UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

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

For the quarterly period ended June 30, 2006

OR

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

For the transition period from                     to

Commission File Number 000-30698

SINA CORPORATION

Cayman Islands		52-2236363
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

Room 1802, United Plaza
1468 Nan Jing Road West
Shanghai 200040, China
(86-21) 6289 5678
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer þ           Accelerated filer o           Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o or No þ

The number of the registrant’s ordinary shares outstanding as of August 4, 2006 was 53,609,908.

 

 

SINA CORPORATION

INDEX

		Page no.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:			3
Condensed Consolidated Balance Sheets at June 30, 2006 and December 31, 2005			3
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2006 and 2005			4
Condensed Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the six months ended June 30, 2006 and 2005			5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosures About Market Risk			24
Item 4. Controls and Procedures			25
PART II. OTHER INFORMATION			25
Item 1. Legal Proceedings			25
Item 1A. Risk Factors			26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 3. Defaults Upon Senior Securities			42
Item 4. Submission of Matters to a Vote of Security Holders			42
Item 5. Other Information			42
Item 6. Exhibits			43
Signature			44
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I. FINANCIAL INFORMATION

SINA CORPORATION

		June 30,				December 31,
		2006				2005
ASSETS
Current assets:
Cash and cash equivalents		$	116,716			$	88,410
Short-term investments			195,765				212,279
Accounts receivable, net of allowances for doubtful accounts of $3,453 and $2,443, respectively			44,895				33,940
Short-term deferred tax assets			865				857
Prepaid expenses and other current assets			8,690				11,523
Total current assets			366,931				347,009
Investment in Tidetime Sun			740				716
Property and equipment, net			23,248				22,207
Equity investments			2,247				3,261
Intangible assets, net			8,754				9,691
Goodwill			82,663				82,663
Other assets			2,619				3,174
Total assets		$	487,202			$	468,721
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,120			$	1,582
Accrued liabilities			36,834				43,235
Income taxes payable			4,855				4,282
Total current liabilities			42,809				49,099
Convertible debt			100,000				100,000
Total liabilities			142,809				149,099
Commitments and contingencies (Note 13)
Shareholders’ equity:
Ordinary shares: $0.133 par value; 150,000 shares authorized; 53,605 and 53,265 shares issued and outstanding			7,129				7,084
Additional paid-in capital			290,991				284,559
Retained earnings			43,532				26,057
Accumulated other comprehensive income (loss):
Unrealized loss on investments in marketable securities			(4,224	)			(2,903	)
Cumulative translation adjustments			6,965				4,825
Total shareholders’ equity			344,393				319,622
Total liabilities and shareholders’ equity		$	487,202			$	468,721

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

SINA CORPORATION

		Three months ended								Six months ended
		June 30,								June 30,
		2006				2005				2006				2005
Net revenues:
Advertising		$	29,454			$	20,373			$	51,635			$	37,021
Non-advertising			24,224				25,757				48,755				54,957
			53,678				46,130				100,390				91,978
Cost of revenues:
Advertising (*)			10,317				6,541				18,615				12,435
Non-advertising			9,343				7,794				19,090				16,834
			19,660				14,335				37,705				29,269
Gross profit			34,018				31,795				62,685				62,709
Operating expenses:
Sales and marketing (*)			13,497				10,718				25,302				22,202
Product development (*)			4,993				3,520				9,603				7,222
General and administrative (*)			7,427				5,078				12,584				9,775
Amortization of intangible assets			469				1,041				937				2,082
			26,386				20,357				48,426				41,281
Income from operations			7,632				11,438				14,259				21,428
Interest and other income			2,012				1,564				3,952				3,096
Amortization of convertible debt issuance cost			(171	)			(171	)			(342	)			(342	)
Gain (loss) on sales of investments and investment in Tidetime Sun			2,006				(1,338	)			1,794				(1,282	)
Loss on equity investments			(162	)			(858	)			(505	)			(1,424	)
Income before income taxes			11,317				10,635				19,158				21,476
Provision for income taxes			(878	)			(682	)			(1,683	)			(1,213	)
Net income		$	10,439			$	9,953			$	17,475			$	20,263
Basic net income per share		$	0.19			$	0.19			$	0.33			$	0.39
Shares used in computing basic income per share			53,554				52,111				53,496				51,771
Diluted net income per share		$	0.18			$	0.17			$	0.30			$	0.35
Shares used in computing diluted income per share			58,444				58,783				58,522				58,642

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

SINA CORPORATION

																		Accumulated
										Additional								Other				Total
		Ordinary Shares								Paid-in				Retained				Comprehensive				Shareholders’
		Shares				Amount				Capital				Earnings				Income(Loss)				Equity
Balances at December 31, 2005			53,265			$	7,084			$	284,559			$	26,057			$	1,922			$	319,622
Comprehensive income:
Net income			—				—				—				17,475				—				17,475
Unrealized loss on marketable securities			—				—				—				—				(1,321	)			(1,321	)
Currency translation adjustments			—				—				—				—				2,140				2,140
Total comprehensive income																							18,294
Stock-based compensation			—				—				4,539				—				—				4,539
Issuance of ordinary shares pursuant to stock plans			156				20				1,918				—				—				1,938
Business acquisition			184				25				(25	)			—				—				—
Balances at June 30, 2006			53,605			$	7,129			$	290,991			$	43,532			$	2,741			$	344,393

														Retained				Accumulated
										Additional				Earnings				Other				Total
		Ordinary Shares								Paid-in				(Accumulated				Comprehensive				Shareholders’
		Shares				Amount				Capital				Deficit)				Income(Loss)				Equity
Balances at December 31, 2004			51,359			$	6,834			$	263,912			$	(17,058	)		$	(343	)		$	253,345
Comprehensive income:
Net income			—				—				—				20,263				—				20,263
Unrealized loss on marketable securities			—				—				—				—				(1,380	)			(1,380	)
Currency translation adjustments			—				—				—				—				10				10
Total comprehensive income																							18,893
Issuance of ordinary shares pursuant to stock plans			1,436				191				4,774				—				—				4,965
Business acquisition			275				37				11,198				—				—				11,235
Balances at June 30, 2005			53,070			$	7,062			$	279,884			$	3,205			$	(1,713	)		$	288,438

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

SINA CORPORATION

		Six months ended
		June 30,
		2006				2005
Cash flows from operating activities:
Net income		$	17,475			$	20,263
Adjustments to reconcile net income to net cash provided by operating activities:
Changes in allowance for doubtful accounts			1,891				1,097
(Gain) loss on sales of investments and investments in Tidetime Sun			(1,794	)			1,282
Loss on equity investments			505				1,424
Depreciation			4,673				4,372
Stock-based compensation			4,539				—
Amortization of convertible debt issuance cost			342				342
Amortization of intangible assets			937				2,082
Changes in assets and liabilities:
Accounts receivable			(12,507	)			6,423
Prepaid expenses and other current assets			(261	)			2,644
Accounts payable			(473	)			31
Accrued liabilities			4,490				(6,741	)
Income taxes payable			531				(960	)
Other assets			223				(1,421	)
Net cash provided by operating activities			20,571				30,838
Cash flows from investing activities:
Proceeds from sale of short-term investments			16,460				1,206
Cash paid for business acquisition			(11,266	)			(16,891	)
Purchases of property and equipment			(5,515	)			(7,792	)
Cash paid for equity investments			—				(2,819	)
Proceeds from sale of investments			5,578				286
Net cash provided by (used in) investing activities			5,257				(26,010	)
Cash flows from financing activities:
Proceeds from issuance of ordinary shares			1,938				4,965
Net cash provided by financing activities			1,938				4,965
Effect of exchange rate change on cash and cash equivalents			540				—
Net increase in cash and cash equivalents			28,306				9,793
Cash and cash equivalents at the beginning of the period			88,410				153,768
Cash and cash equivalents at the end of the period		$	116,716			$	163,561
Supplemental disclosure of significant noncash activities:
Ordinary shares issued for business acquisition		$	4,145			$	11,235

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

SINA CORPORATION

1. Business

     SINA Corporation (“SINA” or the “Company”), a Cayman Islands corporation, is a leading online media company and value-added information service provider in the People’s Republic of China (the “PRC” or “China”) and the global Chinese communities. With a branded network of localized websites targeting Greater China and overseas Chinese, the Company provides services through five major business lines including SINA.com (online news and content), SINA Mobile (mobile value-added services or “MVAS”), SINA Online (community-based services and games), SINA.net (search and enterprise services) and SINA E-Commerce (online shopping). Together these business lines provide an array of services including region-focused online portals, MVAS, search and directory, interest-based and community-building channels, free and premium email, audio and video streaming, online games, virtual ISP, classified listings, fee-based services, e-commerce and enterprise e-solutions.

2. Summary of Significant Accounting Policies

     Principles of consolidation and basis of presentation

     The accompanying interim condensed consolidated financial statements have been prepared in conformity with the generally accepted accounting principles in the United States of America (“GAAP”), consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. The interim financial information is unaudited but reflects all adjustments which are, in the opinion of management, necessary to provide fair condensed consolidated balance sheets, condensed consolidated statements of operations, condensed consolidated statements of shareholders’ equity and comprehensive income and condensed consolidated statements of cash flows for the interim periods presented. Such adjustments are normal and recurring except as otherwise noted. The Condensed Consolidated Balance Sheets as of December 31, 2005 are derived from the December 31, 2005 audited financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America. You should read these interim condensed consolidated financial statements in conjunction with the audited financial statements, including the notes thereto, and the other information set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

     The condensed consolidated financial statements include the accounts of the Company, its subsidiaries and variable interest entities (“VIEs”) for which the Company is the primary beneficiary. All significant intercompany accounts and transactions have been eliminated. Investments in entities in which the Company can exercise significant influence, but which are less than majority owned and not otherwise controlled by the Company, are accounted for under the equity method. The Company has adopted Financial Accounting Standards Board (“FASB”) Interpretation No. (“FIN”) 46R “Consolidation of Variable Interest Entities” (“FIN 46R”), an Interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements.” FIN 46R requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIEs or is entitled to receive a majority of the VIE’s residual returns. To comply with PRC laws and regulations, the Company provides substantially all its Internet content provision, MVAS and advertising services in China via its VIEs. These VIEs are wholly or partially owned by certain employees of the Company. The capital for the VIEs are funded by the Company and recorded as interest-free loans to these PRC employees. These loans were eliminated with the capital of the VIEs during consolidation. As of June 30, 2006, the total amount of interest-free loans to these PRC employees was $9.6 million. The aggregate accumulated losses of all VIEs as of June 30, 2006 were approximately $5.7 million and have been included in the condensed consolidated financial statements.

     The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and such differences may be material to the financial statements. Certain prior year amounts have been reclassified to conform to the current year presentation.

     Stock-based compensation

     Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which revises FASB Statement No. 123, “Accounting-Based Compensation” (“SFAS 123”) and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Under the fair value recognition provisions of SFAS 123R, the Company is required to measure the cost of employee services

received in exchange for stock-based compensation measured at the grant date fair value of the award. The Company recognizes the compensation costs, net of a forfeiture rate, on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of four years. In March 2005, the Securities & Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123R. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R.

     The Company elected the modified prospective method and therefore has not restated results for prior periods. The valuation provisions of SFAS 123R apply to new grants and grants that were outstanding as of the effective date. Estimated compensation for grants that were outstanding as of the effective date are recognized over the remaining service period using the compensation cost estimated for the SFAS 123 pro forma disclosures.

     In conjunction with the adoption of SFAS 123R, the Company changed its method of attributing the value of stock compensation expense from accelerated basis to straight-line basis. Compensation expense for share-based payment awards granted prior to fiscal 2006 will continue to be recognized using the accelerated basis while compensation expense for awards granted after the effective date are recognized using the straight-line basis.

     SFAS 123R requires forfeitures to be estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. Compensation cost estimated for the SFAS 123 pro forma disclosures accounted for forfeitures as they occur. See Note 10 for further discussion on stock-based compensation.

     Recent accounting pronouncements

     In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognize in its financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for the Company on January 1, 2007, with the cumulative effect of the change in accounting principle, if any, recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on its consolidated financial position, cash flows and results of operations.

3. Short-Term Investments

     The investments in marketable debt securities are classified as available-for-sale securities. The Company invests in these securities with the intent to make such funds readily available for operating or acquisition purposes and, accordingly, classifies them as short-term investments. The following table summarizes the contractual maturities of available-for-sale debt securities:

		June 30,				December 31,
		2006				2005
		(in thousands)
Short-term investments:
Due within one year		$	164,595			$	173,657
Due one to five years			18,529				24,688
Due after five years			12,641				13,934
		$	195,765			$	212,279

     During the three and six months ended June 30, 2006, the Company recorded unrealized losses of $1.0 million and $1.3 million, respectively, and recorded an unrealized gain of $0.5 million and $0.1 million, in the same periods of 2005, respectively, on its marketable debt securities as a component of comprehensive income. The Company considered the declines in value as not other-than-temporary, because the declines in market value were attributable to changes in interest rates, not credit quality, and because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity.

4. Investment in Tidetime Sun

     Investment in Tidetime Sun is accounted for as an investment in marketable equity securities under the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and is classified as available for sale. The fair value of this investment as of June 30, 2006 was $0.7 million, compared to a cost basis of $0.7 million. If there is a decline in fair value that is deemed to be other-than-temporary, the Company may have to recognize impairment charges in future periods.

5. Equity Investments

     Equity investments are comprised of investments in privately held companies and are accounted for using the equity method of accounting. In May 2006, the Company sold its interest in Shanghai-NC SINA, a joint venture with NC Soft, a Korean online game company, to NC Soft. The Company recorded a gain of $2.0 million from this transaction.

     The following sets forth the changes in the Company’s equity investments:

		Shanghai NC-SINA				COAL *		Others				Total
		(in thousands)
Balances at December 31, 2005		$	1,417			$        —		$	1,844			$	3,261
Additional investment			—			—			800				800
Share of loss on equity investments			(108	)		—			(397	)			(505	)
Sale of investment			(1,309	)		—			—				(1,309	)
Balances at June 30, 2006		$	—			$        —		$	2,247			$	2,247

		Shanghai NC-SINA				COAL				Others				Total
		(in thousands)
Balances at December 31, 2004		$	1,384			$	1,932			$	1,225			$	4,541
Additional investment			—				1,749				1,070				2,819
Share of gain (loss) on equity investments			257				(1,498	)			(183	)			(1,424	)
Balances at June 30, 2005		$	1,641			$	2,183			$	2,112			$	5,936

6. Intangible Assets

     The following table summarizes intangible assets, net:

		June 30, 2006												December 31, 2005
						Accumulated												Accumulated
		Cost				amortization				Net				Cost				amortization				Net
										(in thousands)
Non-compete agreements			3,627				(3,113	)			514				3,627				(2,691	)			936
Technology			10,300				(2,060	)			8,240				10,300				(1,545	)			8,755
		$	13,927			$	(5,173	)		$	8,754			$	13,927			$	(4,236	)		$	9,691

     The intangible assets are all amortizable. Non-compete agreements have original estimated useful lives of eighteen to thirty-six months. Technology has original estimated useful life of ten years.

     Amortization expense related to intangible assets were $0.5 million and $0.9 million for the three and six months ended June 30, 2006, respectively, and $1.0 million and $2.1 million for the three and six months ended June 30, 2005, respectively. As of June 30, 2006, estimated amortization expenses in future periods are expected to be as follows:

			Amortization
Fiscal year			expenses
			(in thousands)
Remainder of 2006			$	883
2007				1,176
2008				1,030
2009				1,030
2010				1,030
Thereafter				3,605
Total expected amortization expense			$	8,754

7. Accrued Liabilities

     During the three months ended March 31, 2006, the Company paid $11.3 million in cash to the prior shareholders of Crillion

Corporation for the achievement of the 2005 performance target which was accrued as of December 31, 2005.

8. Income Taxes

     The Company is registered in the Cayman Islands and has operations in four tax jurisdictions, including China, the United States, Hong Kong and Taiwan. The operations in Taiwan represent a branch office of the subsidiary in the United States. For operations in the United States, Hong Kong and Taiwan, the Company has incurred net accumulated operating losses for income tax purposes. The Company believes that it is more likely than not that these net accumulated operating losses will not be utilized in the future. Therefore, the Company has provided full valuation allowance for the deferred tax assets arising from the losses at these locations as of June 30, 2006. The Company generated substantially all of its net income from its China operations for the three and six months ended June 30, 2006 and 2005, and the Company has recorded income tax provisions for the periods as follows:

		Three months ended								Six months ended
		June 30,								June 30,
		2006				2005				2006				2005
		(in thousands, except percentages)								(in thousands, except percentages)
Loss subject to non China operation		$	(1,944	)		$	(3,716	)		$	(4,859	)		$	(6,101	)
Income subject to China operation			13,261				14,351				24,017				27,577
Income before taxes		$	11,317			$	10,635			$	19,158			$	21,476
Income tax expenses subject to China operation		$	878			$	682			$	1,683			$	1,213
Effective tax rate for China operation			7	%			5	%			7	%			4	%

     Pursuant to PRC Income Tax Laws, the Company’s subsidiaries and VIEs are generally subject to Enterprise Income Taxes (“EIT”) at a statutory rate of 33%, which comprises 30% national income tax and 3% local income tax. Some of these subsidiaries and VIEs are qualified new technology enterprises and under PRC Income Tax Laws, they are subject to the preferential tax rate of 15%. In addition, some of the Company’s subsidiaries are Foreign Investment Enterprise and under PRC Income Tax Laws, they are entitled to either a three-year tax exemption followed by three years with a 50% reduction in the tax rate, commencing the first operating year, or a two-year tax exemption followed by three years with a 50% reduction in the tax rate, commencing the first profitable year. The VIEs are wholly owned by the Company’s employees and controlled by the Company through various contractual agreements. To the extent that the VIEs have undistributed after-tax net income, the Company would have to pay a dividend tax of 20% on behalf of its employees when dividends are distributed from these local entities in the future.

     The provisions for income taxes for the three and six months ended June 30, 2006 and 2005 differ from the amounts computed by applying the EIT primarily due to the tax holidays and the preferential tax rate enjoyed by certain of the Company’s entities in the PRC. The effective tax rates for the PRC operations for the three and six months ended June 30, 2006 were higher than the same periods of the prior year primarily due to the expiration of tax holidays of certain entities in 2006.

9. Net Income Per Share

     Basic net income per share is computed using the weighted average number of the ordinary shares outstanding during the period. Diluted net income per share is computed using the weighted average number of ordinary shares and ordinary share equivalents outstanding during the period.

     The following table sets forth the computation of basic and diluted net income per share for the periods indicated:

		Three months ended June 30,								Six months ended June 30,
		2006				2005				2006				2005
		(in thousands, except per share amounts)
Basic net income per share calculation:
Numerator:
Net income used in computing basic net income per share		$	10,439			$	9,953			$	17,475			$	20,263
Denominator:
Weighted average ordinary shares outstanding			53,554				52,111				53,496				51,771
Basic net income per share		$	0.19			$	0.19			$	0.33			$	0.39
Diluted net income per share calculation:
Numerator:
Net income		$	10,439			$	9,953			$	17,475			$	20,263
Amortization of convertible debt issuance cost			171				171				342				342
Net income used in computing diluted net income per share		$	10,610			$	10,124			$	17,817			$	20,605

		Three months ended June 30,								Six months ended June 30,
		2006				2005				2006				2005
		(in thousands, except per share amounts)
Denominator:
Weighted average ordinary shares outstanding			53,554				52,111				53,496				51,771
Weighted average ordinary shares equivalents:
Stock options			1,013				2,795				1,131				2,994
Convertible debt			3,877				3,877				3,877				3,877
Others			—				—				18				—
Shares used in computing diluted net income per share			58,444				58,783				58,522				58,642
Diluted net income per share		$	0.18			$	0.17			$	0.30			$	0.35

10. Stock-Based Compensation

     The Company’s stock option program is a long-term retention program that is intended to attract, retain and incentivize talented employees, officers and directors, and to align stockholder and employee interests. The Company currently grants options pursuant to the 1) 1999 Stock Plan, 2) 1999 Executive Stock Option Plan and 3) 1999 Directors’ Stock Option Plan. Prior to August 1, 2005, the Company also offered stock options to its eligible employees pursuant to the 1999 Employee Stock Purchase Plan.

     Stock Compensation

     Effective January 1, 2006, the Company adopted SFAS 123R. See Note 2 for a description of the Company’s adoption of SFAS 123R. The fair value of stock-based compensation awards is determined using the Black-Scholes option pricing model, which is consistent with the valuation techniques previously utilized for options in footnote disclosures required under SFAS 123, as amended by FASB Statement No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” The determination of the fair value of stock-based compensation awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables, including the expected volatility of the Company’s stock price over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends.

     The assumptions used to value stock-based compensation awards for the three and six months ended June 30, 2006 and 2005 are as follows:

		Three months ended June 30,				Six months ended June 30,
		2006		2005		2006		2005
Expected term (in years)		3.8-5.0		1.0-4.0		3.8-5.0		1.0-4.0
Expected volatility		67.6%-71.3%		70.0%		67.6%-71.3%		70.0%-87.0%
Risk-free interest rate		5.0%-5.2%		3.9%		5.0%-5.2%		2.9%-3.9%
Expected dividend yield		0		0		0		0

     Expected term represents the weighted average period of time that stock-based awards granted are expected to be outstanding giving consideration to historical exercise patterns. Expected volatilities are based on historical volatilities of the Company’s ordinary shares. Risk-free rate is based on US Treasury zero-coupon issues with remaining terms similar to the expected term on the stock-based awards. The Company does not anticipate paying any cash dividends in the foreseeable future. Forfeitures are estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest.

     Total stock-based compensation recognized on the Company’s Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2006 is as follows:

		Three months ended				Six months ended
		June 30, 2006				June 30, 2006
		(in thousands)
Cost of revenues		$	350			$	700
Sales and marketing			353				614
Product development			377				711
General and administrative			1,943				2,514
Total		$	3,023			$	4,539

     The following table sets forth the pro forma amounts of net income and net income per share for the three and six months ended June 30, 2005 that would have resulted if the Company had accounted for stock-based awards under the fair value recognition provisions of SFAS 123:

		Three months ended				Six months ended
		June 30, 2005				June 30, 2005
		(in thousands)
Net income:
As reported		$	9,953			$	20,263
Deduct: Employee stock purchase plan related compensation expenses determined under fair value based method			(45	)			(73	)
Deduct: Stock-based employee compensation expenses determined under fair value based method			(2,084	)			(5,031	)
Pro forma		$	7,824			$	15,159
Basic net income per share:
As reported		$	0.19			$	0.39
Pro forma		$	0.15			$	0.29
Diluted net income per share:
As reported		$	0.17			$	0.35
Pro forma		$	0.14			$	0.26

     As of June 30, 2006, there was $28.4 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards granted to the Company’s employees. This cost is expected to be recognized over a weighted-average period of 2.1 years. Total unrecognized compensation cost may be adjusted for future changes in estimated forfeitures.

     General Stock Option Information

     The following table sets forth the summary of option activity under the Company’ stock option program for the six months ended June 30, 2006:

		Options Available				Options				Weighted Average
		for Grant				Outstanding				Exercise Price
		(in thousands, except exercise price)
Beginning of period			2,681				3,610			$	14.97
Granted			(2,100	)			2,100			$	23.90
Exercised			N/A				(157	)		$	12.36
Cancelled/expired/forfeited			530				(530	)		$	8.30
End of period			1,111				5,023			$	19.49

     The total intrinsic value of options exercised for the six months ended June 30, 2006 was $1.9 million. The intrinsic value is calculated as the difference between the market value as of June 30, 2006 and the exercise price of the shares.

     Information regarding the stock options outstanding at June 30, 2006 is summarized below:

						Weighted Average				Weighted								Weighted
		Options				Remaining				Average				Options				Average
Range of Exercise prices		Outstanding				Contractual Life				Exercise Price				Exercisable				Exercise Price
		(in thousands)				(in years)								(in thousands)
$0.16 – $1.88			414				5.64			$	1.69				382			$	1.67
$1.88 – $12.98			840				6.12			$	10.83				614			$	10.16
$12.98 – $20.86			1,024				7.61			$	19.79				509			$	19.23
$20.86 – $36.40			2,745				6.56			$	24.71				542			$	27.92
			5,023				6.63			$	19.49				2,047			$	15.53

     The aggregate intrinsic value of options outstanding and options exercisable as of June 30, 2006 was $29.4 million and $21.1 million, respectively.

11. Segment Information

     Based on the criteria established by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company currently operates in three principal business segments globally. The Company does not allocate any operating costs or assets to its advertising, MVAS and other segments as management does not use this information to measure the performance of these operating segments. Management does not believe that allocating these expenses or assets is necessary in evaluating these segments’ performance.

     The following is a summary of revenues, cost of revenues and gross profit margins:

		Three months ended								Six months ended
		June 30,								June 30,
		2006				2005				2006				2005
		(in thousands, except percentages)
Revenues:
Advertising		$	29,454			$	20,373			$	51,635			$	37,021
MVAS			22,448				22,618				45,142				49,133
Other			1,776				3,139				3,613				5,824
		$	53,678			$	46,130			$	100,390			$	91,978
Cost of revenues:
Advertising		$	10,317			$	6,541			$	18,615			$	12,435
MVAS			8,925				7,374				18,325				16,044
Other			418				420				765				790
		$	19,660			$	14,335			$	37,705			$	29,269
Gross profit margins:
Advertising			65	%			68	%			64	%			66	%
MVAS			60	%			67	%			59	%			67	%
Other			76	%			87	%			79	%			86	%
Overall			63	%			69	%			62	%			68	%

     The following is a summary of the Company’s geographic operations:

		China				U.S.				Hong Kong				Taiwan				Total
		(in thousands)
Three months ended and as of June 30, 2006:
Revenue		$	52,812			$	469			$	303			$	94			$	53,678
Long-lived assets			21,895				143				1,131				79				23,248
Three months ended and as of June 30, 2005:
Revenues		$	45,122			$	515			$	363			$	130			$	46,130
Long-lived assets			18,950				79				168				375				19,572
Six months ended and as of June 30, 2006:
Revenue		$	98,551			$	1,002			$	647			$	190			$	100,390
Long-lived assets			21,895				143				1,131				79				23,248
Six months ended and as of June 30, 2005:
Revenues		$	89,845			$	1,048			$	807			$	278			$	91,978
Long-lived assets			18,950				79				168				375				19,572

12. Certain risks and concentrations

     Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, marketable debt securities and accounts receivable. The Company limits its exposure to credit loss by depositing its cash and cash equivalents with financial institutions in the U.S., the PRC, Hong Kong and Taiwan that management believes are of high credit quality. The Company usually invests in marketable debt securities with A ratings or above.

     Accounts receivable consist primarily of advertising agencies, direct advertising customers and third-party mobile operators. As of June 30, 2006 and December 31, 2005, approximately 98% and 97%, respectively, of the net accounts receivable were derived from the Company’s operations in the PRC. With regard to the advertising operations, no individual advertising customer accounted for more than 10% of total net revenues for the three and six months ended June 30, 2006 and 2005. Also, no individual advertising customer accounted for more than 10% of accounts receivables as of June 30, 2006 and December 31, 2005. With regard to the

MVAS operations, the Company mainly contracts with China Mobile Communication Corporation (“China Mobile”) and China Unicom Co. Ltd. (“China Unicom”) and their subsidiaries for utilizing their transmission gateways for message delivery and billing systems to collect subscription or usage fees from its subscribers. MVAS fees charged to users via these operators accounted for 42% and 45% of the Company’s net revenues for the three and six months ended June 30, 2006, respectively, and 49% and 54% of the Company’s net revenues for the three and six months ended June 30, 2005, respectively. Short Messaging Service (“SMS”) revenue accounted for 30% and 32% of the Company’s net revenues for the three and six months ended June 30, 2006, respectively, and 34% and 39% of the Company’s net revenues for the three and six months ended June 30, 2005, respectively. Accounts receivable from the mobile operators represent MVAS fees collected on behalf of the Company after deducting their billing services and transmission charges. The Company maintains allowances for potential credit losses. Historically, the Company has not had any significant direct write-off of bad debts.

     Revenues received through China Mobile and its subsidiaries accounted for 33% and 37% of the Company’s total net revenues for the three and six months ended June 30, 2006, respectively, and 44% and 47% of the Company’s total net revenues for the three and six months ended June 30, 2005, respectively. It also accounted for 34% and 26% of the Company’s total accounts receivable as of June 30, 2006 and December 31, 2005, respectively.

     The Company operates in business segments which are characterized by rapid technological advances, changes in customer requirements and evolving regulatory requirements and industry standards. Any failure by the Company to anticipate or to respond adequately to technological changes in its industry segments, changes in customer requirements or changes in regulatory requirements or industry standards, could have a material adverse effect on the Company’s business and operating results. The Company relies on a number of third-party suppliers for various other services, including web server hosting, banner advertising delivery software, Internet traffic measurement software and transmission and billing of MVAS. Any failure of these suppliers to provide services to the Company or any termination of these services with the Company could have a material adverse effect on the Company’s business and operating results.

     The majority of the Company’s net income was derived from China. The operations in China are carried out by the Company’s subsidiaries and VIEs. The Company depends on dividend payments from its subsidiaries in China for its revenues after these subsidiaries receive payments from VIEs in China under various services and other arrangements. In addition, under Chinese law, its subsidiaries are only allowed to pay dividends to the Company out of their accumulated profits, if any, as determined in accordance with Chinese accounting standards and regulations. Moreover, these Chinese subsidiaries are required to set aside at least 10% of their respective accumulated profits, if any, up to 50% of their registered capital to fund certain mandated reserve funds that are not payable or distributable as cash dividends. The appropriation to mandated reserve funds are assessed annually. As of December 31, 2005, the Company is subject to a maximum appropriation of $11.1 million to these non-distributable reserve funds. The Company’s subsidiaries and VIEs in China are subject to different tax rates. See Note 8 — Income Taxes.

     The majority of the Company’s revenues derived and expenses incurred were in Chinese renminbi. As of June 30, 2006, the Company’s cash, cash equivalents and short-term investments balance denominated in Chinese renminbi was approximately $207.3 million, which accounted for approximately 66% of its total cash, cash equivalents and short-term investment balance; accounts receivable denominated in Chinese renminbi was approximately $47.4 million, which accounted for approximately 98% of its total accounts receivable balance; and liabilities balance denominated in Chinese renminbi was approximately $40.3 million, which accounted for approximately 28% of its total liabilities balance. Accordingly, the Company may experience economic losses and negative impacts on earnings and equity as a result of exchange rate fluctuations in renminbi. Moreover, the Chinese government imposes controls on the convertibility of renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC. The Company may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency.

13. Commitments and Contingencies

     Operating lease commitments include the commitments under the lease agreements for the Company’s office premises. The Company leases office facilities under non-cancelable operating leases with various expiration dates beginning 2005 through 2007. Rental expenses for the three and six months ended June 30, 2006 were $0.8 million and $1.6 million, respectively, and for the three and six months ended June 30, 2005 were $1.0 million and $1.9 million, respectively. Based on the current rental lease agreements, future minimum rental payments required as of June 30, 2006 were as follows:

						Less than one				One to				Three to				More than
		Total				year				three years				five years				five years
		( in thousands)
Operating lease commitments		$	2,819			$	2,338			$	481			$	—			$	—

     Purchase commitments mainly include minimum commitments for Internet connection fees associated with web sites production, content fees associated with web sites production and MVAS, advertising serving services and marketing activities. Purchase commitments as of June 30, 2006 were as follows:

						Less than one				One to				Three to				More than
		Total				year				three years				five years				five years
		( in thousands)
Purchase commitments		$	13,723			$	10,593			$	3,012			$	46			$	72

     There are uncertainties regarding the legal basis of our ability to operate an Internet business and value-added telecommunication services in China. Although the country has implemented a wide range of market-oriented economic reforms, the telecommunication, information and media industries remain highly regulated. Not only are such restrictions currently in place, but in addition regulations are unclear as to in which specific segments of these industries companies with foreign investors, including us, may operate and the manner of any such operations. Therefore, we might be required to limit the scope of our operations in China or alter the manner in which we operate, or both and any such operational changes could have a material adverse effect on our financial position, results of operations and cash flows.

     For a discussion of current lawsuits, please refer to Part II, Item 1. Legal Proceedings.

14. Subsequent Event

     In July 2006, China Mobile made significant changes to their policy on subscription-based MVAS, which included extending the trial period and requiring double reminders on new MVAS subscriptions as well as sending SMS reminders to existing monthly subscribers of SMS, MMS and WAP to inform them of their MVAS subscription and fee information. These policy changes could have a significant and adverse impact on the Company’s MVAS business going forward. For the three months ending September 30, 2006, the Company may need to assess the goodwill and intangible assets related to the MVAS business for impairment. As of June 30, 2006, total goodwill and intangible assets related to the MVAS business was $69.4 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act, including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expect”, “anticipate”, “intend”, “believe”, the negative of such terms or other comparable terminology. All forward-looking statements included in this document are based on information available to us on the date hereof, and we undertake no obligation to update any such forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information set forth in the section titled “Risk Factors” in Part II, Item 1A. We caution you that our businesses and financial performance are subject to substantial risks and uncertainties, including the factors identified in “Risk Factors,” that could cause actual results to differ materially from those in the forward-looking statements.

Overview

     We are a leading online media company and value-added information services provider in the People’s Republic of China (the “PRC” or “China”) and the global Chinese communities. With a branded network of localized web sites targeting Greater China and overseas Chinese, we provide services through five major business lines including SINA.com (online news and content), SINA Mobile (MVAS), SINA Online (community-based services, games and instant messaging), SINA.net (search and enterprise solutions) and SINA E-Commerce (online shopping). Together these provide an array of services including region-focused online portals, MVAS, search and directory, interest-based and community-building channels, free and premium email, audio and video streaming, online games, virtual ISP, classified listings, fee-based services, e-commerce and enterprise e-solutions. In turn, we generate revenues through advertising, MVAS, fee-based services, e-commerce and enterprise services. Advertising and MVAS are currently the major sources of our revenues and we expect this trend to continue in the near future.

Critical Accounting Policies and Estimates

     Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to customer programs and incentives, bad debts, investments, intangible assets, income taxes, financing operations, restructuring, employee benefits, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For further information on our critical accounting policies, see the discussion in the section titled “Recent Accounting Pronouncements” below and Note 2 to the Condensed Consolidated Financial Statements.

     Other than noted below, there have been no significant changes during the first half of 2006 to the items disclosed as our critical accounting policies and estimates in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2005.

     Stock-based compensation

     We adopted the provisions of, and account for stock-based compensation in accordance with, SFAS 123R during the first quarter of fiscal 2006. We elected the modified-prospective method, under which prior periods are not revised for comparative purposes. Under the fair value recognition provisions of SFAS 123R, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis (net of estimated forfeitures) over the requisite service period, which generally is the vesting period. We currently use the Black-Scholes option pricing model to determine the fair value of stock options and ESPP shares. The determination of the fair value of stock-based compensation awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables, including our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. Furthermore, we are required to estimate forfeitures at the time of grant and record stock-based compensation expense only for those awards that are expected to vest. If actual forfeitures differ from those estimates, we may need to revise those estimates in subsequent periods.

     If factors change and we employ different assumptions for estimating stock-based compensation expense in future periods or if we decide to use a different valuation model, the future periods may differ significantly from what we have recorded in the current period and could materially affect our operating income, net income and net income per share.

     The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics not present in our option grants and ESPP shares. Existing valuation models, including the Black-Scholes and lattice binomial models, may not provide reliable measures of the fair values of our stock-based compensation. Consequently, there is a risk that our estimates of the fair values of our stock-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those stock-based payments in the future. Certain stock-based compensation awards, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are significantly higher than the fair values originally estimated on the grant date and reported in our financial statements. There currently is no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values.

     The guidance provided in SFAS 123R and SAB 107 is relatively new. The application of these principles may be subject to further interpretation and refinement over time. There are significant differences among valuation models, and there is a possibility that we will adopt different valuation models in the future. This may result in a lack of consistency in future periods and materially affect the fair value estimates of stock-based compensation awards. It may also result in a lack of comparability with other companies that use different models, methods and assumptions.

     See Note 10 for further information regarding stock-based compensation under SFAS 123R.

     Property and equipment

     Property and equipment are stated at historical cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally from three to five years. Judgment is required to determine the estimated useful lives of assets, especially for computer equipment, including determining how long existing equipment can function and when new technologies will be introduced at cost-effective price points to replace existing equipment. Changes in these estimates and assumptions could materially impact our financial position and results of operations.

     During a recent fixed-assets inventory count, we noted that a significant portion of certain fully depreciated computer equipment was still in use. We changed the estimated useful lives of these computer equipment (e.g., servers and filers), from three years to four years. This change in accounting estimate resulted in a reduction in depreciation expenses of $0.6 million in the first quarter of 2006, of which $0.2 million were in the cost of advertising revenues and $0.4 million were in operating expenses. Depreciation expenses were approximately $2.4 million and $4.7 million for the three and six months ended June 30, 2006, respectively, and $2.2 million and $4.2 million for the three and six months ended June 30, 2005, respectively.

     Recent Accounting Pronouncements

     In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that we recognize in our financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for us on January 1, 2007, with the cumulative effect of the change in accounting principle, if any, recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 on our consolidated financial position, cash flows and results of operations.

Results of Operations

Net revenues

		Three months ended June 30,
		2006								2005
		(in thousands, except percentages)
						% of net								% of net				% of
						revenues								revenues				change
Net Revenues:
Advertising		$	29,454				55	%		$	20,373				44	%			45	%
Non-advertising:
MVAS			22,448				42	%			22,618				49	%			-1	%
Other			1,776				3	%			3,139				7	%			-43	%
Subtotal			24,224				45	%			25,757				56	%			-6	%
Total net revenues		$	53,678				100	%		$	46,130				100	%			16	%

		Six months ended June 30,
		2006								2005
		(in thousands, except percentages)
						% of net								% of net				% of
						revenues								revenues				change
Net Revenues:
Advertising		$	51,635				51	%		$	37,021				40	%			39	%
Non-advertising:
MVAS			45,142				45	%			49,133				54	%			-8	%
Other			3,613				4	%			5,824				6	%			-38	%
Subtotal			48,755				49	%			54,957				60	%			-11	%
Total net revenues		$	100,390				100	%		$	91,978				100	%			9	%

     During the second quarter and first half of 2006, total net revenues increased by $7.5 million, or 16%, and $8.4 million, or 9%, respectively, compared to the same periods of 2005. Advertising revenues in absolute dollars and as a percentage of total net revenues grew while MVAS revenues declined.

     Advertising. The year-over-year growth in advertising revenues in the second quarter and first half of 2006 was primarily due to

the increase in the number of advertisers, price and overall average spending per advertiser in China. Compared to the same periods last year, the advertising revenue growth in the second quarter and first half of 2006 came mostly from the automobile, real estate and information technology sectors and was boosted by the World Cup event. Since many of our advertisers for the World Cup are recurring customers who regularly advertise with us even in the absence of the World Cup event, we are unable to quantify the incremental revenues that can attributed solely to the World Cup event.

     During the second quarter and first half of 2006, China accounted for 98% and 97% of our total advertising revenues, respectively, compared to 96% and 95% in the same periods of 2005, respectively. Average spending per advertising customer in the PRC grew from $54,100 and $70,000 in the second quarter and first half of 2005, respectively, to $55,800 and $76,000 in the second quarter and first half of 2006, respectively. Our top ten customers in aggregate generated 27% and 16% of our advertising revenues during the second quarter and first half of 2006, respectively, compared to 15% and 17% in the same periods of 2005.

     Non-advertising. The year-over-year decline in non-advertising revenues in the second quarter of 2006 can be mostly attributed to the 43% decline in other (non-MVAS related) non-advertising revenues. The year-over-year decline in non-advertising revenues in the first half of 2006 was due to a decline of 8% in MVAS revenues and a decline of 38% in other non-advertising revenues.

MVAS

		Three months ended June 30,
		2006								2005								% of change
						(in thousands, except percentages)
2.0G products		$	18,653				83	%		$	18,999				84	%			-2	%
2.5G products			3,795				17	%			3,619				16	%			5	%
Total MVAS revenues		$	22,448				100	%		$	22,618				100	%			-1	%

		Six months ended June 30,
		2006								2005								% of change
						(in thousands, except percentages)
2.0G products		$	37,974				84	%		$	41,774				85	%			-9	%
2.5G products			7,168				16	%			7,359				15	%			-3	%
Total MVAS revenues		$	45,142				100	%		$	49,133				100	%			-8	%

     Revenues from 2.0G products, which includes SMS, interactive voice response system (“IVR”) and color ringbacktone (“CRBT”), decreased 2% and 9% year-over-year in the second quarter and first half of 2006, respectively. Revenues from SMS were $16.1 million and $15.6 million in the second quarter of 2006 and 2005, respectively, and accounted for 72% and 69% of total MVAS revenues over the respective periods. For the first half of 2006, SMS revenues declined $3.7 million, or 10%, year-over-year, which was largely due to higher churn rates by our monthly subscription users and less effective means to recruit new users. SMS revenues accounted for 71% and 73% of total MVAS revenues in the first half of 2006 and 2005, respectively. Revenues from CRBT decreased 58% and 39% year-over-year in the second quarter and first half of 2006, respectively. Revenues from IVR grew 2% and 22% year-over-year in the second quarter and first half of 2006, respectively, primarily due to the addition of IVR service with China Telecom.

     On a year-over-year basis, revenues from 2.5G products, including multimedia messaging service (“MMS”), wireless application protocol (“WAP”) and Kjava, increased 5% in the second quarter of 2006 but decreased 3% in the first half of 2006. MMS declined 45% in the second quarter and 51% for the first half of 2006. These year-over-year decreases were partially offset by the year-over-year increase in WAP and Kjava revenues. The year-over-year decreases in MMS revenues were mainly related to the termination of MMS Album by China Mobile and the new billing platform, which have made new user recruitment more difficult and increased the failure rate on fee collection from our users.

     In July 2006, China Mobile made significant changes to their policy on subscription-based MVAS. These changes were in accordance with policy directives from China’s Ministry of Information Industry (“MII”) and were intended to address a number of issues, including reducing subscriber complaints, increasing customer satisfaction and promoting healthy development of the MVAS industry in China. The key changes include extending the trial period and requiring double reminders on new MVAS subscriptions as well as sending SMS reminders to existing monthly subscribers of SMS, MMS and WAP to inform them of their MVAS subscription and fee information. Certain provincial subsidiaries, such as Guangdong Mobile, one of China Mobile’s largest provincial

subsidiaries, have begun to discontinue charging MVAS users monthly subscription fees unless the users reply to the SMS reminders and reconfirm their subscription. Other provincial subsidiaries are expected to announce similar measures of their own. In addition, it is expected that China Mobile’s provincial subsidiaries will begin canceling existing WAP subscriptions that have been inactive for the prior four months and existing SMS subscriptions of users who have not successfully received more than three SMS messages during the month. These policy changes from China Mobile will reduce our ability to acquire new monthly MVAS subscribers and increase the churn rate of our existing monthly MVAS subscribers. Although we have not completed our assessment of the policy changes, we believe that these changes could have a significant, adverse impact on our results of operations, cash flow and financial condition going forward. Other Chinese mobile operators, like China Unicom, may announce measures in response to the MII campaign. For the second quarter of 2006, 42% of our revenues were from the MVAS business, approximately 67% of which related to monthly subscription from China Mobile. Since we derive the majority of our China Mobile subscription revenues from SMS, MMS and WAP, we expect revenues from these products to be negatively impacted going forward. We are in the process of developing new products, such as IVR, that are not subject to China Mobile’s recent policy changes. However, there is no guarantee that we will be able to develop any such new products, that any such products will achieve market acceptance or that such products will not be affected by future rules and regulations.

     Other non-advertising revenues

     Other non-advertising revenues include fee-based services, such as virtual ISP and paid email services, e-commerce and other enterprise services such as paid search and directory listings. The year-over-year decreases in other non-advertising revenues in the second quarter and first half of 2006 were due to revenue declines from paid search and directory listings, loss of revenues from the sale of our online hotel-booking business in the third quarter of 2005 and the sale of our interest in an online auction joint venture in the fourth quarter of 2005.

     Revenues from paid search and directory listings accounted for 55% and 61% of our other non-advertising revenues in the second quarter and first half of 2006, respectively. These revenues are generated mainly from pay-by-listing products offered on our old search platform. Starting in the first quarter of 2006, we began to promote our new search engine iAsk as the preferred search engine on our website. iAsk is currently being offered free of charge. Consequently, we expect revenues from paid search and directory listings to continue to decline as existing contracts expire.

Cost of revenues

		Three months ended June 30,
		2006				2005				% of Change
		(in thousands, except percentages)
Cost of revenues:
Advertising		$	10,317			$	6,541				58	%
Non-advertising:
MVAS			8,925				7,374				21	%
Other			418				420				*
Subtotal			9,343				7,794				20	%
Total cost of revenues		$	19,660			$	14,335				37	%

		Six months ended June 30,
		2006				2005				% of Change
		(in thousands, except percentages)
Cost of revenues:
Advertising		$	18,615			$	12,435				50	%
Non-advertising:
MVAS			18,325				16,044				14	%
Other			765				790				-3	%
Subtotal			19,090				16,834				13	%
Total cost of revenues		$	37,705			$	29,269				29	%