cost and net realisable value. Costs are calculated on the weighted average basis. Net realisable value is determined on the basis of anticipated sales proceeds less estimated selling expenses.

(k) Trade and other receivables

Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the profit and loss account.

(l) Employee benefits

(i) Pension obligations

The Group operates a number of defined contribution and defined benefit plans and the assets of which are generally held in separate trustees administered funds. The pension plans are generally funded by payments from employees and by the relevant group companies, taking into account of the recommendations of independent qualified actuaries.

The Group’s contributions to the defined contribution plans are expensed as incurred.

For defined benefit plans, pension costs are assessed using the projected unit credit method: the cost of providing pensions is charged to the consolidated profit and loss account so as to spread the regular cost over the service lives of employees in accordance with the advice of the actuaries who carry out a full valuation of the plans. Actuarial gains and losses are recognised directly in equity through the consolidated statement of recognised income and expense.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

(ii) Equity compensation benefits

The Group operates equity-settled, share-based compensation plans. For share options granted after 7 November 2002 and not yet vested on 1 January 2005, the fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted at the grant date. At each balance sheet date, the Group revises its estimates of the number of options that are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the profit and loss account, and a corresponding adjustment to equity over the remaining vesting period.

No compensation cost is recognised in relation to share options granted on or before 7 November 2002, or that have already fully vested on 1 January 2005.

The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised.

(m) Borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability, including fees and commissions paid to agents, advisers, brokers and dealers, levies by regulatory agencies and security exchanges, and transfer taxes and duties. Borrowings are subsequently stated at amortised cost, any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the profit and loss account over the period of the borrowing using the effective interest method.

The fair value of the liability portion of a convertible bond is determined using a market interest rate for an equivalent non-convertible bond. This amount is recorded as a liability on an amortised cost basis until extinguished on conversion or maturity of the bonds. The remainder of the proceeds is allocated to the conversion option, which is recognised and included in equity.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after balance sheet date.

(n) Deferred taxation

Deferred taxation is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the accounts. Taxation rates enacted or substantively enacted by the balance sheet date are used to determine deferred taxation.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred taxation is provided on temporary differences arising on investment in subsidiaries, associated companies and jointly controlled entities except where the timing of the reversal of the temporary difference can be controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

(o) Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the Group expects a provision to be reimbursed, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

(p) Contingent liabilities and contingent assets

A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. It can also be a present obligation arising from past events that is not recognised because it is not probable that outflow of economic resources will be required or the amount of obligation cannot be measured reliably.

A contingent liability is not recognised but is disclosed in the notes to the accounts. When a change in the probability of an outflow occurs so that outflow is probable, it will then be recognised as a provision.

A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain events not wholly within the control of the Group.

Contingent assets are not recognised but are disclosed in the notes to the accounts when an inflow of economic benefits is probable. When inflow is virtually certain, an asset is recognised.

(q) Revenue recognition

Revenue from sale of services is recognised when the services are rendered.

Revenue from sale of goods is recognised on the transfer of risks and rewards of ownership, which generally coincides with the time when the goods are delivered to customers and title has passed.

Revenue from advertising is recognised over the period when the advertisement is placed.

Interest income is recognised on a time proportion basis using the effective interest method.

(r) Translation of foreign currencies

(i) Functional and presentation currency

Items included in the accounts of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated accounts are presented in Hong Kong dollars, which is the Company’s functional and presentation currency.

(ii) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the profit and loss account.

Translation differences on non-monetary items, such as equity instruments held at fair value through profit or loss, are reported as part of the fair value gain or loss. Translation differences on non-monetary items, such as equities classified as available-for-sale financial assets, are included in the available-for-sale financial assets reserve or included in reserve in equity.

(iii) Group companies

The results and financial position of all group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

(1) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
(2) income and expense for each profit and loss account are translated at average exchange rates; and
(3) all resulting exchange differences are recognised as a separate component of equity.

Exchange differences arising from the translation of the net investment in foreign entities are taken to shareholders’ equity on consolidation. When a foreign operation is sold, such exchange differences are recognised in the profit and loss account as part of the gain or loss on sale.

Goodwill and fair value adjustments arising on acquisition of a foreign entity on or after 1 January 2005 are treated as assets and liabilities of the foreign entity and translated at closing rate. For those acquisitions made prior to 1 January 2005, goodwill and fair value adjustments arising on the acquisition are expressed in the acquiring company’s functional currency.

(s) Segment reporting

In accordance with the Group’s internal financial reporting, the Group has determined that business segments be presented as the primary reporting format and geographical segments as the secondary reporting format.

Unallocated costs represent corporate expenses, including depreciation and amortisation and net of corporate interest income. Segment assets consist primarily of fixed assets, other non-current assets, goodwill, available-for-sale financial assets, inventories, trade and other receivables and operating cash. Segment liabilities comprise operating liabilities, consideration payables, pension obligations and exclude items such as taxation payable and corporate borrowings. Capital expenditure comprises additions to fixed assets and other intangible assets.

In respect of geographical segment reporting, sales are based on the country in which the business is operated. Total assets and capital expenditure are based on the location of the assets.

(t)

Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term high liquid investments and bank overdrafts, if any.

(u) Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

Where any Group company purchases the Company’s equity share capital, the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company’s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company’s equity holders.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

2 Financial Risk Management

(a) Financial risk factors

The Group’s activities expose it to a variety of financial risks: credit risk, liquidity risk, price risk, cash flow and fair value interest rate risk and foreign currency risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance.

The Group’s treasury function operates as a centralised service for managing financial risks and for providing cost efficient funding to the Group.

(i) Credit risk

The Group’s credit risk is primarily attributable to trade and other receivables, and listed debt securities. The Group has no significant concentrations of credit risk. Management has a credit policy in place and the exposures to these credit risks are monitored on an ongoing basis.

Sales of products and services are made to customers with appropriate credit history. Investments are normally only in liquid securities (except for where entered into for long term strategic purposes). Transactions involving derivative financial instruments are with counterparties with sound credit ratings.

(ii) Liquidity risk

The Group’s policy is to regularly monitor current and expected liquidity requirements and its compliance with lending covenants, to ensure the maintenance of sufficient reserves of cash and readily realisable marketable securities and adequate committed lines of funding from major financial institutions to meet the Group’s liquidity requirements in the short and longer term.

(iii) Price risk

The Group’s available-for-sale financial assets are measured at fair value at each balance sheet date. Management manages the price risk exposure by maintaining a portfolio of investments with different risk profiles.

(iv) Cash flow and fair value interest rate risk

Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. Cash flow interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The key exposure of the Group to these risks originates from the interest-bearing borrowings.

Apart from the convertible bonds as mentioned in note 33 to the accounts, total bank loans of HK$29,971,000 held by the Group as at 31 December 2006 were with fixed interest rates, of which HK$29,509,000 are fully repayable within one year. The total bank loans with floating rates held by the Group as at 31 December 2006 amounted to HK$2,696,820,000, of which the interest repricing dates are all within one year.

Management of the Group monitors the interest rate risk exposure on a continuous basis and adjust the portfolio of borrowings where necessary.

(v) Foreign currency risk

The Group mainly operates in the Greater China region and is exposed to foreign currency exchange risk arising from various foreign currencies, primarily the Renminbi and New Taiwan dollar. Foreign exchange risk on net investments in foreign currencies is managed primarily through borrowings denominated in the relevant foreign currencies.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

(b) Fair value estimation

The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group is the current bid price; the appropriate quoted market price for financial liabilities is the current ask price.

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, or discounted cash flow analysis refined to reflect the issuer’s specific circumstances.

The nominal value less estimated credit adjustments of trade receivables and payables approximate their fair values. The fair value of long-term financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market rate that is available to the Group for similar financial instruments.

3 Critical Accounting Estimates and Judgements

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom exactly equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities related to goodwill impairment, defined benefit retirement obligations and fair value of share options granted are contained in notes 17, 34 and 37 to the accounts, respectively. Other key sources of estimation uncertainty are as follows:

(a) Income taxes

The Group is subject to income taxes in various jurisdictions. As at 31 December 2006, the total income tax provision and deferred tax liabilities of the Group amounted to HK$56,858,000 and HK$11,617,000, respectively. Significant judgement is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

(b) Provision for sales return

Turnover is stated net of sales return provision. Sales return provision is made by the Group upon the delivery of goods to the customers when the significant risks and rewards of ownership of the goods are transferred to the customers. As at 31 December 2006, the provision for sales return of the Group amounted to HK$17,806,000. This provision is recognised by the Group based on the best estimates by management with reference to past experience and other relevant factors. Any difference between this estimate and the actual return will impact the Group’s result in the period in which the actual return is determined.

(c) Allowance for bad and doubtful debts

The policy for allowance of bad and doubtful debts of the Group is based on the evaluation of collectability and ageing analysis of trade and other receivables and on management’s judgement. A considerable amount of judgement is required in assessing the ultimate realisation of these receivables, including the current creditworthiness and the past collection history of each customer. The amount of provision made as at 31 December 2006 was HK$79,638,000 (2005: HK$69,708,000). If the financial conditions of customers of the Group were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

4 Turnover, Revenue and Segment Information

The principal activity of the Company is investment holding. The principal activities of the subsidiaries are set out on note 47.

Turnover and revenues recognised during the year are as follows:

Turnover Provision of wireless internet services, online advertising, commercial enterprise solutions and internet access Magazine and book circulation, sales of publication advertising and other related products Advertising sales of outdoor media assets and provision of outdoor media services Event organisation, advertising and sponsorship sales in relation to sports events and programmes Advertising sales in relation to satellite television channel operations and provision of broadcasting post production services Interest income – available-for-sale financial assets – bank and others Total revenues Primary reporting format – business segments	2006 HK$’000 1,370,862 948,063 391,166 112,250 88,573 2,910,914 66,051 43,354 109,405 3,020,319	2005 HK$’000 1,370,738 1,034,859 412,280 208,487 78,953
		3,105,317
		77,865 10,223
		88,088
		3,193,405

The Group is organised into five main business segments:

Internet Group – provision of wireless internet services, online advertising, commercial enterprise solutions, and internet access.
Publishing Group – magazine and book circulation, sales of publication advertising and other related products.
Outdoor Media Group – advertising sales of outdoor media assets and provision of outdoor media services.
Sports Group – event organisation, advertising and sponsorship sales in relation to sports events and programmes.
Television and Entertainment Group – advertising sales in relation to satellite television channel operations and provision of broadcasting post production services.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

Secondary reporting format – geographical segments

The Group’s five business segments are operated in three main geographical areas:

– Hong Kong Internet Group, Publishing Group, Sports Group and Television and Entertainment Group Mainland China – Internet Group, Publishing Group, Outdoor Media Group, Sports Group and Television and Entertainment Group Taiwan and other Asian countries – Internet Group and Publishing Group

Primary reporting format – business segments

Total gross segment turnover Inter-segment turnover Turnover Segment profit/(loss) before amortisation and depreciation Amortisation and depreciation Segment profit/(loss) Provision for impairment of assets Share of losses of jointly controlled entities Share of profits less losses of associated companies Unallocated costs Operating profit before net gain on deemed disposals of interests in subsidiaries Net gain on deemed disposals of interests in subsidiaries Operating profit Finance costs Profit before taxation Taxation Profit after taxation Attributable to: Minority interests Equity holders of the Company		Year ended 31 December 2006	Year ended 31 December 2006	Year ended 31 December 2006	Year ended 31 December 2006	Group HK$’000 2,920,466 (9,552) 2,910,914 498,852 (164,471) 334,381 (47,044) (758) 8,977 (22,467) 273,089 24,601 297,690 (145,070) 152,620 (33,005) 119,615 87,654 31,961
	Internet group HK$’000 1,371,177 (315) 1,370,862 379,384 (77,683) 301,701 (36,044) (758) (212) –	Publishing group HK$’000 950,858 (2,795) 948,063 119,898 (21,233) 98,665 – – 10,088 –	Outdoor media group HK$’000 391,166 – 391,166 37,436 (30,660) 6,776 – – – 24,601	Sports group HK$’000 113,314 (1,064) 112,250 (22,330) (581) (22,911) (11,000) – (899) –	Television and entertain- ment group HK$’000 93,951 (5,378) 88,573 (15,536) (34,314) (49,850) – – – –

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

Segment assets Assets classified as held for sale Interests in jointly controlled entities Interests in associated companies Unallocated assets Total assets Segment liabilities Liabilities classified as held for sale Unallocated liabilities Total liabilities Segment capital expenditure Unallocated capital expenditure Total capital expenditure	Year ended 31 December 2006
	Television and Outdoor entertain- Internet Publishing media Sports ment group group group group group HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 3,974,986 1,261,094 1,024,608 221,646 217,596 93,973 – – – – 14,171 – – – – 1,246 229,847 – – – 287,538 358,022 155,795 45,650 38,182 7,920 – – – – 64,200 12,731 28,869 119 25,560	Group HK$’000 6,699,930 93,973 14,171 231,093 1,251,556
		8,290,723

		885,187 7,920 3,075,838
		3,968,945

		131,479 1,019
		132,498

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

Total gross segment turnover Inter-segment turnover Turnover Segment profit/(loss) before amortisation and depreciation Amortisation and depreciation Segment profit/(loss) Provision for receivables, net Share of losses of jointly controlled entities Share of profits less losses of associated companies Unallocated costs Operating profit before net gain on deemed disposals of interests in subsidiaries Net gain on deemed disposals of interests in subsidiaries Operating profit Finance costs Profit before taxation Taxation Profit after taxation Attributable to: Minority interests Equity holders of the Company		Year ended 31 December 2005	Year ended 31 December 2005	Year ended 31 December 2005	Year ended 31 December 2005	Group HK$’000 3,108,353 (3,036) 3,105,317 560,870 (150,108) 410,762 (7,271) (138) 21,229 (89,468) 335,114 160,335 495,449 (103,973) 391,476 (40,178) 351,298 91,772 259,526
	Internet group HK$’000 1,371,650 (912) 1,370,738 412,374 (64,135) 348,239 38,932 (138) (263) 160,335	Publishing group HK$’000 1,034,859 – 1,034,859 113,691 (17,132) 96,559 – – 18,046 –	Outdoor media group HK$’000 412,280 – 412,280 44,229 (28,243) 15,986 – – – –	Sports group HK$’000 208,487 – 208,487 4,888 (520) 4,368 (46,203) – – –	Television and entertain- ment group HK$’000 81,077 (2,124) 78,953 (14,312) (40,078) (54,390) – – 3,446 –

APPENDIX II

FINANCIAL INFORMATION ON THE TOM GROUP

Segment assets Interests in jointly controlled entities Interests in associated companies Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Segment capital expenditure Unallocated capital expenditure Total capital expenditure	Year ended 31 December 2005
	Television and Outdoor entertain- Internet Publishing media Sports ment group group group group group HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 3,556,519 1,342,073 748,789 323,249 222,151 14,876 – – – – 1,459 236,665 – – – 297,862 428,054 118,522 54,726 39,467 80,064 23,235 38,887 551 37,441	Group HK$’000 6,192,781 14,876 238,124 1,344,489
		7,790,270

		938,631 2,944,356
		3,882,987

		180,178 4,113
		184,291

Secondary reporting format – geographical segments

Hong Kong Mainland China Taiwan and other Asian countries Amortisation and depreciation Provision for receivables, net Provision for impairment of assets Share of losses of jointly controlled entities Share of profits less losses of associated companies Net gain on deemed disposals of interests in subsidiaries Unallocated costs Operating profit Hong Kong Mainland China Taiwan and other Asian countries Total	Turnover 2006 2005 HK$’000 HK$’000 15,785 73,176 1,935,824 2,034,354 959,305 997,787 2,910,914 3,105,317 Total assets 2006 2005 HK$’000 HK$’000 1,233,390 1,395,645 5,745,490 5,072,667 1,311,843 1,321,958 8,290,723 7,790,270	Operating profit 2006 2005 HK$’000 HK$’000 (683) (11,837) 366,188 444,103 133,347 128,604 498,852 560,870 (164,471) (150,108) – (7,271) (47,044) – (758) (138) 8,977 21,229 24,601 160,335 (22,467) (89,468) 297,690 495,449 Capital expenditure 2006 2005 HK$’000 HK$’000 1,410 3,530 117,340 158,881 13,748 21,880 132,498 184,291	Operating profit 2006 2005 HK$’000 HK$’000 (683) (11,837) 366,188 444,103 133,347 128,604 498,852 560,870 (164,471) (150,108) – (7,271) (47,044) – (758) (138) 8,977 21,229 24,601 160,335 (22,467) (89,468) 297,690 495,449 Capital expenditure 2006 2005 HK$’000 HK$’000 1,410 3,530 117,340 158,881 13,748 21,880 132,498 184,291
			184,291

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

5 Provision for Receivables, Net

In 2005, provision for receivables, net represented a provision of HK$46,203,000 for accounts receivables in respect of a sports event, offset by a write-back of provision of HK$38,932,000 made in prior years in respect of loans and advances to certain investee companies.

6 Provision for Impairment of Assets

The amount represented a provision for impairment of assets held for sale of HK$36,044,000 (note 32(a)), and a provision for impairment of goodwill of HK$11,000,000 (note 17(b)). The provision for impairment of goodwill, which is related to the business of a sports event in Mainland China, was made with reference to the expected disposal value of that business less costs to sell.

7 Net Gain on Deemed Disposals of Interests in Subsidiaries

On 28 March 2006, the Group signed a partnership agreement with Singapore Press Holdings Limited (“SPH”) under which SPH invested US$26,000,000 (approximately of HK$202,800,000) in the outdoor media business of the Group through investing in TOM Outdoor Media Group Limited (“OMG Holdco”) by way of issuance of new shares of OMG Holdco.

As a result of the issuance of new shares of OMG Holdco, the Group’s shareholding in OMG Holdco has been diluted to 65% and resulted in a gain of HK$24,601,000.

The amount of net gain on deemed disposals of interests in subsidiaries of HK$160,335,000 in 2005 included a gain as a result of shares issued by TOM Online Inc. (“TOMO”) in relation to the acquisition of Puccini International Limited of HK$160,872,000, and a loss on the issuance of shares by Indiagames Limited (“Indiagames”), a subsidiary of the Company, of HK$537,000.

8 Operating Profit

Operating profit is stated after charging/crediting the following:

Charging:– Depreciation_(note 16) Amortisation of other intangible assets(note 18) Amortisation of other intangible assets included in interests in associated companies(note 21) Cost of inventories sold Staff costs (including directors’ emoluments)(note 14) Operating leases in respect of: – Land and buildings – Other assets Auditors’ remuneration Provision for bad and doubtful trade receivables (excluding provision for receivables as mentioned in note 5) Loss on disposal of fixed assets Provision for inventories Crediting:– Gain on disposal of available-for-sale financial assets Gain on partial disposal of an associated company Gain on exercise of share options of TOMO Net gain on disposal of interests in subsidiaries(note 42(d)) Gain on disposal of a subsidiary(note 42(d))_ Dividend income from available-for-sale financial assets Exchange gain, net	2006 HK$’000 115,895 52,589 4,896 473,805 595,857 57,763 134,789 23,797 12,862 5,407 25,165 90 – 19,694 – 14,698 2,465 12,108	2005 HK$’000 104,515 51,046 4,894 509,358 666,161 49,985 85,886 13,168 21,193 7,185 24,616

		6,233 12,336 14,177 6,180 – 1,250 7,433

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

9 Finance Costs

Finance Costs
Interest and borrowing costs on bank loans Interest and borrowing costs on convertible bonds Interest on other loans, wholly repayable within five years Total finance costs	2006 HK$’000 93,853 50,298 919 145,070	2005 HK$’000 49,837 52,709 1,427
		103,973

10 Taxation

Hong Kong profits tax has been provided at the rate of 17.5% (2005: 17.5%) on the estimated assessable profits for the year. Taxation on overseas profits has been calculated on the estimated assessable profits for the year at the rates of taxation prevailing in the countries in which the Group operates. The amount of taxation charged to the consolidated profit and loss account represents:

Hong Kong profits tax Overseas taxation Over-provision in prior years Deferred taxation_(note 35(c))_ Taxation charges	2006 HK$’000 – 37,580 (1,994) (2,581) 33,005	2005 HK$’000 – 72,029 (4,688) (27,163)
		40,178

Share of associated companies’ taxation for the year ended 31 December 2006 of approximately HK$2,683,000 (2005: HK$446,000) has been included in the consolidated profit and loss account as share of profits less losses of associated companies.

Taxation on the Group’s profit before taxation differs from the theoretical amount that would arise using the taxation rate of the home country of the Group as follows:

Profit before taxation Calculated at a taxation rate of 17.5% (2005: 17.5%) Effect of different applicable taxation rates in other countries Income not subject to taxation Expenses not deductible for taxation purposes Utilisation of previously unrecognised temporary difference Utilisation of previously unrecognised tax losses Recognition of previously unrecognised temporary differences Tax losses not recognised Results of associated companies and jointly controlled entities Withholding tax Temporary differences not recognised Over provision in prior years Taxation charge	2006 HK$’000 152,620 26,709 (61,175) (32,941) 40,516 – (2,105) (3,536) 66,520 (1,438) 6,463 (4,014) (1,994) 33,005	2005 HK$’000 391,476

		68,508 (75,884) (60,772) 39,693 (1,403) (3,395) – 72,330 (3,691) 7,448 2,032 (4,688)
		40,178

The weighted average applicable tax rate was 21.63% (2005: 10.26%). The increase is mainly caused by the reduction of amount of income not subject to taxation for the year, and the change in the profitability of the Group’s subsidiaries under different respective applicable tax rates.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

11 Profit Attributable to Equity Holders of the Company

The net loss of the Company is HK$285,992,000 (2005: HK$5,787,000) and is included in determining the profit attributable to the equity holders of the Company in the consolidated profit and loss account. The loss of the Company for the year ended 31 December 2006 included a provision for impairment in interests in subsidiaries amounting to HK$273,894,000 (2005: HK$Nil).

12 Dividends

No dividends had been paid or declared by the Company during the year (2005: HK$Nil).

13 Earnings per Share

(a) Basic

The calculation of the basic earnings per share is based on consolidated profit attributable to equity holders of the Company of HK$31,961,000 (2005: HK$259,526,000) and the weighted average of 3,893,270,558 (2005: 3,890,885,006) ordinary shares in issue during the year.

(b) Diluted

Diluted earnings per share is equal to the basic earnings per share for the year ended 31 December 2005 and 2006 as the exercise price of the outstanding share options granted by the Company were higher than the average market price of the share of the Company, and the conversion of the outstanding convertible bonds would have an anti-dilutive effect on earnings per share.

14 Staff Costs, including Directors’ Emoluments

Wages and salaries Pension costs – defined contribution plans Pension costs – defined benefit plans (note 34(b)) Share-based compensation (note 37(c))	2006 HK$’000 546,509 19,616 4,258 25,474 595,857	2005 HK$’000 590,224 19,977 6,589 49,371
		666,161

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

15 Directors’ and Senior Management’s Emoluments

(a) Directors’ emoluments

The remuneration of each director for the year ended 31 December 2006 is set out below:

Current executive directors Ms. Tong Mei Kuen, Tommei Ms. Mak Soek Fun, Angela Past executive director Mr. Sing Wang Independent non-executive directors and members of Audit Committee Mr. Cheong Ying Chew, Henry Ms. Wu Hung Yuk, Anna Mr. James Sha Non-executive director and member of Audit Committee Mrs. Lee Pui Ling, Angelina Non-executive directors Mr. Wang Lei Lei Mr. Frank John Sixt Ms. Chang Pui Vee, Debbie Mrs. Chow Woo Mo Fong, Susan Mr. Ip Tak Chuen, Edmond Total	Basic salaries, housing allowances, Contributions other to allowances retirement and benefit Discretionary benefit Fees in kind bonuses schemes HK$’000 HK$’000 HK$’000 HK$’000 100 2,250 10,750 150 77 1,645 369 115 7 1,143 971 – 100 – – – 100 – – – 100 – – – 100 – – – 100 1,425 – 139 100 – – – 50 – – – 50 – – – 50 – – – 934 6,463 12,090 404	Share compensation Sub-total costs# HK$’000 HK$’000 13,250 242 2,206 – 2,121 98 100 – 100 – 100 – 100 – 1,664 19,419 100 – 50 – 50 – 50 – 19,891 19,759	Fees returned to the Company HK$’000 (50 ) (37 ) (4 ) – – – – – – – – – (91 )	Total HK$’000 13,442 2,169 2,215 100 100 100 100 21,083 100 50 50 50
				39,559

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

The remuneration of each director for the year ended 31 December 2005 is set out below:

Current executive director Ms. Tong Mei Kuen, Tommei Past executive director Mr. Sing Wang Independent non-executive directors and members of Audit Committee Mr. Cheong Ying Chew, Henry Ms. Wu Hung Yuk, Anna Mr. James Sha Non-executive director and member of Audit Committee Mrs. Lee Pui Ling, Angelina Non-executive directors Mr. Wang Lei Lei Mr. Frank John Sixt Ms. Chang Pui Vee, Debbie Mrs. Chow Woo Mo Fong, Susan Mr. Ip Tak Chuen, Edmond Past non-executive director Mr. Holger Kluge Total	Basic salaries, housing allowances, Contributions other to allowances retirement and benefit Discretionary benefit Fees in kind bonuses schemes HK$’000 HK$’000 HK$’000 HK$’000 100 2,250 10,750 150 100 3,464 9,536 277 100 – – – 100 – – – 100 – – – 100 – – – 100 1,369 20,036 79 50 – – – 50 – – – 50 – – – 50 – – – 25 – – – 925 7,083 40,322 506	Share compensation Sub-total costs# HK$’000 HK$’000 13,250 1,904 13,377 2,730 100 – 100 – 100 – 100 – 21,584 24,773 50 – 50 – 50 – 50 – 25 – 48,836 29,407	Fees returned to the Company HK$’000 (50 ) (50 ) – – – – – – – – – – (100 )	Total HK$’000 15,104 16,057 100 100 100 100 46,357 50 50 50 50 25
				78,143

This represents the amortisation of the fair value of share options measured at the grant dates charged to the consolidated profit and loss account, regardless of whether the share options have been exercised or not (note 37(c)).

During the year, no emoluments were paid by the Group to the directors as an inducement to join or upon joining the Group or as compensation for the loss of office.

Save as above, there has been no arrangement under which a director has waived or agreed to waive any emoluments for the years ended 31 December 2006 and 2005.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

(b) Five highest paid individuals

The five individuals whose emoluments were the highest in the Group for the year include two directors (2005: two directors and one past director) whose emoluments are reflected in the analysis presented above. The emoluments payable to the remaining three (2005: two) individuals during the year are as follows:

Basic salaries, housing allowances, other allowances and benefits in kind Discretionary bonuses Director’s fee received from subsidiary of the Group Contributions to retirement benefit schemes Share-based compensation (#)	2006 HK$’000 7,525 876 100 557 9,058 3,002 12,060	2005 HK$’000 4,558 2,825 – 363
		7,746 3,866
		11,612

This represents the amortisation of the fair value of share options measured at the grant dates to the consolidated profit and loss account, regardless of whether the share options have been exercised or not (note 37(c)).

After taking into account the share-based compensation, the emoluments of these three (2005: two) individuals fell within the following bands:

	Number of individuals	Number of individuals
	2006	2005
Emolument bands
HK$3,000,001 – HK$3,500,000	1	–
HK$4,000,001 – HK$4,500,000	1	–
HK$4,500,001 – HK$5,000,000	1	1
HK$6,500,001 – HK$7,000,000	–	1

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

16 Fixed Assets

Cost At 1 January 2005 Exchange adjustment Additions Acquisition of subsidiaries (note 42(b)) Transfer between categories Disposals Disposals of subsidiaries (note 42(d)) At 31 December 2005 At 1 January 2006 Exchange adjustment Additions Acquisition of subsidiaries (note 42(b)) Transfer between categories Transfer to other intangible assets Reclassification to assets held for sale Disposals Disposals of subsidiaries (note 42(d)) At 31 December 2006 Accumulated depreciation and impairment losses At 1 January 2005 Exchange adjustment Acquisition of subsidiaries (note 42(b)) Depreciation charge for the year Disposals Disposals of subsidiaries (note 42(d)) At 31 December 2005 At 1 January 2006 Exchange adjustment Acquisition of subsidiaries (note 42(b)) Depreciation charge for the year Reclassification to assets held for sale Disposals Disposals of subsidiaries (note 42(d)) At 31 December 2006					Group			Total HK$’000 777,280 7,399 138,427 1,416 – (142,096 ) (4,180 ) 778,246 778,246 23,345 98,547 6,580 – (2,721 ) (3,457 ) (35,605 ) (581 ) 864,354 492,729 3,017 713 104,515 (134,745 ) (3,575 ) 462,654 462,654 15,221 1,046 115,895 (2,375 ) (29,820 ) (581 ) 562,040
		Properties HK$’000 13,220 257 – – – – – 13,477 13,477 588 – – – – – – – 14,065 1,497 35 – 649 – – 2,181 2,181 110 – 641 – – – 2,932	Leasehold improvements HK$’000 50,105 119 9,690 – 1,962 (4,040 ) (1,720 ) 56,116 56,116 1,208 2,955 – – – (522 ) (2,227 ) – 57,530 25,532 69 – 9,684 (2,674 ) (1,626 ) 30,985 30,985 649 – 9,018 (231 ) (2,227 ) – 38,194	Computer equipment HK$’000 478,406 4,092 96,948 998 2,976 (121,960 ) (2,022 ) 459,438 459,438 13,773 71,880 1,312 362 – (1,418 ) (19,101 ) – 526,246 368,593 2,181 524 68,242 (121,757 ) (1,628 ) 316,155 316,155 10,562 628 79,987 (1,234 ) (19,002 ) – 387,096	Outdoor media assets HK$’000 150,415 2,592 9,783 – 5,606 (10,112 ) – 158,284 158,284 5,582 10,778 4,602 7,207 – – (9,535 ) – 176,918 58,246 709 – 13,811 (5,549 ) – 67,217 67,217 2,569 151 14,996 – (4,504 ) – 80,429	Other assets HK$’000 81,672 268 5,908 418 – (5,984 ) (438 ) 81,844 81,844 1,678 4,989 666 – – (1,517 ) (4,410 ) (581 ) 82,669 38,861 23 189 12,129 (4,765 ) (321 ) 46,116 46,116 1,331 267 11,253 (910 ) (4,087 ) (581 ) 53,389	Construction in progress HK$’000 3,462 71 16,098 – (10,544 ) – – 9,087 9,087 516 7,945 – (7,569 ) (2,721 ) – (332 ) – 6,926 – – – – – – – – – – – – – – –

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

			Group
Properties HK$’000 11,133 11,296	Leasehold improvements HK$’000 19,336 25,131	Computer equipment HK$’000 139,150 143,283	Outdoor media assets HK$’000 96,489 91,067	Other assets HK$’000 29,280 35,728	Construction in progress HK$’000 6,926 9,087	Total HK$’000 302,314

						315,592

The Group’s interests in properties at their net book values are analysed as follows:

Outside Hong Kong, held on Leases of over 50 years Leases of between 10 to 50 years	2006 HK$’000 11,024 109 11,133	2005 HK$’000 11,170 126
		11,296

17 Goodwill

At 1 January Exchange adjustment Additions Current year acquisitions_(note 42(b)) Prior year acquisition(note a) Consideration adjustment for acquisition of subsidiaries Transferred to assets held for sale(note 32) Deemed disposal of interests in subsidiaries(note 42(c)) Disposal of a subsidiary/interests in subsidiaries(note 42(d)) Provision for impairment of goodwill(note b)_ At 31 December	Group 2006 2005 HK$’000 HK$’000 2,514,896 2,280,025 80,886 46 242,963 126,732 – 129,821 (7,800) – (72,997) – – (16,585) (27,493) (5,143) (11,000) – 2,719,455 2,514,896	Group 2006 2005 HK$’000 HK$’000 2,514,896 2,280,025 80,886 46 242,963 126,732 – 129,821 (7,800) – (72,997) – – (16,585) (27,493) (5,143) (11,000) – 2,719,455 2,514,896
		2,514,896

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

(a) Prior year acquisition

At 31 December 2004, the Group had commitment in respect of the acquisition of 100% beneficial interest in Treasure Base Investments Limited and its subsidiaries (collectively referred to as the “Treasure Base Group”). According to the sale and purchase agreement, the initial consideration recognised totalled RMB274,000,000 (approximately HK$257,700,000), which was 4.5 times of the 2004 audited net profit of Treasure Base Group, and the earn-out consideration will be resolved in terms of (i) if the 2005 audited combined after-tax profit is less than RMB40,000,000 (approximately HK$37,600,000), an amount equal to the 2005 audited combined after-tax profit; or (ii) if the 2005 combined after-tax profit is equal to or more than RMB40,000,000 (approximately HK$37,600,000) but less than or equal to RMB75,000,000 (approximately HK$70,500,000), 1.5 times the amount of the 2005 audited combined after-tax profit; or (iii) if 2005 audited combined after-tax profit is more than RMB75,000,000 (approximately HK$70,500,000), 1.75 times the amount of the 2005 combined after-tax profit. The consideration is subject to a maximum of RMB550,000,000 (approximately HK$517,000,000), and therefore the Group’s maximum earnout consideration payable in respect of this acquisition as at 31 December 2004 amounted to RMB276,000,000 (approximately HK$259,300,000).

The audited accounts of Treasure Base Group for the year ended December 2005 showed a combined after-tax profit of RMB77,100,000 (approximately HK$74,000,000). Therefore, the earn-out consideration, at 1.75 times the amount of the combined after-tax profit of RMB135,000,000 (approximately HK$130,000,000) was provided at 31 December 2005 and was fully paid in 2006.

(b) Impairment tests for goodwill

Goodwill is allocated to the Group’s CGUs identified according to business and geographical segments.

A segment level of the goodwill allocation is presented below.

Internet Group Publishing Group Outdoor Media Group Sports Group Television and Entertainment Group	Mainland China HK$’000 1,710,362 116 311,940 109,688 82,116 2,214,222	2006 Hong Kong HK$’000 – – – – 3,387 3,387	Taiwan and other Asian countries HK$’000 – 501,846 – – – 501,846	Total HK$’000 1,710,362 501,962 311,940 109,688 85,503 2,719,455	Mainland China HK$’000 1,404,578 116 296,656 121,517 82,984 1,905,851	2005 Taiwan and other Asian Hong Kong countries HK$’000 HK$’000 – 74,699 27,493 506,853 – – – – – – 27,493 581,552	Total HK$’000 1,479,277 534,462 296,656 121,517 82,984
							2,514,896

The recoverable amount of a CGU in the Sports Group in relation to the business of a sports event in Mainland China is determined based on the expected disposal value of that business less costs to sell (note 6).

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

The recoverable amount of each CGU in the Internet Group is determined based on fair value. Fair value is the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. The valuation was performed by American Appraisal China Limited in November 2006. Before arriving at the valuation, the following principal factors were considered:

the nature of the CGU;
the global economic outlook in general and the specific economic and competitive elements affecting the CGU’s business, its industry and its market;
the nature and prospects of the Internet and wireless value-added services industries;
the market-derived investment returns of entities engaged in a similar line of business and returns from other similar types of projects;
the stage of development of the CGU’s operation; and
the business risks of the CGU.

Due to the changing environment in which the CGUs are operating in, a number of assumptions have to be made in order to sufficiently support the concluded value of the CGUs. The major assumptions adopted were:

there will be no major changes in the existing political, legal, fiscal and economic conditions in countries in which the CGU will carry on its business;
there will be no major changes in the current taxation law in countries in which the CGU operates, that the rates of tax payable remain unchanged and that all applicable laws and regulations will be complied with;
exchange rates and interest rates will not differ materially from those presently prevailing;
the availability of finance will not be a constraint on the future growth of the CGU’s operation;
the CGU will retain and have competent management, key personnel, and technical staff to support its ongoing operation; and
industry trends and market conditions for related industries will not deviate significantly from economic forecasts.

The recoverable amounts of all other CGUs are determined based on value-in-use calculations. These calculations use cash flow projections based on financial budgets approved by management covering a five-year period. Cash flows beyond the five-year period are extrapolated using the estimated growth rates stated below. The growth rate does not exceed the long-term average growth rate for the business segments in which the CGUs operate.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

Key assumptions used for value-in-use calculations:

					Television and
			Outdoor Media		Entertainment
	Publishing Group		Group	Sports Group	Group
	Mainland China	Taiwan	Mainland China	Mainland China	Mainland China
Gross margin1	45%	50%	22% – 69%	11% – 17%	42% – 64%
Growth rate2	1%	1%	1%	1%	1%
Discount rate3	9%	9%	9%	9%	9%

1 Budgeted gross margin
2 Weighted average growth rate used to extrapolate cash flows beyond the five-year budget period
3 Pre-tax discount rate applied to the cash flow projections.

These assumptions have been used for the analysis of each CGU within the business segment. Management determined budgeted gross margin based on past performance and its expectations for the market development. The weighted average growth rates used are consistent with the forecasts and the discount rates used are pre-tax and reflect specific risks relating to the relevant segments.

18 Other Intangible Assets

Other Intangible Assets
Cost At 1 January 2005 Exchange adjustment Additions Acquisition of subsidiaries (note 42(b)) Deemed disposal of interests in subsidiaries_(note 42(c)) Disposal At 31 December 2005 At 1 January 2006 Exchange adjustment Additions Acquisition of subsidiaries (note 42(b))_ Reclassification to assets held for sale Transfer from construction in progress Written-off At 31 December 2006				Group
	Concession rights HK$’000 60,625 1,359 9,877 – – (2,872 ) 68,989 68,989 1,902 6,513 5,941 – 2,721 – 86,066	Licence rights and royalties HK$’000 35,447 75 – – – – 35,522 35,522 431 – 890 – – – 36,843	Publishing rights HK$’000 17,016 (541 ) – – – – 16,475 16,475 367 4,415 – – – – 21,257	Purchased programme and film rights HK$’000 108,908 – 35,987 – – – 144,895 144,895 – 23,023 – – – – 167,918	Software HK$’000 9,682 206 – – – – 9,888 9,888 366 – 85 – – – 10,339	Customer base and technical know-how HK$’000 7,263 2 – 6,021 (1,094 ) – 12,192 12,192 761 – 20,036 (1,771 ) – (10,737 ) 20,481	Total HK$’000 238,941 1,101 45,864 6,021 (1,094 (2,872
							287,961

							287,961 3,827 33,951 26,952 (1,771 2,721 (10,737
							342,904

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

Accumulated amortisation At 1 January 2005 Exchange adjustment Amortisation charge for the year Deemed disposal of interests in subsidiaries_(note 42(c))_ Disposal At 31 December 2005 At 1 January 2006 Exchange adjustment Amortisation charge for the year Reclassification to assets held for sale Written-off At 31 December 2006 Net book value At 31 December 2006 At 31 December 2005					Group			Total HK$’000 145,550 805 51,046 (234 ) (1,079 ) 196,088 196,088 1,468 52,589 (820 ) (10,737 ) 238,588 104,316 91,873
		Concession rights HK$’000 24,239 837 8,877 – (1,079 ) 32,874 32,874 552 9,892 – – 43,318 42,748 36,115	Licence rights and royalties HK$’000 4,275 74 1,291 – – 5,640 5,640 284 1,718 – – 7,642 29,201 29,882	Publishing rights HK$’000 4,781 (151 ) 2,665 – – 7,295 7,295 186 5,948 – – 13,429 7,828 9,180	Purchased programme and film rights HK$’000 104,749 – 31,903 – – 136,652 136,652 – 27,744 – – 164,396 3,522 8,243	Software HK$’000 1,161 45 1,957 – – 3,163 3,163 155 2,099 – – 5,417 4,922 6,725	Customer base and technical know-how HK$’000 6,345 – 4,353 (234 ) – 10,464 10,464 291 5,188 (820 ) (10,737 ) 4,386 16,095 1,728

The Group has considered the useful life of one of its licence rights to be indefinite and therefore no amortisation has been provided in accordance with the provision of HKAS 38 “Intangible assets”. The carrying value of this intangible asset is tested for impairment annually, as well as when there is indication of impairment. This licence right is considered to have an indefinite life as the right has no fixed termination date and management considered that economic benefits will be generated from the licence right for the foreseeable future. As at 31 December 2006, the carrying amount of the licence right was HK$27,300,000.

Key assumptions used for value-in-use calculation for impairment assessment on intangible assets with indefinite useful life:

Gross margin 50% – 75% Growth rate beyond the five-year budget period 1% Discount rate 9%

Please refer to note 17(b) for detailed explanation of these key assumptions.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

19 Interests in Subsidiaries

Investments at cost – unlisted shares Amounts due from subsidiaries Amounts due to subsidiaries Less : Provisions	Company 2006 2005 HK$’000 HK$’000 644,034 629,993 5,005,778 5,382,464 (778,966) (1,397,844) (2,514,347) (2,240,453) 2,356,499 2,374,160	Company 2006 2005 HK$’000 HK$’000 644,034 629,993 5,005,778 5,382,464 (778,966) (1,397,844) (2,514,347) (2,240,453) 2,356,499 2,374,160
		2,374,160

The amounts due from and to other subsidiaries are unsecured, interest-free and repayable on demand.

The carrying values of amounts due from and to subsidiaries of the Company approximate their fair values.

The list of the principal subsidiaries of the Group at 31 December 2006 is set out on note 47.

20 Interests in Jointly Controlled Entities

		Group
	2006	2005
	HK$’000	HK$’000
Share of net assets – unlisted shares	14,171	14,876

There are no material contingent liabilities relating to the Group’s interests in these jointly controlled entities, and no material contingent liabilities of the entities themselves.

21 Interests in Associated Companies

Share of net assets – unlisted shares Goodwill Other intangible assets_(note (a))_ Cost Accumulated amortisation	Group 2006 2005 HK$’000 HK$’000 49,590 51,725 128,177 128,177 65,156 65,156 (11,830) (6,934) 53,326 58,222 231,093 238,124	Group 2006 2005 HK$’000 HK$’000 49,590 51,725 128,177 128,177 65,156 65,156 (11,830) (6,934) 53,326 58,222 231,093 238,124
		128,177
		65,156 (6,934)
		58,222

		238,124

(a) The other intangible assets arising from the acquisition mainly comprised exclusive operation agreements, non-compete agreements and advertising customer base, which are recognised at fair value at acquisition and are amortised on a straight-line basis over 5 to 20 years.

Key assumptions used for value-in-use calculations for goodwill impairment assessment:

Gross margin	45%
Growth rate beyond the five-year budget period	1%
Discount rate	9%

Please refer to note 17(b) for detailed explanation of these key assumptions.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

(b) The details of the principal associated company of the Group are set out below:

							Effective
	Place of incorporation	Particular of					interest
Name	and kind of legal entity	registered capital	Assets	Liabilities	Turnover	Net profit	held
			HK$’000	HK$’000	HK$’000	HK$’000
2006
China Popular Computer	Mainland China,	RMB30,000,000	138,756	43,515	163,348	28,207	48.5%
Week Management	limited liability
Company Limited	company
2005
China Popular Computer	Mainland China,	RMB30,000,000	132,375	33,227	174,956	43,333	48.5%
Week Management	limited liability
Company Limited	company

22	Available-for-sale Financial Assets
				Group
				2006	2005
				HK$’000	HK$’000
	Listed debt securities outside Hong Kong			1,913,759	1,991,295
	Unlisted equity securities outside Hong Kong			72,629	61,912
	Total			1,986,388	2,053,207

23	Loans and Receivables
			Group		Company
		2006	2005	2006	2005
		HK$’000	HK$’000	HK$’000	HK$’000
	Loans and advances to investee companies	2,091	3,839	–	899

The loans and advances to investee companies as at 31 December 2006 and 2005 are interest-free, unsecured and repayable on demand. The carrying amounts of the loans and advances to investee companies approximate their fair values.

24 Other Non-current Assets

Other Non-current Assets
Long-term other receivables_(note (a)) Deferred expenses Pension assets(note 34(a))_	Group 2006 2005 HK$’000 HK$’000 2,592 42,348 16,306 5,191 603 33 19,501 47,572	Company 2006 2005 HK$’000 HK$’000 – – 3,980 – – – 3,980 –
			–

(a) The carrying amounts of the receivables approximate their fair values. In 2005, long-term other receivables mainly represented an exchangeable note of US$5,297,000 issued by the controlling shareholder of an investee company (the “Borrower”) to a wholly-owned subsidiary of the Company, TOM Entertainment Group Limited. It is interest bearing at 6% per annum and will mature in 2007. The Group has the right, exercisable at its option, to convert US$5,000,000 of the outstanding principal amount of the exchangeable note to 8 shares of an investee company held by the Borrower.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

25 Inventories

Inventories
Merchandise Finished goods Raw materials Work in progress	Group 2006 2005 HK$’000 HK$’000 15,026 12,342 103,794 88,615 – 142 11,248 15,981 130,068 117,080
		117,080

26 Trade and Other Receivables Trade receivables (note b) Prepayments, deposits and other receivables (note c)	Group 2006 2005 HK$’000 HK$’000 555,227 764,977 432,906 434,292 988,133 1,199,269	Company 2006 2005 HK$’000 HK$’000 – – 14,153 22,198 14,153 22,198	Company 2006 2005 HK$’000 HK$’000 – – 14,153 22,198 14,153 22,198
			22,198

(a) The carrying values of trade and other receivables approximate their fair values.

(b) Majority of the Group’s turnover is on open account terms and in accordance with terms specified in the contracts governing the relevant transactions.

As at 31 December 2006, the ageing analysis of the Group’s trade receivables is as follows:

Current 31-60 days 61-90 days Over 90 days Less: Provision Represented by: Receivables from an associated company Receivables from related companies Receivables from third parties	Group 2006 2005 HK$’000 HK$’000 204,232 307,208 133,722 181,909 74,707 118,300 222,204 227,268 634,865 834,685 (79,638) (69,708) 555,227 764,977 Group 2006 2005 HK$’000 HK$’000 9,360 – 598 4,967 545,269 760,010 555,227 764,977	Group 2006 2005 HK$’000 HK$’000 204,232 307,208 133,722 181,909 74,707 118,300 222,204 227,268 634,865 834,685 (79,638) (69,708) 555,227 764,977 Group 2006 2005 HK$’000 HK$’000 9,360 – 598 4,967 545,269 760,010 555,227 764,977
		764,977

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

Total trade receivables from related companies beneficially owned by substantial shareholders of the Company, Hutchison Whampoa Limited (“HWL”), Cheung Kong (Holdings) Limited (“CKH”) and Cranwood Company Limited (“Cranwood”), amounted to HK$419,000 (2005: HK$4,967,000). Trade receivables from minority shareholders of subsidiaries of the Group amounted to HK$179,000 (2005: HK$Nil). These are related to sales of goods and services and licence fee income as shown in note 46(a).

(c) The Group balances include amounts due from jointly controlled entities, associated companies and related companies of HK$83,000 (2005: HK$1,373,000), HK$301,000 (2005: HK$260,000) and HK$19,995,000 (2005: HK$21,438,000) respectively. The total balances due from related companies beneficially owned by the substantial shareholders of the Company, HWL, CKH and Cranwood amounted to HK$754,000 (2005: HK$672,000). The balances due from minority shareholders of subsidiaries of the Group amounted to HK$19,241,000 (2005: HK$20,766,000).

The balances due from jointly controlled entities, associated companies and related companies represent expenses paid on behalf of these companies and are unsecured, interest-free and repayable on demand.

27 Restricted Cash

At 31 December 2006, bank deposits and cash of the Group totalling of US$2,344,000 (approximately HK$18,280,000), NT$9,515,000 (approximately HK$2,273,000) and RMB618,000 (approximately HK$618,000) (2005: NT$308,000,000, or approximately HK$72,010,000) were pledged to banks for securing banking facilities granted to certain subsidiaries of the Company and RMB14,043,000 (approximately HK$14,043,000) (2005: HK$Nil) were pledged to banks for securing banking facilities granted to an associated company respectively.

Included in the restricted cash of the Group was an amount of US$300,000 (approximately HK$2,332,000) (2005: US$300,000, or approximately HK$2,340,000), representing money held in escrow pursuant to tax warrants provided by the founder of Indiagames.

28 Consideration Payables

Acquisition of subsidiaries (note b) Acquisition of an associated company (note b)	Group 2006 2005 HK$’000 HK$’000 103,947 135,690 25,273 110,403 129,220 246,093	Company 2006 2005 HK$’000 HK$’000 10,398 6,093 25,273 110,403 35,671 116,496	Company 2006 2005 HK$’000 HK$’000 10,398 6,093 25,273 110,403 35,671 116,496
			116,496

(a) The carrying values of consideration payables approximate their fair values.

(b) These represent consideration payables with respect to the acquisition of subsidiaries and an associated company and will be satisfied by cash and/or the issuance of shares of the Company pursuant to the terms of the respective acquisition agreements.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

29 Trade and Other Payables

Trade payables_(note b) Other payables and accruals(note c)_	Group 2006 2005 HK$’000 HK$’000 271,402 243,349 545,287 618,315 816,689 861,664	Company 2006 2005 HK$’000 HK$’000 – – 19,151 9,982 19,151 9,982	Company 2006 2005 HK$’000 HK$’000 – – 19,151 9,982 19,151 9,982
			9,982

(a) The carrying values of trade and other payables approximate their fair values.

(b) As at 31 December 2006, the ageing analysis of the Group’s trade payables is as follows:

Current 31-60 days 61-90 days Over 90 days Represented by: Payable to an associated company Payable to related companies Payable to third parties	Group 2006 2005 HK$’000 HK$’000 123,629 121,295 47,324 42,458 27,737 25,658 72,712 53,938 271,402 243,349 Group 2006 2005 HK$’000 HK$’000 3,116 – 286 6,407 268,000 236,942 271,402 243,349	Group 2006 2005 HK$’000 HK$’000 123,629 121,295 47,324 42,458 27,737 25,658 72,712 53,938 271,402 243,349 Group 2006 2005 HK$’000 HK$’000 3,116 – 286 6,407 268,000 236,942 271,402 243,349
		243,349

Total trade payables to related companies beneficially owned by HWL amounted to HK$38,000 (2005: HK$81,000). The balances due to minority shareholders of subsidiaries of the Group amounted to HK$248,000 (2005: HK$6,326,000). These are related to purchases of goods and services as shown in note 46(b). The balance due to an associated company mainly represented receipts of cash on behalf of the associated company.

(c) The Group balances include amounts due to a jointly controlled entity and related companies of HK$2,898,000 (2005: HK$2,905,000) and HK$38,712,000 (2005: HK$55,674,000) respectively. The total balance due to related companies beneficially owned by the substantial shareholders of the Company, HWL, CKH and Cranwood, amounted to HK$15,220,000 (2005: HK$8,913,000). The balance due to minority shareholders of subsidiaries of the Group amounted to HK$23,492,000 (2005: HK$46,761,000).

The amounts due to a jointly controlled entity and related companies that represent expenses paid on behalf of the Group by a jointly controlled entity and the amounts due to related companies arising from purchases of goods and services are unsecured, interest-free and repayable on demand.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

30 Short-term Bank Loans

Short-term Bank Loans
Bank loans_(note a)_ Secured Unsecured The bank loans are denominated in: United States dollar Hong Kong dollar Renminbi New Taiwan dollar	Group 2006 2005 HK$’000 HK$’000 304,119 75,213 423,450 – 727,569 75,213 590,562 – – 64,000 29,457 11,213 107,550 – 727,569 75,213	Company 2006 2005 HK$’000 HK$’000 – – 315,900 – 315,900 – 315,900 – – – – – – – 315,900 –
			–

			– – – –
			–

(a) These short-term bank loans are interest bearing at prevailing market rates. Their carrying amounts approximate their fair values.

31 Other Non-current Liabilities

Non-current portion of long-term bank loans_(note a) Loans from a minority shareholder Convertible bonds(note 33) Pension obligations(note 34(a))_	Group 2006 2005 HK$’000 HK$’000 1,733,436 1,513,075 – 9,946 191,023 1,032,803 28,827 19,711 1,953,286 2,575,535	Group 2006 2005 HK$’000 HK$’000 1,733,436 1,513,075 – 9,946 191,023 1,032,803 28,827 19,711 1,953,286 2,575,535
		2,575,535

(a) Long-term bank loans

Secured Unsecured Less: current portion of long-term bank loans The bank loans are repayable as follows: Within one year In the second year In the third to fifth year After the fifth year The bank loans are denominated in: Hong Kong dollar United States dollar New Taiwan dollar Malaysian Ringgit	Group 2006 2005 HK$’000 HK$’000 1,353,922 1,288,088 645,300 289,327 1,999,222 1,577,415 (265,786) (64,340) 1,733,436 1,513,075 265,786 64,340 1,102,978 96,605 472,105 1,416,185 158,353 285 1,999,222 1,577,415 850,000 850,000 503,408 437,576 645,300 289,328 514 511 1,999,222 1,577,415	Group 2006 2005 HK$’000 HK$’000 1,353,922 1,288,088 645,300 289,327 1,999,222 1,577,415 (265,786) (64,340) 1,733,436 1,513,075 265,786 64,340 1,102,978 96,605 472,105 1,416,185 158,353 285 1,999,222 1,577,415 850,000 850,000 503,408 437,576 645,300 289,328 514 511 1,999,222 1,577,415
		1,577,415 (64,340)
		1,513,075

		64,340 96,605 1,416,185 285
		1,577,415

		850,000 437,576 289,328 511
		1,577,415

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

These long-term bank loans are interest bearing at prevailing market rates. Their carrying amounts approximate their fair values.

32 Assets and Liabilities Held for Sale

In December 2006, TOMO, a non wholly-owned subsidiary of the Company, committed to a plan which was approved by the TOMO’s Board of Directors on 29 December 2006 to sell its entire equity interests in Indiagames in order to focus on the China market and initiated actions to locate a buyer. As a result, the assets and liabilities of Indiagames were classified as held for sale and presented separately as current assets and liabilities on the consolidated balance sheet as at 31 December 2006.

The major classes of assets and liabilities classified as held for sale were as follows:

Cash and cash equivalents Trade and other receivables Goodwill_(note 17) Other non-current assets Less: Provision for impairment(note a)_ Exchange adjustment Assets held for sale Trade and other payables Liabilities held for sale	HK$’000 23,049 30,382 72,997 3,517 129,945 (36,044) 72 93,973 7,920 7,920

(a) A provision for impairment of assets held for sale of HK$36,044,000 was made as at 31 December 2006, with reference to the expected disposal value of the assets less costs to sell.

33 Convertible Bonds

On 28 November 2003, a wholly-owned subsidiary of the Company issued convertible bonds (the “Convertible Bonds”) in an aggregate principal amount of US$150,000,000 (approximately HK$1,170,000,000), which are unconditionally and irrevocably guaranteed by, and convertible into ordinary shares of the Company with par value of HK$0.10 each (the “Shares”). The Convertible Bonds bear interest at the rate of 0.5% per annum on the principal amount, payable semi-annually in arrear from 28 November 2003 up to but excluding 28 November 2008.

The Convertible Bonds are convertible at any time on or after 8 January 2004 up to the close of business on 14 November 2008 into the Shares at an initial conversion price of HK$3.315 per share, subject to adjustment. The subsidiary may, subject to certain conditions, on or at any time after 13 December 2006 and prior to 28 November 2008, redeem all, or from time to time, redeem some of the Convertible Bonds, at principal plus a fixed return of 1.25% per annum from 28 November 2003 to the redemption date.

Furthermore, the bond holders have the right to require the subsidiary to redeem all or some only of the Convertible Bonds on 28 November 2006 at 102.31% of the principal amount.

Unless previously redeemed, converted or purchased and cancelled, the Convertible Bonds will be redeemed at 103.86% of the principal amount, plus any accrued interest on 28 November 2008.

The fair value of the liability component and the equity conversion component were determined at issuance of the Convertible Bonds. The fair value of the liability component, included in long-term noncurrent liabilities (note 31), was calculated using a market interest rate for an equivalent non-convertible bond. The residual amount, representing the value of the equity conversion component, is included in shareholders’ equity in convertible bonds reserve (note 38).

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

During the year, the subsidiary:

(i) repurchased part of the Convertible Bonds with face value of US$2,800,000 at an aggregate consideration of approximately HK$22,000,000.
(ii) redeemed part of the Convertible Bonds with face value of US$117,420,000 at the request of certain bondholders at a total consideration of approximately HK$937,002,000.

The movement of the liability component of the Convertible Bonds for the year is set out below:

Face value of Convertible Bonds upon initial recognition, net of arrangement fees Equity component_(note 38) Liability component upon initial recognition Accumulated interest expense Accumulated coupon interest paid Buy-back of convertible bonds Early redemption of convertible bonds Carrying amount at 31 December(note 31)_	2006 HK$’000 1,142,801 (179,036) 963,765 158,900 (17,370) (47,872) (866,400) 191,023	2005 HK$’000 1,142,801 (179,036) 963,765 108,602 (12,132) (27,432) – 1,032,803

Interest expense is calculated using the effective interest method by applying the effective interest rate of 5.24% to the liability component. The carrying value of the liability component approximates its fair value.

34 Pension Assets and Obligations

The Group operates certain defined benefit pension plans in Hong Kong, Taiwan and India. These pension plans are either final salary defined benefit plans or with minimum guaranteed return rate on plan assets. The assets of the funded plans are generally held independently of the Group’s assets in separate trustee administered funds. The Group’s major plans are valued by qualified actuaries annually using the projected unit credit method. Defined benefit plans in Hong Kong, Taiwan and India are valued by Watson Wyatt, KPMG Advisory Services Company Limited and Thanawala Consultancy Services, Actuaries and Consultants, respectively.

(a) The pension assets/obligations recognised in the consolidated balance sheet are determined as follows:

Present value of funded obligations_(note c) Fair value of plan assets(note d) Unrecognised prior service cost Recognised in the consolidated balance sheet Represented by: Pension assets(note 24) Pension obligations(note 31)_	Group 2006 2005 HK$’000 HK$’000 55,021 43,843 (27,230) (24,730) 433 565 28,224 19,678 (603) (33) 28,827 19,711 28,224 19,678

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

(b) The amounts recognised in the consolidated profit and loss account are as follows:

Current service cost Interest cost Expected return on plan assets Others Total, included in staff costs (note 14)	Group 2006 2005 HK$’000 HK$’000 4,301 6,337 1,658 1,434 (1,557) (1,172) (144) (10) 4,258 6,589	Group 2006 2005 HK$’000 HK$’000 4,301 6,337 1,658 1,434 (1,557) (1,172) (144) (10) 4,258 6,589
		6,589

The actual return on plan assets was HK$2,138,000 (2005: HK$1,200,000).

At 1 January Exchange adjustment Service cost Interest cost Actuarial loss/(gain) Others At 31 December_(note a)_	Group 2006 2005 HK$’000 HK$’000 43,843 45,130 729 (1,103) 4,301 6,337 1,658 1,434 7,381 (6,510) (2,891) (1,445) 55,021 43,843	Group 2006 2005 HK$’000 HK$’000 43,843 45,130 729 (1,103) 4,301 6,337 1,658 1,434 7,381 (6,510) (2,891) (1,445) 55,021 43,843
		43,843

(d) Movements in fair value of plan assets in current year are as follows:

At 1 January Exchange adjustment Expected return on plan assets Actuarial gain Contribution by employer Others At 31 December_(note a)_	Group 2006 2005 HK$’000 HK$’000 24,730 19,720 293 (308) 1,557 1,172 581 28 2,780 5,066 (2,711) (948) 27,230 24,730	Group 2006 2005 HK$’000 HK$’000 24,730 19,720 293 (308) 1,557 1,172 581 28 2,780 5,066 (2,711) (948) 27,230 24,730
		24,730

The estimated contribution by the Group for the year 2007 will be amounted to HK$2,300,000.

(e) The major categories of plan assets as a percentage of total plan assets are as follows:


	2006	2005
Cash/Treasury	64%	62%
Equities	29%	32%
Bonds	7%	6%

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

The principal actuarial assumptions used are as follows:

		Group
	2006	2005
Discount rate	2.5% – 3.75%	3.5% – 4.5%
Expected rate of return on plan assets	2.5% – 8.0%	3.5% – 8.0%
Expected rate of future salary increases	2.5% – 4.0%	2.5% – 3.5%

The expected return on plan assets is based on market expectations for returns and long-term benchmark allocation of equities and bonds in each plan and allowing for administration fees and other expenses charged to the plans.

(f) Summary of defined benefit plans and respective experience adjustments are shown as follows:

Defined benefit obligation Plan assets Deficit Experience adjustments on plan liabilities Experience adjustments on plan assets	2006 HK$’000 (55,021) 27,230 (27,791) (6,423) 581	2005 HK$’000 (43,843) 24,730 (19,113) 5,394 28	2004 HK$’000 (45,130) 19,720
			(25,410)

			1,848

			(527)

35 Deferred Taxation

(a) Deferred tax assets

At 1 January Exchange adjustment Acquisition of a subsidiary_(note 42(b)) Credited to consolidated profit and loss account(note c)_ At 31 December Amount to be recovered after more than one year	Group 2006 2005 HK$’000 HK$’000 38,086 16,783 539 (1,045) – 17 4,271 22,331 42,896 38,086 5,220 4,443	Group 2006 2005 HK$’000 HK$’000 38,086 16,783 539 (1,045) – 17 4,271 22,331 42,896 38,086 5,220 4,443
		38,086

		4,443

(b) Deferred tax liabilities

At 1 January Exchange adjustment Charged/(credited) to consolidated profit and loss account_(note c)_ At 31 December Amount to be payable after more than one year	Group 2006 2005 HK$’000 HK$’000 9,720 13,318 207 1,234 1,690 (4,832) 11,617 9,720 11,617 9,720	Group 2006 2005 HK$’000 HK$’000 9,720 13,318 207 1,234 1,690 (4,832) 11,617 9,720 11,617 9,720
		9,720

		9,720

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

(c) Deferred taxation credited/(charged) to consolidated profit and loss account

Deferred tax assets_(note a) Deferred tax liabilities(note b) Deferred taxation credited to consolidated profit and loss account(note 10)_	Group 2006 2005 HK$’000 HK$’000 4,271 22,331 (1,690) 4,832 2,581 27,163	Group 2006 2005 HK$’000 HK$’000 4,271 22,331 (1,690) 4,832 2,581 27,163
		27,163

(d) Movements in deferred tax assets and liabilities (prior to offsetting of balances within the same jurisdiction) during the year

Deferred tax assets

Deferred tax assets
At 1 January Exchange adjustment Acquisition of a subsidiary (Charged)/credited to consolidated profit and loss account At 31 December			Group
	Tax 2006 HK$’000 91 – – – 91	losses 2005 HK$’000 474 (15) – (368) 91	Others 2006 2005 HK$’000 HK$’000 38,197 17,708 539 (1,031) – 17 4,271 21,503 43,007 38,197	Total 2006 2005 HK$’000 HK$’000 38,288 18,182 539 (1,046) – 17 4,271 21,135 43,098 38,288
					38,288

Deferred income tax assets are recognised for tax losses carried forward to the extent that realisation of the related tax benefit through the future taxable profits is probable. The Group has unrecognised tax losses as at 31 December 2006 of HK$3,004,431,000 (2005: HK$2,920,032,000) to carry forward against future taxable income. Certain of the tax losses will expire in accordance with the prevailing tax laws and regulations in the countries in which the Group operates.

Deferred tax liabilities

At 1 January Exchange adjustment (Credited)/charged to consolidated profit and loss account At 31 December		Group
	Accelerated tax depreciation 2006 2005 HK$’000 HK$’000 41 41 – – (41) – – 41	Others 2006 2005 HK$’000 HK$’000 9,881 14,676 207 1,233 1,731 (6,028) 11,819 9,881	Total 2006 2005 HK$’000 HK$’000 9,922 14,717 207 1,233 1,690 (6,028) 11,819 9,922
				9,922

Deferred income tax liabilities as at 31 December 2006 of HK$206,814,000 (2005: HK$172,946,000) have not been established for the withholding and other taxation that would be payable on the undistributed earnings of certain subsidiaries since the Group has determined that the earnings of the subsidiaries will not be distributed in the foreseeable future. Such undistributed earnings as at 31 December 2006 totalled HK$1,034,068,000 (2005: HK$864,731,000).

(e) Deferred income tax assets and liabilities are offset when there is a legally enforcement right to set off current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The following amounts, determined after appropriate offsetting, are shown in the consolidated balance sheet:

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

Deferred tax assets Deferred tax liabilities 36 Share Capital Company – Authorised At 31 December 2006 and 2005 Company – Issued and fully paid At 1 January 2005 Issuance of shares At 31 December 2005 At 1 January 2006 and 31 December 2006	2006 2005 HK$’000 HK$’000 42,896 38,086 (11,617) (9,720) 31,279 28,366 Ordinary shares of HK$0.1 each No. of shares HK$’000 5,000,000,000 500,000 Ordinary shares of HK$0.1 each No. of shares HK$’000 3,889,997,150 389,001 3,273,408 327 3,893,270,558 389,328 3,893,270,558 389,328

37 Share Option Schemes

(a) Details of share options granted by the Company

Pursuant to the written resolutions of the shareholders of the Company dated 11 February 2000, two share option schemes namely, the Pre-IPO Share Option Plan and the Old Option Scheme were adopted by the Company.

Pursuant to an ordinary resolution passed at the extraordinary general meeting of the Company held on 23 July 2004, the Company adopted a New Option Scheme and terminated the Old Option Scheme due to the withdrawal of the listing of the shares of the Company on GEM and commencement of dealings of the shares of the Company on the Main Board. The adoption of the New Option Scheme and the termination of the Old Option Scheme took effect from 4 August 2004 (listing date of the shares of the Company on the Main Board).

Pursuant to the Pre-IPO Share Option Plan, the Company may grant options to any full-time employees of the Company or of its subsidiaries or of HWL or any subsidiary of HWL to subscribe for shares of the Company. However, save for the options which have been granted on 11 February 2000, no further options may be granted upon the listing of the shares of the Company on the GEM of the Stock Exchange on 1 March 2000. The exercise price per share under the Pre-IPO Share Option Plan is HK$1.78 and the options vested in three tranches in the proportion of 20%:30%:50% on 11 February 2001, 2002 and 2003, respectively.

Pursuant to the Old Option Scheme and the New Option Scheme, the Board may, at its discretion, invite any participant (including any employee and director of the Group and of any company in which the Group owns or controls 20% or more of its voting rights and/or issued share capital, business associate and trustee) to take up options to subscribe for shares in the Company. The options granted under the Old Option Scheme can be exercised at prices ranging from HK$2.505 to HK$11.3 per share at any time within the option period of ten years from the respective dates of grant, provided that the options have been vested. Generally, the options are vested in different tranches and may be exercised within the option period unless they are cancelled. No option has been granted pursuant to the New Option Scheme since its adoption.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

The total number of shares which may be issued upon exercise of all options to be granted under the New Option Scheme and any other share option schemes of the Company shall not exceed 388,941,336 shares, being 10% of the issued share capital of the Company at the date of approval of the New Option Scheme.

Movements in share options are as follows:

2006
Weighted
Weighted
average
Number of
average
Pre-IPO Share Option Plan
exercise price
share options
exercise price
HK$
HK$
Outstanding at 1 January and
31 December
1.78
16,196,000
1.78
Exercisable at 31 December
1.78
16,196,000
1.78
2006
Weighted
Weighted
average
Number of
average
Old Option Scheme
exercise price
share options
exercise price
HK$
HK$
Outstanding at 1 January
3.30
164,682,000
3.37
Lapsed
2.54
(10,118,000)
6.65
Cancelled
4.42
(3,916,000)
4.00
Outstanding at 31 December
3.32
150,648,000
3.30
Exercisable at 31 December
3.34
145,648,000
3.39
Terms of the share options outstanding at 31 December 2006 are:
Exercise price
Number of
Expiry date
per share
2006
10 February – 14 November 2010
HK$1.78 – HK$11.30
46,880,000
6 February 2012
HK$3.76
20,000,000
8 October 2013
HK$2.505
89,964,000
15 February 2014
HK$2.55
10,000,000
166,844,000
Weighted average remaining
contractual life (year)
5.68

2005
Number of
share options
16,196,000
16,196,000
2005
Number of
share options
182,757,000
(438,000)
(17,637,000)
164,682,000
135,456,000
share options
2005
49,378,000
20,000,000
101,500,000
10,000,000
180,878,000
6.72

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

(b) Details of TOMO’s Pre-IPO Share Option Plan and Share Option Scheme

Pursuant to a written resolution of the then sole shareholder of TOMO passed on 12 February 2004, a Pre-IPO Share Option Plan and Share Option Scheme were adopted by TOMO.

Pursuant to the Pre-IPO Share Option Plan and the Share Option Scheme, the Board of TOMO may grant share options to any part-time or full-time employees or directors (including any executive director and independent non-executive director) of TOM Group Limited and/or any company in TOMO Group, and any advisor or consultant to TOMO Group. However, save for the options which have been granted on 16 February 2004, no further options may be granted upon the listing of the shares of TOMO on the GEM on 11 March 2004. The exercise price per share under the Pre-IPO Share Option Plan is HK$1.50. The options granted to a grantee will vest in 5 tranches in the proportion of 10%: 15%: 20%: 25%: 30%. The first, second, third and fourth tranches of the options vested on 12 April 2004, 16 February 2005, 16 February 2006 and 16 February 2007 respectively. The fifth tranch of the options will vest on 16 February 2008. The options granted to a grantee will vest in 4 tranches in the proportion of 15%: 25%: 30%: 30%. The first, second and third tranches of the options have vested on 16 February 2005, 16 February 2006 and 16 February 2007 respectively. The fourth tranches of the options will vest on 16 February 2008. For certain grantees, the options vested in 4 tranches in the proportion of 10%: 30%: 30%: 30% on 12 April 2004, 16 February 2005, 16 February 2006 and 16 February 2007 respectively. For certain grantees, the options vested on (i) 12 April 2004 or (ii) 12 April 2004 and 16 February 2005.

Options to subscribe for 18,000,000 shares of TOMO were granted to a grantee under the Share Option Scheme in 2005. The options vested/will vest in 4 tranches in the proportion of 15%:25%:30%:30% on 11 May 2006, 1 May 2007, 11 May 2008 and 11 May 2009 respectively and the exercise price per share is HK$1.204.

Movements in share options are as follows:

		2006		2005
	Weighted		Weighted
	average	Number of	average	Number of
Pre-IPO Share Option Plan	exercise price	share options	exercise price	share options
	HK$		HK$
Outstanding at 1 January	1.50	220,457,181	1.50	262,425,040
Exercised	1.50	(35,122,423)	1.50	(24,176,602)
Lapsed	1.50	(4,087,527)	1.50	(17,791,257)
Outstanding at 31 December	1.50	181,247,231	1.50	220,457,181
Exercisable at 31 December	1.50	69,555,689	1.50	51,502,969

		2006		2005
	Weighted		Weighted
	average	Number of	average	Number of
Share Option Scheme	exercise price	share options	exercise price	share options
	HK$		HK$
Outstanding at 1 January	1.204	18,000,000	–	–
Granted	–	–	1.204	18,000,000
Exercised	–	–	–	–
Outstanding at 31 December	1.204	18,000,000	1.204	18,000,000
Exercisable at 31 December	1.204	2,700,000	–	–

Certain share options under TOMO’s Pre-IPO Share Option Plan were exercised during 2006. The weighted average closing market price of TOMO’s shares immediately preceding the exercise of the options during this period was HK$2.26 per share.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

Terms of the share options outstanding at 31 December 2006 are:

Exercise price Expiry date per share 15 February 2014 HK$1.50 10 May 2015 HK$1.204 Weighted average remaining contractual life (year)	Number of 2006 181,247,231 18,000,000 199,247,231 7.24	share options 2005 220,457,181 18,000,000
		238,457,181

		8.22

(c) Valuation of share options

Pursuant to the transitional provision of HKFRS 2, the fair value of services received from employees in return for share options granted after 7 November 2002 and not yet vested on 1 January 2005 are measured by reference to the fair value of share options granted. The amount is to be expensed in the consolidated profit and loss account over the vesting period of the share options granted. The estimate of the fair value of the services received is measured based on the Black-Scholes model. Key assumptions at the dates of grant are as follow:

Risk-free interest rate (%)	:	2.07 to 4.22
Expected option life (years)	:	1 to 7.01
Expected dividend rate (%)	:	0
Expected volatility (%)	:	46 to 64
Weighted average fair value at grant date (HK$) :		0.55 to 1.16

The expected volatility is based on the historical volatility. The expected option life used has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.

The total share-based compensation costs recognised during the year amounted to HK$25,474,000 (2005: HK$49,371,000).

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

38 Reserves

Reserves
At 1 January 2005, as previously reported Effects of adoption of HKFRS 2 Effect of adoption of HKAS 32 and 39 At 1 January 2005, as restated Issuance of shares for acquisition of subsidiaries, net of issuing expenses Investment revaluation deficit Employee share option schemes – value of employee services Profit for the year Net actuarial gain on defined benefit plan Partial redemption of Convertible Bonds Transfer to general reserve Exchange difference At 31 December 2005 At 1 January 2006 Investment revaluation surplus Employee share option schemes – value of employee services Profit for the year Net actuarial gain on defined benefit plan Partial buy-back and redemption of Convertible Bonds Transfer to general reserve Exchange difference Reserve realised upon disposal Contribution from a minority shareholder At 31 December 2006					Group
	Share premium account HK$’000 3,621,591 – –	Capital reserve HK$’000 (377) 59,680 –	Capital redemption reserve HK$’000 776 – –	General reserve HK$’000 80,067 – –	Available-for- sale financial assets reserve HK$’000 (5,184) – (254)	Exchange difference HK$’000 (2,594) – –	Convertible bonds reserve HK$’000 – – 179,036	Accumulated losses HK$’000 (1,595,509) (59,680) (33,536)	Total HK$’000 2,098,770 – 145,246
	3,621,591 4,390 – – – – – – –	59,303 – – 37,264 – – – – –	776 – – – – – – – –	80,067 – – – – – – 20,028 (256)	(5,438) – (44,788) – – – – – 31	(2,594) – – – – – – – 7,056	179,036 – – – – – (4,709) – –	(1,688,725) – – – 259,526 4,172 – (20,028) –	2,244,016 4,390 (44,788) 37,264 259,526 4,172 (4,709) – 6,831
	3,625,981	96,567	776	99,839	(50,195)	4,462	174,327	(1,445,055)	2,506,702

	3,625,981 – – – – – – – – –	96,567 – 17,757 – – – – – – 184	776 – – – – – – – – –	99,839 – – – – – 11,167 279 – –	(50,195) 6,029 – – – – – 176 167 –	4,462 – – – – – – 79,615 – –	174,327 – – – – (143,448) – – – –	(1,445,055) – – 31,961 (5,366) 50,617 (11,167) – – –	2,506,702 6,029 17,757 31,961 (5,366) (92,831) – 80,070 167 184
	3,625,981	114,508	776	111,285	(43,823)	84,077	30,879	(1,379,010)	2,544,673

APPENDIX II

FINANCIAL INFORMATION ON THE TOM GROUP

	Company
Share premium account HK$’000 4,096,085 – 4,096,085 4,390 – – 4,100,475 4,100,475 – – 4,100,475	Capital Capital Contribution redemption Accumulated reserve surplus reserve losses HK$’000 HK$’000 HK$’000 HK$’000 – 23,565 776 (2,246,876) 23,944 – – – 23,944 23,565 776 (2,246,876) – – – – 11,000 – – – – – – (5,787) 34,944 23,565 776 (2,252,663) 34,944 23,565 776 (2,252,663) 2,916 – – – – – – (285,992) 37,860 23,565 776 (2,538,655)	Total HK$’000 1,873,550 23,944
		1,897,494 4,390 11,000 (5,787
		1,907,097

		1,907,097 2,916 (285,992
		1,624,021

Note: The Company’s reserves available for distribution calculated under Companies Law of the Cayman Islands comprise the share premium account and contributed surplus, less accumulated losses totalling HK$1,585,385,000 (2005: HK$1,871,377,000).

39 Own Shares Held

At 1 January 2005 Buy back of shares At 31 December 2005 At 1 January 2006 and 31 December 2006	No. of shares 2,928,564 115,207 3,043,771 3,043,771	HK$’000 6,085 159
		6,244

		6,244

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

40 Minority Interests

At 1 January Profit for the year attributable to minority interests Exchange difference Revaluation surplus/(deficit) on available-for-sale financial assets Actuarial (loss)/gain on defined benefit plan Recognised income and expense attributable to minority interests Acquisition of interests in subsidiaries_(note 42(b)) Dividends paid by subsidiaries to minority interests Exercise of share option of a subsidiary granted to employees Reclassified from loans from a minority shareholder(note42(e)) Deemed disposal of interests in subsidiaries(note 42(c)) Disposal of a subsidiary/interests in subsidiaries(note 42(d))_ Employee share option scheme-value of employee services attributable to minority interests Other reserves shared by minority interests At 31 December	2006 HK$’000 1,017,497 87,654 45,082 1,264 (1,125) 132,875 10,560 (31,425) 32,990 15,967 177,198 31,188 7,717 (546) 243,649 1,394,021	2005 HK$’000 709,655 91,772 1,611 (6,625) 1,032 87,790 (15,894) (25,433) 23,768 – 224,159 1,345 12,107 – 220,052 1,017,497

41 Business Combinations

Summaries of major business combinations of the Group during the year are as follows:

(a) Acquisition of Beijing Huanjian Shu Meng Network Technology Limited (“Huanjian”)

On 4 January 2006, the Group, through a non wholly-owned subsidiary, entered into a sale and purchase agreement with the shareholders of Huanjian to acquire 75% equity interest in Huanjian for an aggregate amount of RMB22,000,000 (approximately HK$21,274,000), of which RMB10,000,000 (approximately HK$9,600,000) was injected as additional paid-in capital. Huanjian operates a Chinese Internet website, www.hjsm.net, which provides original Chinese novels. In addition, the Group has the option to acquire the remaining 25% shareholding at US$2,400,000 (equivalent to HK$18,700,000) within 2 years from the execution date of the sale and purchase agreement.

The allocation of the costs of acquisition is as follows:

Cash and bank balances Other current assets Fixed assets, net Other intangible assets Current liabilities Minority interests Costs of acquisition Purchase consideration Other directly attributable costs Goodwill	HK$’000 9,881 107 50 4,272 (303) (3,502) 10,505 21,274 127 21,401 10,896

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

Other than the other intangible assets recognised upon acquisition, the acquiree’s book values of net assets acquired at the date of acquisition approximate their fair values as disclosed above.

The goodwill is attributable to the future profitability of Huanjian and the significant synergies expected to arise after the Group’s acquisition.

The Group’s share of net assets as at 31 December 2006 and the share of the post acquisition loss for the year then ended arising from this acquisition amounted to HK$6,414,000 and HK$566,000 respectively. The contribution of turnover and net profit to the Group by Huanjian for the period from 1 January 2006 to 3 January 2006, assuming it was acquired by the Group on 1 January 2006, is not material to the Group.

(b) Acquisition of Gainfirst Asia Group

On 1 June 2006, the Group completed the acquisition of the 100% beneficial interest in Beijing Bo Xun Rong Tong Information Technology Company Limited (“Beijing Infomax”) through the acquisition of the entire share capital of Gainfirst Asia Limited (“Gainfirst Asia” or collectively referred to as the “Gainfirst Asia Group”). Beijing Infomax is primarily engaged in the provision of wireless internet services in Mainland China. The acquisition helps the Group to grow its wireless internet services business in Mainland China. The initial consideration was RMB150,000,000 (equivalent to approximately HK$146,250,000) and the total purchase consideration was and will be contingent on the 2006 and 2007 audited consolidated net profit of Gainfirst Asia Group and subject to the maximum consideration of RMB600,000,000 (approximately HK$600,000,000). As at 31 December 2006, the earn-out consideration in relation to the 2006 audited consolidated net profit was estimated with reliability at the amount of RMB94,000,000 (approximately HK$93,549,000). The contingent consideration in relation to the 2007 audited consolidated net profit is disclosed as a capital commitment in note 45(c).

The allocation of costs of acquisition is as follows:

Net assets acquired at fair value Fixed assets Other intangible assets Trade and other receivables Bank balances and cash Trade and other payables Taxation payables Cost of acquisition Initial consideration Earn-out consideration Other directly attributable costs Goodwill	HK$’000 1,033 16,739 13,664 18,019 (20,927) (186) 28,342 146,250 93,549 874 240,673 212,331

Other than the other intangible assets recognised upon acquisition, the acquiree’s book values of net assets acquired at the date of acquisition approximate their fair values as disclosed above.

The goodwill is attributable to the future profitability of Gainfirst Asia Group and significant synergies expected to arise after the Group’s acquisition.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

The Group’s share of net assets as at 31 December 2006 and the share of the post acquisition profit for the year then ended arising from this acquisition amounted to HK$61,964,000 and HK$42,023,000 respectively. The unaudited pro forma consolidated turnover and profit after taxation assuming the acquisition of Gainfirst Asia Group occurred on 1 January 2006 for the year ended 31 December 2006 were HK$2,934,540,000 and HK$133,720,000 respectively. These pro forma results have been prepared for information purposes only and do not purport to be indicative of the operating results that would have been had the acquisitions actually took place on 1 January 2006 and may not be indicative of future operating results.

(c) Acquisition of Shenzhen TOM Ray Advertising Company Limited (“SZ Ray”) and Shanghai TOM Haosheng Advertising Company Limited (“SHHS”)

On 1 October 2006 and 1 November 2006, the Group, through a non wholly-owned subsidiary, TOM International Outdoor Advertising Company Limited, acquired equity interest of 51% in both SZ Ray and SHHS. Both SZ Ray and SHHS are engaged in the outdoor media advertising business.

The Group believes that the acquisitions will help the Group expand its advertising market in prime locations in Mainland China.

The allocation of the costs of acquisitions is as follows:

Net assets acquired at fair value Fixed assets Other intangible assets Bank balances and cash Trade and other payables Minority interests Cost of acquisitions Purchase consideration Consideration payables Goodwill	HK$’000 4,452 5,941 8,690 (13,440) (2,911) 2,732 12,395 4,305 16,700 13,968

Other than the other intangible assets recognised upon acquisition, the acquirees’ book values of net assets acquired at the date of acquisition approximate their fair values as disclosed above.

The goodwill is attributable to the future profitability of SZ Ray and SHHS and the significant synergies expected to arise after the Group’s acquisition.

As both SZ Ray and SHHS are newly formed companies and therefore no pro forma financial contribution to the Group by these companies assuming the acquisition took place on 1 January 2006 is presented.

The Group’s share of net assets as at 31 December 2006 and the share of the post acquisition profit for the year then ended arising from these acquisitions amounted to HK$2,818,000 and HK$827,000 respectively.

(d) Acquisition of Chi Chi Dei Entertainment Limited (“CCD”)

On 18 December 2006, the Group acquired 60% equity interest in CCD through a wholly-owned subsidiary at a total cash consideration of approximately US$1,286,000 (equivalent to HK$10,028,000). CCD is a newly formed cutting edge production studio aims at the growing Asian market.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

The Group believes that CCD will contribute its creativity and production capability to other corporate marketing projects of the Group.

The allocation of the costs of acquisition is as follows:

Net assets acquired at fair value Bank balances and cash Minority interests Cost of acquisition Purchase consideration Other directly attributable costs Goodwill	HK$’000 11,666 (4,667) 6,999 10,028 358 10,386 3,387

The acquiree’s book values of net assets acquired at the date of acquisition approximate their fair values as disclosed above.

The goodwill is attributable to the expertise contributed by the management of CCD in relation to program production and distribution, future profitability of CCD and the significant synergies expected to arise after the Group’s acquisition.

As CCD is a newly formed company and therefore no pro forma financial contribution to the Group by this company assuming the acquisition took place on 1 January 2006 is presented.

The Group’s share of net assets as at 31 December 2006 and the share of the post acquisition loss for the year then ended arising from this acquisition amounted to HK$6,830,000 and HK$281,000 respectively.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

42 Notes to the Consolidated Cash Flow Statement

(a) Reconciliation of operating profit to net cash inflow from operations

Operating profit Net gain on deemed disposals of interests in subsidiaries Gain on partial disposal of an associated company Provision for receivables, net Amortisation and depreciation Share of losses of jointly controlled entities Share of profits less losses of associated companies Provision for impairment of assets held for sale Provision for impairment of goodwill Loss on disposal of fixed assets Loss on disposal of non-current assets Gain on early redemption and buy-back of convertible bonds Share-based compensation Gain on exercise of share options of TOMO Gain on disposal of a subsidiary/interest in subsidiaries (note 42(d)) Gain on disposal of available-for-sale financial assets Interest income Adjusted operating profit before working capital changes Decrease in long-term other receivables Increase in pension assets (Increase)/decrease in inventories Decrease/(increase) in trade and other receivables Increase in trade and other payables Decrease in long-term payables Increase in pension obligations Exchange adjustments Net cash inflow from operations	2006 HK$’000 297,690 (24,601) – – 168,484 758 (8,977) 36,044 11,000 5,407 – (20,669) 25,474 (19,694) (14,698) (90) (109,405) 346,723 39,756 (570) (13,130) 161,085 28,534 – 2,625 57,696 622,719	2005 HK$’000 495,449 (160,335) (12,336) 7,271 155,561 138 (21,229) – – 7,185 1,793 (2,852) 49,371 (14,177) (6,180) (6,233) (88,088) 405,338 31,752 (33) 5,481 (295,495) 160,597 (46,800) 843 (10,251) 251,432

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

(b) Acquisition of interests in subsidiaries

Net assets acquired: Fixed assets_(note 16) Other intangible assets(note 18) Deferred tax asset(note 35(a)) Trade and other receivables Bank balances and cash Trade and other payables Taxation payables Consideration payable Minority interests (note 40) Own share held Goodwill (note 17) Satisfied by: Cash Consideration of disposal of subsidiaries(note 42(d))_ Consideration payables Other receivables Direct costs incurred Analysis of the net cash outflow in respect of the acquisition of subsidiaries: Cash consideration Bank balances and cash acquired Net cash outflow in respect of acquisition of interests in subsidiaries	2006 HK$’000 5,534 26,952 – 13,781 48,256 (34,675) (186) – (10,560) – 49,102 242,963 292,065 191,881 – 97,854 1,515 815 292,065 (191,881) 48,256 (143,625)	2005 HK$’000 703 6,021 17 21,047 2,442 (6,934) (2,122) 7,800 15,894 159 45,027 126,732 171,759 167,108 1,651 – – 3,000 171,759 (167,108) 2,442 (164,666)

The subsidiaries acquired during the year contributed HK$44,501,000 (2005: HK$6,410,000) to the Group’s net operating cash flows.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

(c) Deemed disposal of interests in subsidiaries

2006
HK$’000
Decrease in goodwill_(note 17)
–
Decrease in other intangible assets(note 18)
–
Increase in bank balances and cash
202,800
Increase in trade and other payables
(1,001)
Decrease in consideration payables
–
Increase in minority interests(note 40)
(177,198)
Gain on deemed disposal of subsidiaries
24,601
(d)
Disposal of a subsidiary/interests in subsidiaries
2006
_HK$’000
Net assets disposed of:
Fixed assets_(note 16)
–
Goodwill(note 17)
27,493
Inventories
142
Trade and other receivables
12,925
Bank balances and cash
8,344
Trade and other payables
(78,506)
Consideration payables
–
Taxation payable
–
Minority interests(note 40)
31,188
1,586
Gain on disposal of a subsidiary/interests
in subsidiaries (note 42(a))
14,698
16,284
Satisfied by:
Available-for-sale financial assets
16,284
As partial consideration of acquisition of interests
in subsidiaries(note 42(b))_
–
Cash
–
16,284
Analysis of the net cash outflow in respect of the disposal of
subsidiaries:
Cash consideration
–
Bank balances and cash disposed of
(8,344)
Net cash outflow in respect of disposal of a subsidiary/interests
in subsidiaries
(8,344)

2005
HK$’000
(16,585)
(860)
31,072
–
370,867
(224,159)
160,335
2005
HK$’000
605
5,143
556
26,112
2,706
(18,844)
(13,536)
(8,383)
1,345
(4,296)
6,180
1,884
–
1,651
233
1,884
233
(2,706)
(2,473)

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

(e) Analysis of changes in financing during the year

Share capital
including
Loans from
premium and
Convertible
a minority
capital reserve
Bank loans
bonds shareholder
HK$’000
HK$’000
HK$’000
HK$’000
At 1 January 2005,
as previously reported
4,004,130
1,192,553
1,179,785
–
Effect of adoption of HKFRS 2
59,680
–
–
–
Effect of adoption of HKAS 32
–
–
(166,513)
–
At 1 January 2005, as restated
4,063,810
1,192,553
1,013,272
–
New bank and other loans
–
512,123
–
9,946
Loan repayments
–
(41,469)
–
–
Net cash from financing activities
–
470,654
–
9,946
Shares issued for acquisition of
interests in subsidiaries
4,717
–
–
–
Buy-back of convertible bonds
–
–
(27,432)
–
Employees share option schemes –
value of employee services
37,264
–
–
–
Interest expenses for the year,
net of interest payment
–
–
46,963
–
Increase of own shares held
(159)
–
–
–
Exchange adjustment
–
(10,579)
–
–
41,822
(10,579)
19,531
–
At 31 December 2005
4,105,632
1,652,628
1,032,803
9,946
At 1 January 2006
4,105,632
1,652,628
1,032,803
9,946
New bank and other loans
–
1,431,211
–
–
New contribution
–
–
–
6,021
Loan repayments
–
(379,022)
–
–
Net cash from financing activities
–
1,052,189
–
6,021
Buy-back and early redemption of
convertible bonds
–
–
(886,840)
–
Employees share option schemes –
value of employee services
17,757
–
–
–
Interest expenses for the year,
net of interest payment
–
–
45,060
–
Minority interests in other reserves
184
–
–
–
Reclassification to minority interests
(note 40)
–
–
–
(15,967)
Exchange adjustment
–
21,974
–
–
17,941
21,974
(841,780)
(15,967)
At 31 December 2006
4,123,573
2,726,791
191,023
–

Total
HK$’000
6,376,468
59,680
(166,513)
6,269,635
522,069
(41,469)
480,600
4,717
(27,432)
37,264
46,963
(159)
(10,579)
50,774
6,801,009
6,801,009
1,431,211
6,021
(379,022)
1,058,210
(886,840)
17,757
45,060
184
(15,967)
21,974
(817,832)
7,041,387

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

43 Pledge of Assets

Save as disclosed in note 27, the Group has the following pledge of assets:

(a) At 31 December 2006, available-for-sale financial assets with a total market value of approximately HK$1,758,646,000 (2005: HK$1,378,943,000) were pledged to banks for securing bank loans totalling HK$1,628,071,000 (2005: HK$1,287,576,000).
(b) At 31 December 2006, concession rights and properties with a total net book value of HK$7,588,000 (2005: HK$4,916,000) and HK$11,003,000 (2005: HK$11,174,000), respectively were pledged to banks for securing banking facilities granted to certain subsidiaries of the Company.

44 Contingent Liabilities

(a) As at 31 December 2006, the Group has contingent liabilities amounting to approximately HK$14,043,000 in respect of the provision of fixed deposits as securities for bank loans granted to an associated company. As at 31 December 2005, the Group had no such contingent liabilities.
(b) Save as disclosed in note 33, the Company did not have any contingent liability at 31 December 2006 and 2005.

45 Commitments

(a) Capital commitments

Save as disclosed in note (b) and (c) below, the Group has the following capital commitments as at 31 December 2006:

Acquisition of/loans to new investments – Contracted but not provided for Acquisition of fixed assets and other intangible assets – Contracted but not provided for – Authorised but not contracted for	Group 2006 2005 HK$’000 HK$’000 20,814 22,266 1,196 21,941 295,892 319,178 317,902 363,385	Group 2006 2005 HK$’000 HK$’000 20,814 22,266 1,196 21,941 295,892 319,178 317,902 363,385
		363,385

(b) Joint venture (“Joint Venture”) with Ebay International AG (“eBay”)

On 20 December 2006, TOMO entered into a deed with an independent third party, eBay, to form the Joint Venture which will carry on the business of owning and operating a mobile and Internetbased marketplace in Mainland China. The Joint Venture will be jointly controlled and 51% owned by TOMO while the remaining 49% interest will be owned by eBay, and is to be jointly controlled by both parties.

The Group believes that the Joint Venture will enable the Group to enlarge its wireless market share and increase its revenues from wireless Internet service.

Following the formation of the Joint Venture, eBay will provide an initial funding of US$40,000,000 (equivalent to HK$312,000,000) in cash to the Joint Venture while TOMO will provide an initial shareholder’s loan of US$20,000,000 (equivalent to HK$156,000,000) to the Joint Venture. TOMO and eBay will contribute an additional shareholder’s loan not exceeding US$10,000,000 to the Joint Venture in total in equal proportion, subject to a mutual agreement between both parties once the Joint Venture uses up its initial funding from both parties.

In addition, eBay will inject its subsidiary engaging in the business of operating an online auction and marketplace site in Mainland China to the Joint Venture while the Group will contribute its expertise in the Internet and mobile industries in Mainland China and its leadership and management services to the Joint Venture. The Group will account for this Joint Venture using the equity method.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

As at 31 December 2006, the commitment of the Group in respect of this joint venture included equity contribution of US$51,000 (equivalent to HK$398,000) and shareholder’s loan totalled US$20,000,000 (equivalent to HK$156,000,000).

(c) Commitment in respect of the acquisition of the Gainfirst Asia Group

As at 31 December 2006, the Group had outstanding capital commitment in respect of the acquisition of the 100% beneficial interest in Gainfirst Asia Group (note 41(b)). According to the sale and purchase agreement, the maximum consideration in respect of the acquisition amounted to RMB600,000,000 (equivalent to approximately HK$600,000,000) and the total consideration will be determined in the following manners and fully payable in cash:

(i) an initial consideration, amounting to RMB150,000,000 (equivalent to approximately HK$146,250,000);
(ii) second consideration, amounting to approximately RMB94,000,000 (equivalent to approximately HK$93,549,000), that is equal to 3.5 times of the 2006 adjusted audited combined after-tax profit (“2006 earn-out consideration”) minus the initial consideration; and
(iii) final consideration that is an amount equal to 3 times (if the 2007 adjusted audited combined after-tax profit is less than RMB65,000,000) or 4 times (if the 2007 adjusted audited combined after-tax profit is equal to or more than RMB65,000,000) of the 2007 adjusted audited combined after-tax profit plus adjusted 2006 earn-out consideration minus consideration previously paid.

The considerations mentioned in (i) and (ii) have been paid by the Group as at 31 December 2006. The Group’s total maximum outstanding commitment in relation to the acquisition amounted to approximately RMB356,000,000 (equivalent to approximately HK$354,336,000) as at 31 December 2006.

(d) Commitments under operating leases

At 31 December 2006, the Group had future aggregate minimum lease payments under noncancellable operating leases as follows:

Not later than one year Later than one year and not later than five years Later than five years	2006 Land and Other buildings assets HK$’000 HK$’000 29,911 93,345 25,136 154,416 – 11,928 55,047 259,689	2005 Land and Other buildings assets HK$’000 HK$’000 24,993 66,848 22,001 148,441 – 15,860 46,994 231,149	2005 Land and Other buildings assets HK$’000 HK$’000 24,993 66,848 22,001 148,441 – 15,860 46,994 231,149
			231,149

(e) The Company did not have any commitments at 31 December 2006 (2005: HK$Nil).

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

46 Related Party Transactions

A summary of other significant related party transactions, in addition to those disclosed in notes 26, 27 and 29 to the accounts, is set out below:

(a) Sales of goods and services and licence income


	2006	2005
	HK$’000	HK$’000
Sales to
– HWL and its subsidiaries	9,277	8,086
– CKH and its subsidiaries	212	663
– a jointly controlled entity	–	2,485
Licence fee income from
– an associated company	9,360	–

Year-end balances due from these related companies arising from sales of goods and services and licence income are shown in note 26(b) and 26(c).

(b) Purchase of goods and services


	2006	2005
	HK$’000	HK$’000
Cost of sales payable to
– minority shareholders of subsidiaries and their subsidiaries	526	33,530
– related companies of minority shareholders of subsidiaries	434	2,265
Office and warehouse rental payable to
– an associated company of CKH	11,011	9,996
– a subsidiary of CKH	4,140	4,140
– minority shareholders of subsidiaries and their subsidiaries	1,284	1,418
Service fees payable to
– HWL and its subsidiaries	10,868	11,295
– minority shareholders of subsidiaries and their subsidiaries	134	7,024
Interest expenses payable to minority shareholders of subsidiaries
and their subsidiaries	1,097	89

Year-end balances due to these related companies arising from purchase of goods and services are shown in notes 29(b) and 29(c).

(c) Key management compensation

Management considers remuneration to all key management of the Group has already been disclosed in note 15.

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

47 Principal Subsidiaries and Associated Companies

					Effective
		Place of incorporation	Principal activities and	Particular of issued/	interest
	Name	and kind of legal entity	place of operation	registered capital	held
	tom.com enterprises limited	British Virgin Islands (“BVI”),	Holding of the domain name	1 ordinary share of US$1	100%
		limited liability company	of www.tom.com
	TOM Group International Limited	Hong Kong,	Operation of tom.com portal	10 ordinary shares of	100%
		limited liability company	and management of	HK$1 each
			strategic investments of
			the Group in Greater China
	TOM Holdings Limited	Cayman Islands (“CI”),	Issuer of guaranteed	2 ordinary shares of	100%
		limited liability company	convertible bonds	US$1 each
	Internet Group
	Advanced Internet Services Limited	Hong Kong,	Investment holding in	10,000,000	65.73%
		limited liability company	Mainland China	ordinary shares of
				US$0.01 each
@	Beijing Bo Xun Rong Tong Information	Mainland China,	Provision of wireless internet	Registered capital	65.73%
	Technology Company Limited	limited liability company	services in Mainland China	RMB10,000,000
	Beijing GreaTom United Technology	Mainland China,	Development of operating	Registered capital	59.16%
	Company Limited	limited liability company	platform for broadband	RMB25,000,000
			Internet value–added
			services in Mainland China
@	Beijing Lei Ting Wan Jun Network	Mainland China,	Provision of Internet content	Registered capital	65.73%
	Technology Limited	limited liability company	services, online advertising	RMB100,000,000
			services and telecom
			value-added services in
			Mainland China
@	Beijing LingXun Interactive Science	Mainland China,	Provision of wireless internet	Registered capital	65.73%
	Technology and Development	limited liability company	services in Mainland China	RMB10,000,000
	Company Limited
@	Beijing Lei Ting Wu Ji Network	Mainland China,	Provision of wireless IVR	Registered capital	65.73%
	Technology Company Limited	limited liability company	services in Mainland China	RMB10,000,000
@	Beijing Redsail Netlegend Data Network	Mainland China,	Provision of interactive call	Registered capital	100%
	Technology Company Limited	limited liability company	center services in	RMB62,800,000
			Mainland China
	Beijing Super Channel Network Limited	Mainland China,	Development of software	Registered capital	65.73%
		limited liability company	information system,	US$13,000,000
			computer network and
			website products in
			Mainland China
	Cernet Information Technology Company	Mainland China,	Provision of system integration	Registered capital	51%
	Limited	limited liability company	and consultancy services	RMB60,000,000
			in Mainland China
	Eclink Electronic Network Systems	Mainland China,	Software, electronics and	Registered capital	100%
	(Shenzhen) Company Limited	limited liability company	computer network system	US$3,000,000
			development in
			Mainland China

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

					Effective
		Place of incorporation	Principal activities and	Particular of issued/	interest
	Name	and kind of legal entity	place of operation	registered capital	held
	Indiagames Limited	India, limited liability company	Development of mobile games	619,756	41.03%
			in India	ordinary shares of
				Rs.10 each
	TOM.COM (China) Investment Limited	Mainland China,	Investment holding in	Registered capital	65.73%
		limited liability company	Mainland China	US$30,000,000
	TOM Online Inc.	CI, limited liability company	Investment holding in	4,259,654,528	65.73%
			Mainland China	ordinary shares of
				HK$0.01 each
@	Shenzhen Freenet Information	Mainland China,	Operation of 163.net and	Registered capital	65.73%
	Technology Company Limited	limited liability company	e-mails service provider	RMB23,000,000
			in Mainland China
@	Startone (Beijing) Information Technology	Mainland China,	Provision of wireless internet	Registered capital	65.73%
	Company Limited	limited liability company	services in Mainland China	RMB10,000,000
	Outdoor Media Group
@	Beijing TOM International Advertising	Mainland China,	Advertising sales in	Registered capital	65%
	Limited	limited liability company	Mainland China	RMB1,000,000
@	Changchun TOM New Star Media	Mainland China,	Advertising sales in	Registered capital	39%
	Company Limited (formerly known as	limited liability company	Mainland China	RMB3,000,000
	Changchun TOM Media Company Limited)
@	Chongqing Jinzhao Advertising Company	Mainland China,	Advertising sales in	Registered capital	33.15%
	Limited	limited liability company	Mainland China	RMB6,000,000
@	Fujian TOM Seeout Media Company	Mainland China,	Advertising sales in	Registered capital	45.5%
	Limited	limited liability company	Mainland China	RMB5,000,000
@	Guangzhou TOM Advertising Limited	Mainland China,	Advertising sales in	Registered capital	65%
		limited liability company	Mainland China	RMB1,000,000
@	Henan New Tianming Advertising &	Mainland China,	Advertising sales in	Registered capital	32.5%
	Information Chuanbo Company Limited	limited liability company	Mainland China	RMB6,000,000
@	Kunming Fench Media Company Limited	Mainland China,	Advertising sales in	Registered capital	65%
		limited liability company	Mainland China	RMB11,000,000
@	Kunming Fench Star Information Industry	Mainland China,	Advertising sales in	Registered capital	65%
	Limited	limited liability company	Mainland China	RMB11,000,000
@	Liaoning New Star Guangming Media	Mainland China,	Advertising sales in	Registered capital	39%
	Assets Company Limited	limited liability company	Mainland China	RMB10,000,000
@	Shandong TOM Longjun Media	Mainland China,	Advertising sales in	Registered capital	39%
	Company Limited	limited liability company	Mainland China	RMB11,000,000
	Shanghai TOM Haosheng Advertising	Mainland China,	Advertising sales in	Registered capital	33.15%
	Company Limited	limited liability company	Mainland China	RMB1,000,000
@	Shanghai TOM International Outdoor	Mainland China,	Advertising sales in	Registered capital	65%
	Advertising Limited	limited liability company	Mainland China	RMB1,000,000
@	Shenyang TOM Sano Media Company	Mainland China,	Advertising sales in	Registered capital	39%
	Limited	limited liability company	Mainland China	RMB3,000,000

100

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

					Effective
		Place of incorporation	Principal activities and	Particular of issued/	interest
	Name	and kind of legal entity	place of operation	registered capital	held
	Shenzhen TOM Ray Advertising Company	Mainland China,	Advertising sales in	Registered capital	33.15%
	Limited	limited liability company	Mainland China	RMB5,000,000
@	Sichuan TOM Southwest Outdoor Media	Mainland China,	Advertising sales in	Registered capital	45.5%
	Company Limited (formerly	limited liability company	Mainland China	RMB3,000,000
	known as Sichuan Southwest Outdoor
	Media Company Limited)
@	Wuhan TOM Outdoor Information &	Mainland China,	Advertising sales in	Registered capital	55.25%
	Media Company Limited	limited liability company	Mainland China	RMB5,000,000
@	Xiamen TOM Bomei Advertising Company	Mainland China,	Advertising sales in	Registered capital	39%
	Limited	limited liability company	Mainland China	RMB2,500,000
	TOM Outdoor Media Group Limited	BVI, limited liability company	Investment holding in	100 ordinary shares	65%
			Mainland China	of US$1 each
	Publishing Group
	Bookworm Club Co., Ltd	Taiwan,	Distribution and retailing of	100,000 ordinary shares	82.53%
		limited liability company	books and magazines in	of NT$10 each
			Taiwan
#	China Popular Computer Week	Mainland China,	Advertising sales and	Registered capital	48.50%
	Management Company Limited	limited liability company	distribution of publication	RMB30,000,000
			products in Mainland China
	Cite Publishing Holding Limited	BVI, limited liability company	Investment holding in Taiwan	4,999,563	82.55%
				ordinary shares of
				US$0.01 each
	Cité Publishing Limited	Taiwan,	Publishing of books in Taiwan	28,171,506	82.53%
		limited liability company		ordinary shares of
				NT$10 each
	廣州城邦文化傳播有限公司	Mainland China,	Provision of consulting	Registered capital	82.55%
		limited liability company	services relating to publishing,	HK$1,000,000
			distribution, marketing of
			books and system integration
			in Mainland China

101

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

					Effective
		Place of incorporation	Principal activities and	Particular of issued/	interest
	Name	and kind of legal entity	place of operation	registered capital	held
	Home Media Group Limited	CI, limited liability company	Advertising sales and	986,922,602	82.53%
			distribution of publications	ordinary shares of
				US$0.00001 each
	Nong Nong Magazine Company Limited	Taiwan,	Publishing of magazines in	2,500,000	66.02%
		limited liability company	Taiwan	ordinary shares of
				NT$10 each
	Shanghai TOM Cite Consulting Limited	Mainland China,	Publication products design,	Registered capital	100%
		limited liability company	promotion and information	US$200,000
			consultancy services in
			Mainland China
	Cup Magazine Publishing Limited	Hong Kong,	Publishing of magazines in	2 ordinary shares of	100%
		limited liability company	Hong Kong	HK$1 each
	Sports Group
	Media Serv Ltd.	BVI, limited liability company	Advertising and sponsorship	200 ordinary shares of	100%
			sales in relation to sports	US$1 each
			event and programmes
			in Asia
	Media Serv Asia Pacific Limited	BVI, limited liability company	Advertising and sponsorship	1 ordinary share of US$1	100%
			sales in relation to sports
			event and programmes
			in Asia
	YCP Advertising Limited	Hong Kong,	Sports advertising, event	10 ordinary shares of	80%
		limited liability company	management and media	HK$1 each
			buying business in
			Mainland China and
			Hong Kong
@	廣東羊城報業體育發展有限公司	Mainland China,	Management of sponsorships	Registered capital	80%
		limited liability company	and marketing of sports	RMB5,000,000
			events and production of
			TV sports programs in
			Mainland China
@	廣東羊城廣告有限公司	Mainland China,	Advertising, corporate image	Registered capital	80%
		limited liability company	design and sale of products	RMB5,000,000
			in Mainland China

102

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

==> picture [370 x 217] intentionally omitted <==

----- Start of picture text -----

Effective
Place of incorporation Principal activities and Particular of issued/ interest
Name and kind of legal entity place of operation registered capital held
Television and Entertainment Group
Chi-Chi Dei Entertainment Limited Hong Kong, Provision of media programme 10,000 ordinary shares 60%
limited liability company production and distribution of HK$1.00 each
services in Asia
China Entertainment Television Hong Kong, Operation of satellite television 33,451 ordinary shares 67.78%
Broadcast Limited limited liability company channels and provision of of HK$0.3 each
content and television
programmes to various
platforms including satellite
television and syndication
network
TOM Digital Media Center Limited Hong Kong, Provision of television channel 2 ordinary shares of 100%
limited liability company organisation and satellite HK$1 each
television transmission
services
----- End of picture text -----

# Associated company

@The equity interest is held by individual nominees on behalf of the Group

The above table lists the principal subsidiaries and associated companies of the Group at 31 December 2006 which, in the opinion of the directors of the Company, principally affect the results and net assets of the Group. To give full details of subsidiaries, jointly controlled entities and associated companies would, in the opinion of the directors of the Company, result in particulars of excessive length.

Except for tom.com enterprises limited, TOM Group International Limited, TOM Holdings Limited and TOM Online Inc. which are directly held by the Company, the interests in the remaining subsidiaries and associated companies are held indirectly.

48 Subsequent events

(a) In connection with the deed entered into between the Group and eBay on 20 December 2006 as mentioned in note 45(b) above, the Joint Venture has been formed on 1 February 2007.
(b) On 14 February 2007, the Group, through a 82.5% owned subsidiary, Cite Publishing Limited, entered into a Sale and Purchase Agreement with the shareholders of Pixnet Digital Media Corporation (“Pixnet”) for the acquisition of 90% equity interests in Pixnet at a total consideration of NT$135 million (approximately HK$32,265,000), of which NT$35 million (approximately HK$8,365,000) is for the acquisition of existing shares of Pixnet from the existing shareholders, and NT$100 million (approximately HK$23,900,000) is to be injected into Pixnet for subscription of new Pixnet shares. Pixnet is principally engaged in the operation of popular online community and social networking websites in Taiwan. Up to the date of these accounts, cash totalling NT$20 million (approximately HK$4,780,000) has been paid by the Group. Management is in the process of assessing the fair value of the identifiable assets and liabilities of Pixnet, and the corresponding goodwill in relation to this acquisition.
(c) On 9 March 2007, the Company and TOMO made a joint announcement regarding a proposed conditional possible privatisation of TOMO by the Company by way of a scheme of arrangement (the “Proposed Privatisation Plan”). Pursuant to the Proposed Privatisation Plan, the Company intends to propose that the issued shares of TOMO held by parties other than the Company, Cranwood, Handel International Limited (“Handel”), Schumann International Limited (“Schumann”) and Devine Gem Management Limited (“Devine Gem”) are to be cancelled in exchange for HK$1.52 per share in cash payable by the Company. Upon completion of the cancellation, TOMO will apply for the withdrawal of the listing of its shares.

The estimated amount of cash to be paid by the Company for the Proposed Privatisation Plan ranges from HK$1,571 million to HK$1,771 million, depending on the number of outstanding share options that may be exercised prior to the completion of the Proposed Privatisation Plan.

103

FINANCIAL INFORMATION ON THE TOM GROUP

APPENDIX II

The execution and completion of the Proposed Privatisation Plan is conditional and subject to, among others, the approval by the independent shareholders of the Company, and the approval by the shareholders of TOMO other than the Company, Cranwood, Handel, Schumann and Devine Gem.

(d) On 18 March 2007, the Group entered into a series of agreements with a buyer with respect to the proposed disposal of the Group’s 49% equity interest in Beijing China Open Promotion Company Limited (“COL”), and 100% equity interests in Champion Will International Limited (“Champion Will”) and Swidon Enterprises Limited (“Swidon”) for a total consideration of USD15.5 million (approximately HK$121 million). COL is mainly engaged in the organisation of the China Open tennis tournament in Beijing, while Champion Will and Swidon are the holders of the ATP and WTA licences, respectively. This disposal is conditional and subject to, among others, the approval of the relevant authorities.

49 Approval of accounts

The accounts were approved by the board of directors on 20 March 2007.

(C) WORKING CAPITAL STATEMENT

Taking into account the financial resources available to the Enlarged Group, including the available banking facilities, internally generated funds and the multi-currency bridge loan facilities of up to US$230 million (obtained on 10 March 2007), the TOM Directors are of the opinion that the working capital available to the Enlarged Group is sufficient for the Enlarged Group’s present requirements, that is for at least the next 12 months from the date of this circular.

(D) INDEBTEDNESS STATEMENT

Borrowings

As at the close of business on 28 February 2007, being the latest practicable date for the purpose of calculating TOM Group’s indebtedness, TOM Group had outstanding borrowings of approximately HK$2,851 million which comprised convertible bonds in the amount of approximately HK$193 million, unsecured bank loans in the amount of approximately HK$1,006 million and secured bank loans of approximately HK$1,652 million.

Convertible Bonds

On 28 November 2003, TOM Holdings Limited, a wholly-owned subsidiary of the Company issued the Convertible Bonds in the aggregate principal amount of US$150 million (approximately HK$1,170 million), which are unconditionally and irrevocably guaranteed by and are convertible into shares of par value HK$0.10 each of TOM. The Convertible Bonds bear interest at the rate of 0.5% per annum on the principal amount of each Convertible Bond, payable semi-annually in arrear from 28 November 2003 up to but excluding 28 November 2008. The Convertible Bonds are convertible at any time on and after 8 January 2004 up to the close of business on 14 November 2008 into the Shares at an initial conversion price of HK$3.315 per share, subject to adjustment.

TOM Holdings Limited may, subject to certain conditions, on or at any time after 13 December 2006 and prior to 28 November 2008, redeem all, or from time to time, redeem some of the Convertible Bonds, at principal plus a fixed return of 1.25 per cent. per annum from 28 November 2003 to the redemption date. Furthermore, the bond holders have the right to require TOM Holdings Limited to redeem all or some only of the Convertible Bonds on 28 November 2006 at 102.31% of the principal amount.

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APPENDIX II

Convertible Bonds were bought back by TOM Group or early redeemed by bondholders in previous years. As at 28 February 2007, no Convertible Bonds have been converted into Shares and the outstanding Convertible Bonds amounted to approximately US$25 million (approximately HK$193 million).

Contingent Liabilities

As at 28 February 2007, the TOM Group has contingent liabilities amounting to approximately HK$14,183,000 in respect of the provision of fixed deposits as securities for bank loans granted to an associated company.

Charges on Group Assets

Certain TOM Group’s assets are pledged to banks as security for general banking facilities granted to the TOM Group and its associated company. As at 28 February 2007, the pledged assets of the TOM Group included bank deposits, cash, available-for-sale financial assets and other assets at net book value totalling approximately HK$1,810 million.

Disclaimer

Except as disclosed above, the TOM Group did not have any outstanding loan capital, bank overdrafts, and liabilities under acceptances or other similar indebtedness, debentures, mortgages, charges or loans or acceptance credits or hire purchase commitments, or guarantees or other material contingent liabilities outstanding as at 28 February 2007, apart from intra-group liabilities, which have been disregarded for these purposes.

(E) FINANCIAL AND TRADING PROSPECTS

Financial and Trading prospects

TOM Group revenues dropped by 6.3% to HK$2,911 million compared to HK$3,105 million in 2005. Net profit attributable to shareholders was HK$32 million, represents a basic earnings per share of HK0.82 cents versus HK6.67 cents in 2005.

In 2006, despite the tough operating environment, TOM Group were taking measures in consolidating the businesses such as disposal of Yazhou Zhoukan and other non-performing publishers, proposed disposal of Indiagames, acquisition of Pixnet as well as making impairment provision for the sport event. The operating profit before gain on early redemption and buy-back of convertible bonds, provision for impairment of assets, share of results of associated companies and jointly controlled entities was HK$291 million, with operating margin maintained at 10% which is at similar level of last year.

Cost structure improvement and margin expansion is one of the major focus of the TOM Group, during the year TOM successfully reduced the headquarter expenses by around 30%; these efforts will be continued to drive further growth in the years ahead.

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APPENDIX II

TOM Group is a leading media platform in the Greater China market, and its business groups continue to offer great long-term potential. Looking to the future, TOM will continue to strengthen to be a successful media and content provider as well as explore opportunities in new media and leveraging its strength in traditional media to gain a stronger foothold in Greater China Media market.

(F) MATERIAL ADVERSE CHANGE

The Directors have confirmed that since 31 December 2006 (being the date to which the TOM Group’s latest consolidated financial results were prepared as set out in the annual report of the TOM Group for the year ended 31 December 2006), there has been no material adverse change in the financial or trading position of TOM or any of its subsidiaries.

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APPENDIX III

Set out below are the audited consolidated financial information of Tom Online for the years ended December 31, 2004, 2005 and 2006 extracted from the audited financial statements of Tom Online for the relevant years.

(A) Consolidated Statements of Operations for the three years ended December 31, 2006

Revenues:
Wireless Internet services
Online advertising
Others
Total revenues
Cost of revenues:
Cost of services
Cost of goods sold
Total cost of revenues
Gross profit
Operating expenses:
Selling and marketing expenses
General and administrative expenses
Product development expenses
Amortization of intangibles
Provision for impairment of intangibles
Total operating expenses
Operating profit
Other income:
Net interest income
Exchange gain
Gain on disposal of
available-for-sale securities
Income from continuing operations
before tax
Income tax credit
Income from continuing operations after tax
Minority interests
Income from continuing operations
Loss from discontinued operations,
net of income tax
Net income attributable to shareholders

Year ended December 31,
2004
2005
2006
(in thousands of U.S. dollars,
except number of shares & per share amounts)
Restated (note 7)
112,880
157,833
152,637
7,583
9,210
13,279
2,257
1,025
2,449
122,720
168,068
168,365
---------------
---------------
---------------
(63,966)
(96,900)
(105,919)
(791)
–
–
(64,757)
(96,900)
(105,919)
---------------
---------------
---------------
57,963
71,168
62,446
---------------
---------------
---------------
(7,695)
(7,176)
(6,974)
(12,385)
(21,144)
(23,087)
(886)
(1,528)
(1,617)
(5,614)
(535)
(1,045)
(307)
–
–
(26,887)
(30,383)
(32,723)
---------------
---------------
---------------
31,076
40,785
29,723
3,095
2,543
1,424
–
1,132
2,382
–
450
–
34,171
44,910
33,529
41
63
140
34,212
44,973
33,669
(304)
34
35
33,908
45,007
33,704
–
(1)
(5,049)
33,908
45,006
28,655

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APPENDIX III

Year ended December 31, 2004 2005 2006 (in thousands of U.S. dollars, except number of shares & per share amounts) Restated (note 7)

Earnings/(Losses) per ordinary share – basic (cents): Continuing operations Discontinued operations Total earnings per ordinary share – basic Earnings/(Losses) per ordinary share – diluted (cents): Continuing operations Discontinued operations Total earnings per ordinary share – diluted Earnings/(Losses) per American Depositary Share – basic (cents): Continuing operations Discontinued operations Total earnings per American Depositary Share – basic Earnings/(Losses) per American Depositary Share – diluted (cents): Continuing operations Discontinued operations Total earnings per American Depositary Share – diluted Weighted average number of shares used in computing Earnings Per Share: Ordinary share – basic Ordinary share – diluted American Depositary Share – basic American Depositary Share – diluted *Included share-based compensation expense under SFAS 123R (Note 32) Cost of services Selling and marketing expenses General and administrative expenses Product development expenses Total share-based compensation expense	0.94 – 0.94 0.85 – 0.85 75.2 – 75.2 68.4 – 68.4 3,608,743,169 3,967,558,949 45,109,290 49,594,487 – – – – –	1.10 – 1.10 1.07 – 1.07 87.7 – 87.7 85.4 – 85.4 4,107,485,514 4,217,527,395 51,343,569 52,719,092 – – – – –	0.79 (0.12) 0.67 0.79 (0.12) 0.67 63.4 (9.5) 53.9 63.0 (9.4) 53.6 4,254,457,083 4,282,032,387 53,180,714 53,525,405 96 5 2,973 33 3,107

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APPENDIX III

(B) Consolidated balance sheets as at December 31, 2004, 2005 and 2006

Assets Current assets: Cash and cash equivalents Short-term bank deposits Accounts receivable, net Restricted cash Prepayments Deposits and other receivables Due from related parties Inventories Assets held for sale Total current assets Available-for-sale securities Restricted securities Investment under cost method Long-term prepayments and deposits Property and equipment, net Deferred tax assets Goodwill, net Intangibles, net Total assets Liabilities and shareholders’ equity Current liabilities: Accounts payable Other payables and accruals Income tax payable Deferred revenues Consideration payable Short-term bank loan Due to related parties Liabilities held for sale Total current liabilities	December 31, 2004 2005 2006 (in thousands of U.S. dollars) 79,320 99,869 110,993 – 1,863 25,613 26,369 33,950 23,473 – 300 300 4,116 6,053 4,754 2,343 2,503 2,616 159 189 170 113 53 65 – – 12,192 112,420 144,780 180,176 --------------- --------------- --------------- 116,471 38,519 – – 59,122 97,729 1,494 1,494 1,588 240 132 333 11,927 15,346 15,360 348 521 673 158,494 184,678 214,791 1,707 1,415 2,949 403,101 446,007 513,599 2,778 5,031 9,365 10,834 16,002 14,679 543 569 432 122 69 328 133,613 16,615 12,037 – – 35,340 20,331 19,430 204 – – 1,131 168,221 57,716 73,516 --------------- --------------- ---------------	December 31, 2004 2005 2006 (in thousands of U.S. dollars) 79,320 99,869 110,993 – 1,863 25,613 26,369 33,950 23,473 – 300 300 4,116 6,053 4,754 2,343 2,503 2,616 159 189 170 113 53 65 – – 12,192 112,420 144,780 180,176 --------------- --------------- --------------- 116,471 38,519 – – 59,122 97,729 1,494 1,494 1,588 240 132 333 11,927 15,346 15,360 348 521 673 158,494 184,678 214,791 1,707 1,415 2,949 403,101 446,007 513,599 2,778 5,031 9,365 10,834 16,002 14,679 543 569 432 122 69 328 133,613 16,615 12,037 – – 35,340 20,331 19,430 204 – – 1,131 168,221 57,716 73,516 --------------- --------------- ---------------
		180,176 --------------- – 97,729 1,588 333 15,360 673 214,791 2,949
		513,599

		9,365 14,679 432 328 12,037 35,340 204 1,131
		73,516 ---------------

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APPENDIX III

Non-current liabilities: Secured bank loan Deferred tax liabilities Total liabilities Minority interests Minority interests of a subsidiary held for sale Commitments Shareholders’ equity: Share capital (ordinary share, US$0.001282 par value, 10,000,000,000 shares authorized, 3,896,200,000, 4,224,532,105 and 4,259,654,528 shares issued and outstanding as at December 31, 2004, 2005 and 2006 respectively) Paid-in capital Statutory reserves Accumulated other comprehensive (losses)/incomes (Accumulated deficit)/retained earnings Total shareholders’ equity Total liabilities, minority interests and shareholders’ equity	December 31, 2004 2005 2006 (in thousands of U.S. dollars) – 56,099 55,271 – 182 152 168,221 113,997 128,939 456 2,900 878 – – 2,324 168,677 116,897 132,141 --------------- --------------- --------------- 4,995 5,416 5,461 260,867 312,643 322,459 9,452 11,396 11,535 (670) (3,187) 10,645 (40,220) 2,842 31,358 234,424 329,110 381,458 403,101 446,007 513,599	December 31, 2004 2005 2006 (in thousands of U.S. dollars) – 56,099 55,271 – 182 152 168,221 113,997 128,939 456 2,900 878 – – 2,324 168,677 116,897 132,141 --------------- --------------- --------------- 4,995 5,416 5,461 260,867 312,643 322,459 9,452 11,396 11,535 (670) (3,187) 10,645 (40,220) 2,842 31,358 234,424 329,110 381,458 403,101 446,007 513,599
		128,939
		878 2,324
		132,141 ---------------
		5,461 322,459 11,535 10,645 31,358
		381,458
		513,599

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(C) Audited financial statements for the year ended December 31, 2006

CONSOLIDATED BALANCE SHEETS

Note Assets Current assets: Cash and cash equivalents Short-term bank deposits 9 Accounts receivable, net 10 Restricted cash 11 Prepayments 12 Deposits and other receivables 13 Due from related parties 14 Inventories Assets held for sale 7 Total current assets Available-for-sale securities 15 Restricted securities 15 Investment under cost method 16 Long-term prepayments and deposits Property and equipment, net 17 Deferred tax assets 28 Goodwill, net 18 Intangibles, net 19 Total assets Liabilities and shareholders’ equity Current liabilities: Accounts payable 20 Other payables and accruals 21 Income tax payable Deferred revenues Consideration payable 22 Short-term bank loan 23 Due to related parties 14 Liabilities held for sale 7 Total current liabilities	December 31, 2005 2006 (in thousands of U.S. dollars) 99,869 110,993 1,863 25,613 33,950 23,473 300 300 6,053 4,754 2,503 2,616 189 170 53 65 – 12,192 144,780 180,176 --------------- --------------- 38,519 – 59,122 97,729 1,494 1,588 132 333 15,346 15,360 521 673 184,678 214,791 1,415 2,949 446,007 513,599 5,031 9,365 16,002 14,679 569 432 69 328 16,615 12,037 – 35,340 19,430 204 – 1,131 57,716 73,516 --------------- ---------------	December 31, 2005 2006 (in thousands of U.S. dollars) 99,869 110,993 1,863 25,613 33,950 23,473 300 300 6,053 4,754 2,503 2,616 189 170 53 65 – 12,192 144,780 180,176 --------------- --------------- 38,519 – 59,122 97,729 1,494 1,588 132 333 15,346 15,360 521 673 184,678 214,791 1,415 2,949 446,007 513,599 5,031 9,365 16,002 14,679 569 432 69 328 16,615 12,037 – 35,340 19,430 204 – 1,131 57,716 73,516 --------------- ---------------
		180,176 --------------- – 97,729 1,588 333 15,360 673 214,791 2,949
		513,599

		9,365 14,679 432 328 12,037 35,340 204 1,131
		73,516 ---------------

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APPENDIX III

Note Non-current liabilities: Secured bank loan 24 Deferred tax liabilities 28 Total liabilities Minority interests Minority interests of a subsidiary held for sale 7 Commitments 33 Shareholders’ equity: Share capital (ordinary share, US$0.001282 par value, 10,000,000,000 shares authorized, 4,224,532,105 and 4,259,654,528 shares issued and outstanding as at December 31, 2005 and 2006 respectively) 25 Paid-in capital Statutory reserves 26(b) Accumulated other comprehensive (losses)/income 15, 35 Retained earnings Total shareholders’ equity Total liabilities, minority interests and shareholders’ equity	December 31, 2005 2006 (in thousands of U.S. dollars) 56,099 55,271 182 152 113,997 128,939 2,900 878 – 2,324 116,897 132,141 --------------- --------------- 5,416 5,461 312,643 322,459 11,396 11,535 (3,187) 10,645 2,842 31,358 329,110 381,458 446,007 513,599	December 31, 2005 2006 (in thousands of U.S. dollars) 56,099 55,271 182 152 113,997 128,939 2,900 878 – 2,324 116,897 132,141 --------------- --------------- 5,416 5,461 312,643 322,459 11,396 11,535 (3,187) 10,645 2,842 31,358 329,110 381,458 446,007 513,599
		128,939
		878 2,324
		132,141 ---------------
		5,461 322,459 11,535 10,645 31,358
		381,458
		513,599

The accompanying notes are an integral part of the consolidated financial statements.

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APPENDIX III

CONSOLIDATED STATEMENTS OF OPERATIONS

Note
Revenues:
Wireless Internet services
Online advertising
Others
Total revenues
34
Cost of revenues:
Cost of services
Cost of goods sold
Total cost of revenues
34
Gross profit
34
Operating expenses:
Selling and marketing expenses
General and administrative expenses
Product development expenses
Amortization of intangibles
19
Provision for impairment of intangibles
Total operating expenses
Operating profit
Other income:
Net interest income
Exchange gain
35
Gain on disposal of available-for-sale securities
Income from continuing operations before tax
37(b)
Income tax credit
28
Income from continuing operations after tax
Minority interests
Income from continuing operations
Loss from discontinued operations, net of income tax
7
Net income attributable to shareholders

Year ended December 31,
2004
2005
2006
(in thousands of U.S. dollars, except
number of shares & per share amounts)
Restated (note 7)
112,880
157,833
152,637
7,583
9,210
13,279
2,257
1,025
2,449
122,720
168,068
168,365
------------------
------------------
------------------
(63,966)
(96,900)
(105,919)
(791)
–
–
(64,757)
(96,900)
(105,919)
------------------
------------------
------------------
57,963
71,168
62,446
------------------
------------------
------------------
(7,695)
(7,176)
(6,974)
(12,385)
(21,144)
(23,087)
(886)
(1,528)
(1,617)
(5,614)
(535)
(1,045)
(307)
–
–
(26,887)
(30,383)
(32,723)
------------------
------------------
------------------
31,076
40,785
29,723
3,095
2,543
1,424
–
1,132
2,382
–
450
–
34,171
44,910
33,529
41
63
140
34,212
44,973
33,669
(304)
34
35
33,908
45,007
33,704
–
(1)
(5,049)
33,908
45,006
28,655

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APPENDIX III

Note
Earnings/(Losses) per ordinary share
– basic (cents):
29
Continuing operations
Discontinued operations
Total earnings per ordinary share – basic
Earnings/(Losses) per ordinary share
– diluted (cents):
29
Continuing operations
Discontinued operations
Total earnings per ordinary share – diluted
Earnings/(Losses) per American Depositary Share
– basic (cents):
29
Continuing operations
Discontinued operations
Total earnings per American Depositary Share – basic
Earnings/(Losses) per American Depositary Share
– diluted (cents):
29
Continuing operations
Discontinued operations
Total earnings per American Depositary Share – diluted
Weighted average number of shares used in
computing Earnings Per Share:
Ordinary share – basic
29
Ordinary share – diluted
29
American Depositary Share – basic
American Depositary Share – diluted
Included share-based compensation expense under*
SFAS 123R (Note 32)**
Cost of services
Selling and marketing expenses
General and administrative expenses
Product development expenses
Total share-based compensation expense

Year ended December 31,
2004
2005
2006
(in thousands of U.S. dollars, except
number of shares & per share amounts)
Restated (note 7)
0.94
1.10
0.79
–
–
(0.12)
0.94
1.10
0.67
0.85
1.07
0.79
–
–
(0.12)
0.85
1.07
0.67
75.2
87.7
63.4
–
–
(9.5)
75.2
87.7
53.9
68.4
85.4
63.0
–
–
(9.4)
68.4
85.4
53.6
3,608,743,169
4,107,485,514
4,254,457,083
3,967,558,949
4,217,527,395
4,282,032,387
45,109,290
51,343,569
53,180,714
49,594,487
52,719,092
53,525,405
–
–
96
–
–
5
–
–
2,973
–
–
33
–
–
3,107

The accompanying notes are an integral part of the consolidated financial statements.

114

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APPENDIX III

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Balance as of January 1, 2004 Issuance of shares pursuant to initial public offering (“IPO”) Share issuing expenses Issuance of shares to Cranwood as initial purchase consideration for acquisition of Puccini Group Unrealized loss on securities Net income Appropriation to statutory reserves Balance as of December 31, 2004 Issuance of shares to Cranwood as earn-out purchase consideration for acquisition of Puccini Group Issuance of shares on exercise of employee share options Unrealized loss on securities () Currency translation adjustments Net income Appropriation to statutory reserves Balance as of December 31, 2005 Issuance of shares on exercise of employee share options Share-based compensation (*) Unrealized gain on securities Currency translation adjustments Net income Appropriation to statutory reserves Balance as of December 31, 2006	Number of shares 2,800,000,000 1,000,000,000 – 96,200,000 – – – 3,896,200,000 304,155,503 24,176,602 – – – – 4,224,532,105 35,122,423 – – – – – 4,259,654,528	Accumulated other (Accumulated comprehensive deficit)/ Share Paid-in Statutory (losses)/ Retained capital capital reserves income earnings (in thousands of U.S. dollars except for number of shares) 3,590 75,551 1,552 (55) (66,228) 1,282 192,528 – – – – (25,589) – – – 123 18,377 – – – – – – (615) – – – – – 33,908 – – 7,900 – (7,900) 4,995 260,867 9,452 (670) (40,220) 390 47,157 – – – 31 4,619 – – – – – – (2,903) – – – – 386 – – – – – 45,006 – – 1,944 – (1,944) 5,416 312,643 11,396 (3,187) 2,842 45 6,709 – – – – 3,107 – – – – – – 465 – – – – 13,367 – – – – – 28,655 – – 139 – (139) 5,461 322,459 11,535 10,645 31,358	Total shareholders’ equity 14,410 193,810 (25,589) 18,500 (615) 33,908 –
			234,424 47,547 4,650 (2,903) 386 45,006 –
			329,110 6,754 3,107 465 13,367 28,655 –
			381,458

During the year ended December 31, 2005, unrealized gains of US$450,000 were realized upon disposal of two availablefor-sale securities.
** The Group recognized share-based compensation expense using SFAS 123R from January 1, 2006. Please refer to note 32.

The accompanying notes are an integral part of the consolidated financial statements.

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APPENDIX III

CONSOLIDATED STATEMENTS OF CASH FLOWS

Cash flow from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of intangibles
Amortization of premium on debt securities
Provision for impairment of intangibles
Allowance for doubtful accounts
Provision for impairment of goodwill
Depreciation
Deferred income tax
Minority interests
Exchange gain, net
Loss on disposal of property and equipment
Gain on disposal of available-for-sale securities
Loss on issuance of shares by a subsidiary
Share-based compensation expense
Change in assets and liabilities, net of effects
from acquisitions:
Accounts receivable
Prepayments
Deposits and other receivables
Due from related parties
Inventories
Long-term prepayments and deposits
Accounts payable
Other payables and accruals
Income tax payable
Deferred revenues
Due to related parties
Net cash provided by operating activities

Year ended December 31,
2004
2005
2006
(in thousands of U.S. dollars)
33,908
45,006
28,655
5,614
975
1,155
298
383
379
307
–
–
761
691
335
–
–
4,628
4,544
6,977
8,535
(74)
18
(216)
304
221
(223)
–
(1,132)
(2,382)
9
94
74
–
(450)
–
–
69
–
–
–
3,107
(10,443)
(5,764)
10,586
(2,892)
(1,144)
43
69
(368)
(162)
(35)
(30)
10
(84)
62
(10)
63
(82)
–
(1,085)
1,684
385
2,499
5,140
(1,359)
24
(409)
(299)
(374)
(54)
251
346
(879)
386
33,759
51,008
53,878

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APPENDIX III

Cash flow from investing activities:
Payments for purchase of property and equipment
Cash paid for short-term bank deposits
Cash paid for entrusted loan provided to a related party
Cash received from short-term bank deposits
Receipt from a related party for repayment of the
entrusted loan
Payments for purchase of intangible assets
Payment for investment under cost method
Net cash used in acquisition of subsidiaries
Payments for investment in available-for-sale securities
Receipt on disposal of available-for-sale securities
Net cash used in investing activities
Cash flow from financing activities:
Issuance of ordinary shares including from the
exercise of share options, net of issuing expenses
Payments for IPO shares issuing expenses
Cash received from issuance of shares by a subsidiary,
net of issuing expenses
Bank loan, net of handling charges
Partial repayment of bank loan
Repayment of loans due to parent company
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Foreign currency translation
Cash and cash equivalents, end of year
Representing:
Cash and cash equivalents in discontinued
operations, end of year (Note 7)
Cash and cash equivalents in continuing
operations, end of year

Year ended December 31,
2004
2005
2006
(in thousands of U.S. dollars)
(9,175)
(9,843)
(6,354)
–
(1,878)
(51,110)
–
(2,461)
–
–
–
25,417
–
2,461
–
(1,663)
–
–
(1,494)
–
–
(14,884)
(99,937)
(34,519)
(118,883)
–
–
–
16,392
–
(146,099)
(95,266)
(66,566)
169,024
4,650
6,754
–
(803)
–
–
3,985
–
–
56,886
35,340
–
(901)
(828)
–
–
(20,038)
169,024
63,817
21,228
56,684
19,559
8,540
22,636
79,320
99,869
–
990
2,957
79,320
99,869
111,366
–
1,135
373
79,320
98,734
110,993

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APPENDIX III

	Year ended December 31,	Year ended December 31,
	2004	2005	2006
	(in thousands of U.S. dollars)
Supplemental disclosures of cash flow information
Cash (paid)/received during the year:
Cash paid for income taxes	(9)	(208)	(330)
Interest received from bank deposit and
debt securities	3,985	5,552	6,856
Interest paid for bank loans and loans due to
parent company	–	(2,167)	(4,608)
Non-cash activities:
Property and equipment transferred from
TOM Group	7	–	–
Issuance of shares to Cranwood for acquisition
of Puccini Group	18,500	47,547	–
Outstanding payments for listing expenses	803	–	–

The accompanying notes are an integral part of the consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND NATURE OF OPERATIONS

TOM Online Inc. (the “Company”), a subsidiary of TOM Group Limited (“TOM Group”, formerly TOM.COM LIMITED), was incorporated in the Cayman Islands on August 28, 2001 as a company with limited liability. On March 10, 2004 and March 11, 2004, the Company became listed on the National Market of National Automated Systems Dealership and Quotation (the “NASDAQ”) in the United States and the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (the “GEM”) in Hong Kong, respectively.

On August 11, 2004, the Company, through a subsidiary, acquired 100% equity interest of Treasure Base Investments Limited (“Treasure Base”). Treasure Base provides wireless Internet services in China through a variable interest entity. Treasure Base and its controlled entities (“Treasure Base Group”) were included in the consolidated financial statements of the Company and its controlled entities from August 11, 2004.

On November 19, 2004, the Company, through a subsidiary, acquired 100% equity interest of Whole Win Investments Limited (“Whole Win”). Whole Win provides wireless Internet services in China through a variable interest entity. Whole Win and its controlled entities (“Whole Win Group”) were included in the consolidated financial statements of the Company and its controlled entities from November 19, 2004.

On February 24, 2005, the Company, through a subsidiary, acquired 76.29% equity interest of Indiagames Limited (“Indiagames”). On April 29, 2005, Cisco Inc. and Macromedia Inc. invested in Indiagames by subscribing for new ordinary shares of Indiagames for a combined stake of 18.18% of the enlarged share capital, resulting in a dilution of the Company’s stake in Indiagames to 62.42% from that date. Indiagames publishes, develops and distributes wireless games content globally. The results of operations of Indiagames were included in the consolidated financial statements from February 24, 2005. In December 2006, the Company committed to a plan which was approved by the Company’s Board of Directors on December 29, 2006 to sell substantially all its equity interest in Indiagames so as to focus on the China market and initiated actions to locate a buyer. Accordingly, the results of operations of Indiagames have been shown as “Discontinued Operations” in the Consolidated Statements of Operations for the years ended December 31, 2005 and 2006. The assets and liabilities of Indiagames have been shown as “Assets held for sale” and “Liabilities held for sale” respectively, as at December 31, 2006. For detailed information, please refer to note 7.

On August 22, 2005, the Company, through a subsidiary, entered into a joint venture agreement with Skype Technologies, S.A. (“Skype”) and formed Tel-Online Limited (“Tel-Online”). Tel-Online is currently developing a more customized localized version of its TOM-Skype instant messaging software for the Chinese market and is focusing on building a strong, large user base prior to launching premium services. The Company has determined that Tel-Online is a variable interest entity, and the Company is the primary beneficiary of Tel-Online and therefore consolidates the results of operations of the joint venture.

On January 4, 2006, the Company, through a variable interest entity, acquired 75% equity interest of Beijing Huan Jian Shu Meng Network Technology Limited (“Huanjian Shumeng”). Huanjian Shumeng is an operator of an Internet website which provides original Chinese novels to its users. Huanjian Shumeng has been included in the consolidated financial statements of the Company and its controlled entities from January 4, 2006.

On June 1, 2006, the Company, through a subsidiary, acquired 100% equity interest of Gainfirst Asia Limited (“Gainfirst”). Gainfirst provides wireless Internet services in China through a variable interest entity, Beijing Bo Xun Rong Tong Information Technology Company Limited (“Beijing Infomax”). Gainfirst and its controlled entities (“Gainfirst Group”) have been included in the consolidated financial statements of the Company and its controlled entities from June 1, 2006.

On December 20, 2006, the Company entered into a Joint Venture Deed with eBay International AG (“eBay”) to form a joint venture in 2007 to carry on the business of owning and operating a mobile and Internet-based marketplace in China. As at December 31, 2006, the joint venture had not been established and accordingly, no results of this joint venture are reflected in the consolidated financial statements of the Company and its controlled entities. For detailed information, please refer to note 36.

The Company and its controlled entities, including subsidiaries and variable interest entities, are hereinafter collectively referred to as the ‘Group’.

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The Group principally provides a wide variety of online and mobile value-added services, including wireless Internet services such as Short Messaging Service (“SMS”), Multimedia Messaging Service (“MMS”), Wireless Application Protocol (“WAP”), Color Ring-Back Tones (“CRBT”) and Interactive Voice Response (“IVR”) services, online advertising, provision of online Chinese novels and a free online, PC-to-PC Instant Messaging Service (“TOM-Skype”) in China. The Group also provides other wireless Internet services (“Mobile Games”) in China, India and elsewhere.

Details of the Group’s principal subsidiaries and variable interest entities as at December 31, 2006 are described below:

	Place of incorporation	Principal activities and	Particulars of issued/	Effective
Name	and kind of legal entity	place of operation	registered share capital	interest held
Beijing Super	China,	Development of software	Registered capital	100%
Channel Network Limited	Limited Liability Company	information system, computer	US$13,000,000
		network and website products
		in China
Beijing Lahiji Technology	China,	Provision of wireless Internet	Registered capital	100%
Development Limited	Limited Liability Company	services in China	US$140,000
Beijing Lei Ting Wan Jun	China,	Provision of Internet content	Registered capital	100%
Network Technology	Limited Liability Company	services, telecom value-added	RMB100,000,000
Limited (“Beijing Lei Ting”)		services and online advertising
		services in China
Puccini International Limited	Cayman Islands,	Investment holding in China	1 ordinary share of US$1	100%
	Limited Liability Company
Puccini Network Technology	China,	Technology development in	Registered capital	100%
(Beijing) Limited	Limited Liability Company	network, computer software	US$200,000
		and hardware, IVR services
		and communications and the
		provision of related
		consultancy services in China
Beijing Lei Ting Wu Ji	China,	Provision of IVR services	Registered capital	100%
Network Technology Limited	Limited Liability Company	in China	RMB10,000,000
(“Wu Ji Network”)
Treasure Base Investments	British Virgin Islands,	Investment holding in China	100 ordinary shares	100%
Limited	Limited Liability Company		of US$1 each
Ceng Dong Yi (Beijing)	China,	Provision of wireless Internet	Registered Capital	100%
Technology Company Limited	Limited Liability Company	services in China	US$150,000
Beijing LingXun Interactive	China,	Provision of wireless Internet	Registered capital	100%
Science Technology and	Limited Liability Company	services in China	RMB10,000,000
Development Company
Limited (“LingXun”)
Whole Win Investments Limited	British Virgin Islands,	Investment holding in China	1 ordinary share of US$1	100%
	Limited Liability Company
Heng Dong Wei Xin (Beijing)	China,	Provision of wireless Internet	Registered capital	100%
Technology Company Limited	Limited Liability Company	services in China	US$150,000

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	Place of incorporation	Principal activities and	Particulars of issued/	Effective
Name	and kind of legal entity	place of operation	registered share capital	interest held
Startone (Beijing) Information	China,	Provision of wireless Internet	Registered Capital	100%
Technology Company Limited	Limited Liability Company	services in China	RMB10,000,000
(“Startone”)
Gainfirst Asia Limited	British Virgin Islands,	Investment holding in China	1,000 ordinary share of	100%
	Limited Liability Company		US$1 each
Beijing Dong Kui Lin	China,	Provision of wireless Internet	Registered capital	100%
Information Technology	Limited Liability Company	services in China	US$100,000
Company Limited
Beijing Bo Xun Rong Tong	China,	Provision of wireless Internet	Registered Capital	100%
Information Technology	Limited Liability Company	services in China	RMB10,000,000
Company Limited
(“Beijing Infomax”)
Beijing Huan Jian Shu Meng	China,	Provision of Internet content	Registered Capital	75%
Network Technology Limited	Limited Liability Company	services in China	RMB100,000
(“Huanjian Shumeng”)
Beijing GreaTom United	China,	Development of operating	Registered capital	90%
Technology Company	Limited Liability Company	platform for broadband Internet	RMB25,000,000
Limited (“GreaTom”)		value-added services in China
Shenzhen Freenet Information	China,	Operates 163.net and e-mail	Registered capital	100%
Technology Company Limited	Limited Liability Company	service provider in China	RMB23,000,000
(“Shenzhen Freenet”)
Indiagames Limited	India,	Developer, publisher and	619,756 ordinary shares of	62.42%
(“Indiagames”)	Limited Liability Company	distributor of mobile games	RS10 each
		content globally
Tel-Online Limited	Cayman Islands,	Create, market and distribute	100 ordinary shares of	51%
(“Tel-Online”)	Limited Liability Company	TOM-Skype, a customized	US$1 each
		version of the Skype software
		in China and develop and
		maintain a TOM-Skype website

The above table lists the principal subsidiaries and variable interest entities of the Group at December 31, 2006, which in the opinion of the directors of the Company principally affect the results and net assets of the Group. To give full details of subsidiaries and variable interest entities would, in the opinion of the directors of the Company, result in particulars of excessive length.

2. BASIS OF PRESENTATION

The consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”).

The comparative consolidated statements of operations for the year ended December 31, 2005 have been restated as if the operation discontinued during the year ended December 31, 2006, i.e. Indiagames, had been discontinued from the start of the comparative period. Please refer to note 7.

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3. USE OF ESTIMATES

The preparation of the consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from these estimates.

4. VARIABLE INTEREST ENTITIES

To comply with Chinese laws and regulations that prohibit or restrict foreign ownership of companies that provide valueadded telecommunications services, including wireless Internet services and Internet content services, the Group conducts substantially all of its operations through Beijing Lei Ting, Shenzhen Freenet, Wu Ji Network, LingXun, Startone and Beijing Infomax. Each of these six entities is legally owned by certain citizens of China (the “Registered Shareholders”).

Pursuant to certain contractual arrangements, Beijing Lei Ting, Shenzhen Freenet, Wu Ji Network, LingXun, Startone, and Beijing Infomax have been granted the right to use the domain names, trademarks and other intellectual properties for a license fee. In addition, the Group has the exclusive right to provide technical and consulting services in exchange for service fees which equal to substantially all of the net income of Beijing Lei Ting, Shenzhen Freenet, Wu Ji Network, LingXun, Startone and Beijing Infomax. The Registered Shareholders of Beijing Lei Ting, Shenzhen Freenet, Wu Ji Network, LingXun, Startone and Beijing Infomax are required under their contractual arrangements with the Group to transfer their interests in Beijing Lei Ting, Shenzhen Freenet, Wu Ji Network, LingXun, Startone and Beijing Infomax to the Group or the Group’s designee upon the Group’s request, provided that such transfer does not violate Chinese laws or regulations. The Group also had extended loans of US$7,968,000, US$19,093,000 and US$19,867,000 as of December 31, 2004, 2005 and 2006, respectively, to the Registered Shareholders to finance their investments. The direct equity interest in these six entities held by the Registered Shareholders has been pledged as collateral for the loans and when permitted under Chinese laws, the loans are to be repaid by transferring the direct equity interest in these six entities to the Group.

In December 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, revised December 2003, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (“FIN 46R”). FIN 46R is intended to achieve more consistent application of consolidation policies to variable interest entities to improve comparability between enterprises engaged in similar activities even if some of those activities are conducted through variable interest entities. The Group has evaluated its relationship with Beijing Lei Ting, Shenzhen Freenet, Wu Ji Network, LingXun, Startone and Beijing Infomax, and has concluded that these entities are variable interest entities of the Company as the Company is the primary beneficiary of these entities.

In addition, the Company has also determined that Tel-Online and Huanjian Shumeng, a subsidiary of Beijing Lei Ting, are variable interest entities of the Company as the Company is the primary beneficiary of these entities.

The results of operations of these variable interest entities have been included in the Group’s consolidated financial statements.

5. PRINCIPAL ACCOUNTING POLICIES

(a) Basis of consolidation

The consolidated financial statements include the financial statements of the Company and its controlled operating entities including the subsidiaries and the variable interest entities.

Subsidiaries are those entities in which the Company, directly or indirectly, controls more than one half of the voting power; has the power to govern the financial and operating policies; to appoint or remove the majority of the members of the board of directors; or to cast majority of votes at the meeting of directors.

Variable interest entities are those entities in which the Company, through contractual arrangements, bears the risks of, and enjoys the rewards normally associated with ownership of the entities, and therefore the Company is the primary beneficiary of these entities.

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Acquisitions of subsidiaries or variable interest entities are accounted for using the purchase method of accounting. The results of subsidiaries or variable interest entities acquired or set up during the year are included in the consolidated statements of operations from the effective date of acquisition or set up.

All significant inter-company balances and transactions within the Group have been eliminated on consolidation.

(b) Cash and cash equivalents

Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.

(c) Accounts receivable, net

An allowance for doubtful debts is provided based on an aging analysis of accounts receivable balances, historical bad debt rates, repayment patterns, customer credit worthiness and industry trend analysis. The Group also makes a specific allowance if there is strong evidence showing that the receivable is likely to be irrecoverable. Accounts receivables in the balance sheet are stated net of such allowance.

(d) Inventories

Inventories represent finished goods and work in progress. Inventories are stated at the lower of cost and net realizable value. Net realizable value is determined on the basis of anticipated sales proceeds less estimated selling expenses.

(e) Assets held for sale

Long-lived assets (or disposal groups comprising assets and liabilities) that are expected to be recovered primarily through sale rather than through continuing use are classified as held for sale. Prior to the classification as held for sale, these assets are measured in accordance with the Group’s accounting policies. Thereafter, these assets are measured at the lower of its carrying amount or fair value less cost to sell.

(f) Available-for-sale securities and restricted securities

Investments in available-for-sale securities are stated at fair values, with unrealized gains or losses, net of tax, recorded directly into equity as other comprehensive income/(loss). Realized gains and losses and decline in value judged to be other-than-temporary, if any, on available-for-sale securities are recorded as gain/(loss) on disposal of available-for-sale securities and impairment of available-for-sale securities respectively under other income/(expense) in the consolidated statement of operations. Interest income from available-for-sale securities are reported in interest income.

When determining whether a decline in value of an available-for sale security is other-than temporary, the Company evaluates current factors including the economic environment, market conditions, operational performance, near term prospects and other specific factors relating to the business underlying the securities.

Restricted securities are those securities distinguished from available-for-sale securities as being pledged and set aside as collateral for securing other sources of finance, such as a bank loan facility. Restricted securities are accounted for as the same as available-for-sale securities.

(g) Property and equipment, net

Property and equipment are stated at cost less accumulated depreciation and provision for impairment, if any.

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Property and equipment are depreciated at rates sufficient to write off their cost less provision for impairment, if any, over their estimated useful lives on a straight-line basis. Management considers that property and equipment have no significant residual value. The estimated useful lives are as follows:

Computer equipment 36-60 months Furniture and office equipment 60-80 months Motor vehicles 48-60 months Leasehold improvements The shorter of their useful lives or over the lease terms

Expenditure for maintenance and repairs is expensed as incurred. The carrying value of the assets is assessed regularly and/or when factors indicating impairment are present. If the total of the expected future undiscounted cash flow is less than the carrying value, an indication of impairment is present and a loss is recognized in the consolidated statement of operations for the difference between the fair value and the carrying value of the assets.

The gain or loss on the disposal of property and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets and is recognized in the consolidated statement of operations.

(h) Goodwill, net

Goodwill represents the excess of the cost of acquisition (comprising purchase price and professional costs) over the fair value of the identifiable assets and liabilities acquired as a result of the Group’s acquisitions of interests in its subsidiaries or variable interest entities.

Goodwill is tested for impairment at the reporting unit level on an annual basis, or more frequently if events or changes in circumstances indicate that it might be impaired. Except for the newly acquired businesses in 2006 (Huanjian Shumeng and Beijing Infomax) which are tested separately for impairment, the whole of the Group’s wireless Internet services business in China was taken as one reporting unit, as a result of successful completion of operational and managerial integration of previously acquired entities after their acquisitions and the focus of our chief decision makers on the wireless Internet services business as a whole rather than by entity. Goodwill relating to Indiagames was also tested separately for impairment.

(i) Intangibles, net

Intangibles, which primarily include partnership contracts, domain names, core technology, developed technology, subscriber list, brand names, operating licenses and copy right arising from the acquisitions of subsidiaries and variable interest entities were initially recognized and measured at fair value upon acquisition. Intangible assets that have indefinite useful lives are not amortized. Other intangibles with finite useful lives are amortized over their estimated useful lives of one month to five years. The amortization methods and estimated useful lives of intangibles are reviewed regularly.

Identifiable intangibles are required to be determined separately from goodwill based on fair value. In particular, an intangible which is acquired in a business combination should be recognized as an asset separate from goodwill if it satisfies either the “contractual-legal” or “separability” criterion.

An intangible asset that is subject to amortization shall be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An intangible asset that is not subject to amortization shall be reviewed for impairment annually or more frequently whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Group evaluates recoverability of an intangible asset to be held and used by comparing the carrying amount of the intangible asset to the expected future net undiscounted cash flows resulting from its use. An intangible asset is considered to be impaired if its carrying amount is greater than the sum of its future net undiscounted cash flows resulting from its use. The impairment loss is measured as the amount by which the carrying amount of the intangible asset exceeds the fair value of the intangible asset calculated using a discounted cash flow analysis.

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(j) Impairment of long-lived assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount may not be recoverable. An impairment loss is recognized when the carrying amount of a longlived asset 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 calculated using a discounted cash flow analysis.

(k) Revenue recognition

The Group derives revenues from provision of wireless Internet services, online advertising, commercial enterprise solutions, online games, and others. The Group recognizes its revenues net of related business taxes and valueadded taxes.

Wireless Internet services

Wireless Internet services revenues are derived principally from providing mobile phone users in China with SMS, MMS, WAP, IVR and CRBT value-added services. These include news subscriptions, music, entertainment, sports information, mobile e-mail, dating service, picture downloads, wallpaper, mobile games, ring tones, logo downloads, chat rooms and access to music files. A small portion of our wireless Internet services are derived from mobile games provided by our Indiagames subsidiary which was reported under “Discontinued Operations”.

Wireless Internet services are billed on monthly subscription basis or on usage basis.

In China, these services are delivered to the Group’s customers primarily through the platform of various subsidiaries of China Mobile Communications Corporation (“China Mobile”) and China United Telecommunications Corporation (“China Unicom”). Revenues retained by China Mobile and China Unicom are calculated based on agreed percentages of revenues generated from the wireless data services of the Group. Revenues from wireless Internet services are recognized as the services are rendered and are recorded based on the gross amounts billed to the end customers as the Group markets, supports and contracts for its services directly with the end customers.

The Group purchases certain wireless services related content from independent content providers. Certain of these agreements determine the fees payable for content provided based on a percentage of revenues of the Group generated from the use of the content. The Group records its revenues inclusive of fees to be paid to content providers as the Group acts as the principal in these arrangements by having the ability to determine the fees charged to the users and being the primary obligator to the users with respect to providing the content services. The fees paid/payable to the content providers are included in cost of services.

From our Indiagames subsidiary, mobile games services are delivered to customers through the platform of various mobile telecommunication operators. Revenues retained by the mobile telecommunication operators are calculated based on agreed percentages of revenues generated based on the number of downloads and active subscriptions. Revenues from mobile games services are recognized net of mobile telecommunication operators’ revenue share as Indiagames markets, supports and contracts for its services directly with the mobile telecommunication operators and not the mobile phone users.

Online advertising

The Group derives its online advertising services revenues from placing online advertisements for its customers such as banners, links and logos on the Group’s websites in China.

Revenues from online advertisements are derived from written contracts with customers that include the related fee, payment terms and provide persuasive evidence of the arrangement. The majority of the online advertising contracts are for the provision of online advertisement for a fixed period of time with no guaranteed minimum impression level. Revenues from these contracts are recognized based on the time period the advertisement is displayed. Certain of the Group’s online advertising contracts do not include a fixed delivery pattern for the online advertising. In these situations, revenues are deferred until completion of the contract. In all contracts, there are no future obligations after the completion of the contract and no rights of refund related to the impression levels.

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(l) Cost of revenues

Cost of services

Costs of services includes service fees retained by and transmission fees payable to the mobile telecommunication operators in China, costs of direct product promotion and marketing, staff bonuses and commissions that are based on revenues, bandwidth leasing charges, Internet access fees, channel alliance fees, handset manufacturers alliance fees, royalty payments, content fees, depreciation, portal content production, wireless Internet services and games development staff costs, website and platform maintenance costs and other production costs.

Cost of goods sold

Cost of goods sold consists of the costs of consumer products, computer hardware and software that the Group sold to its commercial enterprise solutions customers.

(m) Advertising expenses

The Group recognizes advertising expenses in accordance with American Institute of Certified Public Accountants (“AICPA”) SOP 93-7 “Reporting on Advertising Costs”. As such, the Group expenses the costs of producing advertisements at the time production occurs, and expenses the cost of communicating advertising in the period in which the advertising space or airtime is used. Advertising expenses totaled US$5,778,000, US$5,793,000 and US$6,415,000 during the years ended December 31, 2004, 2005 and 2006.

(n) Product development expenses

The Company accounts for website development costs under SOP 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”) and capitalizes material direct costs of materials and services consumed in developing or obtaining internal-use computer software during the application development stage, when it is probable that there will be a success considering its commercial and technological feasibility and costs can be measured reliably. Costs incurred in the enhancement of the Company’s website and the classification and organization of listings within Internet properties and enhancements to existing products are charged to product development expenses as incurred. We have not capitalized any product development expense as the criteria for capitalization are not met.

(o) Share-based compensation expenses

Prior to 2006, the Group accounts for the share option schemes under the recognition and measurement provisions of Accounting Principles Board Opinion No.25 (“APB 25”), “Accounting for Stock Issued to Employees” and related interpretations. Accordingly, the amount of compensation expense was determined based on the intrinsic value, i.e. the excess, if any, of the quoted market price of the shares over the exercise price of the options at the date of the grant, and was amortized over the vesting period of the option concerned. SFAS 148 “Accounting for Stock-Based Compensation – Transition and Disclosure” allowed entities to continue applying the provisions of APB 25 and provide pro forma net income or loss and pro forma earnings or loss per share disclosures in the notes to financial statements for employee share options using fair-value based methods of accounting as prescribed in SFAS 123 “Accounting for Stock-Based Compensation” and SFAS 148.

In December 2004, SFAS 123R “Share-Based Payment” was released and this new standard requires entities to recognize the costs of employee services in share-based payment transactions using fair-value methods thereby reflecting the economic consequences of those transactions in the financial statements. This Statement is effective for the Group from January 1, 2006. Under its modified prospective application, SFAS 123R applies to new awards and to awards modified, repurchased, or cancelled after the required effective date. Additionally, compensation cost for the portion of awards, for which the requisite service has not been rendered and therefore the related compensation expenses have not been recognized in the income statement, that are outstanding as of the required effective date shall be recognized as the requisite service is rendered on or after the required effective date. Pro forma disclosure of application of the fair value recognition provision to share-based compensation in the comparative year is disclosed in note 32.

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(p)

Contribution plan and statutory reserves

China Contribution Plan

Full-time employees of the Group are entitled to staff welfare benefits including medical care, welfare subsidies, unemployment insurance and pension benefits through a China government-mandated multi-employer defined contribution plan. The Group is required to accrue for these benefits based on certain percentages of the employees’ salaries. The Group is also required to make contributions to the plans out of the amounts accrued for medical and pension benefits. The Chinese government is responsible for the medical benefits and the pension liability to be paid to these employees.

India Employee Benefits Schemes

Gratuity Plan: Indiagames is required to provide for a defined benefit retirement plan covering all its employees in India. Indiagames provides for the gratuity benefit through actuarially determined valuations and the unfunded accumulated benefit obligation is recognized. No funds are set aside for payment of the gratuity accrual up to December 31, 2006.

Provident Fund: All employees in India are entitled to receive benefits under a provident fund administrated and managed by the Government of India, which is a defined contribution plan. Indiagames is required to make monthly contributions to the plan at a predetermined rate (presently 12%) of the employee’s basic salary. Such contributions are charged to income in the period in which they are incurred.

China Statutory Reserves

Certain subsidiaries and variable interest entities of the Group are required to make appropriations to reserve funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the People’s Republic of China (the “PRC GAAP”). Appropriation to the statutory surplus reserve should be at least 10% of the after-tax net income determined in accordance with the PRC GAAP until the reserve is equal to 50% of the entities’ registered capital. Prior to 2006, appropriations to the statutory public welfare fund were at 5% to 10% of the after-tax net income determined in accordance with the PRC GAAP. Starting from 2006, no appropriations to statutory public welfare fund were required to be made. Appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors. The statutory public welfare fund was established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation. Other statutory reserves are established for the purpose of offsetting accumulated losses, enlarging production or increasing share capital.

(q) Income taxes

The Company accounts for income tax using SFAS No. 109 “Accounting for Income Taxes”, which requires the asset and liability approach for financial accounting and reporting for income taxes. Under this approach, deferred income taxes are provided for the estimated future tax effects attributable to temporary differences between financial statement carrying amounts of assets and liabilities and their respective tax bases, and for the expected future tax benefits from loss carry-forwards and provisions, if any. Deferred tax assets and liabilities are measured using the enacted tax rates expected in the years of recovery or reversal and the effect from a change in tax rates is recognized in the statement of operations in the period of enactment. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.

(r) Discontinued operations

A discontinued operation is a component of the Group that may be a reportable segment or an operating segment, a reporting unit, a subsidiary or an asset group that has been disposed or is held for sale. The results of that component is separately reported as “discontinued operations” in the Consolidated Statements of Operations. The comparative Consolidated Statements of Operations is restated as if the operation had been discontinued from the start of the comparative period. The assets, liabilities and minority interests of such component classified as “discontinued operations” or “held for sale” are presented separately in the assets, liabilities and minority interests sections, respectively, of the Consolidated Balance Sheet upon such classification being made.

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(s) Earnings per ordinary share (“EPS”) and per American Depositary Share (“ADS”)

Basic EPS is computed by dividing net profit attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year.

Diluted EPS is computed by dividing net profit attributable to shareholders by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the year. Ordinary equivalent shares consist of ordinary shares issuable upon the exercise of outstanding stock options (using the treasury stock method) and contingently issuable shares in relation to a business acquisition.

Earnings per ADS are computed by multiplying the EPS by 80, which is the number of ordinary shares represented by each ADS.

(t) Translation of foreign currencies

The functional currency of the Group is Renminbi (“RMB”). The functional currency of our Indiagames subsidiary is the Indian Rupee (“RS”).

Transactions of the Group excluding Indiagames denominated in currencies other than RMB are translated into RMB at the exchange rates quoted by the People’s Bank of China (“PBOC”) prevailing at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into RMB using the applicable exchange rates quoted by the PBOC at the balance sheet dates. Exchange differences are included in the Consolidated Statements of Operations.

The functional currency of our subsidiary in India, Indiagames, is the RS. Transactions in foreign currencies are translated in RS at the exchange rate quoted by the State Bank of India prevailing on the date of transaction. Monetary assets and liabilities denominated in currencies other than RS are expressed in the functional currency at the exchange rates in effect at the balance sheet date. Exchange differences resulting from foreign currency transactions are included in the statement of operations of Indiagames. The financial statements of Indiagames are translated from RS to RMB for the purpose of the Group consolidation, using exchange rate in effect at each year end for assets and liabilities and average exchange rates during each reporting year for the statement of operations of Indiagames. The translation adjustments resulting from the translation of these financial statements of Indiagames are reflected as accumulated other comprehensive losses or income in the shareholders’ equity.

The Group’s consolidated financial statements are translated into the reporting currency, the United States Dollar (“US$”), using exchange rates in effect at each year end for assets and liabilities and average exchange rates during each reporting year for the consolidated statements of operations. Translation adjustments resulting from translation of these consolidated financial statements are reflected as accumulated other comprehensive (losses)/ income in the shareholders’ equity.

(u) Segmental reporting

SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information” establishes standards for reporting information about operating segments on a basis consistent with the Group’s internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. The Group operates in three principal business segments in 2006, namely wireless Internet services, online advertising and others.

(v) Comprehensive (loss)/income

Comprehensive (loss)/income is defined as the change in equity of the Group during a period from transactions and other events and circumstances excluding those resulting from investments by shareholders and distributions to shareholders. Comprehensive (loss)/income includes net income and other comprehensive (loss)/income. Accumulated other comprehensive (losses)/income of the Group represent the cumulative foreign currency translation adjustment; and unrealized losses on investments in available-for-sale securities.

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(w) Recent accounting pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued the final 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 tax positions recognized in an enterprise’s financial statements. FIN 48 creates a single model to address uncertainty in income tax positions and clarifies the accounting for income taxes by prescribing a more-likely-than-not recognition threshold a tax position is required to meet before being recognized in the financial statements. The Company is required to adopt it in the first quarter of fiscal year 2007. The Group is currently evaluating the effect that the adoption of FIN 48 will have on its consolidated results of operations and financial condition.

In September 2006, SFAS 157 “Fair Value Measurement” was issued by FASB. The statement clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures requirement about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and shall be applied prospectively except for several types of financial instruments. The Group will be required to adopt the statement in the first quarter of fiscal year 2008. The Company considers that the adoption of SFAS 157 will not have material impact on its consolidated results of operations and financial condition because the fair value measurement we currently use to measure our assets or liabilities is in accordance with the requirement of this new statement.

In September 2006, the FASB issued SFAS 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”. This statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status through comprehensive income in shareholders’ equity in the year in which the changes occur. SFAS 158 is effective as of the end of the fiscal year ending after December 15, 2006 and shall be applied prospectively. We have adopted this aspect of SFAS 158 in these consolidated financial statements for the year ended December 31, 2006 and no material impact on the consolidated results of operations and financial condition has been resulted.

In September 2006, the Securities and Exchange Commission 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. SAB 108 is effective for financial statements issued for fiscal years on or after November 15, 2006 and shall be applied prospectively. We have adopted the provisions of SAB 108 in the consolidated financial statements for the year ended December 31, 2006 and no material impact on the consolidated results of operations and financial condition has been resulted.

In February, 2007, the FASB issued SFAS 159 “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115”. This statement permits all entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. SFAS 159 will be effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Group is currently evaluating the effect that the adoption of this statement will have on its consolidated results of operations and financial condition but does not expect it to have a material impact.

6. BUSINESS COMBINATIONS

(a) Acquisition of Treasure Base Group

Effective August 11, 2004, the Group acquired 100% equity interest of Treasure Base Group for a maximum consideration of RMB550,000,000 (equivalent to US$66,420,000). Through a series of contractual arrangements, Treasure Base is the primary beneficiary of a wireless Internet services company, namely LingXun. LingXun is a domestic limited liability company incorporated in China in September 2002, and is principally engaged in the provision of wireless Internet services to customers in China. The acquisition helped the Group to grow its wireless Internet services business in China.

The acquisition has been accounted for using the purchase method of accounting and the results of the operations of LingXun have been included in the Group’s consolidated financial statements from the acquisition date of August 11, 2004.

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The purchase consideration comprised of the following:

an initial consideration of US$33,034,000, that is equal to 4.5 times Treasure Base’s 2004 audited combined after-tax profit; and
an earn-out consideration of US$16,615,000, that is equal to 1.75 times Treasure Base’s 2005 audited combined after-tax profit.

The final allocation of the purchase price is as follows:

	(in thousands of
	U.S. dollars)
Cash and bank balances	5,880
Other current assets	1,381
Property and equipment, net	175
Intangibles	710
Goodwill	43,462
Current liabilities	(1,700)
	49,908
Professional costs	(259)
Initial consideration paid in 2004	(18,077)
Initial consideration paid in 2005	(14,957)
Earn-out consideration paid in 2006	(16,615)
	(49,908)

The excess of the acquisition cost (comprising the consideration and the professional cost associated with the acquisition) over the fair value of the identifiable assets acquired and liabilities assumed was recorded as goodwill. The goodwill is not deductible for tax purposes. Identifiable intangible assets, the valuation of which was performed by an independent valuer, were recognized and measured at fair value upon acquisition and amortized over their useful lives of three months.

A prepayment of the initial consideration amounting to US$18,077,000 was made in 2004, and in May 2005, the Company paid US$14,957,000 cash to satisfy the remaining balance of the initial consideration.

During the year 2006, the Company made a cash payment of US$16,615,000 to settle the earn-out consideration.

(b) Acquisition of Whole Win Group

Effective November 19, 2004, the Group acquired 100% equity interest of Whole Win Group for consideration of RMB60,000,000 (equivalent to US$7,231,000). Through a series of contractual arrangements, Whole Win is the primary beneficiary of a wireless Internet services company, namely Startone. Startone is a domestic limited liability company incorporated in China in December 2002 and is principally engaged in the provision of WAP services to customers in China. The acquisition helped the Group to grow its WAP business in China.

The acquisition has been accounted for using the purchase method of accounting and the results of the operations of Startone have been included in the Group’s consolidated financial statements from the acquisition date of November 19, 2004.

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The final allocation of the purchase price is as follows:

	(in thousands of
	U.S. dollars)
Cash and bank balances	107
Other current assets	936
Property and equipment, net	30
Intangibles	221
Goodwill	6,021
Current liabilities	(26)
	7,289
Professional costs	(58)
Initial consideration paid in 2004	(2,169)
Earn-out consideration paid in 2005	(5,062)
	(7,289)

The excess of the acquisition cost (comprising purchase price and the professional costs associated with the acquisition) over the fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill. The goodwill is not deductible for tax purposes. Identifiable intangible assets, the valuation of which was performed by an independent valuer, were recognized and measured at fair value upon acquisition and amortized over their useful lives of three months.

A payment of the initial consideration amounting to US$2,169,000 was made in 2004, and in May 2005, the Company made the final cash payment of US$5,062,000.

(c) Acquisition of Indiagames Limited

Effective February 24, 2005, the Company, through its wholly-owned subsidiary TOM Online Games Limited, completed the acquisition of 76.29% of the issued and paid-up share capital of Indiagames by paying US$13,732,000 cash as consideration (of which US$300,000 represent tax warranties given by the founder of Indiagames, are currently held in escrow and accounted for as restricted cash in the consolidated balance sheets). Pursuant to the Sales and Subscription Agreement, the Company was due to subscribe for new shares of Indiagames for US$4,000,000 which would have increased its ownership interest to 80.6%. Indiagames is a limited liability company incorporated in India and is principally engaged in the publication, development and distribution of mobile games globally. The acquisition of Indiagames was intended to help the Company to grow its wireless games content services business in India and overseas market.

The acquisition has been accounted for using the purchase method of accounting and the results of operations of Indiagames, to the extent of our ownership interest, have been included in the Group’s consolidated financial statements from the acquisition date of February 24, 2005.

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The allocation of the purchase price is as follows:

	(in thousands of
	U.S. dollars)
Cash and bank balances	313
Other current assets	2,989
Property and equipment, net	90
Intangibles assets	772
Goodwill	11,695
Current liabilities	(1,313)
Minority interests	(493)
	14,053
Professional costs	(321)
Cash paid, excluding cash under escrow	(13,432)
Cash paid, held under escrow	(300)
	(14,053)

The excess of the acquisition cost (comprising purchase price and the professional costs associated with the acquisition) over the fair value of identifiable assets acquired and liabilities assumed amounting to US$11,695,000 was recorded as goodwill. Identifiable intangible assets amounting to US$772,000, the valuation of which was performed by an independent valuer, were recognized and measured at fair value upon acquisition and amortized over their useful lives.

On April 29, 2005, the Company announced the participation of Cisco Systems Inc. (“Cisco”) and Macromedia Inc. (“Macromedia”) in the financing of Indiagames under a Subscription and Shareholders Agreement. Cisco and Macromedia invested US$4,000,000 for a combined stake of 18.18% in Indiagames, through a subscription for newly issued shares. The Company’s ownership interest in Indiagames was diluted to 62.42% from that date, resulting in an overall loss of US$69,000 after reducing goodwill and intangible assets related to Indiagames in the consolidated balance sheets by US$2,126,000 and US$110,000, respectively. As part of the agreement for Cisco and Macromedia to invest in Indiagames, the Company was released from its commitment to subscribe for new shares of Indiagames as stated in the original Sales and Subscription Agreement.

(d)

Acquisition of Huanjian Shumeng

Effective January 4, 2006, the Group, through its variable interest entity, Beijing Lei Ting, entered into a sale and purchase agreement with the shareholders of Huanjian Shumeng, to acquire 75% of the entire issued share capital of Huanjian Shumeng for an aggregate amount of RMB22,000,000 (equivalent to US$2,728,000), of which RMB10,000,000 (equivalent to US$1,240,000) was injected as additional paid-in capital. The payment of the total consideration was made in March 2006 and August 2006. Huanjian Shumeng is an operator of the Internet website hjsm.tom.com (previously www.hjsm.net) which provides original Chinese novels to its users. The investment in Huanjian Shumeng helped to increase traffic to its Internet portal, increase online advertising opportunities and generate synergies with our wireless Internet business through the provision of literature content.

The acquisition has been accounted for using the purchase method of accounting and the results of the operations of Huanjian Shumeng have been included in the Group’s consolidated financial statements from the acquisition date of January 4, 2006.

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The final allocation of the purchase price is as follows:

	(in thousands of
	U.S. dollars)
Cash and bank balances	1,267
Other current assets	14
Property and equipment, net	6
Intangibles	548
Goodwill	1,397
Current liabilities	(39)
Minority interests	(449)
	2,744
Professional costs	(16)
Cash paid	(2,728)
	(2,744)

The excess of the acquisition cost (comprising the purchase price and the professional costs associated with the acquisition) over the fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill. The goodwill is not deductible for tax purposes. Identifiable intangible assets, the valuation of which was performed by an independent valuer, were recognized and measured at fair value upon acquisition and will be amortized over their useful lives of one month to two years, except for domain names which was considered to have an indefinite useful life. As at December 31, 2006, the carrying value of non-amortized domain names was US$437,000.

On August 23, 2006, the Company, through Beijing Lei Ting, obtained an exclusive call option to purchase the remaining 25% equity interest of Huanjian Shumeng for US$2,400,000, exercisable at anytime after 2 years from February 8, 2006. The fair value of the call option was determined to be de minimis as of December 31, 2006.

(e) Acquisition of Gainfirst Group

Effective June 1, 2006, the Group acquired 100% interest in Gainfirst Asia Limited for a maximum consideration of RMB600,000,000 (equivalent to approximately US$75,000,000). Through a series of contractual arrangements, Gainfirst is the primary beneficiary of a wireless Internet services company, namely Beijing Infomax. Beijing Infomax is a domestic limited liability company incorporated in China in February 2003, and is principally engaged in the provision of wireless Internet services to customers in China. The Company has evaluated its relationship with Beijing Infomax and has concluded that it is a variable interest entity of the Company. The acquisition helped the Group strengthen its market position in the wireless Internet services business in China.

The acquisition has been accounted for using the purchase method of accounting and the results of the operations of Beijing Infomax have been included in the Group’s consolidated financial statements from the acquisition date of June 1, 2006.

The purchase consideration, to be paid fully in cash, comprised of the following:

an initial consideration of RMB150,000,000 (equivalent to US$18,750,000);
second consideration of RMB93,991,000 (equivalent to US$12,037,000), that is equal to 3.5 times of the 2006 adjusted audited combined after-tax profit (“2006 earn-out consideration”) minus initial consideration; and
final earn-out consideration that is an amount equal to 3 times (if the 2007 adjusted audited combined after-tax profit is less than RMB65,000,000) or 4 times (if the 2007 adjusted audited combined after-tax profit is equal to or more than RMB65,000,000) of the 2007 adjusted audited combined after-tax profit plus adjusted 2006 earn-out consideration minus consideration previously paid up to the final payment.

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The allocation of the purchase price consisting of the initial consideration and the 2006 earn-out consideration is as follows:

	(in thousands of
	U.S. dollars)
Cash and bank balances	2,310
Other current assets	1,852
Property and equipment, net	132
Intangibles	2,146
Goodwill	27,266
Current liabilities	(2,707)
	30,999
Professional costs	(212)
Consideration paid in 2006	(18,750)
2006 earn-out consideration payable in 2007	(12,037)
	(30,999)

The excess of the acquisition cost (comprising the considerations and the professional cost associated with the acquisition) over the fair value of identifiable assets acquired and liabilities assumed was recorded as goodwill. The goodwill is not deductible for tax purposes. Identifiable intangible assets, the valuation of which was performed by an independent valuer, were recognized and measured at fair value upon acquisition. The primary intangible asset (comprising of 90% of total identifiable intangible assets) is amortized over its useful life of 27 months based on the initial contract period of Beijing Infomax’s TV channel partner.

The payment of the initial consideration of RMB150,000,000 (equivalent to US$18,750,000) was made in August 2006.

Pursuant to the SFAS 141 “Business Combinations”, the earn-out consideration is considered contingent consideration, which will not become certain until the adjusted audited combined after-tax profits of Gainfirst Group for the year 2007 is available. As at December 31, 2006, the 2006 audited combined after-tax profit of Gainfirst Group has been ascertained and accordingly, the Company expects to make a cash payment of US$12,037,000 during 2007, to settle the 2006 earn-out consideration. The amount of 2006 earn-out consideration payable and additional goodwill related to Gainfirst Group have been reflected in our 2006 consolidated financial statements. The 2007 audited combined after-tax profit of Gainfirst Group has not become certain and accordingly, this contingent consideration has not been reflected in the consolidated financial statements of the Group as at December 31, 2006.

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(f) Unaudited pro forma consolidated financial information

Disclosure for the year ended December 31, 2005

The following unaudited pro forma consolidated financial information for the year ended December 31, 2004 and 2005, as presented below, reflects the results of operations of the Company assuming the acquisitions of Indiagames occurred on January 1, 2004 and 2005 respectively, and after giving effect to the purchase accounting adjustments. These pro forma results have been prepared for information purposes only and do not purport to be indicative of what operating results would have been had the acquisitions actually taken place on January 1, 2004 and 2005 respectively, and may not be indicative of future operating results.

	Year ended December 31,	Year ended December 31,
	2004	2005
	(unaudited and in thousands
	of U.S.	dollars)
Revenues	125,924	173,009
Operating profit	32,051	41,256
Net income attributable to shareholders	34,245	45,069
Earnings per ordinary share – basic (cents)	0.95	1.10
Earnings per ordinary share – diluted (cents)	0.86	1.07
Earnings per ADS – basic (cents)	75.9	87.8
Earnings per ADS – diluted (cents)	69.1	85.5

In December 2006, the Company committed to a plan which was approved by the Company’s Board of Directors on December 29, 2006 to sell substantially all its equity interest in Indiagames so as to focus on the China market and initiated actions to locate a buyer. For detailed information, please refer to note 7.

Disclosure for the year ended December 31, 2006

The following unaudited pro forma consolidated financial information for the years ended December 31, 2005 and 2006, as presented below, reflects the results of operations of the Company assuming the acquisitions of Huanjian Shumeng and Gainfirst Group occurred on January 1, 2005 and 2006 respectively, and after giving effect to the purchase accounting adjustments. These pro forma results have been prepared for information purposes only and do not purport to be indicative of what operating results would have been had the acquisitions actually taken place on January 1, 2005 and 2006 respectively, and may not be indicative of future operating results.

	Year ended December 31,	Year ended December 31,
	2005	2006
	(unaudited and in thousands
	of U.S.	dollars)
Revenues	182,371	171,394
Operating profit	39,986	29,990
Net income attributable to shareholders	44,187	28,889
Earnings per ordinary share – basic (cents)	1.08	0.68
Earnings per ordinary share – diluted (cents)	1.05	0.67
Earnings per ADS – basic (cents)	86.06	54.32
Earnings per ADS – diluted (cents)	83.82	53.97

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7. DISCONTINUED OPERATIONS

In December 2006, the Company committed to a plan which was approved by the Company’s Board of Directors on December 29, 2006 to sell substantially all its equity interests in Indiagames in order to focus on the China market and initiated actions to locate a buyer. As a result, the assets and liabilities of Indiagames were classified as held for sale and presented separately in the asset and liability sections, respectively, of the consolidated balance sheet as at December 31, 2006. The results of its operation were also separately presented on the face of the consolidated statements of operations under “Discontinued Operations” for the years ended December 31, 2005 and 2006 which included:

Net profit/(loss) for Indiagames Loss on issuance of Indiagames’ shares (Note 6(c)) Provision for goodwill impairment * Loss from Discontinued Operations	Year ended December 31, 2005 2006 (in thousands of U.S.dollars) 68 (421) (69) – – (4,628) (1) (5,049)	Year ended December 31, 2005 2006 (in thousands of U.S.dollars) 68 (421) (69) – – (4,628) (1) (5,049)
		(5,049)

* The Company recognized an impairment charge on goodwill relating to Indiagames amounting to US$4,628,000 based on a binding term sheet signed with a potential buyer in March 2007.

The major classes of assets and liabilities classified as held for sale were as follows:

	December 31, 2006
	(in thousands of U.S. dollars)
Cash and cash equivalents	373
Short-term bank deposits	2,592
Account receivable, net	2,067
Other current assets	1,856
Goodwill, net	4,754
Other non-current assets	550
Assets held for sale	12,192
Accounts payable	104
Other payable and accruals	1,027
Liabilities held for sale	1,131

Minority shareholders’ interest in Indiagames amounting to US$2,324,000 has been reported separately in the Group’s consolidated balance sheet as at December 31, 2006.

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The results and cash flow information for Indiagames during the years ended December 31, 2005 and 2006 were as follows:

Revenues
Operating expenses
Operating profit/(loss)
Other income
Income/(loss) before tax
Income tax (charge)/credit
Income/(loss) after tax
Minority interest
Net profit/(loss)
Net cash (used)/provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Foreign currency translation
Cash and cash equivalents, end of year

Year ended December 31,
2005
2006
(in thousands of U.S.dollars)
4,046
3,946
(3,802)
(4,805)
244
(859)
118
205
362
(654)
(39)
45
323
(609)
(255)
188
68
(421)
Year ended December 31,
2005
2006
(in thousands of U.S.dollars)
(915)
5
(2,143)
(769)
3,985
–
927
(764)
313
1,135
(105)
2
1,135
373

8. CONCENTRATION AND RISKS

(a) Major customers

There are no revenues from customers which individually represent greater than 10% of the total revenues for the years ended December 31, 2005 and 2006.

(b) Dependence on mobile telecommunication operators

Substantially all of the wireless Internet services revenues of the Group for the years ended December 31, 2005 and 2006 are derived from co-operative arrangements with China Mobile and China Unicom (the “Chinese mobile telecommunication operators”). The Chinese mobile telecommunication operators are entitled to a percentage of the revenues earned from users of our services. If the strategic relationship with either mobile telecommunication operator is terminated or scaled-back, or if the Chinese mobile telecommunication operators alter the co-operative arrangements, the Group’s wireless Internet services business might be adversely affected.

Revenues earned from customers through the Chinese mobile telecommunication operators for the years ended December 31, 2005 and 2006 were US$157,719,000, representing 94% of total revenue of the Group, and US$152,165,000, representing 90% of total revenue of the Group, respectively.

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Amounts due from the Chinese mobile telecommunication operators as of December 31, 2005 and 2006, were US$27,284,000, representing 80% of net accounts receivable, and US$15,846,000, representing 68% of net accounts receivable, respectively.

A small portion of wireless Internet services revenues are derived from co-operative arrangements with a number of foreign mobile telecommunication operators, distributing mobile games from our Indiagames subsidiary. Indiagames’s results were reported under “Discontinued Operations”.

(c) Credit risk

The Group focuses on key customers both for online advertising services and commercial enterprise solutions services and works closely with them. The Group generally does not require collateral for its accounts receivable. The Group also performs regular reviews of its accounts receivable and maintains allowances for potential credit losses.

For the wireless Internet services, the Group is required to assume certain credit risk under specified circumstances when the mobile telecommunication operators are not able to collect the fee from the end customers. During the three years ended December 31, 2006, the Group did not experience significant credit losses.

(d) Chinese market macro-economic and regulatory risks and uncertainties

The Chinese market in which the Group operates has certain macro-economic and regulatory risks and uncertainties. These uncertainties extend to the ability of the Group to operate its business, and to conduct wireless Internet services, online advertising, commercial enterprise solutions and Internet access services in China. Although China, since 1978, implemented a wide range of market oriented economic reforms, continued reforms and progress towards a full-market-oriented economy are uncertain. In addition, the telecommunication, information and media industries remain highly regulated. Restrictions are currently in place or are unclear regarding in what specific segments of these industries foreign-owned entities, like the Group, may operate. The Group’s legal structure and scope of operations in China could be subject to restrictions that could result in severe limits to the Group’s ability to conduct business in China.

On July 7, 2006, the Group received a notice from China Mobile on policy changes for services on China Mobile’s Monternet platform. The changes, which have been implemented under the policy directives of China’s Ministry of Information Industry (“MII”), aim to address a number of issues, including reducing customer complaints, increasing customer satisfaction and promoting the healthy development of Monternet. In addition, under the same MII policy directives, China Unicom has also implemented similar policies to that of China Mobile during the third quarter 2006.

These new policies have had a substantial negative impact on the Group’s wireless business, resulting in substantial revenue and profit declines from prior periods.

(e) Other markets macro-economic and regulatory risks and uncertainties

The Group operates its mobile games subsidiary, Indiagames, in India and Indiagames is subject to certain macroeconomic and regulatory risks and uncertainties in that country. These uncertainties extend to the ability of the Group to operate its mobile games publishing, development and distribution business in India. Although one of the driving forces of the Indian economy is their strength in information technology, uncertainty remains as to, among others, the regulatory, competitiveness and labor factors. On a global scale, excluding China and India, the Group may be subject to restrictions that could result in severe limits to Indiagames’ ability to conduct mobile games business in its chosen markets.

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(f) Other risks

A majority of the Group’s sales, purchases and expenses transactions are generally denominated in RMB and a significant portion of the Group’s assets and liabilities is denominated in RMB. The RMB is not freely convertible into foreign currencies. In China, certain foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the PBOC. Remittances in currencies other than RMB by the Group in China must be processed through the PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to effect the remittance.

Our Indian subsidiary, Indiagames, generates a significant portion of its revenues from international sales in US$ and EURO, with the remaining local sales denominated in the local currency, the RS. In addition, most of its licensing and royalties expenses are to the account of foreign providers. To minimize foreign exchange exposure risk, Indiagames has foreign currency bank accounts in each of the said currencies.

On July 21, 2005, the PBOC announced a 2.1% revaluation of the RMB to US$ (or from roughly a RMB8.28 exchange rate to roughly RMB8.11 per US$), and a new system to set the value of the RMB against an unspecified basket of currencies. Since then the RMB has shown continuous appreciation against the US$, climbing 3.7% against the US$ to RMB7.81 per US$ on December 31, 2006. We would expect our revenues on a US$ basis to be impacted roughly in line with the fluctuation of the RMB exchange rates against the US$.

9. SHORT-TERM BANK DEPOSITS

Short-term bank deposits arose from one-year fixed deposits of US$25,613,000 (December 31, 2005: US$1,863,000), bearing interest rates between 2.25% and 2.52% per annum.

10. ACCOUNTS RECEIVABLE, NET

Accounts receivable, gross Provision for doubtful accounts receivable Accounts receivable, net	December 31, 2005 2006 (in thousands of U.S.dollars) 37,883 27,825 (3,933) (4,352) 33,950 23,473	December 31, 2005 2006 (in thousands of U.S.dollars) 37,883 27,825 (3,933) (4,352) 33,950 23,473
		23,473

The aging analysis of the accounts receivable of the Group is set out below:

Current 31-60 days 61-90 days Over 90 days Accounts receivable, net	December 31, 2005 2006 (in thousands of U.S.dollars) 14,229 11,051 7,323 3,987 5,122 2,469 7,276 5,966 33,950 23,473	December 31, 2005 2006 (in thousands of U.S.dollars) 14,229 11,051 7,323 3,987 5,122 2,469 7,276 5,966 33,950 23,473
		23,473

The majority of the Group’s sales are on open account terms and in accordance with terms specified in the contracts governing the relevant transactions. Wireless Internet services revenues are collected from the mobile telecommunication operators in arrears.

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The movement of the allowance for doubtful accounts receivable for the years ended December 31, 2005 and 2006 are as below:

Beginning of year Charged to expenses Write-off of receivable balances and corresponding provisions Exchange adjustment Reclassified to assets held for sale End of year	December 31, 2005 2006 (in thousands of U.S.dollars) (3,164) (3,933 (691) (335 5 53 (83) (169 – 32 (3,933) (4,352	December 31, 2005 2006 (in thousands of U.S.dollars) (3,164) (3,933 (691) (335 5 53 (83) (169 – 32 (3,933) (4,352
		(4,352

11. RESTRICTED CASH

Restricted cash of US$300,000 (December 31, 2005: US$300,000) represents money held in escrow pursuant to tax warranties provided by the founder of Indiagames Limited. The tax warranties are effective for a period of 2 years starting from the share subscription closing date of April 29, 2005. As at December 31, 2006, the restricted cash is classified as a current asset of the Company in the consolidated balance sheets.

12. PREPAYMENTS

Prepayment for website content Portal facility prepayment Fixed asset purchase prepayment Tax prepayment Prepaid marketing expense Others Total	December 31, 2005 2006 (in thousands of U.S.dollars) 3,191 1,608 253 402 113 23 424 460 1,456 1,871 616 390 6,053 4,754	December 31, 2005 2006 (in thousands of U.S.dollars) 3,191 1,608 253 402 113 23 424 460 1,456 1,871 616 390 6,053 4,754
		4,754

13. DEPOSITS AND OTHER RECEIVABLES

Rental deposits Advances to staff Interest receivable Others Total	December 31, 2005 2006 (in thousands of U.S.dollars) 581 370 74 163 1,627 1,774 221 309 2,503 2,616	December 31, 2005 2006 (in thousands of U.S.dollars) 581 370 74 163 1,627 1,774 221 309 2,503 2,616
		2,616

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14. DUE FROM/TO RELATED PARTIES

Due from: Parent company Fellow subsidiaries Related companies Total Due to: Parent company Fellow subsidiaries Related companies Total	December 31, 2005 2006 (in thousands of U.S.dollars) – 4 153 127 36 39 189 170 19,281 – 63 195 86 9 19,430 204	December 31, 2005 2006 (in thousands of U.S.dollars) – 4 153 127 36 39 189 170 19,281 – 63 195 86 9 19,430 204
		170

		– 195 9
		204

Except for the balance due to parent company (as below), the balances due from/(to) all related parties are unsecured, non-interest bearing and have no fixed terms of repayment.

The balance due to parent company was unsecured and was repayable on demand after December 31, 2004, bearing interest at the rate of 1.65% per annum over the Hong Kong Interbank Offered Rate since January 1, 2004. In August 2006 and September 2006, the Company repaid all outstanding balances of US$20,038,000 to the parent company. During the years ended December 31, 2004, 2005 and 2006, interest charges on the balance due to our parent company amounted to US$428,000, US$939,000 and US$836,000, respectively.

15. AVAILABLE-FOR-SALE SECURITIES AND RESTRICTED SECURITIES

In April 2004, the Company purchased a portfolio of marketable debt securities at a consideration of US$118,883,000 including accrued interest of US$1,500,000 in cash. The maturity date ranges from March 2008 to November 2011, and the coupon interest rate ranges from 2.25% per annum to 8% per annum (Upon disposal of certain securities as mentioned below, the maturity date ranges from March 2008 to August 2009, and the coupon interest rate ranges from 2.25% per annum to 5.375% per annum). The Company’s investment in marketable debt securities was classified as available-forsale securities.

In April 2005, the Company sold certain available-for-sale securities and received the proceeds totaling US$16,392,000 on the same date. Gains on disposal amounted to US$450,000. Also, during the same month, the Company pledged and set aside debt securities with total face value of US$60,000,000 as collateral for a four-year bank loan facility. As a result, those debt securities were reclassified from “available-for-sale securities” to “restricted securities”. As at December 31, 2006, these restricted securities had a market value of US$59,037,000 (December 31, 2005: US$59,122,000). Details of the bank loan are presented in note 24.

In June 2006, the Company effectively pledged debt securities with total face value of US$40,000,000 as collateral for a one-year bank loan. Details of the short-term bank loan are presented in note 23. As a result, those debt securities have been reclassified from “available-for-sale securities” to “restricted securities”. As at December 31, 2006, these restricted securities had a market value of US$38,692,000 (December 31, 2005: US$38,519,000).

The aggregate fair value of restricted securities amounted to US$97,729,000 as at December 31, 2006 (December 31, 2005: US$59,122,000 of restricted securities and US$38,519,000 of available-for-sale securities). For the year ended December 31, 2006, the Company recorded US$465,000 of unrealized gain on its restricted securities in other comprehensive (loss)/income and US$3,713,000 of interest income in the Consolidated Statements of Operations.

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16. INVESTMENT UNDER COST METHOD

On July 23, 2004, the Company entered into a share subscription agreement to acquire a 13.95% equity interest (or 1,494,030 convertible redeemable participating Preferred Shares of the enlarged share capital) in Sichuan Great Wall Software Group (“Sichuan Greatwall”) for a consideration of US$1,494,000. As at December 31, 2006, the investment in Sichuan Greatwall of US$1,588,000 included a currency translation adjustment of US$94,000 arising in 2006. This investment is accounted for using the cost method of accounting as the Company does not have significant influence on the operations and management of Sichuan Greatwall. For the year ended December 31, 2006, following impairment tests, it was concluded that no impairment occurred in the carrying value of this investment.

17. PROPERTY AND EQUIPMENT, NET

Computer equipment Furniture and office equipment Motor vehicles Leasehold improvements Less: Accumulated depreciation Less: Provision for impairment Net book value	December 31, 2005 2006 (in thousands of U.S.dollars) 30,844 39,566 1,133 1,133 284 343 2,296 2,497 34,557 43,539 (16,748) (25,716) (2,463) (2,463) 15,346 15,360

During the years ended December 31, 2004, 2005 and 2006, the depreciation charges of the Group amounted to US$4,544,000, US$6,977,000 and US$8,535,000 respectively, of which US$4,544,000, US$6,909,000 and US$8,436,000 were depreciation charges in continuing operations.

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18. GOODWILL, NET

Cost: Beginning of year Goodwill arising from acquisitions (*) Exchange adjustment Reclassified to assets held for sale End of year Accumulated amortization and provision for impairment: Beginning of year Exchange adjustment End of year Net book value: End of year Beginning of year	December 31, 2005 2006 (in thousands of U.S.dollars) 201,856 228,040 26,184 28,663 – 13,558 – (9,392) 228,040 260,869 43,362 43,362 – 2,716 43,362 46,078 184,678 214,791 158,494 184,678

Goodwill arising from acquisitions totaling US$26,184,000 during the year ended December 31, 2005 included US$9,569,000 in connection with the acquisition of Indiagames and US$16,615,000 of the earn-out consideration for the acquisition of Treasure Base, as discussed in note 6 “Business Combinations”.

In 2006, goodwill increased by US$28,663,000 which included US$1,397,000 arising on the acquisition of Huanjian Shumeng and US$27,266,000 arising on the acquisition of Beijing Infomax, as discussed in note 6 “Business Combinations”.

For the year ended December 31, 2006, the Company tested goodwill for impairment with the assistance of an independent valuer and determined that there was no impairment of goodwill on the Company’s wireless Internet business in China, Huanjian Shumeng and Beijing Infomax. The valuations were arrived at after using a combination of a market value approach (with comparisons to selected publicly traded companies operating in the same industry) and an income approach (Discounted Cash Flows). The book value of goodwill of wireless Internet business in China, Huanjian Shumeng and Beijing Infomax were US$185,712,000, US$1,443,000 and US$27,636,000 respectively as at the December 31, 2006.

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19. INTANGIBLES, NET

Domain names Trademark Customer base Backlog Software Licenses Completed technology Core technology Partnership contract Less: Accumulated amortization Less: Provision for impairment Net book value	December 31, 2005 2006 (in thousands of U.S.dollars) 660 1,138 263 279 471 516 28 30 1,403 1,466 1,053 1,365 356 – 215 61 – 1,993 4,449 6,848 (1,440) (2,205 (1,594) (1,694 1,415 2,949	December 31, 2005 2006 (in thousands of U.S.dollars) 660 1,138 263 279 471 516 28 30 1,403 1,466 1,053 1,365 356 – 215 61 – 1,993 4,449 6,848 (1,440) (2,205 (1,594) (1,694 1,415 2,949
		6,848 (2,205 (1,694
		2,949

Partnership contract represents the Partnership Agreement between Beijing Infomax and CCTV2 which was recognized and measured at fair value upon acquisition based on a valuation performed by an independent valuer. The intangible asset of the partnership contract is amortized over its useful life of 27 months based on the initial contract period of Beijing Infomax’s TV channel partner. Other additions of intangible assets primarily include domain names, licenses and content copyrights which arose in connection with the acquisitions of Huanjian Shumeng and Beijing Infomax.

During the year ended December 31, 2004, 2005 and 2006, the amortization expenses of the Group amounted to US$5,614,000, US$975,000, and US$1,155,000 respectively, of which US$5,614,000, US$535,000 and US$1,045,000 were recorded in continuing operations.

During the year ended December 31, 2005, the Company wrote off intangible assets totalling US$221,000 relating to customer base together with the corresponding accumulated amortization of the same amount as such intangible asset was fully amortized. In 2006, the Company did not write off any intangible assets.

20. ACCOUNTS PAYABLE

The aging analysis of the accounts payable of the Group is set below:

Current 31-60 days 61-90 days Over 90 days Total accounts payable	December 31, 2005 2006 (in thousands of U.S.dollars) 2,609 3,956 399 1,548 323 836 1,700 3,025 5,031 9,365	December 31, 2005 2006 (in thousands of U.S.dollars) 2,609 3,956 399 1,548 323 836 1,700 3,025 5,031 9,365
		9,365

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21. OTHER PAYABLES AND ACCRUALS

Staff costs and welfare accruals Advertising expenses payable Rental and other lease charges accruals Internet access charges and other direct costs accruals Business tax and other levies payable Advances received from customers Professional fees on acquisitions Interest on bank loans Legal and professional fees accruals Others Total	December 31, 2005 2006 (in thousands of U.S.dollars) 2,559 778 811 901 5 26 5,419 5,396 3,180 3,003 1,709 1,484 272 65 446 695 986 1,575 615 756 16,002 14,679	December 31, 2005 2006 (in thousands of U.S.dollars) 2,559 778 811 901 5 26 5,419 5,396 3,180 3,003 1,709 1,484 272 65 446 695 986 1,575 615 756 16,002 14,679
		14,679

22. CONSIDERATION PAYABLES

Acquisition of Treasure Base Group Acquisition of Gainfirst Group Total	December 31, 2005 2006 (in thousands of U.S.dollars) 16,615 – – 12,037 16,615 12,037	December 31, 2005 2006 (in thousands of U.S.dollars) 16,615 – – 12,037 16,615 12,037
		12,037

In March 2006, the Company paid the outstanding consideration payables totaling US$16,615,000 in connection with the acquisition of Treasure Base Group. As at December 31, 2006, the Company had a balance of US$12,037,000 of consideration payable in relation to the 2006 earn-out consideration due for the acquisition of Gainfirst Group, as discussed in note 6 “Business Combinations”.

23. SHORT-TERM BANK LOAN

In May 2006, the Company entered into a loan agreement with a bank whereby on June 2, 2006 the Company effectively pledged certain debt securities (the “Securities”) with a total face value of US$40,000,000 as security for a one-year bank loan, totaling US$35,340,000 and bearing interest at 0.3% over 3-month London Inter-Bank Offered Rate (“LIBOR”). The Company is entitled to the income in respect of the debt securities while they are pledged.

Pursuant to the agreement, the Company shall pay the bank an additional amount (“Additional Amount”) in case: (i) the market value of the Securities is equal to or less than 96% of the market value at inception of the loan (“Initial Market Value”) or (ii) the market value of the Securities plus the Additional Amount paid (“Portfolio Amount”) is equal to or less than 96% of Initial Market Value. Correspondingly, the Company is entitled to request the bank to repay the Additional Amount plus interest calculated at daily US Federal Funds Rate thereon if the Portfolio Amount is equal to or higher than 104% of Initial Market Value. The bank loan will be repaid on or before June 2, 2007.

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24. SECURED BANK LOAN

In April 2005, the Group had pledged certain available-for-sale securities (thereafter referred to as the “restricted securities”) with a total face value of US$60,000,000 to secure a bank loan facility, totaling US$57,000,000 and bearing interest at 0.23% per annum over LIBOR. On April 29, 2005 and July 28, 2005, the Group drew down US$35,000,000 and US$22,000,000, respectively, which, after handling charges, aggregated to US$56,886,000, to fund the payment of business acquisitions. Pursuant to the loan covenants, if the aggregate principal amount of the outstanding loan exceeds 95% of the lower of the market value or face value of the restricted securities, or if any of the restricted securities has been downgraded, the Company shall repay part of the loan or provide additional securities. During the year ended December 31, 2006, US$828,000 was repaid and the remaining balance of the bank loan will be repaid on or before April 28, 2009.

25. SHARE CAPITAL

Company – Authorized

					Ordinary shares at par value
					US$0.001282 or HK$0.01 each
					Number of shares US$’000
As at December	31,	2005	and	2006	10,000,000,000 12,821

Company – Issued and Outstanding

	Ordinary shares at	par value
	US$0.001282 or HK$0.01 each
	Number of shares	US$’000
As at December 31, 2005	4,224,532,105	5,416
Issuance of shares on exercise of employee share options	35,122,423	45
As at December 31, 2006	4,259,654,528	5,461

As at December 31, 2003, the Company had an authorized share capital of 10,000,000,000 ordinary shares of par value of HK$0.01 each, totaling US$12,821,000, and an issued and fully paid share capital of 4,000,000,000 ordinary shares of par value of HK$0.01 each, totaling US$ 5,128,000.

Subsequent to December 31, 2003, the Company underwent a capital reorganization, with the effect of reducing issued share capital from US$ 5,128,000 to US$3,590,000 through repurchasing 1,300,000,000 ordinary shares and allotting 100,000,000 ordinary shares at the same consideration of US$9,750,000. The share capital of the Company has been retroactively restated for the effect of the capital reorganization from the beginning of the earliest period presented.

In March 2004, the Company issued 1,000,000,000 ordinary shares under the Global Offering, split into 800,000,000 shares under the international offering and U.S. offering and 200,000,000 shares under the Hong Kong Offering. In addition to the ordinary shares issued under the global offering, 96,200,000 ordinary shares, worth US$18,500,000, were issued at the initial public offering price, held in escrow and allotted to Cranwood by the Company to satisfy part of the initial consideration for the acquisition of Puccini Group. These ordinary shares have a par value of US$0.001282 or HK$0.01 each and the initial public offering price was US$0.19 or HK$1.50 per offer share.

On April 25, 2005, Cranwood was issued and allotted 304,155,503 ordinary shares in the Company, worth US$47,547,000, which represented the balance settled in shares of half the total purchase consideration for the acquisition of Puccini Group of US$132,094,000. During the period from September 29, 2005 to December 31, 2005, share options were exercised by certain employees. As a result, the Company issued 24,176,602 new ordinary shares at the exercise price of HK$1.50 each (equivalent to US$19.23 cents) and received US$4,650,000.

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During the year ended December 31, 2006, share options were exercised by certain employees. As a result, the Company issued 35,122,423 new ordinary shares at the exercise price of HK$1.50 each (equivalent to US$19.23 cents) and received US$6,754,000. The newly issued shares were included in the computation of basic earnings per share in proportion to the period they were outstanding.

26. CONTRIBUTION PLAN AND STATUTORY RESERVES

(a) China Contribution Plan

The total provision for such employee benefits was US$1,121,000, US$2,086,000 and US$1,989,000 for the years ended December 31, 2004, 2005 and 2006, respectively. For the years ended December 31, 2004, 2005 and 2006, contributions to the plans out of the amounts accrued for medical and pension benefits amounted to US$1,045,000 US$1,881,000 and US$1,908,000 respectively.

(b) China Statutory Reserves

During the year ended December 31, 2004, one legal entity appropriated US$2,299,000 and US$1,150,000 respectively to statutory surplus reserve and statutory public welfare fund, based on its after-tax net income under PRC GAAP. An additional US$4,451,000 was appropriated to the reserve funds for specific tax holiday benefits as required by local regulations

During the year ended December 31, 2005, six legal entities totally appropriated US$1,354,000 and US$590,000 respectively to statutory surplus reserve and statutory public welfare fund, based on their after-tax net income under PRC GAAP.

During the year ended December 31, 2006, three legal entities totally appropriated US$139,000 to statutory surplus reserve based on their after-tax net income under PRC GAAP.

(c) India Employee Benefits Schemes

Gratuity Plan: The Company recognized contributions of US$4,000 and US$26,000 for the years ended December 31, 2005 and 2006, respectively. Estimated contributions for the year 2007 based on an actuarial valuation is US$27,000.

Provident Fund: Provident Fund contributions of US$56,000 and US$80,000 were included in our consolidated statements of operations for the years ended December 31, 2005 and 2006 respectively. These contributions are made to the fund administered and managed by the Government of India. Such contributions are charged to our consolidated statements of operations in the period in which they are incurred.

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27. RELATED PARTY TRANSACTIONS

				Year ended December 31,	Year ended December 31,
			2004	2005	2006
		Note	(in thousands of U.S. dollars)
i)	Operating revenue items
	Online advertising, commercial enterprise solutions
	and wireless Internet services revenues
	earned from:	(a)
	– subsidiaries of TOM Group	(b)	51	–	40
	– subsidiaries of a shareholder of TOM Group		–	15	488
	– a joint venturer	(c)	–	–	126
ii)	Operating expenses items
	Office rental expenses charged by:
	– a related company of a shareholder of
	TOM Group	(d)	1,487	1,378	1,413
	Wireless Internet revenues share, commercial
	enterprise solutions and Internet access
	expenses charged by:	(e)
	– subsidiaries of TOM Group	(f)	82	240	746
	– subsidiaries of a shareholder of TOM Group		–	61	83
	– a joint venturer	(c)	–	–	100
	Recharge to TOM Group and its subsidiaries of
	operating expenses incurred on their behalf		365	255	312
	Administrative service fees charged by
	TOM Group	(g)	641	641	577
	Recharged by TOM Group or its subsidiaries
	for miscellaneous expenses incurred on our behalf		164	191	131
	Operating expenses recharged from a related
	company of the Group	(h)	–	89	40
iii)	Others
	Interest income from an associate of TOM Group	(i)	–	54	–
	Entrusted loan to an associate of TOM Group
	which has been collected before year end	(i)	–	2,461	–
	Interest expenses charged by TOM Group	(j)	428	939	836
	Loan repayment to TOM Group	(j)	–	–	20,038

(a) As of December 31, 2004, 2005 and 2006, balances due from these related companies in respect of online advertising, commercial enterprise solutions and wireless Internet services amounted to US$705,000, nil and US$258,000 respectively.

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(b) On September 26, 2003, the Company entered into an online media services agreement with TOM Group International Limited (“TOM International”), a wholly-owned subsidiary of TOM Group. Pursuant to this agreement, the Group shall provide certain goods and services to our parent company and its subsidiaries on a non-exclusive basis including content, mobile communication, infotainment services or related telecommunication services, website development maintenance and hosting services and online advertising services. The fees for such services will be calculated with reference to the market rate for the provision of the relevant goods and services. This agreement expired on December 31, 2006. During the year end December 31, 2006, the Group provided no online media services and thus fee received for such services was nil. Other than revenue earned from online media services, the Group earned commercial enterprise solution revenue from a subsidiary of TOM Group amounted to US$40,000.
(c) On August 22, 2005, the Group entered into a co-branding agreement with Skype to provide co-marketing and cobranding activities for TOM-Skype branded application, website and content to the Group’s existing customers. Pursuant to this agreement, the revenue generated from these customers will be equally shared between the Group and Skype accordingly. For the year ended December 31, 2006, the Group earned total revenue of US$126,000 from Skype and shared total revenue of US$100,000 with Skype.
(d) The office premises were leased to the Group at market rates commencing June 15, 2003 under three lease agreements and were renewed on December 15, 2006 for a term of three years.
(e) As of December 31, 2004, 2005 and 2006, balances due to these related companies in respect of media services, commercial enterprise solutions and Internet access charges amounted to US$23,000, US$240,000 and US$163,000 respectively.
(f) On September 26, 2003, the Company entered into a media services agreement with TOM International, under which, TOM International agreed to provide, and/or use reasonable endeavours to procure the provision of certain goods and services to the Group on a non-exclusive basis, including print and publishing services, advertising services, public relations and sports event management and other organization services, content, advertising services and other marketing or promotional services in relation to the television channel operated by China Entertainment Television Broadcast Limited (“Media Services”). The purpose of this agreement is to enable the Group to procure offline media services (e.g. print, publishing and offline advertising) on a non-exclusive basis from TOM Group. This agreement expired on December 31, 2006. During the year ended December 31, 2006, the Group recorded Media Services fee expenses equal to US$746,000.
(g) On September 26, 2003, the Company entered into an administrative services agreement with TOM Group for three years, pursuant to which TOM Group agreed to provide certain administrative services, including but not limited to, company secretarial, legal and other supporting services to the Group. The fee for the services provided was calculated on a cost reimbursement basis and capped at HK$5,000,000 (equivalent to US$641,000 for the years ended December 31, 2004 and 2005). On September 27, 2006, the Company renewed the administrative services agreement with TOM Group for another 2 years, and pursuant to the renewed agreement, the cap of the service fee is reduced to HK$3,000,000 (equivalent to US$385,000).
(h) ChinaCare (Hong Kong) Limited, which is controlled by a principal shareholder of the Company, paid approximately US$40,000 to two of its staff on behalf of the Company for their consulting services to the Company in 2006. The amount had been fully reimbursed by the Company in 2006.
(i) The Group provided an entrusted loan of US$2,461,000 to Huayi Brothers Advertising Limited (a company in which TOM Group has a 27% interest) on September 2, 2005. The principal amount plus interest income amounting to US$54,000 was paid to the Group at the end of December 2005.
(j) On September 21, 2003, the Group entered into loan agreements with TOM Group, under which TOM Group provided loans of HK$156,300,000 (approximately US$20 million) to the Group. The loans were non-interest bearing until December 31, 2003, after which the loans were interest bearing at the market rate of 1.65% per annum over the Hong Kong Interbank Offered Rate. In the opinion of the Directors, the above loan agreements were entered into on normal commercial terms. The loans and imputed loan interests were fully repaid in August and September 2006 upon demand. The loans’ interest for the year 2006 amounted to US$836,000 and was repaid during the year.
(k) The Group had extended loans of US$7,968,000, US$19,093,000 and US$19,867,000 as of December 31, 2004, 2005 and 2006, respectively, to the registered shareholders of the Company’s variable interest entities to finance their investments in the respective entities. For details of these variable interest entities, please refer to note 4.

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28. INCOME TAXES

Cayman Islands

Under the current laws of the Cayman Islands, the Company is not subject to income taxes.

China

The Group is subject to taxes in China. The variable interest entities for which the Group does not have legal ownership are governed by the Enterprise Income Tax Law and the remaining companies operating in China are governed by the Income Tax Law of the People’s Republic of China concerning Foreign Investment Enterprises and Foreign Enterprises (collectively the “PRC Income Tax Laws”). Pursuant to the PRC Income Tax Laws, the Group is generally subject to enterprise income tax (“EIT”) at a statutory rate of 33% (30% national income tax plus 3% local income tax) and companies located within special economic zones are entitled to a 15% preferential income tax rate. Certain companies were also granted a full exemption from EIT for the first three years of operation including the year of incorporation and a 50% reduction for the following three years. Hong Kong profits tax has not been provided as the Group has no estimated assessable profit in Hong Kong for the years ended December 31, 2004, 2005 and 2006.

The effect of tax holiday is as follows:

		Year ended December 31,
	2004	2005	2006
	(in thousands of U.S. dollars,
		except for per share data)
Effect of tax holiday	8,153	20,843	15,534
Earnings per ordinary share effect, basic (cents)	0.23	0.51	0.37

The following is a reconciliation between the EIT statutory rate to which the Group is subject and the effective tax rate of the Group:

EIT statutory rate Permanent book-tax differences: – Staff costs and welfare – Administrative expenses – Advertising expenses – Interest expense – Provision for impairment and amortization of goodwill and other intangibles – Donation – Others Change in valuation allowance Effect of tax holiday Effective EIT rate	Year ended December 31, 2004 2005 2006 33% 33% 33% 2% 2% 6% 3% 5% 9% – – 1% – 2% 6% 1% – 8% 2% – – (2%) (3%) (5%) (18%) 7% (2%) (21%) (46%) (55%) – – 1%	Year ended December 31, 2004 2005 2006 33% 33% 33% 2% 2% 6% 3% 5% 9% – – 1% – 2% 6% 1% – 8% 2% – – (2%) (3%) (5%) (18%) 7% (2%) (21%) (46%) (55%) – – 1%
		1%

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As of December 31, 2004, 2005 and 2006, the tax impact of significant temporary differences between the tax and financial statement basis of assets and liabilities that gave rise to deferred tax assets was principally related to the following:

Loss carry-forwards Depreciation Provision for impairment of intangibles Allowance for doubtful accounts Provision for impairment of property and equipment Others Valuation allowances Net deferred tax assets	2004 (in 1,797 858 23 285 114 729 (3,458) 348	December 31, 2005 2006 thousands of U.S. dollars) 4,180 5,803 950 906 – – 341 675 – – 350 (118) (5,482) (6,745) 339 521

Subject to the approval of the relevant tax authorities, the Group had losses carried forward of US$24,985,000 as of December 31, 2006. US$2,318,000, US$4,210,000, US$2,183,000, US$8,026,000 and US$8,248,000 of these loss carryforwards will expire in 2007, 2008, 2009, 2010 and 2011, respectively.

As of December 31, 2004, 2005 and 2006, valuation allowances of US$3,458,000, US$5,482,000 and US$6,745,000 were provided on the deferred tax assets due to the uncertainty surrounding their realization. It is more likely than not that the Group will not be able to utilize the loss carry-forwards before expiration. Alternatively, if events are to occur in the future that will allow the Group to realize more of its deferred tax assets than the presently recorded amount, an adjustment to the valuation allowance will increase income when those events occur.

The deferred tax assets of US$673,000 as of December 31, 2006 (December 31, 2005: US$521,000) arose mainly from the temporary differences between financial statements carrying amounts of depreciation of two operating companies and their respective tax bases. No valuation allowance was made on these deferred tax assets because they are expected to be utilized in the foreseeable future. As of December 31, 2006, the Group had deferred tax liabilities of US$152,000 (December 31, 2005: US$182,000).

India

The Group, via its subsidiary Indiagames, is subject to taxes in India, as per the provisions of the Income Tax Act and based on existing legislation, interpretations and practices in respect thereof. Income generated from sales in India is taxed at 33.66% with the exception that income generated from export is fully exempted under a 10 year tax holiday incentive granted under certain conditions. Income tax of Indiagames was included under discontinued operations as disclosed in note 7.

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29. EARNINGS/(LOSSES) PER ORDINARY SHARE AND EARNINGS/(LOSSES) PER AMERICAN DEPOSITARY SHARE

The following table sets forth the computation of basic and diluted earnings per ordinary share for the years ended December 31, 2004, 2005 and 2006:

Numerator:
Income from continuing operations
Loss from discontinued operations
Net income attributable to ordinary shareholders
Denominator:
Weighted average number of ordinary shares
outstanding, basic
Dilutive effect of contingently issuable shares in
relation to settlement of considerations for
business acquisition
Dilutive effect of share options
Weighted average number of ordinary shares
outstanding, diluted
Earnings/(Losses) per ordinary share – basic (cents):
Continuing operations
Discontinued operations
Total earnings per ordinary share – basic
Earnings/(Losses) per ordinary share – diluted (cents):
Continuing operations
Discontinued operations
Total earnings per ordinary share – diluted
Earnings/(Losses) per American Depositary Share
– basic (cents):
Continuing operations
Discontinued operations
Total earnings per American Depositary Share – basic
Earnings/(Losses) per American Depositary Share
– diluted (cents):
Continuing operations
Discontinued operations
Total earnings per American Depositary Share – diluted

Year ended December 31,
2004
2005
2006
(in thousands of U.S. dollars,
except number of shares)
33,908
45,007
33,704
–
(1)
(5,049)
33,908
45,006
28,655
3,608,743,169
4,107,485,514
4,254,457,083
358,815,780
95,829,816
–
–
14,212,065
27,575,304
3,967,558,949
4,217,527,395
4,282,032,387
Year ended December 31,
2004
2005
2006
0.94
1.10
0.79
–
–
(0.12)
0.94
1.10
0.67
0.85
1.07
0.79
–
–
(0.12)
0.85
1.07
0.67
75.2
87.7
63.4
–
–
(9.5)
75.2
87.7
53.9
68.4
85.4
63.0
–
–
(9.4)
68.4
85.4
53.6

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Share options for a total of 280,000,000 ordinary shares in 2004 were excluded from the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the ordinary shares. In 2005 and 2006, we have computed the diluted earnings per share by applying the treasury stock method as the average market price of the ordinary shares was greater than the exercise prices of the stock options.

In 2005 and 2006, share options were exercised by certain employees. As a result, the Company issued 24,176,602 and 35,122,423 new ordinary shares at the exercise price of HK$1.50 each (equivalent to US$19.23 cents) and received US$4,650,000 and US$6,754,000 in 2005 and 2006, respectively. The newly issued shares were included in the computation of basic earnings per share in proportion to the period they were outstanding.

30. DIVIDENDS

There were no dividends declared, made or paid by the Group for the years ended December 31, 2004, 2005 and 2006.

31. FINANCIAL INSTRUMENTS

The carrying amount of the Group’s cash and cash equivalents approximate their fair value due to the short maturity of those instruments. The carrying value of receivables and payables approximate their fair value based on their short-term maturities.

32. SHARE-BASED COMPENSATION

The Group’s share-based compensation plans include five share option plans (collectively the “Share Option Plans”), namely the pre-IPO share option plan (“TOM Group Pre-IPO Share Option Plan”) and two share option schemes of TOM Group (“TOM Group Old Share Option Scheme” and “TOM Group New Share Option Scheme”), and pre-IPO share option plan (“The Company Pre-IPO Share Option Plan”) and share option scheme of the Company (“The Company Share Option Scheme”).

(a) TOM Group Pre-IPO Share Option Plan

On February 11, 2000, the shareholders of TOM Group approved the TOM Group Pre-IPO Share Option Plan, which was open to any qualified employees, as determined by the board of directors of TOM Group. Each option is exercisable as determined by the board and has a maximum term of ten years from February 11, 2000. In accordance with the terms of the TOM Group Pre-IPO Share Option Plan, TOM Group granted 9,080,000 options to an executive director of the Company on February 11, 2000. Share-based compensation charge incurred by TOM Group for this executive director of the Company was allocated to the Company primarily based on the Group’s total assets to those of TOM Group.

Following the listing of the shares of TOM Group on the GEM on March 1, 2000, no further options were eligible for grant under the TOM Group Pre-IPO Share Option Plan.

(b) TOM Group Old Share Option Scheme and TOM Group New Share Option Scheme

On February 11, 2000, the shareholders of TOM Group approved the TOM Group Share Option Scheme (“TOM Group Old Share Option Scheme”) which was subsequently amended on April 24, 2002 pursuant to the changes in the Rules Governing the Listing of Securities on GEM (“GEM Listing Rules”), under which TOM Group initially reserved for issuance 1,377,904,000 shares. Shares reserved for issuance under the TOM Group Old Share Option Scheme are subject to a maximum based upon a percentage of TOM Group’s total shares issued, calculated in accordance with certain requirements of the GEM Listing Rules.

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On July 23, 2004, the then shareholders of TOM Group terminated the TOM Group Old Share Option Scheme and adopted a new share option scheme “TOM Group New Share Option Scheme” due to the withdrawal of the listing of the shares of TOM Group on GEM and commencement of dealings of the shares of TOM Group on Main Board. The termination of the TOM Group Old Share Option Scheme and the adoption of the TOM Group New Share Option Scheme took effect from August 4, 2004 (listing date of TOM Group on the Main Board of the Stock Exchange of Hong Kong (“Main Board”)). No further options may be granted under the TOM Group Old Share Option Scheme upon its termination, but the provisions of the TOM Group Old Share Option Scheme shall in all other respects remain in full force and effect and options which are granted during the life of the TOM Group Old Share Option Scheme may continue to be exercisable in accordance with the terms of issue.

Under the TOM Group Old Share Option Scheme and the TOM Group New Share Option Scheme, share options may be granted, at the discretion of the board of directors of TOM Group, to employees or directors of TOM Group, or of any company in which TOM Group owns or controls 20% or more of its voting rights and/or issued share capital, or business associate or trustee.

The exercise price per share of the share options granted shall not be less than the higher of

(i) the closing price of the shares of TOM Group on the date of grant;
(ii) the average closing price of the shares of TOM Group for the five business days immediately preceding the date of grant; and
(iii) the nominal value of one share of TOM Group.

Each option is exercisable as determined by the board of directors of TOM Group and has a maximum term of ten years from the date of the grant. For the TOM Group Old Share Option Scheme, vesting periods generally range from 1 year to 7 years. No vesting period is specified in the TOM Group New Share Option Scheme yet.

No option was granted to the executive directors of the Company and employees of the Group during 2004, 2005 and 2006 under TOM Group Old Share Option Scheme. There has been no option granted to the executive directors of the Company and employees of the Group under the TOM Group New Share Option Scheme since the adoption of the scheme.

(c) The Company Pre-IPO Share Option Plan

On February 12, 2004, the shareholders of the Company approved The Company Pre-IPO Share Option Plan, which was open to any qualified employees, as determined by the board of directors of the Company. In accordance with the terms of The Company Pre-IPO Share Option Plan, the Company granted 280,000,000 options to certain directors and employees of the Company to subscribe for ordinary shares at the initial public offering price under the Hong Kong public offering, excluding brokerage and trading fees, and transaction and investor compensation levies. Each option is exercisable as determined by the board directors of the Company and has a maximum term of ten years from the date of grant. Vesting period generally ranges from one month to four years.

Following the listing of the shares of the Company on the GEM on March 11, 2004, no further options were eligible for grant under The Company Pre-IPO Share Option Plan.

(d) The Company Share Option Scheme

On February 12, 2004, the Company adopted The Company Share Option Scheme, pursuant to which the Company may grant, at the discretion of the board of directors of the Company, to officers, directors, employees and business associates options to subscribe for ordinary shares of the Company.

The exercise price per share of the share options granted shall not be less than the higher of

(i) the closing price of the ordinary shares of the Company on GEM on the date of grant;
(ii) the average closing price of the ordinary shares of the Company for the five consecutive business days immediately preceding the date of grant; and

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(iii) the nominal value of one ordinary share of the Company.

The total number of ordinary shares that are available for issuance upon the exercise of options granted pursuant to this scheme may not exceed 10% of the total number of issued ordinary shares. The Company may, however, seek separate approvals from shareholders and parent company’s shareholders for granting options beyond the 10% limit. Under GEM Listing Rules, the limit on the number of our ordinary shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the scheme and the plan must not exceed 30% of our total ordinary shares in issue from time to time. The scheme will be valid and effective for a period of ten years and no options may be granted pursuant to this scheme following the expiration of the scheme.

(e) Movement of Share Option Plans

The movements of the share options granted to the executive directors of the Company and employees of the Group under the Share Option Plans during the years ended December 31, 2004, 2005 and 2006 are summarized as follows:

TOM Group Pre-IPO Share Option Plan and TOM Group Old Share Option Scheme

Outstanding at the beginning of the year Granted Cancelled Outstanding at year end Exercisable at year end	Year ended December 31, 2004 2005 Weighted Weighted average average Options exercise Options exercise outstanding price outstanding price (US$) (US$) 25,626,000 0.45 24,124,000 0.44 – – – – (1,502,000) 0.86 (1,902,000) 0.66 24,124,000 0.44 22,222,000 0.42 18,204,000 0.38 19,376,000 0.39	2006 Weighted average Options exercise outstanding price (US$) 22,222,000 0.42 – – (922,000) 0.76 21,300,000 0.40 21,300,000 0.40	2006 Weighted average Options exercise outstanding price (US$) 22,222,000 0.42 – – (922,000) 0.76 21,300,000 0.40 21,300,000 0.40
			0.40

			0.40

The following is additional information relating to options outstanding as of December 31, 2006:

Range of exercise price (US$) 0 – 0.38 0.39 – 0.77 1.16 – 1.54	As of December 31, 2006 Options outstanding Options exercisable Weighted Weighted average Weighted average Weighted remaining average remaining average Options contractual exercise Options contractual exercise outstanding life price exercisable life price (years) (US$) (years) (US$) 16,438,000 4.75 0.27 16,438,000 4.75 0.27 3,756,000 3.59 0.69 3,756,000 3.59 0.69 1,106,000 3.22 1.45 1,106,000 3.22 1.45 21,300,000 4.47 0.40 21,300,000 4.47 0.40	As of December 31, 2006 Options outstanding Options exercisable Weighted Weighted average Weighted average Weighted remaining average remaining average Options contractual exercise Options contractual exercise outstanding life price exercisable life price (years) (US$) (years) (US$) 16,438,000 4.75 0.27 16,438,000 4.75 0.27 3,756,000 3.59 0.69 3,756,000 3.59 0.69 1,106,000 3.22 1.45 1,106,000 3.22 1.45 21,300,000 4.47 0.40 21,300,000 4.47 0.40
		0.40

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The Company Pre-IPO Share Option Plan

Outstanding at the beginning of the year Granted Exercised Cancelled Outstanding at year end Exercisable at year end	Year ended December 31, 2004 2005 Weighted Weighted average average Options exercise Options exercise outstanding price outstanding price (US$) (US$) – – 262,425,040 0.19 280,000,000 0.19 – – – – (24,176,602) 0.19 (17,574,960) 0.19 (17,791,257) 0.19 262,425,040 0.19 220,457,181 0.19 26,352,654 0.19 51,502,969 0.19	2006 Weighted average Options exercise outstanding price (US$) 220,457,181 0.19 – – (35,122,423) 0.19 (4,087,527) 0.19 181,247,231 0.19 69,555,689 0.19	2006 Weighted average Options exercise outstanding price (US$) 220,457,181 0.19 – – (35,122,423) 0.19 (4,087,527) 0.19 181,247,231 0.19 69,555,689 0.19
			0.19

			0.19

The remaining contractual lives of the options outstanding and exercisable as of December 31, 2004 are 9.13 years and 9.13 years, respectively.

The remaining contractual lives of the options outstanding and exercisable as of December 31, 2005 are 8.13 years and 8.13 years, respectively.

The remaining contractual lives of the options outstanding and exercisable as of December 31, 2006 are 7.13 years and 7.13 years, respectively.

The Company’s Share Option Scheme

Outstanding at the beginning of the year Granted Exercised Cancelled Outstanding at year end Exercisable at year end	Year ended December 31, 2005 2006 Weighted Weighted average average Options exercise Options exercise outstanding price outstanding price (US$) (US$) – – 18,000,000 0.15 18,000,000 0.15 – – – – – – – – – – 18,000,000 0.15 18,000,000 0.15 – – 2,700,000 0.15	Year ended December 31, 2005 2006 Weighted Weighted average average Options exercise Options exercise outstanding price outstanding price (US$) (US$) – – 18,000,000 0.15 18,000,000 0.15 – – – – – – – – – – 18,000,000 0.15 18,000,000 0.15 – – 2,700,000 0.15
		0.15

		0.15

The 18,000,000 share options were granted to a director of the Company as at May 11, 2005.

The remaining contractual life of the options outstanding as of December 31, 2005 is 9.36 years.

The remaining contractual lives of the options outstanding and exercisable as of December 31, 2006 are 8.36 years and 8.36 years, respectively.

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The movements of the share options granted to the non-executive directors of the Company under the Share Option Plans during the year ended December 31, 2004, 2005 and 2006 are summarized as follows:

TOM Group Pre-IPO Share Option Plan and TOM Group Old Share Option Scheme

Outstanding at the beginning of the year Addition Exclusion* Outstanding at year end Exercisable at year end	Year ended December 31, 2004 2005 Weighted Weighted average average Options exercise Options exercise outstanding price outstanding price (US$) (US$) 78,138,000 0.39 78,138,000 0.39 – – – – – – – – 78,138,000 0.39 78,138,000 0.39 56,138,000 0.41 67,138,000 0.40	2006 Weighted average Options exercise outstanding price (US$) 78,138,000 0.39 9,026,000 0.29 (63,138,000) 0.40 24,026,000 0.31 24,026,000 0.31	2006 Weighted average Options exercise outstanding price (US$) 78,138,000 0.39 9,026,000 0.29 (63,138,000) 0.40 24,026,000 0.31 24,026,000 0.31
			0.31

			0.31

As Ms. Angela Mak was appointed as a non-executive director of the Company in April 2006, the outstanding options totaling 9,026,000 held by her as at December 31, 2006 were included accordingly.
** As Mr. Sing Wang resigned as a non-executive director of the Company in January 2006, the outstanding options totaling 63,138,000 held by him as at December 31, 2006 were excluded.

The following is additional information relating to options outstanding as of December 31, 2006:

			As of December	31, 2006
	Options outstanding				Options exercisable
		Weighted				Weighted
		average	Weighted			average	Weighted
		remaining	average			remaining	average
Range of	Options	contractual	exercise	Options		contractual	exercise
exercise price (US$)	outstanding	life	price	exercisable		life	price
		(years)	(US$)			(years)	(US$)
0 – 0.38	24,026,000	6.40	0.31	24,026,000		6.40	0.31

(f) Pro forma disclosures

Prior to 2006, the Group accounted for the share options scheme, using the intrinsic value method as prescribed in APB 25, and related interpretations. Accordingly, the Group recorded expense for employee share compensation plans equal to the excess of the market price of the underlying shares at the date of grant over the exercise price of the share-related award, if any (known as the intrinsic value). The intrinsic value of the stock based compensation issued to employees as of the date of grant was amortized on a straight-line basis to compensation expense in accordance with the vesting period.

The Company provides pro forma disclosures to illustrate the effects on the results of operations as if the Company had recorded compensation costs based on the estimated grant date fair value in the comparative periods, as defined by SFAS 123R for awards granted under its share option plans.

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The estimated weighted average grant date fair value as defined by SFAS 123 was calculated using the BlackScholes model. The following weighted average assumptions were included in the estimated grant date fair value calculations for the Company’s Share Options Plans:

	Year ended	December 31,
	2004	2005
Risk free interest rate (%)	0.2 – 2.07	2.34 – 3.23
Expected life (years)	0.57 – 4.07	1-4
Expected dividend yield	0	0
Volatility (%)	64	40
Weighted average estimated grant date fair value (US$)	0.38 – 0.75	0.04

If the Group had applied the fair value recognition provision of SFAS 123 to stock based employee compensation in the comparative periods, the effect would have been to reduce net income and pro forma amounts would have been adjusted as follows:

Net income as reported Add: share compensation cost as reported Less: stock based employee compensation expense determined under fair value based method, net of tax Less: allocation of total stock based employee compensation expense determined under fair value method Pro forma net income attributable to shareholders Pro forma earnings per ordinary share – basic (cents) Pro forma earnings per ordinary share – diluted (cents)	Year ended December 31, 2004 2005 (in thousands of U.S.dollars) 33,908 45,006 – – (8,578) (5,252 – – 25,330 39,754 0.702 0.97 0.654 0.94	Year ended December 31, 2004 2005 (in thousands of U.S.dollars) 33,908 45,006 – – (8,578) (5,252 – – 25,330 39,754 0.702 0.97 0.654 0.94
		39,754

		0.97

		0.94

33. COMMITMENTS

(a) Capital commitments

Contracted but not provided for * Property and equipment: Authorized but not contracted for Total	December 31, 2005 2006 (in thousands of U.S.dollars) – 20,000 1,046 3,010 1,046 23,010	December 31, 2005 2006 (in thousands of U.S.dollars) – 20,000 1,046 3,010 1,046 23,010
		23,010

US$20,000,000 represents the commitment for financing the Joint Venture with eBay. For details, please refer to note 36.

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(b) Operating lease commitments

The Group rented offices under operating lease agreements. The net aggregate future lease payments under noncancelable operating leases as of December 31, 2005 and 2006 are as follows:

2006 2007 2008 2009 Total	December 31, 2005 2006 (in thousands of U.S.dollars) 1,463 – 306 1,233 7 815 – 862 1,776 2,910	December 31, 2005 2006 (in thousands of U.S.dollars) 1,463 – 306 1,233 7 815 – 862 1,776 2,910
		2,910

As of December 31, 2006, the Group had no operating lease commitment beyond 2009.

For the years ended December 31, 2004, 2005 and 2006, the Group incurred rental expenses of US$1,150,000, US$1,930,000 and US$2,084,000 respectively.

34. SEGMENT INFORMATION

Based on the criteria established by SFAS 131 “Disclosures about Segments of an Enterprise and Related Information” the Group operates in three principal business segments in 2006. The Group does not allocate any operating expenses or assets to its three business segments as management does not use this information to measure the performance of the operating segments. Certain costs of revenues are shared between business segments. These costs, including staff costs, content acquisition costs, bandwidth leasing charges, depreciation as well as portal facilities, were allocated to the wireless Internet services and online advertising segments in proportion to their gross margin contribution before the allocation of these costs. Also, no measures of assets by segment are reported and used by the chief operating decision makers. Hence, the Group has not made disclosure of total assets by reportable segment.

Summarized information by business segment for the years ended December 31, 2004, 2005 and 2006 is as follows:

Revenues Wireless Internet services Online advertising Others Total revenues Cost of revenues Wireless Internet services Online advertising Others Total cost of revenues Gross profit	Year ended December 31, 2004 2005 2006 (in thousands of U.S. dollars) (restated*) 112,880 157,833 152,637 7,583 9,210 13,279 2,257 1,025 2,449 122,720 168,068 168,365 (60,979) (93,806) (100,212) (2,736) (2,877) (4,925) (1,042) (217) (782) (64,757) (96,900) (105,919) 57,963 71,168 62,446	Year ended December 31, 2004 2005 2006 (in thousands of U.S. dollars) (restated*) 112,880 157,833 152,637 7,583 9,210 13,279 2,257 1,025 2,449 122,720 168,068 168,365 (60,979) (93,806) (100,212) (2,736) (2,877) (4,925) (1,042) (217) (782) (64,757) (96,900) (105,919) 57,963 71,168 62,446
		168,365
		(100,212) (4,925) (782)
		(105,919)
		62,446

Figures in 2005 were restated as the results of Indiagames were separately presented under “Discontinued Operations”.

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35. EXCHANGE GAIN

Due to the appreciation of RMB against the US$, as discussed in note 8(f), we recorded an exchange gain of US$1,132,000 and US$2,382,000 in our consolidated statements of operations for the years ended December 31, 2005 and 2006 respectively. This exchange gain primarily arose from the translation of our net non-RMB liability at the year end. Our investments in available-for-sale securities and restricted securities were excluded from the quantification for the exchange difference to be captured in the consolidated statements of operations, due to the Group’s accounting policy requiring the change in fair value of the available-for-sale securities and restricted securities (including the exchange difference) to be recorded in other comprehensive income/(loss) in equity directly.

Since our reporting currency is the US$, we recorded an exchange gain of approximately US$386,000 and US$13,367,000 separately in “Other comprehensive income/(loss)” upon the translation of our financial statements from our functional currency, RMB, into our reporting currency, US$ for the years ended December 31, 2005 and 2006 respectively.

36. SUBSEQUENT EVENTS

New Joint Venture

In connection with the Joint Venture Deed entered between the Company and eBay on December 20, 2006, a joint venture (“Joint Venture”) has been formed on February 1, 2007 to carry on the business of owning and operating a mobile and Internet-based marketplace in China. The Joint Venture will be jointly controlled and owned by the Company and eBay with 51% and 49% stake interest respectively. eBay will provide the initial funding of US$40,000,000 in cash to the Joint Venture and the Company will provide a shareholder’s loan in the amount of US$20,000,000 to the Joint Venture. If the funding from eBay and the shareholder’s loan from the Company have been fully utilized, additional funding in the form of shareholders’ loans of not exceeding US$10,000,000 will be provided by the Company and eBay in equal proportions if additional funding is required by the Joint Venture and as mutually agreed by eBay and the Company. In addition, eBay will inject its subsidiary engaging in the business of operating an online auction and marketplace site in China to the Joint Venture while the Company will contribute its expertise in the Internet and mobile industries in China and its leadership and management services to the Joint Venture. The Company will account for this Joint Venture using the equity method of accounting.

Proposed Conditional Possible Privatisation of TOM Online

On March 9, 2007, the respective directors of the Company and TOM Group Limited (“TOM”) jointly announced that on March 3, 2007, a letter was sent by TOM to inform the Company that TOM was considering making a proposal to take the Company private by way of a scheme of arrangement (“Proposal”) under Section 86 of the Cayman Islands Companies Law. On March 9, 2007, TOM requested the board of directors of TOM Online to put forward the Proposal to TOM Online’s shareholders. The Proposal will be made only if the Proposal and the transactions contemplated thereunder have first been approved at an extraordinary general meeting of TOM (“TOM EGM”). Accordingly, there is no assurance that the Proposal will be made. An announcement will be made by TOM in relation to the voting results of the TOM EGM. For further details of the Proposal, please see the joint announcement of the Company and TOM which was posted on the website of the Growth Enterprise Market of the Stock Exchange of Hong Kong on March 12, 2007 and filed with the U.S. Securities and Exchange Commission under Form 6K on March 12, 2007.

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37. ADDITIONAL DISCLOSURES PURSUANT TO THE GEM LISTING RULES/HONG KONG COMPANIES ORDINANCE

(a) Staff costs, including directors’ emoluments, in continuing operations

==> picture [399 x 316] intentionally omitted <==

----- Start of picture text -----

Year ended December 31,
2004 2005 2006
(in thousands of U.S. dollars)
Wages and salaries 10,305 17,920 16,231
Pension costs – defined contribution plan 904 1,358 1,124
Share-based compensation expenses – – 3,107
11,209 19,278 20,462
Income from continuing operations before tax
Year ended December 31,
2004 2005 2006
(in thousands of U.S. dollars)
Income from continuing operations before tax was arrived at
after charging and crediting:
Charging:
Interest expense 428 2,295 5,030
Auditors’ remuneration 1,025 868 1,308
Provision for impairment of intangibles 307 – –
Allowance for doubtful accounts 761 684 276
Loss on disposal of property and equipment 9 94 70
Crediting:
Interest income 3,523 4,838 6,454
----- End of picture text -----

(b) Income from continuing operations before tax

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(c) Directors’ emoluments

The remuneration of every director for the year ended December 31, 2004 is set out below:

Current executive directors Wang Lei Lei Peter Andrew Schloss Feng Jue, Elaine Fan Tai Wu Yun Xu Zhiming Independent non-executive directors and members of Audit Committee Kwong Che Keung, Gordon Ma Wei Hua Lo Ka Shui Non-executive directors Frank John Sixt () Chow Woo Mo Fong, Susan Tong Mei Kuen, Tommei () Sing Wang (*) Total	Basic salaries, housing allowances, other allowances Contribution to and benefits Discretionary pension Fees in kind bonuses schemes (in thousands of U.S. dollars) 6 191 – 10 6 308 – 14 6 40 – – 6 69 – 2 6 66 – 2 6 246 – 25 26 – – – 26 – – – 7 – – – 6 – – – – – – – 6 – 109 – 6 – – – 113 920 109 53	Total 207 328 46 77 74 277 26 26 7 6 – 115 6
		1,195

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The remuneration of every director for the year ended December 31, 2005 is set out below:

Current executive directors Wang Lei Lei Jay Kenneth Chang Peter Andrew Schloss Feng Jue, Elaine Fan Tai Wu Yun Past executive director Xu Zhiming Independent non-executive directors and members of Audit Committee Kwong Che Keung, Gordon Ma Wei Hua Lo Ka Shui Non-executive directors Frank John Sixt () Chow Woo Mo Fong, Susan Tong Mei Kuen, Tommei () Sing Wang (*) Total	Fees 6 3 6 6 6 6 3 26 26 26 6 – 6 6 132	Basic salaries, housing allowances, other allowances and benefits in kind 181 182 309 81 96 74 80 – – – – – – – 1,003	Contribution Discretionary to pension bonuses schemes (in thousands of U.S. dollars) 2,564 10 250 8 – 18 22 – 12 2 12 2 – 24 – – – – – – – – – – – – – – 2,860 64	Compensation for loss of office# – – – – – – 116 – – – – – – – 116	Total 2,761 443 333 109 116 94 223 26 26 26 6 – 6 6
					4,175

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The remuneration of every director for the year ended December 31, 2006 is set out below:

Current executive directors Wang Lei Lei Jay Kenneth Chang Peter Andrew Schloss Feng Jue, Elaine Fan Tai Past executive director Wu Yun Independent non-executive directors and members of Audit Committee Kwong Che Keung, Gordon Ma Wei Hua Lo Ka Shui Non-executive directors Frank John Sixt () Chow Woo Mo Fong, Susan Tong Mei Kuen, Tommei () Mak Soek Fun, Angela () Past non-executive director* Sing Wang Total	Fees 13 6 6 6 6 4 26 26 26 6 – 6 5 – 136	Basic salaries, housing allowances, other allowances and benefits in kind 189 257 308 69 90 61 – – – – – – – – 974	Contribution Discretionary to pension bonuses schemes (in thousands of U.S. dollars) – 11 – 19 – 18 – – – 2 – 2 – – – – – – – – – – – – – – – – – 52	Share-based compensation expenses 2,494 246 94 97 97 9 – – – – – – – – 3,037	Total 2,707 528 426 172 195 76 26 26 26 6 – 6 5 –
					4,199

For the years ended December 31, 2004, 2005 and 2006, emoluments of these directors were recorded and paid by the Group.
This is severance payment to a director who left the Company.

During the years ended December 31, 2004, 2005 and 2006, no emoluments were paid by the Group to the directors as an inducement to join or upon joining the Group, and there has been no arrangement under which a director has waived or agreed to waive any emoluments.

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(d) Five highest paid individuals of the Group

The five individuals whose emoluments were the highest in the Group for the years ended December 31, 2004, 2005 and 2006 include 4 directors, 4 directors and 5 directors respectively, whose emoluments are reflected in the analysis presented in note 37(c) above. The emoluments payable to the remaining 1 individual, 1 individual and nil individual for the years ended December 31, 2004, 2005 and 2006, respectively, are as follows:

Basic salaries, housing allowances, other allowances and benefits in kind Bonuses Contributions to pension schemes	Year ended December 31, 2004 2005 2006 (in thousands of U.S. dollars) 22 170 – 76 – – 2 – – 100 170 –	Year ended December 31, 2004 2005 2006 (in thousands of U.S. dollars) 22 170 – 76 – – 2 – – 100 170 –
		–

(e) Net current assets and total assets less current liabilities

	December 31,
	2005 2006
	(in thousands of U.S.dollars)
Net current assets	87,064 106,660
Total assets less current liabilities	388,291 440,083

(f) Property and equipment, net

Additions in continuing operations Disposals in continuing operations	Year ended December 31, 2004 2005 2006 (in thousands of U.S. dollars) 9,175 10,103 7,968 9 94 20	Year ended December 31, 2004 2005 2006 (in thousands of U.S. dollars) 9,175 10,103 7,968 9 94 20

		20

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(g) Selected information of the Company

The following balance sheets and statements of shareholders’ equity of the Company have been prepared in accordance with the accounting principles generally accepted in Hong Kong.

Balance Sheets

Assets
Current Assets:
Cash and cash equivalents
Prepayments
Deposits and other receivables
Due from related parties
Total current assets
Available-for-sale securities
Restricted securities
Investment in subsidiaries
Total non-current assets
Total assets
Liabilities and shareholders’ equity
Current liabilities:
Other payables and accruals
Short-term bank loan
Due to related parties
Total current liabilities
Non-current liabilities:
Secured bank loan
Total non-current liabilities
Total liabilities
Shareholders’ equity:
Share capital
Paid-in capital
Accumulated other comprehensive (losses)/income
Accumulated deficit
Total shareholders’ equity
Total liabilities and shareholders’ equity

December 31,
2005
2006
(in thousands of U.S.dollars)
25,944
9,417
374
159
1,050
1,008
171,350
236,223
198,718
246,807
----------------
----------------
38,519
–
59,122
97,729
30,010
31,890
127,651
129,619
----------------
----------------
326,369
376,426
2,102
2,427
–
35,340
8,666
18,498
10,768
56,265
----------------
----------------
56,099
55,271
56,099
55,271
----------------
----------------
66,867
111,536
5,416
5,461
274,858
284,640
(4,235)
7,159
(16,537)
(32,370)
259,502
264,890
326,369
376,426

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APPENDIX III

Statements of Shareholders’ Equity

Balance as of January 1, 2004 Issuance of shares pursuant to initial public offering Share issuing expenses Issuance of shares to Cranwood as initial purchase consideration for acquisition of Puccini Group Share-based compensation Unrealized loss on securities Net loss Balance as of December 31, 2004 Issuance of shares to Cranwood as earn-out purchase consideration for acquisition of Puccini Group Issuance of shares on exercise of employee share options Share-based compensation Unrealized loss on securities Currency translation adjustments Net loss Balance as of December 31, 2005 Issuance of shares on exercise of employee share options Share-based compensation Unrealized gain on securities Currency translation adjustments Net loss Balance as of December 31, 2006	Number of shares 2,800,000,000 1,000,000,000 – 96,200,000 – – – 3,896,200,000 304,155,503 24,176,602 – – – – 4,224,532,105 35,122,423 – – – – 4,259,654,528	Accumulated other comprehensive Share Paid-in (losses)/ Accumulated capital capital income deficit (in thousands of U.S. dollars except for number of shares) 3,590 26,464 – (62) 1,282 192,528 – – – (25,589) – – 123 18,377 – – – 6,297 – – – – (615) – – – – (7,799) 4,995 218,077 (615) (7,861) 390 47,157 – – 31 4,619 – – – 5,005 – – – – (2,903) – – – (717) – – – – (8,676) 5,416 274,858 (4,235) (16,537) 45 6,709 – – – 3,073 – – – – 465 – – – 10,929 – – – – (15,833) 5,461 284,640 7,159 (32,370)	Total shareholders’ equity 29,992 193,810 (25,589) 18,500 6,297 (615) (7,799) 214,596 47,547 4,650 5,005 (2,903) (717) (8,676) 259,502 6,754 3,073 465 10,929 (15,833) 264,890

(h) Distributable reserves

As of December 31, 2005 and 2006, the Company had no reserves available for distribution to the shareholders of the Company.

(i) Ultimate holding company

The directors regard TOM Group, a company incorporated in the Cayman Islands with limited liability, as the ultimate holding company of the Group.

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APPENDIX IV

The following is the management discussion and analysis principally extracted from the annual report of TOM Online for the year 2006. Definitions and references used in this appendix refer to 2006 annual report of TOM Online.

The following discussion and analysis should be read in conjunction with TOM Online's audited historical consolidated financial statements together with the respective notes thereto, included elsewhere in this document. TOM Online's audited historical consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”).

TOM Online's audited historical consolidated financial statements and the discussion and analysis herein include the financial position and results of operations of (i) Treasure Base, Whole Win, Huanjian Shumeng and Beijing Infomax beginning as of August 11, 2004, November 19, 2004, January 4, 2006 and June 1, 2006 respectively, being the dates of their respective acquisitions by TOM Online and (ii) the TOM-Skype joint-venture, Tel-Online, as of August 22, 2005, being the date the joint-venture was incorporated.

In December 2006, TOM Online made a decision to sell substantially all of its equity interests in Indiagames which was acquired on February 24, 2005, to focus on the China market. Accordingly, the results of Indiagames were separately presented on the face of consolidated statements of operations under “Discontinued Operations” for the years ended December 31, 2005 and 2006.

OVERVIEW

TOM Online are one of the leading wireless Internet companies in China. TOM Online operate one of China’s most trafficked online properties, which focus on the youth demographic. TOM Online seek to provide wireless Internet services that are relevant and essential to TOM Online's users with a bias towards entertainment, lifestyle and sports products and services.

TOM Online deliver TOM Online's services to TOM Online's users through mobile telecommunication operators’ channels, portal and web alliances, alliances with handsets manufacturers, users’ mobile phones, traditional media, including television, radio and print.

TOM Online distinguish and differentiate themselves through (1) TOM Online's broad and diverse distribution channels, which allow Tom Online to reach a large portion of the overall Chinese population which have mobile phones, but not necessarily Internet access; (2) TOM Online's operational excellence, which through TOM Online's teams and systems, allows Tom Online to provide high quality products and services to both TOM Online's mobile operator partners and end users, with a goal to achieve higher consumer satisfaction; (3) TOM Online's acquisition and development of quality content and services tailored for the mobile phone; and (4) TOM Online's integration of TOM Online's online platforms (primarily www.tom.com) and online communities with TOM Online's mobile services. In addition, TOM Online have enhanced TOM Online's online features through the establishment of the TOM-Skype joint venture which provides next-generation communication services to mainland Chinese Internet users.

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APPENDIX IV

In July 2000, TOM Online launched TOM Online's Internet portal, www.tom.com, and focused TOM Online's business upon providing Internet-based content and services to users through TOM Online's websites. In 2000 and 2001, China Mobile and China Unicom, respectively, launched platforms for the delivery of wireless Internet services to users through their mobile phones, and began allowing third parties to use their billing and collection systems to charge fees for products and services that are delivered through these platforms. This created an opportunity for Internet companies, such as Tom Online, to deliver Internet portal products and services to users in China through their mobile phones and to utilize these billing and collection systems to collect fees for these services. In the second half of 2006, China Mobile and China Unicom implemented certain policy changes under the directives of China’s Ministry of Information Industry that negatively impacted TOM Online's wireless Internet business. With the contribution from TOM Online's acquisition of Beijing Infomax, TOM Online's wireless Internet services revenues slightly decreased to US$152,637,000 in 2006 from US$157,833,000 in 2005. TOM Online's wireless Internet services revenues accounted for approximately 90.7% of TOM Online's total revenues in 2006.

TOM Online's online advertising revenue accounted for all TOM Online's advertising revenue. TOM Online's Internet portal is one of the leading Internet portals in China and to monetize this position, TOM Online focused on developing TOM Online's online advertising business by increasing the number of quality and branded companies advertising on TOM Online's websites. TOM Online continue to attract leading advertisers in online auctions, consumer electronics, high-tech products, consumables and fashion, wishing to target TOM Online's young audience. TOM Online's online advertising revenue increased to US$13,279,000 in 2006 from US$9,210,000 in 2005 and accounted for approximately 7.9% of TOM Online's total revenue in 2006.

TOM Online's other business mainly includes online games, e-commerce and fee-based email services in 2005 and 2006 where a majority of the others business revenue in 2004 was derived from commercial enterprise solutions. In 2006, TOM Online's other revenue accounted for approximately 1.4% of TOM Online's total revenues.

PRC regulations currently restrict foreign ownership of companies that provide value-added telecommunications services, which includes wireless Internet services and Internet content services. As a result, TOM Online conduct substantially all of TOM Online's operations in the PRC through Beijing Lei Ting, Shenzhen Freenet, Wu Ji Network, LingXun, Startone and Beijing Infomax, which are owned by PRC citizens. In addition, TOM Online have entered into a series of contractual arrangements with these six entities and their respective shareholders, pursuant to which TOM Online are entitled to receive service fees in an amount equal to substantially all of the net income of these companies and under certain contractual arrangements, TOM Online's wholly-owned subsidiaries agreed to guarantee the performance of these companies in connection with the operations-related agreements they entered into with third parties. As a result of these contractual arrangements, under US GAAP, Beijing Lei Ting, Shenzhen Freenet, Wu Ji Network, LingXun, Startone and Beijing Infomax are variable interest entities and TOM Online are the primary beneficiary of these entities, and accordingly TOM Online consolidate their results of operations in TOM Online's historical consolidated financial statements. In addition, Huanjian Shumeng is also determined as a variable interest entity as Huanjian Shumeng is a subsidiary of Beijing Lei Ting.

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APPENDIX IV

In August 2005, jointly with Skype Technologies, S.A., TOM Online established Tel-Online, a Cayman Islands incorporated company, to develop next generation communication services in the mainland China market. The joint-venture is focusing on developing a localized TOM-Skype instant messaging/ chat client for the mainland China market and to grow its user base. At the end of January 31, 2007, TOM Online had over 31.5 mn registered TOM-Skype users, up from the 7.43 mn registered users at the end of December 31, 2005. The growth in TOM-Skype is due to sustained marketing activities surrounding the voice and community functions of the TOM-Skype service as well the scale of the user base continuing to exhibit positive network effects. TOM Online remain focused on continuing the rapid growth of the TOM-Skype community in 2007 with goal to develop value added services around the TOM-Skype community towards the later parts of 2007 and into 2008. TOM Online have determined that under US GAAP, Tel-Online is a variable interest entity and TOM Online are the primary beneficiary of the investments in the joint-venture. TOM Online consolidate its results of operations in TOM Online's historical consolidated financial statements.

On September 13, 2005, TOM Online secured an alliance with UMPay (whose shareholders include China Mobile and China UnionPay) to become its wireless and online payment portal partner and to work with UMPay to offer more comprehensive mobile payment products to Chinese consumers and merchants. This alliance is an important milestone for TOM Online as China’s leading wireless Internet company to provide not only mobile content, but mobile functions, namely payment services, to TOM Online's end users.

In December 2006, TOM Online announced a joint venture agreement with eBay/Eachnet to combine their respective expertise to build a new China marketplace business in 2007. TOM Online are optimistic that through the combination of eBay’s global e-commerce knowledge and TOM Online's deep local market expertise enhanced by TOM Online's online assets that there is an opportunity to create an attractive and profitable online marketplace for mainland Chinese buyers and sellers. Moreover, TOM Online believe that the joint venture will benefit from TOM Online's strong position in the Chinese wireless Internet market in developing m-commerce opportunities.

REVENUES

TOM Online's revenues in 2006 are derived from TOM Online's two primary operating segments: wireless Internet services and online advertising. TOM Online derive a minor portion of TOM Online's revenues from others.

TOM Online's revenues are primarily derived from TOM Online's wireless Internet services, which include SMS, MMS, WAP, IVR and CRBT services. Through these services TOM Online provide music and entertainment downloads, information and community-oriented products, as well as news headlines, sports information, games, wallpaper and dating services.

TOM Online's revenues represent TOM Online's total revenues from operations net of certain business and value-added taxes. TOM Online's revenues are primarily derived from Beijing Lei Ting, Shenzhen Freenet, Wu Ji Network, LingXun, Startone, Huanjian Shumeng and Beijing Infomax, and from TOM Online's subsidiaries that are incorporated in the PRC. TOM Online's wireless Internet services revenue in China is subject to a 3.3% business tax and TOM Online's online advertising revenue is

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MANAGEMENT DISCUSSION AND ANALYSIS ON TOM ONLINE

subject to a business tax of up to 8.5%. In addition, TOM Online's computer hardware sales revenue is subject to a 17.0% value-added tax, which is partially offset by value-added taxes paid on purchases, and TOM Online's other commercial enterprise solutions revenue is subject to a 5.5% business tax. Furthermore, any service fees that TOM Online's subsidiaries charge and subsequently collect pursuant to exclusive technical and consulting service agreements with TOM Online's variable interest entities are subject to a 5.0% business tax.

The following table sets forth certain historical consolidated revenue data in terms of amount and as a percentage of TOM Online's total revenues for the periods indicated:

Wireless Internet services(1) Online advertising Others(2) Total revenues	For the year ended December 31, 2004 *2005 (restated) 2006 Percentage Percentage Percentage Amount of revenues Amount of revenues Amount of revenues** (in thousands of U.S. dollars, except percentages) 112,880 92.0% 157,833 93.9% 152,637 90.7% 7,583 6.2% 9,210 5.5% 13,279 7.9% 2,257 1.8% 1,025 0.6% 2,449 1.4% 122,720 100.0% 168,068 100.0% 168,365 100.0%	For the year ended December 31, 2004 *2005 (restated) 2006 Percentage Percentage Percentage Amount of revenues Amount of revenues Amount of revenues** (in thousands of U.S. dollars, except percentages) 112,880 92.0% 157,833 93.9% 152,637 90.7% 7,583 6.2% 9,210 5.5% 13,279 7.9% 2,257 1.8% 1,025 0.6% 2,449 1.4% 122,720 100.0% 168,068 100.0% 168,365 100.0%
		100.0%

Figures in 2005 had been restated as revenue from mobile games products of Indiagames was separately presented under “Discontinued Operations”.
(1) Includes revenue from TOM Online's download products, information products and community-oriented products that TOM Online provide through the wireless Internet services platforms of China Mobile and China Unicom. Revenues from the services of LingXun, Startone and Beijing Infomax are included beginning as of August 11, 2004, November 19, 2004 and June 1, 2006 respectively.
(2) Primarily includes revenue from online games, e-commerce and fee-based email services for the years ended December 31, 2005 and 2006 where a majority of revenue for year ended December 31, 2004 was derived from computer hardware sales and integrated enterprise solutions services.

Wireless Internet Services. The majority of TOM Online's wireless Internet services revenue is derived in China from products and services that TOM Online provide through China Mobile’s Monternet platform and China Unicom’s UNI-Info platform. TOM Online recognize revenue derived from TOM Online's wireless Internet services in China on a gross basis, that is, before deducting the share of revenue due to, and the transmission fees paid to, the mobile telecommunications operators.

TOM Online's wireless Internet services include SMS, MMS, WAP, IVR and CRBT services. In 2006, TOM Online's SMS, MMS, WAP, IVR and CRBT services accounted for approximately 39.4%, 8.2%, 19.1%, 26.3% and 6.3%, respectively, of TOM Online's wireless Internet services revenue. The primary factors affecting TOM Online's wireless Internet services revenue, include, but not limited to, the number of subscriptions, the number of downloads, pricing of TOM Online's subscriptions and downloads, mobile telecommunication operators’ policies, changing consumers tastes, competition and distribution channels availability.

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APPENDIX IV

SMS MMS WAP IVR CRBT Others Wireless Internet services revenues	For the year ended December 31, 2004 *2005 (restated) 2006 Percentage Percentage Percentage Amount of revenues Amount of revenues Amount of revenues** (in thousands of U.S. dollars, except percentages) 54,956 48.7% 63,428 40.2% 60,057 39.4% 11,784 10.4% 12,012 7.6% 12,526 8.2% 17,114 15.2% 31,686 20.1% 29,226 19.1% 26,152 23.2% 40,059 25.4% 40,166 26.3% 2,874 2.5% 10,557 6.7% 9,597 6.3% – – 91 – 1,065 0.7% 112,880 100.0% 157,833 100.0% 152,637 100.0%	For the year ended December 31, 2004 *2005 (restated) 2006 Percentage Percentage Percentage Amount of revenues Amount of revenues Amount of revenues** (in thousands of U.S. dollars, except percentages) 54,956 48.7% 63,428 40.2% 60,057 39.4% 11,784 10.4% 12,012 7.6% 12,526 8.2% 17,114 15.2% 31,686 20.1% 29,226 19.1% 26,152 23.2% 40,059 25.4% 40,166 26.3% 2,874 2.5% 10,557 6.7% 9,597 6.3% – – 91 – 1,065 0.7% 112,880 100.0% 157,833 100.0% 152,637 100.0%
		100.0%

Figures in 2005 had been restated as the revenue from mobile games products of Indiagames was separately presented under “Discontinued Operations”.

TOM Online's wireless Internet services operating data is generated by an internal operating system that tracks the delivery confirmations provided to Tom Online by the mobile telecommunications operators. Due to the nature of TOM Online's billing arrangements, however, the revenue that TOM Online recognize is based upon the monthly revenue statements provided to Tom Online that the mobile telecommunications operators generate from their own internal operating data, which TOM Online do not independently verify. Generally, differences exist between the value of TOM Online's revenue calculated from TOM Online's own internal operating data and the monthly revenue statements provided to Tom Online by the mobile telecommunications operators. In 2006, the average difference between TOM Online's estimates and TOM Online's actual revenue, calculated on a quarterly basis, was approximately 3%, slightly lower as compared to approximately 5% in 2005. In 2006, China Mobile and China Unicom contributed 82% and 17% to TOM Online's wireless Internet services revenues.

Online advertising. TOM Online sell online advertisements through TOM Online's direct sales force and through advertising agencies. The primary factors affecting TOM Online's online advertising revenues are the number of TOM Online's advertising clients that contribute revenue during the relevant period, the average revenue per client, consumer preferences for the products and brands advertised, user traffic to TOM Online's portal and websites and seasonality of popular sporting, entertainment and national events.

Others. TOM Online's others revenue is primarily derived from the provision of online games, e- commerce and fee-based email services in 2005 and 2006. Prior to 2005, others revenue mainly represented commercial enterprise solutions revenue in providing technical and consulting services with respect to the Internet-related computer hardware and software needs of TOM Online's clients, with the purchase and installation of computer hardware generating a substantial portion of this revenue.

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APPENDIX IV

COST OF REVENUES

The following table sets forth certain historical consolidated cost of revenues data in terms of amount and as a percentage of TOM Online's total revenues for the periods indicated:

Cost of services Cost of goods sold Total cost of revenues	For the year ended December 31, 2004 *2005 (restated) 2006 Percentage Percentage Percentage Amount of revenues Amount of revenues Amount of revenues** (in thousands of U.S. dollars, except percentages) 63,966 52.1% 96,900 57.7% 105,919 62.9% 791 0.7% – – – – 64,757 52.8% 96,900 57.7% 105,919 62.9%	For the year ended December 31, 2004 *2005 (restated) 2006 Percentage Percentage Percentage Amount of revenues Amount of revenues Amount of revenues** (in thousands of U.S. dollars, except percentages) 63,966 52.1% 96,900 57.7% 105,919 62.9% 791 0.7% – – – – 64,757 52.8% 96,900 57.7% 105,919 62.9%
		62.9%

Figures in 2005 had been restated as the results of Indiagames were separately presented under “Discontinued Operations”.

Cost of Services. Cost of services includes direct cost of services and common cost of services.

TOM Online's wireless Internet services in China incur direct costs and the primary components of such costs include the share of revenue due to, and the transmission fees paid to, the mobile telecommunications operators, the share of revenue due to TOM Online's industry cooperation partners, royalties, handset alliances costs, certain content costs and product promotion and marketing expenses.

TOM Online's online advertising direct costs include the cost of sales commissions and staff bonuses that are based on revenues.

TOM Online's common costs include bandwidth leasing charges, portal content acquisition costs, costs for TOM Online's portal content production staff, wireless Internet services staff, including games development staff, and depreciation and maintenance costs relating to equipment used to provide services. For the purpose of calculating TOM Online's gross profits, common costs are allocated to TOM Online's wireless Internet services business and TOM Online's online advertising business in proportion to the gross profits from these businesses prior to the allocation of these common costs.

TOM Online's direct cost of services and TOM Online's common cost of services accounted for 76.8% and 23.2%, respectively, of TOM Online's cost of services in 2006. In the future, TOM Online expect that TOM Online's direct cost of services will continue to increase due to higher content acquisition costs, higher carrier costs and higher distribution channel fees as TOM Online's business continues to grow.

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APPENDIX IV

GROSS PROFIT MARGIN

The following table sets forth the historical consolidated gross profits and gross profit margin of TOM Online's business activities for the periods indicated:

Gross Profits(1): Wireless Internet services Online advertising Others Total gross profits Gross Profit Margin: Wireless Internet services Online advertising Others Total gross profit margin	For the year ended December 31, 2004 2005 2006 *(restated)** (in thousands of U.S. dollars, except percentages) 51,901 64,027 52,425 4,847 6,333 8,354 1,215 808 1,667 57,963 71,168 62,446 46.0% 40.6% 34.3% 63.9% 68.8% 62.9% 53.8% 78.8% 68.1% 47.2% 42.3% 37.1%

Figures in 2005 had been restated as the results of Indiagames were separately presented under “Discontinued Operations”.

(1) For the purpose of calculating TOM Online's gross profits, certain costs that are common to TOM Online's wireless Internet services business and TOM Online's online advertising business are allocated to these businesses in proportion to gross profits from these businesses prior to the allocation of these common costs.

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APPENDIX IV

OPERATING EXPENSES

The following table sets forth certain historical consolidated operating expenses data in terms of amount and as a percentage of TOM Online's total revenues for the periods indicated:

Selling and marketing expenses General and administrative expenses Product development expenses Amortization of intangibles Provision for impairment of intangibles Total operating expenses	For the year ended December 31, 2004 *2005 (restated) 2006 Percentage Percentage Percentage Amount of revenues Amount of revenues Amount of revenues** (in thousands of U.S. dollars, except percentages) 7,695 6.3% 7,176 4.3% 6,974 4.1% 12,385 10.1% 21,144 12.6% 23,087 13.7% 886 0.7% 1,528 0.9% 1,617 1.0% 5,614 4.6% 535 0.3% 1,045 0.6% 307 0.3% – – – – 26,887 22.0% 30,383 18.1% 32,723 19.4%	For the year ended December 31, 2004 *2005 (restated) 2006 Percentage Percentage Percentage Amount of revenues Amount of revenues Amount of revenues** (in thousands of U.S. dollars, except percentages) 7,695 6.3% 7,176 4.3% 6,974 4.1% 12,385 10.1% 21,144 12.6% 23,087 13.7% 886 0.7% 1,528 0.9% 1,617 1.0% 5,614 4.6% 535 0.3% 1,045 0.6% 307 0.3% – – – – 26,887 22.0% 30,383 18.1% 32,723 19.4%
		19.4%

Figures in 2005 had been restated as the results of Indiagames were separately presented under “Discontinued Operations”.

Selling and Marketing Expenses. Selling and marketing expenses primarily consist of advertising, sales and marketing expenses, including expenses associated with sponsoring promotional events, and salaries and benefits for TOM Online's direct sales force, which are not related to sales target.

General and Administrative Expenses. General and administrative expenses primarily consist of compensation and benefits for general management, finance and administrative personnel costs, professional fees, lease expenses, other office expenses, provisions for bad debts and depreciation with respect to equipment used for general corporate purposes.

Product Development Expenses. Product development expenses primarily consist of research and development staff costs.

Amortization of Intangibles. Amortization of intangibles primarily relates to the amortization of intangible assets acquired in connection with TOM Online's purchase of Puccini in 2003, Treasure Base and Whole Win in 2004 and Huanjian Shumeng and Beijing Infomax in 2006.

Provision for Impairment of Intangibles. Provision for impairment of intangible assets consists of impairment charges relating to intangible assets that have suffered a decline in value.

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APPENDIX IV

DISCONTINUED OPERATIONS

In December 2006, TOM Online committed to a plan which was approved by TOM Online’s Board of Directors on December 29, 2006 to sell substantially all its equity interests in Indiagames, acquired on February 24, 2005, to focus on the China market. Accordingly, the results of Indiagames were separately presented on the face of consolidated statements of operations under “Discontinued Operations” for the years ended December 31, 2005 and 2006. Loss from discontinued operations for the years ended December 31, 2005 and 2006 was US$1,000 (including loss of US$69,000 resulted from dilutive effect of TOM Online’s interest upon the issuance of shares to new shareholders) and US$5,049,000 (including an impairment of goodwill of US$4,628,000) respectively.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements often requires the selection of specific accounting methods and policies from several acceptable alternatives. Further, significant estimates and judgments may be required in selecting and applying those methods and policies in the recognition of the assets and liabilities in TOM Online's consolidated balance sheet, the revenues and expenses in TOM Online's consolidated statements of operations, the information that is contained in the significant accounting policies and notes to TOM Online's consolidated financial statements. Management bases its estimates and judgments on historical experience and various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates and judgments under different assumptions or conditions. TOM Online believe that the following are some of the more critical judgment areas in the application of TOM Online's accounting policies that affect TOM Online's financial condition and results of operations.

Wireless Internet Services Revenue Recognition

Wireless Internet services are billed on monthly subscription basis or on usage basis.

TOM Online's services are delivered to users through the wireless data platforms of the mobile telecommunications operators, and TOM Online rely upon these operators to provide Tom Online with billing and collection services. In China, TOM Online have, however, a proprietary internal system that records the number of messages that TOM Online send, the related fees and the delivery confirmations that the mobile telecommunications operators separately provide Tom Online with respect to messages TOM Online send once the messages are received by the users. Generally, within 20 to 60 days after the end of each month, a statement from each of the mobile telecommunications operators confirming the value of wireless Internet services they bill to users in that month will be delivered to Tom Online, and usually within 60 days after such delivery, TOM Online will be paid by the mobile telecommunications operators for the wireless Internet services, net of their revenue share, transmission fees and applicable business taxes, for that month based on such monthly statements.

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APPENDIX IV

TOM Online initially ascertain the value of the wireless Internet services provided based on delivery confirmations sent to Tom Online by the networks of the mobile telecommunications operators with respect to the amount of services TOM Online deliver to the users. Because there has historically been a discrepancy between this value and the value of the services based on the monthly statements provided by the mobile telecommunications operators due to technical issues with the transmission and billing systems, at the end of each month, TOM Online will, based on the historical data regarding such discrepancies, TOM Online's observation of the stability of the various network systems during the month in question and other factors, make an estimate of the collectible wireless Internet services fees for such month. This estimate may be higher or lower than the actual revenue TOM Online have a right to receive based on the monthly statements from the mobile telecommunications operators. In 2005 and 2006, the average differences between TOM Online's estimates and TOM Online's actual revenue, calculated on a quarterly basis, were approximately 5% and 3% respectively.

By the time TOM Online report TOM Online's financial results, TOM Online would generally have received well over a majority of the monthly statements from the mobile telecommunications operators and would have recognized TOM Online's revenue for the wireless Internet services based on those monthly statements. In the event that a monthly statement for any mobile telecommunication operator has not been received at the time such financial results are reported, TOM Online will report wireless Internet services revenue based on the estimate of the collectible wireless Internet services relating to such mobile telecommunication operator. As a result, TOM Online may overstate or understate TOM Online's wireless Internet services revenue for that reporting period. Any difference between the operator’s monthly statement that is eventually received and TOM Online's estimate of the collectible wireless Internet services for such operator may result in subsequent adjustments to TOM Online's wireless Internet services revenue reported in TOM Online's financial statements.

TOM Online evaluated TOM Online's revenue sharing arrangements with the mobile telecommunications operators and content providers to determine whether to recognize TOM Online's wireless Internet services revenue gross or net of the shared revenues. TOM Online's determination was based upon an assessment of whether TOM Online act as principal or agent when providing wireless Internet services. TOM Online believe that the primary factors with respect to this assessment are whether TOM Online are the primary obligor to the user with respect to the provision of the wireless Internet services.

Revenues retained by China Mobile and China Unicom are calculated based on agreed percentages of revenues generated from the wireless data services of TOM Online. Revenues from wireless Internet services in China are recognized as the services are rendered and are recorded based on the gross amounts billed to the end customers as TOM Online market, support and contract for TOM Online's services directly with the end customers.

Online Advertising Revenue Recognition

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APPENDIX IV

time period the advertisement is displayed. Certain of TOM Online's online advertising contracts do not include a fixed delivery pattern for the online advertising. In these situations, revenues are deferred until completion of the contract. In all contracts, there are no future obligations after the completion of the contract and no rights of refund related to the impression levels.

Impairment of Intangibles and Goodwill

TOM Online assess the carrying value of TOM Online's goodwill and intangibles with indefinite life on an annual basis and when factors are present that indicate impairment may have occurred. TOM Online amortize TOM Online's intangibles with definite life and assess their carrying values when factors are present that indicate impairment may have occurred. TOM Online determine the amount of any impairment charge by using a future discounted cash flow methodology, or an approach based on appraisals performed by independent professional appraisal firms.

For the year end December 31, 2006, TOM Online tested goodwill for impairment with the assistance of an independent valuer and determined that there was no impairment of goodwill on TOM Online’s wireless Internet business in China, Huanjian Shumeng and Beijing Infomax. The valuations were arrived at after using a combination of a market value approach (with comparisons to selected publicly traded companies operating in the same industry) and an income approach (Discounted Cash Flows).

In the year in which TOM Online recorded TOM Online's impairments, it was management’s judgment that an event and change in circumstances triggering the evaluation of goodwill and intangibles for impairment had occurred. If different judgments or estimates had been utilized, material differences could have resulted in the amount and timing of the impairment charges.

Impairment of Property and Equipment

TOM Online assess the carrying value of TOM Online's property and equipment on an annual basis and when factors are present that indicate impairment may have occurred. If the total of the expected future undiscounted cash flow is less than the carrying value, impairment is present and a loss is recognized in the statement of operations for the difference between the fair value and the carrying value of the assets. The future undiscounted cash flow is based on management’s estimates and assumptions with respect to future revenues, cost of revenues and operating expenses. TOM Online cannot provide you with any assurances that actual results will be equal to TOM Online's estimates. If management makes different judgments or adopts different assumptions, material differences could result in the amount and timing of any impairment charge that is recorded.

Deferred Tax Valuation Allowance

TOM Online record a valuation allowance to reduce TOM Online's deferred tax assets if, based on an estimate of TOM Online's future taxable income, it is more likely than not that some portion of, or all of TOM Online's deferred tax assets will not be realized. If unanticipated future events allow Tom Online to realize more of TOM Online's deferred tax assets than the previously recorded net amount, an adjustment to the deferred tax asset would increase TOM Online's net income when those events occur. TOM Online's largest deferred tax asset item relates to TOM Online's loss carry forwards.

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APPENDIX IV

Allowances for Doubtful Accounts

TOM Online establish provisions for bad debts on a quarterly basis. TOM Online maintain allowances for doubtful accounts receivable based on various information, including aging analysis of accounts receivable balances, historical bad debt rates, repayment patterns, client credit worthiness and industry trend analysis. Generally, when an accounts receivable is 180, 270 and 360 days overdue, TOM Online establish a provision for bad debts equal to 25%, 50% and 100% of the amount of the accounts receivable, respectively. TOM Online also make specific provisions for bad debts if there is strong evidence showing that the receivable is likely to be irrecoverable. If the financial conditions of TOM Online's clients were to deteriorate, resulting in their potential inability to make payments, TOM Online may require additional allowance for doubtful accounts. Provision for bad debts as at December 31, 2006 amounted to US$4,352,000.

Available-for-sale Securities and Restricted Securities

Investments in available-for-sale securities, are stated at fair value, with unrealized gains or losses, net of tax, recorded in other comprehensive income/(loss). Realized gains and losses and decline in value judged to be other than temporary, if any, on available-for-sale securities are reported in gain/(loss) on disposal of available-for-sale securities and impairment of available-for-sale securities of other income/ (expense), respectively. Interest on available-for-sale securities is reported in interest income.

When determining whether a decline in value of an available-for-sale security is other than temporary, TOM Online evaluate current factors including the economic environment, market conditions, operational performance, near term prospects and other specific factors relating to the business underlying the securities.

Share-based Compensation Expenses

Prior to 2006, the TOM Online Group accounts for the share option schemes under the recognition and measurement provisions of Accounting Principles Board Opinion No.25 (“APB 25”), “Accounting for Stock Issued to Employees” and related interpretations. Accordingly, the amount of compensation expense was determined based on the intrinsic value, i.e. the excess, if any, of the quoted market price of the shares over the exercise price of the options at the date of the grant, and was amortized over the vesting period of the option concerned. Statement of Financial Accounting Standards (“SFAS”) 148 “Accounting for Stock-Based Compensation – Transition and Disclosure” allowed entities to continue applying the provisions of APB 25 and provide pro forma net income or loss and pro forma earnings or loss per share disclosures in the notes to financial statements for employee share options using fair-value based methods of accounting as prescribed in SFAS 123 “Accounting for Stock-Based Compensation” and SFAS 148.

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APPENDIX IV

In December 2004, SFAS 123R “Share-Based Payment” was issued by the Financial Accounting Standards Board (“FASB”). This statement replaces SFAS 123 and requires that the costs resulting from all share-based compensation transactions be recognized in the financial statements. SFAS 123R applies to all share-based compensation transactions in which an entity acquires goods and services by issuing or offering to issue its shares, share options, or other equity instruments or by incurring liabilities to an employee or other supplier (a) in amounts based, at least in part, on the price of the entity’s shares or other equity instruments or (b) that require or may require settlement by issuing the entity’s equity shares or other equity instruments. SFAS 123R is effective as of the beginning of the first interim or annual reporting period beginning after June 15, 2005, for public entities that do not file as small business issuers.

Effective from January 1, 2006, TOM Online have adopted the modified prospective method under SFAS 123R and recognize the share-based compensation costs based on the fair values of the awards in the consolidated financial statements on a prospective basis.

Consolidation of Variable Interest Entities

PRC laws and regulations restrict foreign ownership of companies that provide value-added telecommunications services, including wireless Internet services and Internet content services in China. As a result, TOM Online conduct substantially all of TOM Online's operations through Beijing Lei Ting, Shenzhen Freenet, Wu Ji Network, LingXun, Startone and Beijing Infomax which are owned by PRC citizens. In addition, TOM Online have entered into a series of contractual arrangements with these companies and their respective shareholders, pursuant to which TOM Online guarantee any obligations undertaken by these companies under their contractual arrangements with third parties and are entitled to receive service fees in an amount equal to substantially all of the net income of these companies. Accordingly, TOM Online bear the risks of, and enjoy the rewards associated with, the investments in these companies.

In December 2003, FASB issued FASB Interpretation No. 46, revised December 2003, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (“FIN 46R”). FIN 46R is intended to achieve more consistent application of consolidation policies to variable interest entities to improve comparability between enterprises engaged in similar activities even if some of those activities are conducted through variable interest entities. TOM Online have evaluated TOM Online's relationship with Beijing Lei Ting, Shenzhen Freenet, Wu Ji Network, LingXun, Startone and Beijing Infomax and have concluded that these entities are TOM Online's variable interest entities as TOM Online are the primary beneficiary of these entities. Consequently, TOM Online have included the results of operations of these variable interest entities in TOM Online's consolidated financial statements.

In addition, TOM Online has also determined that Tel-Online and Huanjian Shumeng, a subsidiary of Beijing Lei Ting, are variable interest entities of TOM Online as TOM Online is the primary beneficiary of these entities.

The results of operations of these variable interest entities have been included in the TOM Online Group’s consolidated financial statements.

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APPENDIX IV

Purchase Price Allocations

TOM Online account for TOM Online's acquisitions using the purchase method. This method requires not only ascertaining the total cost of the acquisition but also allocating that cost to the individual assets and liabilities that TOM Online acquired based upon their fair values. TOM Online make judgments and estimates in determining the fair value of the acquired assets and liabilities. TOM Online base TOM Online's determination upon independent appraiser valuation reports; TOM Online's experience with similar assets and liabilities based upon TOM Online's industry expertise, and forecasted future cash flows. The excess of the cost of the acquisition over the sum of the amounts allocated to identifiable assets and liabilities is recorded as goodwill. If TOM Online were to use different assumptions in determining fair value, the amounts assigned to the individual acquired assets and liabilities could be materially different.

Discontinued Operations

A discontinued operation is a component of the TOM Online Group that may be a reportable segment or an operating segment, a reporting unit, a subsidiary or an asset group that has been disposed or is held for sale. The results of that component are separately reported as “Discontinued Operations” in the Consolidated Statements of Operations. The comparative Consolidated Statements of Operations is restated as if the operation had been discontinued from the start of the comparative period. The assets, liabilities and minority interests of such component classified as “Discontinued Operations” or “held for sale” is presented separately in the assets, liabilities and minority interests, sections, respectively, of the Consolidated Balance Sheets.

TOM ONLINE'S ACQUISITIONS AND INVESTMENTS

On August 11, 2004, TOM Online acquired 100% equity interest in Treasure Base. Treasure Base provides SMS, MMS and WAP services in cooperation with major television broadcasters in China through LingXun. As at December 31, 2005, TOM Online had paid out US$33,034,000, equal to 4.5 times Treasure Base’s 2004 audited combined after-tax profit, as settlement of the initial consideration. The earn-out consideration based on Treasure Base’s 2005 audited combined after-tax profit amounted to US$16,615,000 and TOM Online settled in cash during 2006. The consideration payable and additional goodwill of Treasure Base had been reflected in the consolidated financial statements for the year 2005.

In August 2004, TOM Online invested US$1,494,000 in Sichuan Great Wall for a 13.95% equity interest. This investment is accounted for using the cost method. TOM Online received no dividends from Sichuan Great Wall for the 3 years ended December 31, 2006, and TOM Online concluded that no impairment occurred in the book value of this investment. TOM Online did not take up the option to increase TOM Online's stake to 20.55% as at December 31, 2006.

On November 19, 2004, TOM Online acquired 100% equity interest in Whole Win, which provides WAP services through Startone. TOM Online made cash settlements for the initial consideration of US$2,169,000 in 2004 and in 2005 paid the earn-out consideration of US$5,062,000 to the vendors.

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APPENDIX IV

On February 24, 2005, TOM Online, through TOM Online's wholly-owned subsidiary TOM Online Games Limited, completed the acquisition of 76.29% of the issued and paid-up share capital of Indiagames by paying US$13,732,000 cash as consideration. On April 29, 2005, Cisco and Macromedia invested US$4,000,000 for a combined stake of 18.18% in Indiagames, through a subscription to newly issued shares. Subsequently, TOM Online’s ownership interest in Indiagames was diluted to 62.42%.

In August 2005, jointly with Skype, TOM Online established Tel-Online, a Cayman Islands incorporated limited company, to develop next generation communication services in the mainland China market. The joint venture is focusing on developing a localized TOM-Skype instant messaging/chat client for the mainland China market and to grow its user base. In the year 2007, TOM Online hope to begin commercialization of premium services over the TOM-Skype platform. TOM Online have determined that under US GAAP TOM Online are the primary beneficiary of the investments in the joint venture TelOnline and TOM Online have commenced to consolidate its results of operations in TOM Online's historical consolidated financial statements since August 22, 2005.

On January 4, 2006, TOM Online, through a variable interest entity, acquired 75% equity interest of Huanjian Shumeng for an aggregate amount of RMB22,000,000 (equivalent to US$2,728,000). Huanjian Shumeng is an operator of Internet website which provides original Chinese novels to its users.

On June 1, 2006, TOM Online, through a subsidiary, acquired 100% equity interest of Gainfirst for a maximum consideration of RMB600,000,000 (equivalent to US$75,000,000). Gainfirst provides wireless Internet services in China through Beijing Infomax. An initial consideration of RMB150,000,000 (equivalent to US$18,750,000) was paid out in August 2006. The 2006 earn-out consideration based on Gainfirst’s 2006 adjusted audited combined after-tax profit minus the initial consideration amounts to RMB93,991,000 (equivalent to US$12,037,000) and TOM Online expects to settle in cash during 2007. The consideration payable and additional goodwill of Gainfirst have been reflected in the consolidated financial statements for the year ended December 31, 2006.

On December 20, 2006, TOM Online entered into a Joint Venture Deed with eBay International AG (“eBay”) to form a joint venture in 2007 to carry on the business of owning and operating a mobile and Internet-based marketplace in China. As at December 31, 2006, the joint venture had not been established and accordingly, no results of this joint venture are reflected in the consolidated financial statements of TOM Online.

TOM Online's audited historical consolidated financial statements include the financial results of Wu Ji Network, LingXun, Startone, Indiagames, Tel-Online, Huanjian Shumeng and Beijing Infomax beginning as of November 19, 2003, August 11, 2004, November 19, 2004, February 24, 2005, August 22, 2005, January 4, 2006 and June 1, 2006 respectively.

Subsequent to 2006, in connection with the Joint Venture Deed entered between TOM Online and eBay on December 20, 2006, a joint venture (“Joint Venture”) has been formed on February 1, 2007 to carry on the business of owning and operating a mobile and Internet-based marketplace in China. The Joint Venture will be jointly controlled and owned by TOM Online and eBay with 51% and 49% stake interest respectively. eBay will provide the initial funding of US$40,000,000 in cash to the Joint Venture and TOM Online will provide a shareholder’s loan in the amount of US$20,000,000 to the Joint Venture.

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APPENDIX IV

If the initial funding from eBay and the shareholder’s loan from TOM Online have been fully utilized, additional funding in the form of shareholders’ loans of not exceeding US$10,000,000 will be provided by TOM Online and eBay in equal proportions if additional funding is required by the Joint Venture and as mutually agreed by eBay and TOM Online. In addition, eBay will inject its subsidiary engaging in the business of operating an online auction and marketplace site in China to the Joint Venture while TOM Online will contribute its expertise in the Internet and mobile industries in China and its leadership and management services to the Joint Venture. TOM Online will account for this Joint Venture using the equity method of accounting.

RESULTS OF OPERATIONS

The following discussion of TOM Online's results of operations for the years ended December 31, 2004, 2005 and 2006 is based upon TOM Online's audited historical consolidated financial statements with 2005 figures being restated to conform to current year presentation, included elsewhere in this document.

Year Ended December 31, 2006 compared to Year Ended December 31, 2005

TOM Online's total revenues were US$168,365,000 in 2006, representing an increase of 0.2% from 2005 revenues, which were US$168,068,000. The flat performance in total revenues was due to the negative impact from new government and mobile operator policies, offset by growth in TOM Online's online advertising business and the acquisition of Beijing Infomax.

Wireless Internet Services

The majority of TOM Online's revenues in 2006 continue to be derived from TOM Online's wireless Internet business. In 2006, TOM Online's wireless Internet business achieved revenues of US$152,637,000 representing a decrease of 3.3% from 2005, which were US$157,833,000. In 2006, TOM Online's wireless Internet revenues accounted for 90.7% of TOM Online's total revenues as compared to 93.9% in 2005 as TOM Online continued to emphasize TOM Online's wireless Internet business as TOM Online's core strategic focus area.

On July 7, 2006, TOM Online issued a press release relating to policy changes on China Mobile’s Monternet platform. The changes, which have been implemented under the policy directives of China’s Ministry of Information Industry (“MII”), aim to address a number of issues, including reducing customer complaints, increasing customer satisfaction and promoting the healthy development of Monternet. In addition, under the same MII policy directives, China Unicom has also implemented similar policies to that of China Mobile during the quarter end September 30, 2006.

These policies had a significant negative impact to TOM Online's wireless Internet business in the second half of 2006. Excluding the contribution from TOM Online's acquisition of Beijing Infomax in the middle of 2006, TOM Online's like for like wireless Internet business revenues declined 10.9% from 2005 levels.

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APPENDIX IV

In 2006, TOM Online's wireless Internet business comprised 4 key categories: 2G services (SMS), 2.5G services (WAP and MMS), voice services (IVR and CRBT) and other wireless Internet revenues. As opposed to historically presented financials, other wireless Internet revenues exclude results from TOM Online's Indiagames subsidiary as this business has been separately presented under “Discontinued Operations”.

2G Services – SMS

In 2006, TOM Online's SMS services generated US$60,057,000 in revenues, compared to US$63,428,000 in 2005, representing a decline of 5.3%. In 2006, SMS services accounted for 39.4% of TOM Online's total wireless Internet revenues, down from 40.2% in 2005. The primary factor behind the decline in SMS service revenues was due to the new mobile operator policies implemented in the middle of 2006. These new policies included the cancellation of per message subscriptions, double confirmation for new subscriptions and extended free trial periods, amongst other policy changes. The impact on TOM Online's SMS service revenues from these new policies was offset by the acquisition of Beijing Infomax which derives the majority of its revenues from SMS whose results TOM Online began consolidating as of June 1, 2006.

2.5G Services – MMS and WAP

In 2006, TOM Online's MMS services generated US$12,526,000 in revenues, compared to US$12,012,000 in 2005, representing an increase of 4.3%. In 2006, MMS services accounted for 8.2% of TOM Online's total wireless Internet revenues, up from 7.6% in 2005. TOM Online continue to believe that MMS over the medium-term is a transitory product category.

In 2006, TOM Online's WAP services generated US$29,226,000 in revenues, compared to US$31,686,000 in 2005, representing a decrease of 7.8%. In 2006, WAP services accounted for 19.1% of TOM Online's total wireless Internet revenues, down from 20.1% in 2005. The decline in WAP service revenues was due to the introduction of new mobile operator policies in the middle of 2006. Factors contributing to a decline in WAP service revenues included the introduction of one-month free trials for subscriptions, silent user clean-up periods shortening from 6-months to 4-months and a more stringent operating environment limiting marketing and other cross-selling activities. The impact on WAP service revenues from these new policies was offset by the acquisition of Beijing Infomax whose results TOM Online began consolidating as of June 1, 2006.

Voice Services – IVR and CRBT

In 2006, TOM Online's IVR services generated US$40,166,000 in revenues compared to US$40,059,000 in 2005, representing a small increase of 0.3%. In 2006, TOM Online's IVR business accounted for 26.3% of TOM Online's total wireless Internet business, up from 25.4% in 2005. TOM Online's IVR business showed stable performance in 2006 compared to 2005 as TOM Online broadened TOM Online's distribution channels for TOM Online's IVR services through various means, but primarily TV, radio and print channel partners, but whose benefits were offset by suspension of cross-selling activities by the mobile operators in the second half of 2006 due to changes in the regulatory environment.

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APPENDIX IV

In 2006, TOM Online's CRBT services generated US$9,597,000 in revenues, compared to US$10,557,000 in 2005, representing a decline of 9.1%. In 2006, TOM Online's CRBT business accounted for 6.3% of TOM Online's total wireless Internet revenues, down from 6.7% in 2005. Continued strong price competition in the average CRBT per song fees and a more stringent operating environment due to the new policies, contributed to the poor performance in TOM Online's CRBT business.

Other Wireless Internet Services

In 2006, revenues from TOM Online's other wireless Internet businesses were US$1,065,000, compared to US$91,000 in 2005, representing over 11 times increase. Other wireless Internet services consist primarily of Java-based mobile games and made up 0.7% of TOM Online's total wireless Internet business in 2006.

Online Advertising

TOM Online's online advertising revenues increased 44.2% to US$13,279,000 in 2006 from US$9,210,000 in 2005. In 2006, online advertising revenues accounted for 7.9% of TOM Online's total revenues, up from 5.5% in 2005. This growth was driven by a number of factors including increased traffic on TOM Online's portal, higher average spending per advertiser on TOM Online's portal and TOM Online's initiatives in the second half of 2005 to focus TOM Online's sales efforts on fewer but more strategic portal channels such as TOM Online's music, entertainment, auto and sports channels, amongst others.

Others

Others revenue increased 138.9% to US$2,449,000 in 2006 from US$1,025,000 in 2005. In 2006, others revenues accounted for 1.4% of TOM Online's total revenues, up from 0.6% in 2005. Revenue from paid email services and online games were the largest contributors to this revenue line and accounted for the year-on-year increase where commercial enterprise solutions is no longer a significant contributor.

Total Cost of Services. TOM Online's cost of services increased 9.3% to US$105,919,000 from US$96,900,000 in 2005. The increase was primarily due to higher cost incurred in acquiring content from third-party providers and promoting the products and services for wireless Internet services business, and partly offset by the decrease in transmission fee paid to mobile operators as revenue declined in the second half of 2006.

Gross Profit. As a result of the foregoing, TOM Online's gross profit decreased 12.3% to US$62,446,000 from US$71,168,000 in 2005. TOM Online's gross profit as a percentage of total revenues, or gross profit margin, decreased to 37.1% in 2006 from 42.3% in 2005 due to an increase in TOM Online's cost of services.

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APPENDIX IV

Selling and Marketing Expenses. TOM Online's selling and marketing expenses were US$6,974,000 in 2006 down 2.8% from 2005 levels or US$7,176,000. Sales and marketing expenses as a percentage of total sales remained relatively flat at 4.1% of 2006 total revenues compared to 4.3% of 2005 total revenues, as TOM Online implemented cost control programs due to the new operator policies implemented in 2006.

General and Administrative Expenses. TOM Online's general and administrative expenses increased 9.2% to US$23,087,000 in 2006 from US$21,144,000 in 2005. Beginning in 2006, with the adoption of SFAS 123R, TOM Online recognized US$2,973,000, 95.7% of total share-based compensation (“SBC”) expenses for the year 2006, in general and administrative expenses. Excluding these SBC expenses, total general and administrative expenses in 2006 would have declined from 2005 levels as TOM Online implemented cost control programs due to the new operator policies implemented in 2006.

Product Development. TOM Online's product and development expenses increased 5.8% to US$1,617,000 in 2006 from US$1,528,000 in 2005 as TOM Online continued to invest in new products and services for TOM Online's online advertising, TOM-Skype and wireless Internet businesses.

Amortization of Intangibles. TOM Online's amortization of intangibles increased 95.3% to US$1,045,000 in 2006 from US$535,000 in 2005. The increase in amortization of intangibles was related primarily from the acquisition of Beijing Infomax in 2006.

Total Operating Expenses. As a result of the foregoing, TOM Online's total operating expenses increased 7.7% to US$32,723,000 from US$30,383,000 in 2005.

Operating Profit. As a result of the foregoing, TOM Online's operating profit was US$29,723,000 in 2006 compared to profit of US$40,785,000 in 2005.

Net Interest Income. TOM Online recorded a net interest income of US$1,424,000 in 2006 compared to US$2,543,000 in 2005. The decline in net interest income was driven by higher total borrowing costs associated with an increase in short-term loans for financing purposes.

Exchange Gain. In 2006, TOM Online recognized an exchange gain of US$2,382,000 compared to exchange gain of US$1,132,000 in 2005, due to the appreciation of RMB upon translation of TOM Online's net non-RMB liabilities at the period end as TOM Online's functional currency is RMB.

Income from Continuing Operations. As a result of the forgoing, TOM Online's income from continuing operations was US$33,704,000 in 2006 compared to income of US$45,007,000 in 2005.

Loss from Discontinued Operations. In 2006, TOM Online recognized US$5,049,000 in losses associated with TOM Online's stake in Indiagames which was classified as “held for sale” at the end of 2006 compared to loss of US$1,000 in 2005, primarily due to US$4,628,000 impairment charge of goodwill made in the year.

Net Income. As a result of the foregoing, TOM Online's net income attributable to shareholders was US$28,655,000 in 2006 or a 36.3% decrease, compared to net income of US$45,006,000 in 2005.

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APPENDIX IV

Year Ended December 31, 2005 compared to Year Ended December 31, 2004

TOM Online's total revenues were US$168,068,000 in 2005, representing an increase of 37.0% from 2004 which were US$122,720,000. This increase was primarily due to increases in TOM Online's wireless Internet services revenues.

Wireless Internet Services

The majority of TOM Online's revenues were derived from TOM Online's wireless Internet business. In 2005, TOM Online's wireless Internet business achieved revenues of US$157,833,000, representing an increase of 39.8% over 2004, which were US$112,880,000. In 2005, TOM Online's wireless Internet revenues accounted for 93.9% of TOM Online's total revenues as compared to 92.0% in 2004 as TOM Online continued to emphasize TOM Online's wireless Internet business as TOM Online's core strategic focus area.

In 2005, TOM Online's wireless Internet business comprised 4 key categories: 2G services (SMS), 2.5G services (WAP and MMS), voice services (IVR and CRBT) and other wireless Internet revenues.

2G Services – SMS

In 2005, TOM Online's SMS services generated US$63,428,000 in revenues, compared to US$54,956,000 in 2004, representing an increase of 15.4%. In 2005, SMS services accounted for 40.2% of TOM Online's total wireless Internet revenues, down from 48.7% in 2004 as TOM Online's other wireless Internet businesses grew faster. TOM Online's SMS business experienced more stable growth as mobile operator billing platforms were upgraded, resulting in more consistent carrier billing statements.

2.5G Services – MMS and WAP

In 2005, TOM Online's MMS services generated US$12,012,000 in revenues, compared to US$11,784,000 in 2004, representing an increase of only 1.9%. In 2005, MMS services accounted for 7.6% of TOM Online's total wireless Internet revenues, down from 10.4% in 2004. The flat performance of MMS in 2005 was due to a migration in TOM Online's mobile operator partner’s MMS billing platform to an upgraded system, which caused a decline in revenues in the early part of 2005. In the second half of 2005, MMS revenues had begun to recover as the MMS billing platform stabilized and some provincial operators actively promoted MMS services. TOM Online continue to believe that MMS over the medium-term is a transitory product category.

In 2005, TOM Online's WAP services generated US$31,686,000 in revenues, compared to US$17,114,000 in 2004, representing an increase of 85.1%. In 2005, WAP services accounted for 20.1% of TOM Online's total wireless Internet revenues, up from 15.2% in 2004. This strong growth in WAP services was due to a number of factors including mobile operator initiatives to encourage higher usage of WAP, increased penetration of mobile handsets which support WAP and GPRS services, broader distribution of TOM Online's content and services through channel partners and continued focus on quality content. However, due to mobile operator “silent user clean-up” policies, WAP growth slowed down in the second half of 2005.

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APPENDIX IV

Voice Services – IVR and CRBT

In 2005, TOM Online's IVR services generated US$40,059,000 in revenues, compared to US$26,152,000 in 2004, representing an increase of 53.2%. In 2005, TOM Online's IVR business accounted for 25.4% of TOM Online's total wireless Internet business, up from 23.2% in 2004. TOM Online's IVR business experienced strong growth in 2005 as TOM Online broadened TOM Online's distribution channels for TOM Online's IVR services through various means, but primarily TV, radio and print channel partners.

In 2005, TOM Online's CRBT services generated US$10,557,000 in revenues, compared to US$2,874,000 in 2004, representing an increase of 267.3%. In 2005, TOM Online's CRBT business accounted for 6.7% of TOM Online's total wireless Internet revenues, up from 2.5% in 2004. CRBT was a new business, introduced to the mainland China market in the second half of 2004 with growth driven by low penetration rates. TOM Online earn revenue on a per song basis which is periodically purchased by users whilst the mobile operators receive all CRBT service subscription fees. TOM Online's CRBT revenues declined in the second half of 2005 from the first half of 2005 as TOM Online partnered more closely with mobile operators to offer free CRBT songs to mobile phone users in an effort to promote and increase the popularity of CRBT services.

Other Wireless Internet Services

In 2005, revenues from TOM Online's other wireless Internet businesses were US$91,000 and TOM Online did not report other wireless Internet revenues in 2004.

Online Advertising

TOM Online's online advertising revenues increased 21.5% to US$9,210,000 in 2005 from US$7,583,000 in 2004. In 2005, online advertising revenues accounted for 5.5% of TOM Online's total revenues, down from 6.2% in 2004. This growth was driven by a number of factors including, increased traffic on TOM Online's portal, higher average spending per advertiser on TOM Online's portal and TOM Online's initiatives in the second half of 2005 to focus TOM Online's sales efforts on fewer, but more strategic portal channels such as TOM Online's music, entertainment, auto and sports channels, amongst others.

Others

Others revenue decreased 54.6% to US$1,025,000 in 2005 from US$2,257,000 in 2004. In 2005, others revenues accounted for just 0.6% of TOM Online's total revenues, down from 1.8% in 2004. TOM Online continued to de-emphasize and phase out TOM Online's commercial enterprise solutions business and focus on TOM Online's wireless Internet and online advertising businesses.

Cost of Services. TOM Online's cost of services increased 51.5% to US$96,900,000 in 2005 from US$63,966,000 in 2004. Cost of services increased as a percentage of total revenues as TOM Online increased payments to mobile operators, third party distribution and content partners to differentiate and effectively market TOM Online's services to end consumers.

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APPENDIX IV

Cost of Goods Sold. TOM Online's cost of goods sold was nil in 2005 from US$791,000 in 2004, as TOM Online continued to de-emphasize and phase out the commercial enterprise solution business and focus on TOM Online's wireless Internet and online advertising businesses.

Total Cost of Revenues. As a result of the increase in TOM Online's costs of services, TOM Online's total cost of revenues increased 49.6% to US$96,900,000 in 2005 from US$64,757,000 in 2004.

Gross Profit. As a result of the foregoing, TOM Online's gross profit increased 22.8% to US$71,168,000 in 2005 from US$57,963,000 in 2004. TOM Online's gross profit as a percentage of revenues, or gross profit margin, decreased to 42.3% in 2005 from 47.2% in 2004 due to an increase in TOM Online's cost of services.

Selling and Marketing Expenses. TOM Online's selling and marketing expenses were US$7,176,000 in 2005, down by 6.7% from 2004 levels or US$7,695,000. A substantial portion of TOM Online's promotional expenses was incurred directly in relation to TOM Online's wireless Internet revenues and thus had been reported as cost of services, while the remaining general sales and marketing expenses were kept under tight control in 2005 compared to 2004 levels.

General and Administrative Expenses. TOM Online's general and administrative expenses increased 70.7% to US$21,144,000 in 2005 from US$12,385,000 in 2004. This increase of approximately US$ 8,759,000 in general and administration expenses was due to the following primary factors (a) payment of 2004 management performance bonus of approximately US$1,282,000 in the third quarter of 2005 (b) accrual of 2005 management bonus in the second half of 2005 of approximately US$1,697,000 (c) increased professional fees to prepare for Sarbanes-Oxley compliance and (d) a general increase in staff headcount and salary.

Product Development. TOM Online's product and development expenses increased 72.5% to US$1,528,000 in 2005 from US$886,000 in 2004 as TOM Online increased headcount of TOM Online's product development teams.

Amortization of Intangibles. TOM Online's amortization of intangibles decreased to US$535,000 in 2005 from US$5,614,000 in 2004. This decrease was primarily due to the fact that a substantial portion of intangible assets acquired in connection with the acquisition of Wu Ji Network, LingXun and Startone, were already all amortized in 2004, in the amounts of US$4,411,000, US$710,000 and US$103,000, respectively.

Total Operating Expenses. As a result of the foregoing, TOM Online's total operating expenses increased 13.0% to US$30,383,000 from US$26,887,000 in 2004.

Operating Profit. As a result of the foregoing, TOM Online's income from operations was US$40,785,000 in 2005 compared to income of US$31,076,000 in 2004.

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MANAGEMENT DISCUSSION AND ANALYSIS ON TOM ONLINE

APPENDIX IV

Net Interest Income. TOM Online recorded a net interest income of US$2,543,000 in 2005 compared to US$3,095,000 in 2004. This was derived primarily from TOM Online's investment in marketable securities and from short-term fixed bank deposits, after deducting interest expenses to loans from bank and from TOM Online's parent company. TOM Online sold part of TOM Online's portfolio of marketable securities in the year 2005, primarily in order to finance cash obligations associated with the completion of TOM Online's acquisition of Puccini.

Exchange Gain. In 2005, TOM Online recognized an exchange gain of US$1,132,000 compared to nil in 2004, due to the appreciation of RMB upon translation of TOM Online's net non-RMB liabilities at the period end as TOM Online's functional currency is RMB.

Net Income. As a result of the foregoing, TOM Online's net income attributable to shareholders was US$45,006,000 in 2005 compared to net income of US$33,908,000 in 2004.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows and Working Capital

The following table sets forth TOM Online's cash flows with respect to operating activities, investing activities and financing activities for the periods indicated:

Net cash provided by operating activities Net cash used in investing activities Net cash provided by financing activities Net increase in cash and cash equivalents	For the year ended December 31, 2004 2005 2006 (in thousands of U.S. dollars) 33,759 51,008 53,878 (146,099) (95,266) (66,566) 169,024 63,817 21,228 56,684 19,559 8,540

Prior to TOM Online's initial public offering in March 2004, TOM Online primarily financed TOM Online's operations through capital contributions and advances from TOM Online's parent company. After the completion of TOM Online's initial public offering, TOM Online's parent company did not provide Tom Online with any additional capital contributions or advances. After TOM Online's initial public offering, TOM Online have primarily financed TOM Online's operations from the net proceeds of TOM Online's initial public offering as well as net cash provided by operating activities. As of December 31, 2006, TOM Online had cash and cash equivalents of US$110,993,000.

Net cash provided by operating activities was US$53,878,000 in 2006 compared to net cash provided by operating activities of US$51,008,000 in 2005. This increase was primarily due to the improvement of TOM Online's working capital management in 2006. The average collection time for TOM Online's accounts receivable has decreased from 64 days in 2005 to 62 days in 2006.

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MANAGEMENT DISCUSSION AND ANALYSIS ON TOM ONLINE

APPENDIX IV

Currently, the majority of TOM Online's net accounts receivable consists of fees due to Tom Online from mobile telecommunications operators pursuant to TOM Online's revenue sharing arrangements for wireless Internet services. TOM Online have entered into separate revenue sharing arrangements with the various subsidiaries of the mobile telecommunications operators in China and elsewhere. In 2006, the majority of TOM Online's wireless Internet services revenue was contributed by two major mobile telecommunications operators, China Mobile and China Unicom, upon whom TOM Online rely for billing and collection services in China. China Mobile and China Unicom contributed 82% and 17% to TOM Online's wireless Internet services revenues. In the event that any of the subsidiaries of the mobile telecommunications operators should withhold, suspend or delay the payment of such fees to TOM Online, TOM Online may experience cash flow difficulties, in that TOM Online's net cash from operating activities may not be sufficient to meet TOM Online's cash needs.

Net cash used in investing activities was US$66,566,000 in 2006 compared to US$95,266,000 in 2005. This decrease in 2006 was mainly due to the decrease in TOM Online's net cash paid for acquisitions to US$34,519,000 in 2006 from US$99,937,000 in 2005 and the increase in TOM Online's net cash invested in bank deposits amounting to US$25,693,000 in 2006. In addition, there were receipts of US$16,392,000 from disposal of available-for-sale securities in 2005 while no such disposal in 2006. TOM Online's primary use of cash for investing activities in 2006 was for the payments of consideration in connection with the acquisitions of Treasure Base, Huanjian Shumeng and Beijing Infomax amounting to US$16,615,000, US$2,728,000 and US$18,750,000, respectively.

TOM Online currently have US$3,010,000 worth of capital expenditures in progress, most of which will be located in Beijing. TOM Online do not have any material capital divestitures in progress.

The following table sets forth TOM Online's capital expenditures and divestitures for the periods indicated:

Capital expenditures Capital divestitures (cost) Capital divestitures (book value)	For the year ended December 31, 2004 2005 2006 (in thousands of U.S. dollars) 9,175 9,843 6,354 538 2,510 446 9 94 23

In addition, as at December 31, 2006, TOM Online committed to finance the new joint venture to be set up with eBay in 2007 in the form of a shareholder’s loan of US$20,000,000.

Net cash provided by financing activities was US$21,228,000 in 2006, mainly from cash received, net of facility charges, from a one-year bank loan of US$35,340,000. The loan was effectively pledged with certain debt securities, bearing interest at 0.3% over 3-month London Inter-Bank Offered Rate (“LIBOR”) and will be repaid in June 2007. In 2006, TOM Online had repaid all outstanding loans balances of US$20,038,000 to parent company.

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MANAGEMENT DISCUSSION AND ANALYSIS ON TOM ONLINE

APPENDIX IV

As at December 31, 2006, TOM Online's balance of current assets and restricted securities totaled US$277,905,000 while the balance of TOM Online's total liabilities amounted to US$128,939,000. TOM Online believe that TOM Online's current cash and cash equivalents and cash flows from operations will be sufficient to meet TOM Online's anticipated cash needs, including for working capital, capital expenditures and various contractual obligations, for at least the next 12 months. TOM Online may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions TOM Online may decide to pursue. If these sources are insufficient to satisfy TOM Online's cash requirements, TOM Online may seek to sell debt securities or additional equity or to obtain additional credit facilities.

As at December 31, 2006, TOM Online's balance of long-term liabilities totaled US$55,423,000, comprising a bank loan, amounting to US$55,271,000 and deferred tax liabilities of US$152,000. Should TOM Online require additional financing, for instance, the sale of convertible debt securities or additional equity securities could result in additional dilution to TOM Online's shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financial covenants that would restrict TOM Online's operations. TOM Online cannot assure you that financing will be available in amounts or on terms acceptable to Tom Online, if at all.

Indebtedness

As of December 31, 2006, TOM Online's amount due to related parties was US$204,000 which was unsecured, non-interest bearing and had no fixed repayment terms. In addition, TOM Online had bank loans amounting to US$90,611,000 and TOM Online did not have any material debt securities or material mortgages or liens except for TOM Online's marketable securities were pledged for the bank loans. In addition, other than TOM Online's obligations to pay 2006 earn-out consideration of US$12,037,000 and 2007 earn-out consideration of unknown amount in connection with TOM Online's acquisition of Beijing Infomax as of December 31, 2006, TOM Online did not have any material contingent liabilities.

The following table sets forth TOM Online's indebtedness as of the dates indicated:

Bank loan – short term Bank loan – long term Due to related parties – short term Total	December 31, 2004 2005 2006 (in thousands of U.S. dollars) – – 35,340 – 56,099 55,271 20,331 19,430 204 20,331 75,529 90,815	December 31, 2004 2005 2006 (in thousands of U.S. dollars) – – 35,340 – 56,099 55,271 20,331 19,430 204 20,331 75,529 90,815
		90,815

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APPENDIX IV

Bank loans Due to related parties – short term Acquisition obligation(1) Operating lease commitments Other contractual commitments(2) Total contractual obligations	Total 90,611 204 12,037 2,910 20,000 125,762	Payments due by period Within 1 year 1-3 years 3-5 years Thereafter (in thousands of U.S. dollars) 35,340 55,271 – – 204 – – – 12,037 – – – 1,233 1,677 – – 20,000 – – – 68,814 56,948 – –	Payments due by period Within 1 year 1-3 years 3-5 years Thereafter (in thousands of U.S. dollars) 35,340 55,271 – – 204 – – – 12,037 – – – 1,233 1,677 – – 20,000 – – – 68,814 56,948 – –
			–

(1) This is the 2006 earn-out consideration payable in connection with the acquisition of Beijing Infomax.
(2) This is the commitment in financing the new joint venture to be set up with eBay in 2007.

Except as otherwise disclosed herein and apart from intra-group liabilities, as of December 31, 2006, TOM Online did not have any outstanding loan capital issued or agreed to be issued, bank overdrafts, loans, debt securities or other similar indebtedness, liabilities under acceptance (other than normal trade bills) or acceptance credits, debentures, mortgages, charges, finance leases or hire purchase commitments, guarantees or other material contingent liabilities.

HOLDING COMPANY STRUCTURE

TOM Online are a holding company with no operations of TOM Online's own. TOM Online's operations are conducted through Beijing Lei Ting, Shenzhen Freenet, Wu Ji Network, LingXun, Startone, Huanjian Shumeng, Beijing Infomax and TOM Online's subsidiaries in China and through TOM Online's Indiagames subsidiary in India. As a result, TOM Online's ability to pay dividends and to finance any debt that TOM Online may incur is dependent upon license and service fees paid by Beijing Lei Ting, Shenzhen Freenet, Wu Ji Network, LingXun, Startone, Huanjian Shumeng, Beijing Infomax and dividends and other distributions paid by TOM Online's subsidiaries. If TOM Online's subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends to Tom Online. In addition, PRC legal restrictions permit payment of dividends to Tom Online by TOM Online's subsidiaries only out of the net income from TOM Online's subsidiaries, if any, determined in accordance with PRC accounting standards and regulations. Under PRC law, TOM Online's subsidiaries are also required to set aside a portion, up to 10%, of their after tax net income, if any, each year to fund certain reserve funds. These reserve funds are not distributable as cash dividends.

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APPENDIX IV

RESEARCH AND DEVELOPMENT

Research and development costs represented 1.0% of TOM Online's total revenues in 2006, 0.1% above the level in 2005. TOM Online anticipate that research and development costs will increase in 2007 to expand TOM Online's wireless products and services offering and recruit software engineers.

OFF-BALANCE SHEET ARRANGEMENTS

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

INCOME TAXATION

Cayman Islands – The Cayman Islands currently do not levy any taxes on individuals or corporations based upon profits, income, gains or appreciations and there is no taxation in the nature of inheritance tax or estate duty. In addition, pursuant to Section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, TOM Online has obtained an undertaking from the Governor-in-Council that (i) no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciation shall apply to Tom Online or TOM Online's operations and (ii) no tax to be levied on profits, income gains or appreciations or which is in the nature of estate duty or inheritance tax shall be payable by Tom Online on or in respect of TOM Online's shares, debentures or other obligations or by way of withholding in whole or in part of any relevant payment as defined in Section 6(3) of the Tax Concessions Law (1999 Revision). This undertaking is for a period of 20 years from September 25, 2001.

Hong Kong – Advanced Internet Services Limited (“AIS”) and TOM Online (HK) Limited (“TOM Online HK”), TOM Online's 100% owned subsidiaries, are subject to income tax in Hong Kong. Hong Kong companies are generally subject to a 17.5% corporate income tax. AIS and TOM Online HK have not, however, paid any income taxes in Hong Kong because they do not generate any revenue.

China – In future periods, TOM Online expects that substantially all of TOM Online's revenues will continue to be attributable to TOM Online's subsidiaries and variable interest entities that are incorporated in the PRC, including Shenzhen Freenet, Beijing Lei Ting, Wu Ji Network, GreaTom, Beijing Super Channel, LingXun, Startone, Huanjian Shumeng and Beijing Infomax. Generally, PRC companies are subject to an enterprise income tax of 33%. However, certain of TOM Online's subsidiaries and variable interest entities benefit from preferential tax treatment pursuant to PRC law due to the location of their registered offices inside special economic zones or special development zones, or due to their status as high technology enterprises. The following table sets forth the tax rates applicable to certain of TOM Online's subsidiaries and variable interest entities:

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APPENDIX IV

		For the	year ending	December	31,
	2006	2007	2008	2009	2010	2011
Shenzhen Freenet (Shenzhen)	15%	15%	15%	15%	15%	15%
Shenzhen Freenet (Guangzhou)	33%	33%	33%	33%	33%	33%
Beijing Lei Ting	7.5%	15%	15%	15%	15%	15%
Beijing Lei Ting (Chengdu)	33%	33%	33%	33%	33%	33%
Wu Ji Network	7.5%	7.5%	7.5%	15%	15%	15%
GreaTom	7.5%	15%	15%	15%	15%	15%
Beijing Super Channel	15%	15%	15%	15%	15%	15%
Shanghai Super Channel	33%	33%	33%	33%	33%	33%
Puccini Network	0%	7.5%	7.5%	7.5%	15%	15%
LingXun	7.5%	7.5%	7.5%	15%	15%	15%
Ceng Dong Yi	0%	0%	7.5%	7.5%	7.5%	15%
Beijing Lahiji	0%	7.5%	7.5%	7.5%	15%	15%
Startone	7.5%	7.5%	7.5%	15%	15%	15%
Heng Dong Wei Xin	33%	33%	33%	33%	33%	33%
Huanjian Shumeng	33%	33%	33%	33%	33%	33%
Beijing Infomax	7.5%	7.5%	7.5%	15%	15%	15%
Dong Kuilin	0%	0%	0%	7.5%	7.5%	7.5%

Certain of TOM Online's subsidiaries and variable interest entities have recorded net losses in the past, which they may carry forward for five years from the end of the period in which the loss was recorded to offset future net income for tax purposes. TOM Online cannot, however, give any assurances that these subsidiaries and variable interest entities will record sufficient net income within the carry forward periods to realize the full tax benefit of these past net losses.

The table below sets forth the tax loss carry forward and related expiring periods with respect to certain of TOM Online's subsidiaries and variable interest entities as of December 31, 2006:

		For the year ending December	For the year ending December	For the year ending December	31,
	Total	2007	2008	2009	2010		2011
		(in	thousands of U.S. dollars)
Shenzhen Freenet (Guangzhou)	3,829	877	910	965		477	600
Beijing Lei Ting (Chengdu)	1,789	–	–	538		646	605
Beijing Super Channel	13,520	–	1,256	–	6,086		6,178
Shanghai Super Channel	2,772	459	400	560		621	732

In addition, TOM Online's PRC revenues are subject to business taxes and value-added tax. For a summary of these taxes, see “Revenues”.

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APPENDIX IV

OTHERS

Foreign Exchange Exposure

On July 21, 2005, the People’s Bank of China announced a new system to set the value of the RMB against an unspecified basket of currencies instead of a roughly fixed rate of RMB 8.3 per US$. Since then, the RMB has appreciated to 7.8087 per US$ on December 31, 2006. TOM Online expect TOM Online's revenues on a US$ basis to be impacted roughly in line to fluctuation in the RMB exchange rates to the US$.

Charges on Group Assets

As at December 31, 2006, TOM Online had pledged all the available-for-sale securities (the restricted securities) with aggregate fair value of US$97,729,000 and face value of US$100,000,000 as collaterals for a four-year bank loan of US$55,271,000 and a short term bank loan of US$35,340,000. The short term bank loan bears interest at 0.3% over 3-month LIBOR and will be repaid in June 2007 while the four-year bank loan bears interest at 0.23% per annum over LIBOR and will be repaid in April 2009.

Employee Information

As at December 31, 2006, the TOM Online Group had 1,208 full-time employees located in China for the continuing operations. During 2006, TOM Online's employee costs, including Directors’ emoluments, totaled US$20,462,000 for the continuing operations.

TOM Online has implemented a number of initiatives in recent years to enhance the qualifications and fulfillment of TOM Online's employees. TOM Online has refined TOM Online's recruiting strategy to attract and retain quality employees by hiring experienced or creative personnel who are compatible with TOM Online's company culture and understand the lifestyle trends of the younger generation. TOM Online conducts periodic reviews of TOM Online's employees’ job performance, and TOM Online determines salaries and discretionary bonuses based upon those reviews. In addition, TOM Online offers internal training programs tailored to different job requirements to help enhance TOM Online's employees’ talents and skills. TOM Online believes that these initiatives have contributed to the growth of TOM Online's business.

TOM Online believes that TOM Online maintains a good working relationship with TOM Online's employees and TOM Online has not experienced any significant labor disputes or any difficulty in recruiting staff for TOM Online's operations. TOM Online's employees are not represented by any collective bargaining agreements or labor unions.

Gearing Ratio

As at December 31, 2006, the gearing ratio of the TOM Online Group based on total liabilities over total assets was approximately 25.1%.

196

GENERAL INFORMATION

APPENDIX V

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to TOM Group. The TOM Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular, and confirm, having made all reasonable enquiries, that to the best of their knowledge there are no other facts not contained in this circular, the omission of which would make any statement herein misleading.

2. DISCLOSURE OF INTERESTS

As at the Latest Practicable Date, the interests and short positions of the directors of TOM and chief executive of TOM in the TOM Shares, underlying shares and debentures of TOM or any of its associated corporations (within the meaning of Part XV of the SFO) which were required (a) to be notified to TOM and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they were taken or deemed to have under such provisions of the SFO); or (b) which were required to be entered in the register maintained by TOM pursuant to Section 352 of the SFO; or (c) as otherwise notified to TOM and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies as set out in appendix 10 to the Listing Rules, were as follows:

A. TOM

(a) Long positions in the TOM Shares

			Number of TOM	Number of TOM	Shares
Name of							Approximate
TOM		Personal	Family	Corporate	Other		percentage of
Directors	Capacity	Interests	Interests	Interests	Interests	Total	shareholding
Angela Mak	Beneficial	44,000	–	–	–	44,000	Below 0.01%
	owner
Wang Lei Lei	Beneficial	300,000	–	–	–	300,000	0.01%
	owner

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GENERAL INFORMATION

APPENDIX V

(b) Rights to acquire TOM Shares

Pursuant to the pre-IPO share option plan of TOM and/or the old share option scheme of TOM, certain TOM Directors were granted share options to subscribe for the TOM Shares, details of which as at the Latest Practicable Date were as follows:

		Number of
		share options		Subscription
		outstanding		price
Name of	Date of	as at the Latest		per TOM
TOM Directors	grant	Practicable Date	Option period	Share
				HK$
Tommei Tong	9/10/2003	15,000,000	9/10/2003 – 8/10/2013	2.505
		(Note 1)
Angela Mak	11/2/2000	3,026,000	11/2/2000 – 10/2/2010	1.78
		(Note 2)
	9/10/2003	6,000,000	9/10/2003 – 8/10/2013	2.505
		(Note 3)
James Sha	15/11/2000	15,000,000	15/11/2000 – 14/11/2010	5.30
		(Note 4)
Wang Lei Lei	11/2/2000	9,080,000	11/2/2000 – 10/2/2010	1.78
		(Note 2)
	9/10/2003	6,850,000	9/10/2003 – 8/10/2013	2.505
		(Note 5)

Notes:

The options have vested in three tranches in the proportion of 1/3:1/3:1/3 on 17 March 2004, 17 March 2005 and 17 March 2006 respectively.
The options have vested in three tranches in the proportion of 20%:30%:50% on 11 February 2001, 11 February 2002 and 11 February 2003 respectively.
The options have vested in four tranches. The first tranche of 2,700,000 options and the second, third and fourth tranches of 1,100,000 options each have vested on 10 October 2003, 1 January 2004, 1 January 2005 and 1 January 2006 respectively.
The options have vested in three tranches in the proportion of 20%:30%:50% on 15 November 2001, 15 November 2002 and 15 November 2003 respectively.
The options have vested in four tranches. The first tranche of 850,000 options and the second, third and fourth tranches of 2,000,000 options each have vested on 10 October 2003, 1 February 2004, 1 February 2005 and 1 February 2006 respectively.

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GENERAL INFORMATION

APPENDIX V

B. Associated Corporations (within the meaning of the SFO)

(a) Long positions in TOM Online Shares

Number of TOM Online Shares

							Approximate
Name of		Personal	Family	Corporate	Other		percentage of
Director	Capacity	Interests	Interests	Interests	Interests	Total	shareholding
Angela Mak	Beneficial	2,508	-	-	-	2,508	Below
	owner						0.001%

(b) Rights to acquire TOM Online Shares

Pursuant to the TOM Online Pre-IPO Share Option Plan, a TOM Director was granted share options to subscribe for the TOM Online Shares, details of which as at the Latest Practicable Date were as follows:

			Number of
			share options		Subscription
			outstanding		price per
Name	of	Date of	as at the Latest		TOM Online
TOM	Director	grant	Practicable Date	Option period	Share
					HK$
Wang	Lei Lei	16/2/2004	139,264,000	16/2/2004 – 15/2/2014	1.50

(c) Short positions in associated corporations

Mr. Wang Lei Lei has as of 12 June 2001 (as supplemented on 26 September 2003) granted an option to a subsidiary of TOM in respect of his 20% (RMB20,000,000) equity interest in Beijing Lei Ting Wan Jun Network Technology Limited (“Beijing Lei Ting”) whereby such subsidiary of TOM has the right at any time within a period of 10 years commencing from 26 September 2003 (which may be extended for another 10 years at the option of such subsidiary of TOM) to acquire all of Mr. Wang Lei Lei’s equity interest in Beijing Lei Ting at an exercise price of RMB20,000,000.

Save as disclosed herein, as at the Latest Practicable Date, none of the TOM Directors or chief executive of TOM had any interests or short positions in the shares, underlying shares and/or debentures (as the case may be) of TOM and/or any of its associated corporations (within the meaning of Part XV of the SFO) which were required (a) to be notified to TOM and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including any interests and short positions which they were taken or deemed to have under such provisions of the SFO); or (b) entered in the register of interests required to be kept by TOM pursuant to Section 352 of the SFO; or (c) notified to TOM and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies as set out in appendix 10 of the Listing Rules.

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GENERAL INFORMATION

APPENDIX V

3. INTERESTS AND SHORT POSITIONS OF TOM SHAREHOLDERS

So far as is known to any TOM Director or chief executive of TOM, as at the Latest Practicable Date, each of the following persons/companies (not being a TOM Director or chief executive of TOM), who have interests or short positions in the TOM Shares or underlying TOM Shares as recorded in the register required to be kept under Section 336 of the SFO or have otherwise notified to TOM were as follows:

			Approximate
		No. of TOM	percentage of
Name	Capacity	Shares held	shareholding
Li Ka-shing	Founder of discretionary	1,429,024,545 (L)	36.71%
	trusts & interest of	(Notes 1 & 2)
	controlled corporations
Li Ka-Shing Unity Trustee	Trustee & beneficiary	1,429,024,545 (L)	36.71%
Corporation Limited	of a trust	(Notes 1 & 2)
(as trustee of The
Li Ka-Shing Unity
Discretionary Trust)
Li Ka-Shing Unity	Trustee & beneficiary	1,429,024,545 (L)	36.71%
Trustcorp Limited	of a trust	(Notes 1 & 2)
(as trustee of another
discretionary trust)
Li Ka-Shing Unity Trustee	Trustee	1,429,024,545 (L)	36.71%
Company Limited		(Notes 1 & 2)
(as trustee of The
Li Ka-Shing Unity Trust)
Cheung Kong (Holdings)	Interest of controlled	1,429,024,545 (L)	36.71%
Limited	corporations	(Notes 1 & 2)
Cheung Kong Investment	Interest of controlled	476,341,182 (L)	12.24%
Company Limited	corporations	(Note 1)
Cheung Kong Holdings	Interest of controlled	476,341,182 (L)	12.24%
(China) Limited	corporations	(Note 1)
Sunnylink Enterprises	Interest of a controlled	476,341,182 (L)	12.24%
Limited	corporation	(Note 1)
Romefield Limited	Beneficial owner	476,341,182 (L)	12.24%
		(Note 1)

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APPENDIX V

			Approximate
		No. of TOM	percentage of
Name	Capacity	Shares held	shareholding
Hutchison Whampoa	Interest of a controlled	952,683,363 (L)	24.47%
Limited	corporation	(Note 2)
Hutchison International	Interest of a controlled	952,683,363 (L)	24.47%
Limited	corporation	(Note 2)
Easterhouse Limited	Beneficial owner	952,683,363 (L)	24.47%
		(Note 2)
Chau Hoi Shuen	Interest of controlled	928,006,363 (L)	23.84%
	corporations	(Note 3)
Cranwood Company	Beneficial owner & interest	928,006,363 (L)	23.84%
Limited	of controlled corporations	(Note 3)
Schumann International	Beneficial owner	580,000,000 (L)	14.90%
Limited		(Note 3)
Handel International	Beneficial owner	348,000,000 (L)	8.94%
Limited		(Note 3)
(L) denotes a long position

Notes:

(1) Romefield Limited is a wholly-owned subsidiary of Sunnylink Enterprises Limited, which in turn is a whollyowned subsidiary of Cheung Kong Holdings (China) Limited. Cheung Kong Holdings (China) Limited is a wholly-owned subsidiary of Cheung Kong Investment Company Limited, which in turn is a wholly-owned subsidiary of Cheung Kong (Holdings) Limited.

By virtue of the SFO, Cheung Kong Investment Company Limited, Cheung Kong Holdings (China) Limited and Sunnylink Enterprises Limited are all deemed to be interested in the 476,341,182 TOM Shares held by Romefield Limited.

Li Ka-Shing Unity Holdings Limited, of which each of Mr. Li Ka-shing, Mr. Li Tzar Kuoi, Victor and Mr. Li Tzar Kai, Richard is interested in one-third of the entire issued share capital, owns the entire issued share capital of Li Ka-Shing Unity Trustee Company Limited. Li Ka-Shing Unity Trustee Company Limited as trustee of The Li KaShing Unity Trust, together with certain companies which Li Ka-Shing Unity Trustee Company Limited as trustee of The Li Ka-Shing Unity Trust is entitled to exercise or control the exercise of more than one-third of the voting power at their general meetings, hold more than one-third of the issued share capital of Cheung Kong (Holdings) Limited.

In addition, Li Ka-Shing Unity Holdings Limited also owns the entire issued share capital of Li Ka-Shing Unity Trustee Corporation Limited (“TDT1”) as trustee of The Li Ka-Shing Unity Discretionary Trust (“DT1”) and Li Ka-Shing Unity Trustcorp Limited (“TDT2”) as trustee of another discretionary trust (“DT2”). Each of TDT1 and TDT2 hold units in The Li Ka-Shing Unity Trust.

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(2) Easterhouse Limited is a wholly-owned subsidiary of Hutchison International Limited, which in turn is a whollyowned subsidiary of Hutchison Whampoa Limited. By virtue of the SFO, Hutchison Whampoa Limited and Hutchison International Limited are deemed to be interested in the 952,683,363 TOM Shares held by Easterhouse Limited.

In addition, subsidiaries of Cheung Kong (Holdings) Limited are entitled to exercise or control the exercise of more than one-third of the voting power at the general meetings of Hutchison Whampoa Limited. By virtue of the SFO, Mr. Li Ka-shing, being the settlor and may being regarded as a founder of each of DT1 and DT2 for the purpose of the SFO, Li Ka-Shing Unity Trustee Corporation Limited, Li Ka-Shing Unity Trustcorp Limited, Li Ka-Shing Unity Trustee Company Limited and Cheung Kong (Holdings) Limited are all deemed to be interested in the 476,341,182 TOM Shares and 952,683,363 TOM Shares held by Romefield Limited and Easterhouse Limited respectively.

(3) Schumann International Limited and Handel International Limited are companies controlled by Cranwood Company Limited and Ms. Chau Hoi Shuen is entitled to exercise more than one-third of the voting power at the general meetings of Cranwood Company Limited.

By virtue of the SFO, Cranwood Company Limited is deemed to be interested in the 580,000,000 TOM Shares and 348,000,000 TOM Shares held by Schumann International Limited and Handel International Limited respectively in addition to 6,363 TOM Shares held by itself.

By virtue of the SFO, Ms. Chau Hoi Shuen is deemed to be interested in 6,363 TOM Shares, 580,000,000 TOM Shares and 348,000,000 TOM Shares held by Cranwood Company Limited, Schumann International Limited and Handel International Limited respectively.

So far as is known to any TOM Directors or chief executive of TOM, as at the Latest Practicable Date, the following companies/persons were interested in 10% or more of the equity interests of the subsidiaries of TOM:

		No. and class	Percentage of
Name of subsidiaries	Name of shareholders	of shares held	shareholding
YCP Advertising Limited	Yangcheng Enterprise Limited	2 ordinary shares	20.00%
Beijing GreaTom United	Great Wall Technology	Registered capital	10.00%
Technology Company	Company Ltd.	RMB2,500,000
Limited
Guangdong Yangcheng	Yangcheng Evening News	Registered capital	20.00%
Press Sports	Economic Development	RMB1,000,000
Development Limited	Corporation
Guangdong Yangcheng	Yangcheng Evening News	Registered capital	20.00%
Advertising Company	Economic Development	RMB1,000,000
Limited	Corporation
Cernet Information	Cernet Network Company	Registered capital	49.00%
Technology Company	Limited	RMB29,400,000
Limited
Nong Nong Magazine	Barbizon Interculture	431,000	17.24%
Company Limited	Publication Company	ordinary shares
	Limited

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		No. and class	Percentage of
Name of subsidiaries	Name of shareholders	of shares held	shareholding
TOM Outdoor Media	SPH AlphaOne Pte Ltd.	35	35.00%
Group Limited		ordinary shares
Wuhan TOM Outdoor	Cheng Gang	Registered capital	15.00%
Information & Media		RMB750,000
Company Limited
CNPIT TOM Culture	CNPIT Information Technology	Registered capital	30.00%
Company Limited	Company Limited	RMB1,500,000
China Entertainment	Turner Broadcasting System	10,778	32.22%
Television Broadcast	Asia Pacific, Inc.	ordinary shares
Limited
Cite (H.K.) Publishing	Lo Siu On	500,000	11.91%
Group Limited		ordinary shares
Cite (Malaysia) SDN. BHD.	Chew Kim Ming	40,000	10.00%
		ordinary shares
Cite (Malaysia) SDN. BHD.	Brain Network (M) SDN. BHD.	60,000	15.00%
		ordinary shares
Taiwan Cable Holdings	CDIB Venture Investment	19.99	19.99%
Limited	(Asia) Limited	ordinary shares
Taiwan Cable Holdings	CDIB & Partners Investment	20.02	20.02%
Limited	Holding (Cayman) Ltd.	ordinary shares
Chi-Chi Dei Entertainment	Eastpower Trading Limited	1,160	11.60%
Limited		ordinary shares
Chi-Chi Dei Entertainment	Bloom Time Holdings	1,000	10.00%
Limited	Limited	ordinary shares

Save as disclosed above, as at the Latest Practicable Date, the TOM Directors are not aware of any other person who has an interest or short position in the TOM Shares or underlying TOM Shares which would fall to be disclosed to TOM under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who is interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the TOM Group.

4. INTERESTS OF THE TOM DIRECTORS IN COMPETING BUSINESS

Mr. Frank Sixt and Mrs. Susan Chow, the Chairman of TOM and a non-executive director of TOM respectively, are executive directors of HWL, Cheung Kong Infrastructure Holdings Limited (“CKI”) and directors of certain of their respective associates (collectively referred to as “HWL Group” and “CKI Group” respectively). In addition, Mr. Frank Sixt is also a non-executive director of CKH and Hutchison

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Telecommunications International Limited (“HTIL”) and director of certain of its associates (collectively referred to as “CKH Group” and “HTIL Group” respectively). Mrs. Susan Chow is an alternate director of HTIL and director of certain of its associates. Mr. Edmond Ip, a non-executive director of TOM, is the deputy managing director of CKH, the senior vice president and chief investment officer of CK Life Sciences Int’l., (Holdings) Inc. (“CK Life”), the deputy chairman of CKI and a non-executive director of Excel Technology International Holdings Limited (“Excel Technology”). HWL Group is engaged in e- commerce and general information portals and broadband content. CKH Group, CKI Group, CK Life and Excel Technology are engaged in information technology, e-commerce and new technology. HTIL Group is engaged in providing mobile and fixed-line telecommunications services, including broadband data services, multimedia services and mobile and fixed-line Internet services and Intranet services. The TOM Directors believe that there is a risk that such businesses may compete with those of the TOM Group.

Ms. Tommei Tong, an executive director of TOM and Chief Executive Officer of TOM, is a beneficial owner of less than 1% of the equity interest in Qin Jia Yuan Media Services Company Limited (“Qin Jia Yuan”) whose principal business engaged in the provision of media services in the PRC. The TOM Directors believe that there is a risk that the business of Qin Jia Yuan may compete with those of the TOM Group.

Save as disclosed above, none of the TOM Directors or their respective associates have any interests in a business which competes or may compete with the business of the TOM Group.

5. INTERESTS OF THE TOM DIRECTORS IN THE TOM GROUP’S ASSETS OR CONTRACT OR ARRANGEMENTS SIGNIFICANT TO THE TOM GROUP

As at the Latest Practicable Date, none of the TOM Directors had any interest in any assets which have been, since 31 December 2006 (being the date to which the latest published audited financial statements of TOM were made up), acquired or disposed of by or leased to any member of the TOM Group, or are proposed to be acquired or disposed of by or leased to any member of the TOM Group.

As at the Latest Practicable Date, none of the TOM Directors was material interested in any contract or arrangement, subsisting at the date of this circular, which is significant in relation to the business of the TOM Group.

6. OUTSTANDING SHARE OPTIONS

As at the Latest Practicable Date, options to subscribe for an aggregate of 84,856,000 TOM Shares granted pursuant to the pre-IPO share option plan of TOM and the old share option scheme of TOM were outstanding. Details of which were as follows:

(a) Pre-IPO share option plan of TOM

As at the Latest Practicable Date, options to subscribe for an aggregate of 16,196,000 TOM Shares at a subscription price of HK$1.78 per TOM Share were outstanding. These options were granted to 3 persons who are employees of the TOM Group at the date of grant. All of these options have a duration of 10 years from 11 February 2000, but shall lapse where the grantee ceases to be employed by the TOM Group or the HWL group of companies.

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(b) Share Option Scheme

Options to subscribe for an aggregate of 68,660,000 TOM Shares which were granted to certain TOM Directors, continuous contract employees and ex-employees of the TOM Group were outstanding as at the Latest Practicable Date, breakdown of which are set out below:

				Option period*
			Subscription	(commencing from date
	No. of	No. of	price per	of grant and terminating
Date of grant	share options	employees	TOM Share	ten years thereafter)
			HK$
23/3/2000	1,764,000	43	11.30	23/3/2000-22/3/2010
26/6/2000	654,000	21	5.89	26/6/2000-25/6/2010
8/8/2000	6,600,000	78	5.30	8/8/2000-7/8/2010
15/11/2000	15,000,000	1	5.30	15/11/2000-14/11/2010
9/10/2003	39,642,000	30	2.505	9/10/2003-8/10/2013
16/2/2004	5,000,000	1	2.55	16/2/2004-15/2/2014

* Those options that have been vested may be exercised within the option period, unless they have been cancelled. Generally, the options are vested in different tranches (subject to conditions set out in the offer letters).

7. LITIGATION

As at the Latest Practicable Date, save as mentioned below, no litigation or claim of material importance is known to the TOM Directors to be pending or threatened against any member of the TOM Group.

A 65% owned subsidiary of TOM, being TOM Outdoor Media Group Limited as plaintiff, has initiated a legal proceeding before the PRC court claiming for the repayment of HK$10,849,057 under the loan agreement dated 10 April 2002 entered into between the parties. As at the Latest Practicable Date, no decision has been made for the aforesaid proceeding.

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8. PROCEDURES BY WHICH A POLL MAY BE DEMANDED

Pursuant to the articles of association of TOM, a resolution put to the vote at any general meeting shall be decided on a show of hands unless a poll is required under the Listing Rules or (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is demanded. A poll may be demanded by:

(a) the chairman presiding at the meeting; or
(b) at least five members present in person or by proxy and entitled to vote at the meeting; or
(c) one or more members present in person or by proxy who are entitled to vote who represent in aggregate not less than one-tenth of the total voting rights of all members having the right to attend and vote at the meeting; or
(d) any member of members present in person or by proxy and holding shares conferring a right to attend and vote at the meeting on which there have been paid up sums in the aggregate equal to not less than one-tenth of the total sum paid up on all shares conferring that right.

A demand by a person as a proxy for a TOM Shareholder or in the case of a shareholder of TOM being a corporation by its duly authorised representative shall be deemed to be the same as a demand by the TOM Shareholder.

Pursuant to Rule 13.39(4) of the Listing Rules, any vote of shareholders taken at a general meeting to approve connected transactions pursuant to Chapter 14A of the Listing Rules and transactions that are subject to independent shareholders’ approval pursuant to the Listing Rules must be taken on a poll. Accordingly, the Chairman of the TOM EGM will demand that the ordinary resolution to approve, amongst others, the Share Proposal, the Option Proposal and the transactions contemplated thereunder, be decided by poll.

9. EXPERTS AND CONSENTS

The following is the qualification of the expert who has given opinion or advice, which is contained in this circular:

Name Qualification Evolution Watterson a corporation licensed under the SFO to carry out Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities PricewaterhouseCoopers certified public accountants

Each of Evolution Watterson and PricewaterhouseCoopers has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter or report as set out in this circular and references to its name in the form and context in which they respectively appear.

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As at the Latest Practicable Date, each of Evolution Watterson and PricewaterhouseCoopers do not have any shareholding interest in any member of the TOM Group or any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the TOM Group.

As at the Latest Practicable Date, each of Evolution Watterson and PricewaterhouseCoopers do not have any interest, direct or indirect, in any assets which have been, since 31 December 2006 (being the date to which latest published audited consolidated financial statements of TOM Group were made up), acquired or disposed of by or leased to any member of the TOM Group, or are proposed to be acquired or disposed of by or leased to any member of the TOM Group.

10. SERVICE CONTRACTS

None of the TOM Directors has entered into any service contracts with any member of the TOM Group (excluding contracts expiring or determinable by the employer within one year without payment of compensation other than statutory compensation).

11. MATERIAL CONTRACTS

The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by the TOM Group within the two years preceding the Latest Practicable Date and which are or may be material:

A loan facility letter dated 27 April 2005 from Bank of China (Hong Kong) Limited (“BOC (Hong Kong)”) as lender to TOM Online as borrower in relation to a term loan up to the lowest of (i) US$57,000,000.00; or (ii) 95% of the face value of the AAA bonds charged in favour of BOC (Hong Kong); or (iii) 95% of the market value of the AAA bonds charged in favour of the BOC (Hong Kong); or its equivalent in Hong Kong dollars to finance the general working capital of TOM Online (the “Loan Facility”).
A charge over securities dated 28 April 2005 entered into between TOM Online as chargor and BOC (Hong Kong) as lender in relation to the Loan Facility.
A subscription and shareholders agreement dated 29 April 2005 entered into between Vishal Gondal, Prannath Gondal, Shashi Gondal, Deepak Chandappa Ail, Harpreet Vishal Gondal, Kiran Jagannath Nayak, Mahendra Vasudeo Patel, Cyril Ferry, Cisco Systems, Inc., Macromedia, Inc., TOM Online Games Limited and Indiagames Limited.
An agreement in respect of payment in lieu of initial public offering shares dated 7 June 2005 entered into between TOM Print Media Group Limited (“TOM Print Media”), Right Charm International Limited, Huang Chen-Lung (alias Michael Huang), persons named in the schedule of this agreement and Sharp Point Publishing Company Limited (“SP”) pursuant to a stock purchase agreement dated 21 November 2001 and a supplemental agreement dated 27 December 2001, entered into with certain shareholders of SP.

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A supplemental agreement dated 15 June 2005 entered between certain shareholders of Cité Publishing Holding Limited (“Cité Publishing Holding”) as listed in the schedule of this agreement, TOM Print Media, Jan Hung Tze, Ho Fei Peng and Cité Publishing Holding which supplements a shareholders’ agreement dated 27 December 2002 entered into between the same parties.
A loan guarantee dated 1 July 2005 entered into between TOM Group International Limited (“TOM International”) and Cité Publishing Limited (“Cité”) regarding a stand-by letter of credit from DBS Bank Taipei to enable Cité to obtain a 364-day revolving credit facility of HK$65,000,000.
A deed of settlement dated 8 July 2005 between Spectrum International Holding Limited, Modern Perfect Developments Limited, Lincoln Serejo Venancio, Spectrum Plus Limited and Tennis Management Limited (“Tennis Management”) with respect to China Open 2005.
A shareholders’ deed dated 22 August 2005 entered into between Tom Online (BVI) Limited, TOM Online, Skype Communications, SA., Skype Technologies, S.A., and Tel-Online Limited, with respect to setting up a company to market, distribute, develop and maintain the customized version of the Skype software encompassing TOM Online’s and Skype’s brand features.
A loan entrustment agreement dated 31 August 2005 entered into between Beijing Lei Ting Wan Jun Network Technology Company Limited (北京雷霆萬鈞網絡科技有限責任公司 ) (“LTWJ”) and China Construction Bank Beijing Chaoyang Branch (“CCB (Beijing)”) whereby LTWJ entrusts CCB (Beijing) to grant a loan (“Loan Entrustment Agreement”).
A pledge agreement dated 31 August 2005 entered into between Beijing Huayi Brothers Movie Investment Co. Ltd (“Huayi Brothers Movie Investment”) and LTWJ, pursuant to which Huayi Brothers Movie Investment will pledge the publishing rights of “Battle of Wits” in the PRC to LTWJ.
A guarantee contract dated 31 August 2005 entered into between Wang Zhongjun as guarantor in favour of LTWJ to guarantee the performance of all obligations of Beijing Huayi Brothers Advertisement Co. Ltd. (北京華誼兄弟廣告有限公司 ) (“Huayi Brothers Advertisement”) under the Loan Entrustment Agreement.
A capital loan entrustment contract dated 31 August 2005 entered into between Huayi Brothers Advertisement, LTWJ and CCB (Beijing) whereby LTWJ entrusted CCB (Beijing) to grant a loan in the amount of RMB20,000,000 to Huayi Brothers Advertisement.
A second supplemental agreement dated 1 September 2005 entered between the MI Shareholders as listed in schedule 1 of this agreement, TOM Print Media, Jan Hung Tze, Ho Fei Peng and Cité Publishing Holding which supplements the shareholders’ agreement dated 27 December 2002 and the first supplemental agreement dated 15 June 2005 entered into between the same parties.

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A loan release dated 2 September 2005 with regard to granting a loan of RMB20,000,000 by Huayi Brothers Advertisement.
A trust deed dated 28 September 2005 executed by Mr. Ouyangzhengyu (“Mr. Ouyang”).
A loan agreement dated 28 September 2005 entered into between Puccini International Limited (“Puccini”) and Mr. Ouyang whereby Puccini agreed to grant a loan to Mr. Ouyang as general working capital of Beijing Lei Ting Wu Ji Network Technology Company Limited (北京雷霆無極網絡科技有限公司 ) (“LTWJi”).
A business operation agreement dated 28 September 2005 entered into between Puccini Network Technology (Beijing) Limited (“Puccini Beijing”), LTWJi, Mr. Fan Tai (“Mr. Fan”) and Mr. Ouyang, under which Puccini Beijing will act as a guarantor for any obligations undertaken by LTWJi and in return for which, LTWJi will pledge to Puccini Beijing their accounts receivable and assets. No consideration is payable under the aforesaid business operation agreement.
An equity pledge agreement dated 28 September 2005 entered into between Puccini Beijing and Mr. Ouyang pursuant to which Mr. Ouyang will pledge his interest in LTWJi to Puccini Beijing for the performance of LTWJi’s payment obligations under the exclusive technical consultancy services agreement. No consideration is payable under the aforesaid equity pledge agreement.
A termination agreement dated 28 September 2005 entered into between Puccini, Mr. Wang Lei Lei (“Mr. Wang”) and LTWJi with respect to the termination of an exclusive option agreement dated 19 November 2003 entered into between the same parties.
A termination agreement dated 28 September 2005 entered into between Puccini Beijing and Mr. Wang with respect to the termination of a share pledge agreement dated 19 November 2003 entered into between the same parties.
A termination agreement dated 28 September 2005 entered into between Puccini and Mr. Wang with respect to the termination of the loan agreement dated 6 August 2004 entered into between the same parties.
A termination agreement dated 28 September 2005 entered into between Puccini Beijing, LTWJi, Mr. Fan and Mr. Wang with respect to the termination of a business operation agreement dated 13 December 2004 entered into between the same parties.
A termination agreement dated 28 September 2005 entered into between Puccini and Mr. Wang with respect to the termination of a trust deed dated 19 November 2003 entered into between the same parties.

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An exclusive option agreement dated 28 September 2005 entered into between Puccini, Mr. Ouyang and LTWJi pursuant to which Mr. Ouyang granted an exclusive right to Puccini to purchase all or part of the shareholders’ equity interest in LTWJi.
A supplemental agreement dated 29 September 2005 entered between Chongqing Zhongkepu Media Development Joint Stock Company Limited (重慶中科普傳媒發展股份有限公司 ) (“China Science Media”), 電腦報社 (Diannaobaoshe) (“PCW Publishing House”), Tom.com International Limited and TOM with respect to a framework agreement and a supplemental framework agreement dated 5 July 2004 and 29 June 2005 respectively.
A deed of mortgage of shares dated 29 September 2005 issued by Mr. Wang Zhongjun (王忠軍 ), Mr. Wang Zhonglei (王忠磊 ) and Ms. Liu Xiaomei (劉曉梅 ) as mortgagors in favour of TOM Entertainment Group Limited (“TOM Entertainment”) relating to shares in Huayi Brothers International Holdings Limited (“Huayi Brothers International Holdings”).
A third supplemental agreement dated 29 September 2005 between Mr. Wang Zhongjun, Mr. Wang Zhonglei, Ms. Liu Xiaomei, TOM Entertainment, and ChinaEquity International Holding Company Limited (“ChinaEquity”) which supplements a share purchase agreement dated 9 December 2004, a first supplemental agreement dated 29 June 2005 and a second supplemental agreement dated 6 September 2005.
A shareholders’ agreement dated 29 September 2005 entered into between Mr. Wang Zhongjun, Mr. Wang Zhonghei, Ms. Liu Xiaomei, TOM Entertainment, ChinaEquity and Huayi Brothers International Holdings in relation to the share particulars of Huayi Brothers International Holdings.
An instrument dated 29 September 2005 entered into between Huayi Brothers International Holdings, Mr. Wang Zhongjun and Mr. Wang Zhonglei as guarantors relating to US$5,000,000 – 6% guaranteed convertible bonds of Huayi Brothers International Holdings due on 2007.
An option pledge agreement dated 29 September 2005 entered into between TOM Entertainment and Mr. Wang Zhongjun with regard to a pledge of 27% of the issued share capital of Huayi Brothers Advertisement to TOM.
A mortgage agreement dated 29 September 2005 issued by Mr. Wang Zhongjun to TOM Entertainment in relation to certain assets.
A mortgage agreement dated 29 September 2005 issued by Mr. Wang Zhongjun to TOM Entertainment in relation to certain other assets.
A mortgage agreement dated 29 September 2005 issued by Ms. Liu Xiaomei to TOM Entertainment in relation to certain assets.
A mortgage agreement dated 29 September 2005 issued by Ms. Liu Xiaomei to TOM Entertainment in relation to certain other assets.

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A mortgage agreement dated 29 September 2005 entered into between Beijing Huayi Brothers Investments Limited (北京華誼兄弟投資有限公司 ) and TOM Entertainment in relation to the properties known as 豐聯廣場 (Full Link Plaza) and 美惠大廈 (Meihui Mansion).
A framework agreement dated 1 October 2005 entered into between TOM Outdoor Media Group Limited (“TOM OMG”), Shanghai TOM International Outdoor Advertising Limited (上海湯姆國際戶外傳媒有限公司 ) (“Shanghai TOM Outdoor Advertising”), 上海浩盛廣告有限公司 and上海弘盛廣告有限公司 and 謝金妹 (“Xie Jin Mei”), 沈磊 (“Shen Lei”), 張公浩 (“Zhang Gong Hao”), 徐傳忠 (“Xu Chuan Zhong”), 鄭立梅 (“Zheng Li Mei”) in respect of establishing a new advertising company in Shanghai with a registered capital of RMB100 million.
An agreement for the sale and purchase of shares in Cite (H.K.) Publishing Group Limited (“Cite (H.K.)”) dated 4 October 2005 entered into between Mr. Wong Shun Hing and Cite Publishing & Advertising Group Limited in relation to the sale and purchase of 11.90% of the issued share capital of Cite (H.K.) for a consideration of HK$1,545,000.
A share purchase agreement dated 14 October 2005 entered into between Mr. Kuo Chun Hsin and TOM Print Media in relation to the sale and purchase of 6,250 common shares of Cité Publishing Holding.
A share transfer agreement dated 25 October 2005 entered into between Mr. Pudongwan (“Mr. Pu”) and Ms. Zhang Mingjin (“Ms. Zhang”) whereby Mr. Pu agreed to transfer the 49% of the issue share capital of Beijing Information Technology Company Limited (“Startone”) to Ms. Zhang.
An exclusive option agreement dated 25 October 2005 entered into between Whole Win Investments Limited (“Whole Win”), Ms. Zhang and Startone pursuant to which Ms. Zhang will grant an exclusive right to Whole Win to purchase all or part of the shareholders’ equity interest in Startone.
A business operation agreement dated 25 October 2005 entered into between Heng Dong Wei Xin (Beijing) Technology Company Limited (囱東唯信 (北京 )科技有限公司 ) (“Hendongweixin”), Startone, Mr. Liu Binghai and Ms. Zhang, under which Hendongweixin will act as a guarantor for any obligations undertaken by Startone and in return for which, Startone will pledge to Hendongweixin their accounts receivable and assets. No consideration is payable under the aforesaid business operation agreement.
An equity pledge agreement dated 25 October 2005 entered into between Hendongweixin and Ms. Zhang pursuant to which Ms. Zhang will pledge her interest in Startone to Hendongweixin for the performance of Startone’s payment obligations under the exclusive technical consultancy services agreement. No consideration is payable under the aforesaid equity pledge agreement.
A loan agreement dated 25 October 2005 entered into between Whole Win and Ms. Zhang whereby Whole Win agreed to grant a loan to Ms. Zhang for general working capital of Startone.

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A trust deed dated 25 October 2005 executed by Ms. Zhang.
A termination agreement dated 25 October 2005 entered into between Whole Win, Mr. Pu and Startone with respect to the termination of an exclusive option agreement dated 19 November 2004 entered into between the same parties.
A termination agreement dated 25 October 2005 entered into between Hendongweixin and Mr. Pu with respect to the termination of the share pledge agreement dated 19 November 2004 entered into between the same parties.
A termination agreement dated 25 October 2005 entered into between Whole Win and Mr. Pu with respect to the termination of the loan agreement dated 19 November 2004 entered into between the same parties.
A termination agreement dated 25 October 2005 entered into between Hendongweixin, Startone, Mr. Liu Binghai and Mr. Pu with respect to the termination of a business operation agreement dated 19 November 2004 entered into between the same parties.
A termination agreement dated 25 October 2005 entered into between Whole Win and Mr. Pu with respect to the termination of a trust deed dated 19 November 2004 entered into between the same parties.
A deed dated 25 November 2005 entered into between TOM Television Group Limited, Turner Broadcasting System Asia Pacific Inc., TOM, Turner Broadcasting System Inc. and China Entertainment Television Broadcast Limited to amend and supplement a shareholders’ deed and a supplemental deed executed on 15 September 2003 and 30 March 2004 respectively.
An equity transfer agreement dated 12 December 2005 entered into between Mr. Kongyi (孔毅 ) (“Mr. Kong”) and LTWJ whereby Mr. Kong will transfer 33% of the equity interest in Beijing Huanjianshumeng Technology Development Co. Ltd (北京幻劍書盟科技發展有限公司 ) (“Beijing Huangjianshumeng”) to LTWJ.
An equity transfer Agreement dated 12 December 2005 entered into between Mr. Zhangwei (張偉 ) (“Mr. Zhang”) and LTWJ whereby Mr. Kong will transfer 27% of the equity interest in Beijing Huanjianshumeng to LTWJ.
An exclusive technology consultancy and services agreement dated 21 December 2005 entered into between Kunming Fench Media Co Ltd. (“Fench Media”), Kunming Fench Star Information Industry Limited (“Fench Star”) with regard to the provision of technical and consultancy services.
A business operation agreement dated 21 December 2005 entered into between Fench Media, Fench Star, Kunming Fench Enterprise Management Consultancy Company Limited (“Fench Enterprise”) and Kunming Guojia Technology Development Company Limited (“Kunming Guojia”) with regard to business operation matters for a term of ten years.

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A framework agreement dated 28 December 2005 entered into between TOM OMG, 深圳之光廣告發展有限公司 (Shenzhen Rays), 深圳皇馬廣告發展有限公司 (Shenzhen RMA Media), 洪宏 (Hong Hong), 高明 (Gao Ming), 陳衛強 (Chen Wei Qiang) and 李向暉 (Li Xiang Hui) in respect to the setting up of a new advertising company.
A letter dated 29 December 2005 to CCB Beijing from LTWJ and Huayi Brothers Advertisement regarding the repayment of an entrusted loan of RMB20,000,000.
A loan agreement dated 30 December 2005 entered between Mr. Wang Zhongjun and TOM Entertainment for a convertible loan in the amount of US$5,296,962.85 (the “US$5,296,962.85 Term Loan Facility”).
A loan agreement dated 30 December 2005 entered into between Mr. Wang Zhongjun to Huayi Brothers International Holdings regarding the US$5,296,962.85 Term Loan Facility.
A deed of release dated 30 December 2005 issued by TOM Entertainment to Mr. Wang Zhongjun, Mr. Wang Zhonglei and Ms. Liu Xiaomei with regard to a deed of mortgage of shares dated 29 September 2005 entered into between the same parties.
A deed of mortgage of shares and an assignment of shareholders’ loan dated 30 December 2005 entered between Mr. Wang Zhongjun and TOM Entertainment regarding shares in Huayi Brothers International Holdings and the US$5,296,962.85 Term Loan Facility.
A mortgage agreement dated 30 December 2005 issued by Mr. Wang Zhongjun to TOM Entertainment in relation to certain assets.
A mortgage agreement dated 30 December 2005 issued by Mr. Wang Zhongjun to TOM Entertainment in relation to certain other assets.
A mortgage agreement dated 30 December 2005 issued by Ms. Liu Xiaomei to TOM Entertainment in relation to certain assets.
A mortgage agreement dated 30 December 2005 issued by Ms. Liu Xiaomei to TOM Entertainment in relation to certain other assets.
A termination agreement dated 30 December 2005 entered between TOM Entertainment and Mr. Wang Zhongjun in relation to the termination of a pledge agreement dated 29 September 2005 entered into between the same parties.
A termination agreement dated 30 December 2005 entered between TOM Entertainment and Beijing Huayi Brothers Investment Co. Ltd. regarding the mortgage of the properties known as 豐聯廣場 (Full Link Plaza) and 美惠大廈 (Meihui Mansion).
A shareholders’ agreement dated 30 December 2005 entered between persons listed in part A of the schedule to this agreement TOM Entertainment, ChinaEquity, the entities listed in part B of the schedule to this agreement and Huayi Brothers International Holdings.

213

GENERAL INFORMATION

APPENDIX V

A letter dated 30 December 2005 from Mr. Wang Zhongjun to TOM Entertainment relating to the sale and purchase of 20 shares in the issued share capital of Huayi Brothers International Holdings.
A principal equity transfer agreement dated 4 January 2006 entered into between Mr. Kong, Mr. Zhang and LTWJ whereby Mr. Kong and Mr. Zhang will transfer their 60% equity interest in Beijing Huanjianshumeng to LTWJ.
An exclusive option agreement dated 23 August 2006 entered into between Mr. Kong and LTWJ pursuant to which Mr. Kong will grant an exclusive right to LTWJ to purchase his 25% equity interest in of Beijing Huanjianshumeng.
An equity transfer contract dated 23 August 2006 entered into between Mr. Kong and Mr. Zhang whereby Mr. Zhang will transfer his 11.25% equity interest in Beijing Huanjianshumeng to Mr. Kong.
An equity transfer contract entered in January 2006 entered into between Mr. Kong, LTWJ and Beijing Ling Xun Interactive Science Technology and Development Company Limited (“Beijing Ling Xun”) whereby Mr. Kong will transfer his 25% equity interest in Beijing Huanjianshumeng to Beijing Ling Xun.
A loan agreement dated 16 January 2006 entered into between Lahiji Vale Limited (“Lahiji”) and Ms. Wang Xiu Ling (“Ms. Wang”) with respect to a loan in the amount of RMB100,000,000 for a term of 10 years.
An exclusive option agreement dated 16 January 2006 entered into between Ms. Wang, Lahiji and LTWJ pursuant to which Ms. Wang granted Lahiji an exclusive option to purchase her entire equity interest in LTWJ when permitted by PRC law. The term of this agreement is ten (10) years from the date of execution.
An equity pledge agreement dated 16 January 2006 entered into between Beijing Lei Xi Technology Development Co. Ltd. (“Beijing Lei Xi”) and Ms. Wang whereby Ms. Wang agreed to pledge her entire equity interest in LTWJ to Beijing Lei Xi.
A trust deed dated 16 January 2006 executed by Ms. Wang.
An irrevocable power of attorney dated 16 January 2006 executed by Ms. Wang granting Ms. Su Ying Qi, or, if Ms. Su Ying Qi is no longer an employee of Beijing Lei Xi or if Beijing Lei Xi gives written notice to replace Ms. Su Ying Qi, any other nominated employee of Beijing Lei Xi, full power and authority to exercise all of her shareholder’s rights for a term of ten (10) years with respect to her equity interest in LTWJ.
A termination agreement dated 16 January 2006 entered into between Lahiji and Ms. Wang with respect to the termination of the loan agreement dated 8 August 2002 and its supplemental loan agreements dated 26 September 2003 and 19 January 2005 entered into between the same parties.

214

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A termination agreement dated 16 January 2006 entered into between Lahiji, Ms. Wang and LTWJ with respect to the termination of the an exclusive option agreement dated 19 January 2005 entered into between the same parties.
A termination agreement dated 16 January 2006 entered into between Beijing Lei Xi and Ms. Wang with respect to the termination of an equity pledge agreement dated 30 November 2004 entered into between the same parties.
A termination agreement dated 16 January 2006 entered into between Lahiji and Ms. Wang with respect to the termination of a trust deed dated 19 January 2005 entered into between the same parties.
A loan agreement dated 16 January 2006 entered into between Ms. Wang and Mr. Wang whereby Ms. Wang agreed to grant a loan to Mr. Wang for investment exclusively in LTWJ.
An exclusive option agreement dated 16 January 2006 entered into between Mr. Wang, Lahiji and LTWJ pursuant to which Mr. Wang granted Lahiji an exclusive option to purchase his entire equity interest in LTWJ when permitted by PRC law. The term of this agreement is ten years from the date of execution.
An equity pledge agreement dated 16 January 2006 entered into between Beijing Lei Xi and Mr. Wang whereby Mr. Wang agreed to pledge his entire equity interest in LTWJ to Beijing Lei Xi.
A trust deed dated 16 January 2006 executed by Mr. Wang.
An irrevocable power of attorney dated 16 January 2006 executed by Mr. Wang granting Ms. Su Ying Qi, or, if Ms. Su Ying Qi is no longer an employee of Beijing Lei Xi or if Beijing Lei Xi gives written notice to replace Ms. Su Ying Qi, any other nominated employee of Beijing Lei Xi, full power and authority to exercise all of his shareholder’s rights with respect to his interest in LTWJ.
A termination agreement dated 16 January 2006 entered into between Lahiji and Mr. Wang with respect to the termination of the loan agreement dated 8 August 2002 and its supplemental loan agreements dated 26 September 2003 and 19 January 2005 respectively entered into between the same parties.
A termination agreement dated 16 January 2006 entered into between Ms. Wang and Mr. Wang with respect to the termination of the loan agreement dated 19 January 2005 entered into between the same parties.
A termination agreement dated 16 January 2006 entered into between Lahiji, Mr. Wang and LTWJ with respect to the termination of the an exclusive option agreement dated 19 January 2005 entered into between the same parties.

215

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APPENDIX V

A termination agreement dated 16 January 2006 entered into between Beijing Lei Xi and Mr. Wang with respect to the termination of an equity pledge agreement dated 30 November 2004 entered into between the same parties.
A termination agreement dated 16 January 2006 entered into between Lahiji and Mr. Wang with respect to the termination of a trust deed dated 19 January 2005 entered into between the same parties.
A termination deed dated 18 March 2006 entered into between Media Serv Limited (“Media Serv”), Media Serv Asia Pacific Limited (“Media Serv Asia”), TOM, Beijing Media Corporation Limited and China Open Promotion Company Limited (“北京中國網球公開賽體育推廣有限公司 ”) (“COL”) with respect to the termination of (i) a cooperation agreement dated 10 June 2003 entered into between Media Serv and Beijing Youth Daily Media Development Corporation Limited (“北京青年報傳媒發展股份有限公司”) (“BYD”); (ii) a deed of assignment dated 5 March 2004 entered into between Media Serv and BYD; (iii) a management agreement dated 8 March 2004 entered into between Media Serv and COL; (iv) a WTA event agreement dated 30 March 2004 entered into between Media Serv and COL; and (v) a guarantee dated 5 March 2004 entered into between BYD and Media Serv which is attached to the Deed of Assignment of even date.
A supplemental agreement dated 18 March 2006 entered into between China Tennis Association, Beijing Sports Bureau, COL and Media Serv which supplements to a fourparty co-operation agreement dated 7 July 2005 entered into between the same parties.
A deed of assignment dated 20 March 2006 entered into between Energetic Assets Limited as vendor, Yazhou Zhoukan Limited as debtor and Yazhou Zhoukan Holdings Limited (“Yazhou Zhoukan”) as purchaser in relation to a consideration of HK$4,500,000.00.
A sale and purchase agreement entered into between Energetic Assets Limited, Skyland International Investment Limited, TOM, Ming Pao Enterprise Corporation Limited and Yazhou Zhoukan dated 20 March 2006 in relation to the sale and purchase of 50% of the existing issued share capital of Yazhou Zhoukan.
A share transfer agreement dated 28 March 2006 entered into between Mr. Li Jian (李踐 ) (“Li Jian”) and 李志囱 (“Wilson Li”) whereby Li Jian agreed to transfer 60% registered capital of Shanghai TOM Outdoor Advertising to Wilson Li at a consideration of RMB600,000.
An exclusive option agreement dated 28 March 2006 entered into between TOM Outdoor Advertising Company Limited (唐碼戶外廣告有限公司 ) (“TOM Outdoor Advertising”), Wilson Li and Shanghai TOM Outdoor Advertising regarding the terms and conditions of a share purchase, a share transfer and option rights. The term of this agreement is ten (10) years from the date of execution.

216

GENERAL INFORMATION

APPENDIX V

An equity pledge agreement dated 28 March 2006 entered into between Fench Media and Wilson Li whereby Wilson Li agreed to pledge his 60% equity interest in Shanghai TOM Outdoor Advertising to Fench Media.
A subscription agreement dated 28 March 2006 entered into between TOM OMG, TOM, SPH Multimedia Private Limited (“SPH Multimedia”) and Singapore Press Holdings Limited with respect to the subscription of 35 new shares with a par value of US$1.00 each.
A loan agreement dated 28 March 2006 entered into between Tom Outdoor Media Holdings Limited (“TOM OMH”) and TOM OMG regarding a term loan facility of HK$240,240,000 for a period of five years.
A shareholders’ agreement dated 28 March 2006 entered into between SPH Multimedia, TOM OMH and TOM OMG pursuant to a subscription agreement dated 28 March 2006 in the same nature entered into between the same parties.
A loan agreement dated 28 March 2006 entered into between TOM Outdoor Advertising and Wilson Li in relation to a loan in the amount of RMB600,000 for a term of ten (10) years.
A business operation agreement dated 28 March 2006 entered into between Fench Media, Shanghai TOM Outdoor Advertising and Wilson Li pursuant to which Fench Media will act as a guarantor for any obligations undertaken by Shanghai TOM Outdoor Advertising and in return for which, Shanghai TOM Outdoor Advertising will pledge to Fench Media their accounts receivable and assets. No consideration is payable under the aforesaid business operation agreement.
An exclusive technical and consultancy services agreement dated 28 March 2006 entered into between Fench Media and Shanghai TOM Outdoor Advertising with respect to the provision of technical and consultancy services for a term of ten (10) years.
A power of attorney dated 28 March 2006 issued by Wilson Li authorising Mr. Alex Chu (朱羽文 ) provided that he is under the employment of Fench Media the power to exercise all of his shareholder’s right with respect to his interest in Shanghai TOM Outdoor Advertising for a term of ten years.
A supplemental agreement dated 6 April 2006 entered into between TOM OMG, Shanghai TOM Outdoor Advertising Limited, 上海浩盛廣告有限公司 and 上海弘盛廣告有限公司 and Xie Jin Mei, Shen Lei, Zhang Gong Hao, Xu Chuan Zhong, Zheng Li Mei pursuant to a framework agreement dated 1 October 2005 entered into between the same parties.
An exclusive technology consultancy and services agreement dated 1 June 2006 entered into between Beijing Lei Xi and Beijing Bo Xun Rong Tong Information Technology Co. Ltd (北京博訊融通信息科技有限公司 ) (“Bo Xun Rong Tong”) under which Beijing Lei Xi will provide certain technical and consultancy services to Bo Xun Rong Tong and Bo Xun Rong Tong will pay Beijing Lei Xi service fees on a monthly basis (the “Exclusive Technology Consultancy and Services Agreement”).

217

GENERAL INFORMATION

APPENDIX V

A business operation agreement dated 1 June 2006 entered into among Beijing Lei Xi, Bo Xun Rong Tong, Ms. Sun Wei Jing (孫維靜 ) (“Ms. Sun”) and Mr. Wang Yu Tian (王玉田 ) (“Wang Yu Tian”) under which Beijing Lei Xi will act as a guarantor for any obligations undertaken by Bo Xun Rong Tong and in return for which, Bo Xun Rong Tong will pledge to Beijing Lei Xi its accounts receivable and assets. No consideration is payable under the aforesaid business operation agreement.
An exclusive option agreement dated 1 June 2006 entered into among Beijing Lei Xi, Ms. Sun and Bo Xun Rong Tong, pursuant to which Ms. Sun granted Beijing Lei Xi an exclusive option to purchase her entire equity interest in Bo Xun Rong Tong when permitted by PRC law. The term of this agreement is ten years from the date of execution.
An exclusive option agreement dated 1 June 2006 entered into among Beijing Lei Xi, Mr. Wang Yu Tian and Bo Xun Rong Tong, pursuant to which Mr. Wang Yu Tian granted Beijing Lei Xi an exclusive option to purchase his entire equity interest in Bo Xun Rong Tong when permitted by PRC law. The term of this agreement is ten years from the date of execution.
An equity pledge agreement dated 1 June 2006 entered into between Beijing Lei Xi and Ms. Sun pursuant to which Ms. Sun agreed to pledge her equity interests in Bo Xun Rong Tong to Beijing Lei Xi for the performance of Bo Xun Rong Tong’s payment obligations under the Exclusive Technology Consultancy and Services Agreement. No consideration is payable under the aforesaid equity pledge agreement.
An equity pledge agreement dated 1 June 2006 entered into between Beijing Lei Xi and Mr. Wang Yu Tian pursuant to which Mr. Wang Yu Tian agreed to pledge his equity interest in Bo Xun Rong Tong to Beijing Lei Xi for the performance of Bo Xun Rong Tong’s payment obligations under the Exclusive Technology Consultancy and Services Agreement. No consideration is payable under the aforesaid equity pledge agreement.
A power of attorney dated 1 June 2006 executed by Ms. Sun granting Mr. Wang or if Mr. Wang is no longer an employee of Beijing Lei Xi or if Beijing Lei Xi gives written notice to replace Mr. Wang, any other nominated employee of Beijing Lei Xi, full power and authority to exercise all of her shareholder’s rights with respect to her equity interest in Bo Xun Rong Tong.
A power of attorney dated 1 June 2006 executed by Mr. Wang Yu Tian granting Mr. Wang or if Mr. Wang is no longer an employee of Beijing Lei Xi or if Beijing Lei Xi gives written notice to replace Mr. Wang, any other nominated employee of Beijing Lei Xi, full power and authority to exercise all of his shareholder’s rights with respect to his equity interest in Bo Xun Rong Tong.

218

GENERAL INFORMATION

APPENDIX V

A share transfer agreement dated 8 June 2006 entered into among Ms. Sun, Mr. Wang Yu Tian, Ms. Zhang Ying Nan (張穎楠 ) (“Ms. Zhang YN”) and Mr. Chang Cheng (常承 ) whereby Ms. Sun agreed to transfer her 50% equity interest in Bo Xun Rong Tong to Ms. Zhang YN and Mr. Wang Yu Tian agreed to transfer the his 50% equity interest in Bo Xun Rong Tong to Mr. Chang Cheng.
A deed of adherence dated 8 June 2006 issued by SPH AlphaOne Pte Limited in compliance with the terms in a shareholders’ agreement with TOM OMG dated 28 March 2006 with regard to the transfer of 35 shares of TOM OMG to the new shareholder.
A share purchase agreement dated 12 June 2006 entered into among TOM Online Media Group Limited (“TOM Online Media”), Ms. Sun, Mr. Wang Yu Tian, Grandmetro Group Limited and Valuenet Holdings Limited in respect of the acquisition of entire outstanding shares of Gainfirst Asia by TOM Online Media from Grandmetro Group Limited and Valuenet Holdings Limited.
A deed of assignment dated 22 June 2006 entered into between Media Serv Asia as assignor and WTT Asia Limited as assignee in relation to the assignment of the rights, title and interest in, to and under the agreement dated 16 July 2003 entered into with BEC-TERO.
A deed of assignment dated 28 June 2006 entered into between Media Serv Asia as assignor and Green World International Limited as assignee in relation to the assignment of the rights, title and interest in, to and under the agreement dated 15 December 2002 entered into with ITP.
An exclusive option agreement dated 20 July 2006 entered into between TOM Entertainment, 馮祺 (Feng Qi) (“Mr. Feng”) and Huayi Brothers Advertisement with regard to an option rights arrangement between the same parties.
An equity pledge agreement dated 20 July 2006 entered into between EC Link Electronic Network Systems (Shenzhen) Company Limited (“EC Link”) and Mr. Feng whereby Mr. Feng agreed to pledge his 7% equity interest in Huayi Brothers Advertisement to EC Link.
A loan agreement dated 20 July 2006 entered into between TOM Entertainment and Mr. Feng with regard to a loan in the amount of RMB140,000.00 for a term of ten years.
A certificate of capital injection dated 20 July 2006 issued by Huayi Brothers Advertisement to Mr. Feng in respect of his capital injection of 7% equity interest in Beijing Huayi Brothers (equivalent to RMB2,000,000).
A termination agreement dated 24 July 2006 entered into between Beijing Leixi and Bo Xun Rong Tong with respect to the termination of the exclusive technology consultancy and services agreement.

219

GENERAL INFORMATION

APPENDIX V

A termination agreement dated 24 July 2006 entered into among Beijing Leixi, Bo Xun Rong Tong, Ms. Sun and Mr. Wang Yu Tian (王玉田 ) with respect to the termination of a business operation agreement dated 1 June 2006 entered into between the same parties.
A termination agreement dated 24 July 2006 entered into among Beijing Leixi, Ms. Sun and Bo Xun Rong Tong with respect to the termination of an exclusive option agreement dated 1 June 2006 entered into between the same parties.
A termination agreement dated 24 July 2006 entered into among Beijing Leixi, Mr. Wang Yu Tian and Bo Xun Rong Tong with respect to the termination of an exclusive option agreement dated 1 June 2006 entered into between the same parties.
A termination agreement dated 24 July 2006 entered into between Beijing Leixi and Ms. Sun with respect to the termination of an equity pledge agreement dated 1 June 2006 entered into between the same parties.
A termination agreement dated 24 July 2006 entered into between Beijing Leixi and Mr. Wang Yu Tian with respect to the termination of an equity pledge agreement dated 1 June 2006 entered into between the same parties.
A loan agreement dated 24 July 2006 entered into between Gainfirst Asia and Mr. Chang Cheng whereby Gainfirst Asia agreed to grant a loan to Mr. Chang Cheng for general working capital of Bo Xun Rong Tong.
A loan agreement dated 24 July 2006 entered into between Gainfirst Asia and Ms. Zhang YN whereby Gainfirst Asia agreed to grant a loan in the amount of RMB5,000,000 to Ms. Zhang YN for general working capital of Bo Xun Rong Tong.
An exclusive technical and consultancy services agreement dated 24 July 2006 entered into between Dong Kui Lin and Bo Xun Rong Tong pursuant to which Dong Kui Lin will provide certain technical and consultancy services to Bo Xun Rong Tong. Bo Xun Rong Tong will pay Dong Kui Lin service fees on a monthly basis.
A business operation agreement dated 24 July 2006 entered into among Dong Kui Lin, Bo Xun Rong Tong, Ms Zhang YN and Mr. Chang Cheng under which Dong Kui Lin will act as a guarantor for any obligations undertaken by Bo Xun Rong Tong and in return for which, Bo Xun Rong Tong will pledge to Dong Kui Lin their accounts receivable and assets. No consideration is payable under the aforesaid business operation agreement.
An exclusive option agreement dated 24 July 2006 entered into among Gainfirst Asia, Mr. Chang Cheng and Bo Xun Rong Tong, pursuant to which Mr. Chang Cheng granted Gainfirst Asia an exclusive right to purchase all or part of his shareholders’ equity interest in Bo Xun Rong Tong, when permitted by PRC law. The term of this agreement is ten years from the date of execution.

220

GENERAL INFORMATION

APPENDIX V

An exclusive option agreement dated 24 July 2006 entered into among Gainfirst Asia, Ms. Zhang YN and Bo Xun Rong Tong, pursuant to which Ms Zhang YN granted Gainfirst Asia an exclusive right to purchase all or part of her shareholders’ equity interest in Bo Xun Rong Tong, when permitted by PRC law. The term of this agreement is ten years from the date of execution.
An equity pledge agreement dated 24 July 2006 entered into between Dong Kui Lin and Mr. Chang Cheng, pursuant to which Mr. Chang pledged his respective interests in Bo Xun Rong Tong to Dong Kui Lin for the performance of Bo Xun Rong Tong’s payment obligations under an exclusive technical consultancy services agreement of even date entered into between Dong Kui Lin and Bo Xun Rong Tong. No consideration is payable under the aforesaid equity pledge agreement.
An equity pledge agreement dated 24 July 2006 entered into between Dong Kui Lin and Ms. Zhang YN, pursuant to which Ms. Zhang YN pledged her respective interests in Bo Xun Rong Tong to Dong Kui Lin for the performance of Bo Xun Rong Tong’s payment obligations under an exclusive technical consultancy services agreement of even date entered into between Dong Kui Lin and Bo Xun Rong Tong. No consideration is payable under the aforesaid equity pledge agreement.
A trust deed dated 24 July 2006 executed by Mr. Chang Cheng.
A trust deed dated 24 July 2006 executed by Ms. Zhang YN.
A pledge agreement dated 9 August 2006 entered into between 北京唐碼體育廣告有限公司 (Beijing TOM International Advertising Limited) (“Beijing TOM”) and 中國人民銀行股份有限公司 with regard to a loan in the amount of of RMB2,650,000 borrowed by COL.
An agreement dated 8 September 2006 entered into between Cheung Kong (Holdings) Limited (“CKH”) and TOM International regarding the provision of goods and services to CKH for a period of two years commencing on 1 January 2006.
An agreement dated 8 September 2006 entered into between Hutchison International Limited and TOM International for the provision of services including, among others, print, publishing, advertising, public relations and sports events management, and Internet and website development, maintenance and hosting for the period from 1 January 2006 to 31 December 2008.
A pledge agreement dated 12 September 2006 entered into between Beijing TOM and 中國人民銀行股份有限公司 with regard to a loan in the amount of RMB8,253,000 borrowed by COL.
A pledge agreement dated 25 September 2006 entered into between Beiijng TOM and 中國人民銀行股份有限公司 with regard to a loan in the amount of RMB3,000,000 borrowed by COL.

221

GENERAL INFORMATION

APPENDIX V

An administrative services agreement dated 26 September 2006 entered into between TOM International and TOM Online in relation to the appoint of TOM International to provide legal and company secretarial advisory and supporting services for a term of two years.
A media services agreement dated 24 October 2006 entered into between Hutchison Telecommunications (Hong Kong) Limited and TOM International regarding the provision of goods and services relating to telecommunications and internet for the period from 1 January 2006 to 31 December 2008.
A media services agreement dated 24 October 2006 entered into between Hutchison Global Communications Limited and TOM International regarding the provision of telecommunications, internet related and other media services for the period from 1 January 2006 to 31 December 2008.
A financing facility agreement dated 16 November 2006 among Cité, Home Media Group Limited, Cité Branch, the guarantors listed in part II of schedule I of this agreement, the banks listed in schedule II of this agreement, DBS Bank Limited and DBS Bank Ltd., Taipei Branch with regard to a syndicated financing in an aggregate principal amount up to NT$3,000,000,000.
A facility agreement dated 17 November 2006 entered into between TOM and The Hong Kong and Shanghai Banking Corporation Limited in respect of a US$80,000,000 (or its equivalent in HK$) revolving loan facility.
A subscription agreement dated 29 November 2006 entered into between Chi-Chi Dei Entertainment Limited, TOM Heheha Limited, Bloom Time Holdings Limited and the persons set out in schedule 1 of this agreement in relation to the investment in a joint venture and the issuance of new shares.
A sale and purchase agreement dated 9 December 2005 entered into between TOM Outdoor Advertising and CUP Magazine Publishing Limited in relation to the transfer of proprietorship and the sale of assets and liabilities of Tom Outdoor Advertising.
A shareholders’ agreement dated 18 December 2006 entered into between Chi-Chi Dei Entertainment Limited, TOM Heheha Limited, Bloom Time Holdings Limited, the companies set out in schedule 1 of this agreement and Mr. Jacob James Mense in relation to the establishment of a joint venture company, the government and regulation to the affairs of the said company.
A joint venture deed dated 20 December 2006 entered into between TOM Online, eBay International AG, eBay PRC Holdings (BVI) Inc. (“eBay PRC”) and eBay Inc. (“eBay”) with regard to the investment and operation of eBay PRC of which 51% and 49% of its share capital will be owned by TOM Online and eBay respectively.
A shareholder’s loan agreement dated 20 December 2006 entered into between TOM Online as lender and eBay PRC as borrower in respect of a US$20,000,000 loan facility.

222

GENERAL INFORMATION

APPENDIX V

A shares and options purchase agreement dated 14 February 2007 entered between Cité, 優像數位媒體科技股份有限公司 (Pixnet Digital Media Corporation) (“Pixnet”), 曾皇霖 (“Far Tseng”) and 李俊廣 (“Ryan Li”) in relation to a share transfer of Pixnet.
A share transfer agreement dated 18 March 2007 entered into between TOM, Tennis Management and 北京青年報社 with regard to the transfer of the entire issued share capital in Swidon Enterprises Limited.
A share transfer agreement dated 18 March 2007 entered into between TOM, Tennis Management and 北京青年報社 with regard to the transfer of the entire issued share capital in Champion Will International Limited.
A share transfer agreement dated 18 March 2007 entered between Tennis Tournaments Holdings Ltd. and 北京青年報社 with regard to the transfer of 49% of the issued share capital in COL.

12. GENERAL

(a) The registered office of TOM is at P.O. Box 309, Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands, British West Indies.
(b) The head office and principal place of business of TOM is at 48th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong. The share registrar and transfer office of TOM is Computershare Hong Kong Investor Services Limited at Rooms 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong.
(c) The Qualified Accountant of TOM as required under Rule 3.24 of the Listing Rules is Ms. Tommei Tong. She holds a Bachelor of Social Sciences Degree from the University of Hong Kong in 1986. She is also a Fellow of the Association of Chartered Certified Accountants and the Hong Kong Institute of Certified Public Accountants.
(d) The Company Secretary of TOM is Ms. Pessy Yu. Ms. Yu holds a Master of Arts degree in Jurisprudence from the Oxford University and has been admitted as a solicitor in Hong Kong, and England and Wales.
(e) The English text of this circular shall prevail over the Chinese text.

13. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the principal place of business of TOM at 48th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong during normal business hours on weekdays other than public holidays up to and including 24 April 2007:

(a) the Memorandum of Association and Articles of Association of TOM;
(b) the audited financial statements of the TOM Group for each of the two financial years ended 31 December 2005 and 2006;

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GENERAL INFORMATION

APPENDIX V

(c) the letter of recommendation from the TOM Independent Board Committee, the text of which is set out on page 25 of this circular;
(d) the letter of advice from Evolution Watterson, the text of which is set out on pages 26 to 29 of this circular;
(e) the unaudited pro forma financial information and the report thereon from PricewaterhouseCoopers, the text of each of which is set out in Appendix I to this circular;
(f) the written consents as referred to in paragraph headed “Expert and consents” in this appendix;
(g) the material contracts as referred to in the section headed “Material contracts” in this appendix; and
(h) a copy of each circular of TOM issued pursuant to the requirements set out in Chapters 14 and/or 14A of the Listing Rules since 31 December 2006 (being the date to which the latest published audited consolidated financial statements of TOM Group were made up).

224

NOTICE OF TOM EGM

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(Stock code: 2383)

NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN that an extraordinary general meeting of TOM Group Limited (“TOM”) will be held at the Conference Room, Regus Conference Centre, 35th Floor, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong on Wednesday, 25 April 2007 at 3:00 p.m. for the purpose of considering and, if thought fit, passing, with or without modifications, the following resolution which will be proposed as an ordinary resolution of TOM:

ORDINARY RESOLUTION

“ THAT :–

(a) the proposal for the privatisation of TOM Online Inc. (“TOM Online”) by TOM Group Limited (“TOM”) by way of a scheme of arrangement under Section 86 of the Companies Law Cap.22 (Law 3 of 1961), as consolidated and revised of the Cayman Islands (the “Scheme”), involving the cancellation of all the shares of HK$0.01 each in the share capital of TOM Online held by shareholders of TOM Online (other than TOM, Cranwood Company Limited, Handel International Limited, Schumann International Limited and Devine Gem Management Limited) (the “Scheme Shares”) at the cancellation price of HK$1.520 per Scheme Share (the “Cancellation Price”) payable by TOM in cash, subject to and conditional upon the conditions set out in the circular of TOM dated 11 April 2007 (the “Share Proposal”), be and is hereby approved and the board of directors of TOM be and is hereby authorised to do all acts and to enter into such transactions and arrangements, including but not limited to, the payment by TOM of the Cancellation Price to any connected persons of TOM in consideration for the cancellation of his/her/its interest in the shares of TOM Online, as may be necessary or expedient in order to give effect to the Scheme and the Share Proposal; and
for identification purpose

225

NOTICE OF TOM EGM

(b) the conditional offer by or on behalf of TOM to the holder(s) of the outstanding share options granted under the pre-IPO share option plan adopted by TOM Online on 12 February 2004 and the share option scheme adopted by TOM Online on 12 February 2004 (the “Option Proposal”), subject to and conditional upon the Scheme becoming effective, be and is hereby approved and the board of directors of TOM be and is hereby authorised to do all acts and to enter into such transactions and arrangements, including but not limited to, the payment by TOM of the Option Proposal price to any connected persons of TOM, as may be necessary or expedient in order to give effect to the Option Proposal. ”

By Order of the Board TOM GROUP LIMITED Pessy Yu Company Secretary

Hong Kong, 11 April 2007

Head office and principal place of business:

48th Floor, The Center 99 Queen’s Road Central Central, Hong Kong

Notes:

A member of TOM entitled to attend and vote at the Extraordinary General Meeting convened by the above notice is entitled to appoint one or more proxies to attend and, on a poll, vote instead of such member. A proxy need not be a member of TOM.
In order to be valid, the form of proxy together with a power of attorney or other authority (if any) under which it is signed or a notarially certified copy thereof, must be deposited at the principal place of business of TOM at 48th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong not less than 48 hours before the time appointed for holding the Extraordinary General Meeting (or any adjournment thereof).

226

AI assistant

TOM Group Limited — Proxy Solicitation & Information Statement 2007

50566_rns_2007-04-11_2387726d-375f-4067-b0f5-5c143b30c9a5.pdf

MAJOR TRANSACTION AND CONNECTED TRANSACTION

Evolution Watterson Securities Limited

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

MAJOR TRANSACTION AND CONNECTED TRANSACTION

PROPOSED CONDITIONAL POSSIBLE PRIVATISATION OF TOM ONLINE INC. BY WAY OF A SCHEME OF ARRANGEMENT (UNDER SECTION 86 OF THE COMPANIES LAW) AT THE CANCELLATION PRICE OF HK$1.520 PER SCHEME SHARE (INCLUDING SCHEME SHARES UNDERLYING ADSs) AND POSSIBLE CONDITIONAL OPTION PROPOSAL

1. INTRODUCTION

2. TERMS OF THE SHARE PROPOSAL

3. CONDITIONS OF THE SHARE PROPOSAL

Warning:

4. THE OPTION PROPOSAL

5. SHAREHOLDING STRUCTURES

TOM

TOM Online

LETTER FROM THE TOM BOARD

6. REASONS FOR AND BENEFITS OF THE PROPOSALS

For Scheme Shareholders

For TOM

7. INFORMATION ON TOM ONLINE

8. INFORMATION ON TOM

9. LISTING RULES IMPLICATION ON TOM

10. PRECAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS

11. THE TOM EGM

12. RECOMMENDATION

13. ADDITIONAL INFORMATION

MAJOR TRANSACTION AND CONNECTED TRANSACTION

PROPOSED CONDITIONAL POSSIBLE PRIVATISATION OF TOM ONLINE INC. BY WAY OF A SCHEME OF ARRANGEMENT (UNDER SECTION 86 OF THE COMPANIES LAW) AT THE CANCELLATION PRICE OF HK$1.520 PER SCHEME SHARE (INCLUDING SCHEME SHARES UNDERLYING ADSs) AND POSSIBLE CONDITIONAL OPTION PROPOSAL

PRINCIPAL FACTORS AND REASONS CONSIDERED IN RELATION TO THE OPTION PROPOSAL

Terms of the Option Proposal

ADVICE

Evolution Watterson Securities Limited David Tsang Managing Director

(A) UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX I

(B) REPORT FROM ACCOUNTANTS ON UNAUDITED PRO FORMA FINANCIAL INFORMATION TO THE DIRECTORS OF TOM

REPORT FROM ACCOUNTANTS ON UNAUDITED PRO FORMA FINANCIAL INFORMATION TO THE DIRECTORS OF TOM GROUP LIMITED

Respective Responsibilities of Directors of the Company and Reporting Accountants

Basis of Opinion

Opinion

(A) SHARE CAPITAL

(i) Shares

(ii) Convertible bonds

(iii) Options

(B) AUDITED CONSOLIDATED RESULTS FOR THE TOM GROUP

(i) Consolidated Profit & Loss Account

(ii) Assets and Liabilities

(iii) Audited Accounts

Consolidated Profit & Loss Account

Consolidated Balance Sheet

Balance Sheet

Consolidated Statement of Recognised Income and Expense

Consolidated Cash Flow Statement

Notes to the Accounts

1 Principal Accounting Policies

(a) Basis of preparation

(b) Consolidation

(c) Jointly controlled entities

(d) Associated companies

(e) Investments

(ii) Available-for-sale financial assets

(f) Fixed assets

(g) Intangible assets

(i) Goodwill

(ii) Other intangible assets

(h) Impairment of assets

(i)

Operating leases

(j) Inventories

(k) Trade and other receivables

(l) Employee benefits

(m) Borrowings

(n) Deferred taxation

(o) Provisions

(p) Contingent liabilities and contingent assets

(q) Revenue recognition

TOM Group Limited Proxy Solicitation & Information Statement 2007