UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 20-F

(Mark One)

OR

OR

Commission file number: 000-50705

SHANDA INTERACTIVE ENTERTAINMENT LIMITED

N/A
(Translation of Registrant’s name into English)

Cayman Islands
(Jurisdiction of incorporation or organization)

No. 1 Office Building
No. 690 Bibo Road
Pudong New Area
Shanghai 201203, People’s Republic of China
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Securities registered or to be registered pursuant to Section 12(g) of the Act:

American Depositary Shares, each representing 2 ordinary shares, par value
$0.01 per share
(Title of each class)

Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 139,960,328 ordinary shares, par value $0.01 per share.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     þ Yes     o No

Indicate by check mark which financial statement item the registrant has elected to follow:

     o Item 17     þ Item 18

TABLE OF CONTENTS

Introduction

CONVENTIONS WHICH APPLY TO THIS FORM

     Except where the context otherwise requires and for purposes of this form only:

This form contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader. Unless otherwise noted, all translations from Renminbi to U.S. dollars were made at the noon buying rate in The City of New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York, or the noon buying rate, as of December 31, 2004 which was RMB8.2765 to US$1.00. We make no representation that the Renminbi amounts referred to in this form could have been or could be converted into U.S. dollars at any particular rate or at all. On May 26, 2005, the noon buying rate was RMB8.2765 to US$1.00.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This form contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about us and our industry. All statements other than statements of historical fact in this form are forward-looking statements. These forward-looking statements can be identified by words or phrases such as “may”, “will”, “expect”, “anticipate”, “estimate”, “plan”, “believe”, “is/are likely to” or other similar expressions. The forward-looking statements included in this form relate to, among others:

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     These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, we cannot assure you that our expectations will turn out to be correct. Our actual results could be materially different from and worse than our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in the “Risk Factors” section of Item 3 and elsewhere in this form.

     This form also contains data related to the online game market and the Internet. These market data include projections that are based on a number of assumptions. The online game market may not grow at the rates projected by the market data, or at all. The failure of the market to grow at the projected rates may have a material adverse effect on our business and the market price of our American Depositary Shares, or ADSs. In addition, the relatively new and rapidly changing nature of the online game industry subjects any projections or estimates relating to the growth prospects or future condition of our market to significant uncertainties. Furthermore, if any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

     The forward-looking statements made in this form relate only to events or information as of the date on which the statements are made in this form. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.

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Item 1. Identity of Directors, Senior Management and Advisors

Not Applicable

Item 2. Offer Statistics and Expected Timetable

Not Applicable

Item 3. Key Information

A. SELECTED FINANCIAL DATA

     The following summary consolidated financial information has been derived from our consolidated financial statements included elsewhere in this annual report. Our statements of operations and comprehensive income for the years ended December 31, 2001, 2002, 2003 and 2004 and our balance sheets as of December 31, 2001, 2002, 2003 and 2004 have been audited by PricewaterhouseCoopers Zhong Tian Certified Public Accountants Ltd. Co. independent registered public accounting firm, or PricewaterhouseCoopers. The report of PricewaterhouseCoopers on the consolidated statements of operations and comprehensive income for the years ended December 31, 2002, 2003 and 2004 and the consolidated balance sheets as of December 31, 2003 and 2004 are included elsewhere in this annual report. The summary consolidated financial information for those periods and as of those dates should be read in conjunction with those statements and the accompanying notes and the discussion set forth in Item 5, “Operating and Financial Review and Prospects”. Our consolidated financial information as of December 31, 2000, which was the first full year of our operations and prior to significant growth of our business, has been derived from our unaudited consolidated financial statements which are not included in this annual report, but which have been prepared on the same basis as our audited consolidated financial statements.

     Our consolidated financial statements are prepared and presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, reflect our recent reorganization, and have been prepared as if our current corporate structure had been in existence throughout the relevant periods.

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EXCHANGE RATE INFORMATION

     The following table sets forth information regarding the noon buying rates in Renminbi and U.S. dollars for the periods indicated.

On May 26, 2005, the noon buying rate was RMB8.2765 to US$1.00.

B. CAPITALIZATION AND INDEBTEDNESS

Not Applicable

C. REASONS FOR THE OFFER AND USE OF PROCEEDS

Not Applicable

D. RISK FACTORS

Risks Relating to our Business

We are substantially dependent on two online games, which accounted for approximately 74.2% of our net revenues in 2004 and which may have a finite commercial lifespan.

     Prior to 2004, we depended on The Legend of Mir II, or Mir II, which is an online game we license from a third party, for substantially all of our net revenues. On October 8, 2003, we commercially launched The World of Legend, or Woool, which is an online game we developed in-house. In 2004, we derived approximately 47.4% and 26.8% of our net revenues from Mir II and Woool, respectively. While we expect these amounts to be reduced as these two games reach a more mature stage of their lifecycles, we expect to continue to derive a substantial portion of our net revenues from Mir II and Woool through at least 2005. Accordingly, any of the following could materially and adversely affect our business, financial condition and results of operations:

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If we are unable to maintain the operation of the online games that we license, or to consistently license or develop additional successful online games, our business, financial condition and results of operations may be materially and adversely affected.

     We derive the majority of our net revenues from online games that we license from third parties. In 2004, we derived approximately 63.3% of our net revenues from licensed online games. If any of these licenses are terminated or not renewed at an acceptable cost, or at all, or if we are unable to obtain from the licensor of any of our licensed games the technical support necessary for the satisfactory operation of these games, our financial condition and results of operations may be materially and adversely affected.

     In order to maintain our long-term profitability and financial and operational success, we must continually license or develop new online games that are attractive to our users to replace our existing online games as they reach the end of their useful economic life, which we believe is typically four to five years for successful online games, or two to three years for most other online games. Our ability to license successful online games will depend on their availability at an acceptable cost, our ability to compete effectively to attract the licensors of these games, and our ability to obtain government approvals required for licensing and operation of these games. Moreover, the success of our internally developed games will largely depend on our ability to anticipate and effectively respond to changing consumer tastes and preferences. In addition, developing games internally requires substantial initial investment prior to commercial launch of the games as well as a significant commitment of future resources. We cannot assure you that the games we develop or license will be attractive to users, will be viewed by the regulatory authorities as complying with content restrictions, will be launched as scheduled or will be able to compete with games operated by our competitors. If we are not able to consistently license or develop online games with continuing appeal to users, our future profitability and growth prospects will decline.

Our license to operate Mir II in China is currently subject to an arbitration proceeding. If we lose in this arbitration, we may no longer be able to operate Mir II, which accounted for approximately 47.4% of our net revenues in 2004, and we may be required to pay an unspecified amount of damages.

     We initiated an arbitration in Singapore on July 3, 2003 under the auspices of the International Chamber of Commerce, or the ICC, against Actoz Soft Co., Ltd., or Actoz, and Wemade Entertainment Co., Ltd., or Wemade, which are two online game developers based in Korea. We commenced the arbitration in order to resolve certain disputes relating to our license to operate Mir II in China, or the Mir II license. We settled our disputes with Actoz pursuant to a settlement agreement and an amendment agreement entered into on August 19, 2003, and requested the discontinuation of the arbitration. The amendment agreement with Actoz, among other things, extended the Mir II license for at least two years.

     Wemade has objected to our request for discontinuation of the arbitration, has filed counterclaims against us, and has filed cross-claims against Actoz. Wemade has also requested an injunction against our use of the Mir II software and payment of royalty fees and an unspecified amount of damages.

     If the arbitrator determines that Wemade validly terminated the Mir II license and that the settlement agreement and the amendment agreement are not binding with respect to Wemade, or that the Mir II license has expired, we may no longer be able to operate Mir II, which accounted for approximately 47.4% of our net revenues in 2004. In addition, we may have to pay an unspecified amount of damages. Any lapse in our right to operate Mir II in China, as well as any damages we may be required to pay as a result of the arbitrator’s decision, may have a material adverse effect on our business, financial condition and results of operations.

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We may be subject to intellectual property infringement claims, which may force us to incur substantial legal expenses and, if determined adversely against us, may materially disrupt our business. In particular, we are currently subject to copyright infringement and unfair competition claims by Wemade and Actoz with respect to the Woool software, which if determined adversely against us, could cause us to stop operating Woool, which in 2004 accounted for approximately 26.8% of our net revenues.

     We cannot be certain that our online games do not or will not infringe upon patents, valid copyrights or other intellectual property rights held by third parties. We have in the past been, and may in the future be, subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. If we are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives. In addition, we may incur substantial expenses in defending against these third party infringement claims, regardless of their merit. Successful infringement or licensing claims against us may result in substantial monetary liabilities, which may materially disrupt the conduct of our business.

     On October 8, 2003, Wemade filed claims against us in the Beijing First Intermediate People’s Court, or the Beijing Court, with respect to our operation of Woool. Wemade has alleged, among other things, that Woool copied Mir II and elements of the Legend of Mir III, or Mir III, which is another online game that Wemade developed, thereby infringing Wemade’s copyrights in these games. In addition, Wemade has alleged that our operation of Woool violates the PRC Anti-Unfair Competition Law. In particular, Wemade has alleged that the Chinese name for Woool, which includes two characters from the Chinese name for Mir II, misleads users and that we previously encouraged users to switch from Mir II to Woool by permitting the transfer of game characters developed in Mir II to Woool. Wemade has requested the Beijing Court to, among other things, order us to stop our operation of Woool, and to pay its legal fees and related costs incurred in connection with this litigation. On May 24, 2004, the Beijing court informed us that Actoz had been joined as a co-plaintiff in these proceedings.

     If the Beijing court determines that we have breached the Mir II or Mir III copyrights, we may no longer be able to operate Woool, which accounted for approximately 26.8% of our net revenues in 2004. We may also have to pay legal fees and related costs, which could be significant. In addition, if the Beijing court determines that we have violated the PRC Anti-Unfair Competition Law, we may be required to modify certain aspects of Woool, including its name. Any lapse in our right to operate Woool in China, or any modifications to the game itself, as a result of this litigation, may have a material adverse effect on our business, financial condition and results of operations.

Repercussions stemming from user’s offline actions related to online games may result in bad publicity or governmental response that could have a material and adverse impact on our business, financial condition and results of operations.

     Incidences of violence or theft between users over matters related to online games have been reported. The publicity of these incidences may reduce demand for our games through negative association. Furthermore, it is possible that regulators might seek to address such incidences by seeking to control features of the online game industry despite an absence of a legal cause or provocation for such incidences in the online games themselves. These outcomes could affect our market and operations and have a material adverse effect on our business, financial results and results of operations.

We face significant competition which could reduce our market share and adversely affect our business, financial condition and results of operations.

     The online game market in China is increasingly competitive. Our results of operations to date may be a result, in part, of a first-mover advantage that may not continue to be available to us. A significant number of competitors have entered the online game business in China and we expect more companies to do the same and a wider range of online games to be introduced to the China market. Competition from other online game operators, both based in China as well as overseas, is likely to increase in the future. Other websites, such as China-based Netease, Sina, and Sohu, as well as overseas-based Electronic Arts and NCsoft, are current, or potential future, competitors. As the online game industry in China is relatively new and constantly evolving, our current or future competitors may compete more successfully as the industry matures. In particular, any of these competitors may offer products and

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services that provide significant performance, price, creativity or other advantages over those offered by us. These products and services may weaken the market strength of our brand name and achieve greater market acceptance than ours. Furthermore, any of our current or future competitors may be acquired by, receive investments from or enter into other commercial relationships with, larger, well-established and well-financed companies and therefore obtain significantly greater financial, marketing and game licensing and development resources than we have. In addition, increased competition in the online game industry in China could make it difficult for us to retain existing users and attract new users, and could reduce the average number of hours played by our users or cause us to reduce our fee rates. If we are unable to compete effectively in the online game market in China, our business, financial condition and results of operations could be materially and adversely affected.

We may not be able to successfully implement our growth strategies, which would materially and adversely affect our business, financial condition and results of operations.

     We are pursuing a number of growth strategies, including leveraging our user base to develop additional sources of revenues and exploring opportunities to expand into online entertainment offered over other media platforms, such as game consoles. Some of these strategies relate to new services or products for which there are no established markets in China, or relate to services or products in which we lack experience and expertise. We cannot assure you that we will be able to deliver new products or services on a commercially viable basis or in a timely manner, or at all.

     In addition, we have begun to generate advertising revenue by selling banner advertising on our web pages, including the log-in web pages, the web pages that provide information on the features of our games, and on game pages. Our current online advertising business is very limited and, to date, we do not have significant experience with selling Internet-based advertising. Moreover, we would need to hire additional employees and incur costs relating to any efforts to increase our advertising revenues, which could materially and adversely affect our financial condition and operating results. We cannot assure you that we will be able to efficiently or effectively implement and grow our online advertising business, or that online advertising on our web pages will not detract from our users’ experience and thereby adversely affect our brand name or our service offerings.

     If we are unable to successfully implement our growth strategies, our revenue and profitability will not grow as we expect, and our competitiveness may be materially and adversely affected.

There are risks associated with our business strategy, which contemplates growth through acquisitions and strategic investments.

     As a component of our growth strategy, we intend to continue to enhance our business development, including our game content offerings, by acquiring other businesses that complement our current online business, represent related but new lines of business that may be appropriate areas of expansion, or that we believe may benefit us in terms of user base, product or content offering. We also intend to make strategic investments in selected industry players. We are actively examining the merits, risks and feasibility of several potential transactions, and expect to actively search for additional acquisition opportunities in the future.

     Such search and examination efforts and any related discussions with third parties, may or may not lead to future acquisitions and investments. Our reported financial results may be affected by any such acquisitions and/or investments, including any acquisitions or dispositions undertaken by us in anticipation of or in connection with any such acquisitions and/or investments. Our ability to grow through such acquisitions and investments will depend on the availability of suitable acquisition candidates at an acceptable cost or at all, our ability to compete effectively to attract and reach agreement with acquisition candidates or investee companies on commercially reasonable terms, the availability of financing to complete larger acquisitions or investments, as well as our ability to obtain any required governmental approvals. In addition, the benefits of an acquisition or investment transaction may take considerable time to develop and we cannot assure you that any particular acquisition or investment will produce the intended benefits.

     Furthermore, the identification and completion of these transactions may require us to expend significant management and other resources. Any such transaction may require that we expend a significant portion of our cash reserves and/or issue a substantial amount of new equity, which may adversely affect our financial condition and

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liquidity as well as result in significant dilution of shareholders’ interests. The impact of dilution may restrict our ability to consummate further acquisitions. We may also incur debt and losses related to the impairment of goodwill and other intangible assets upon or following the acquisition of another business, and this could negatively impact our results of operations. For example, in connection with our acquisition of Actoz, we paid a premium to the market price for Actoz’s shares in order to secure the controlling stake that we acquired. Additional risks associated with acquisitions include the following:

There have been historical deficiencies with our internal controls and there remain areas of our internal controls that require improvement. If we fail to maintain an effective system of internal controls, we may be unable to accurately report our financial results or prevent fraud, and investor confidence and the market price of our ADSs may be adversely impacted.

     In the course of their audit for the year ended December 31, 2004, our auditors identified “reportable conditions”, as that term is defined under standards established by the American Institute of Certified Public Accountants and is now adopted by the Public Company Accounting Oversight Board, in our internal controls. Some of these reportable conditions constitute material weaknesses in the design or operation of our internal controls that, in our independent auditors’ judgment, could adversely affect our ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements.

     We need to take further actions to continue to improve our internal controls. If we are unable to implement solutions to this and other weaknesses in our existing internal controls and procedures, or if we fail to maintain an effective system of internal controls in the future, we may be unable to accurately report our financial results or prevent fraud and investor confidence and the market price of our ADSs may be adversely impacted.

     We are in the process of implementing changes to strengthen our internal controls. While we have taken actions to address these deficiencies and weaknesses, additional measures may be necessary and these measures, along with other measures expected to be taken to improve our internal controls, may not be sufficient to address the issues identified by us or to ensure that our internal controls are effective. For a description of these deficiencies and weaknesses, see Item 15 “Evaluation of Disclosure Controls and Procedures”. If deficiencies in internal controls cannot be corrected in a timely manner, our ability to record, process, summarize and report financial information within the time periods specified in the rules and forms of the Commission will be adversely affected. This failure could materially and adversely affect our business, our financial condition, and the market price of our ADSs.

     In addition, we will become subject to Section 404 of the Sarbanes-Oxley Act of 2002 in the fiscal year ending December 31, 2006. We cannot be certain as to the timing of completion of our evaluation, testing and any remedial actions or the impact of the same on our operations. If we cannot implement the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in a timely manner or with adequate compliance, our independent auditors may not be able to provide a written attestation as to the effectiveness of our internal controls over financial reporting and we may be subject to sanctions or investigation by regulatory authorities, such as the Securities and Exchange Commission. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur significant costs in improving our internal control system and the hiring of additional personnel. Any such action could increase our costs relative

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to our revenues, thereby reducing our operating margins and could negatively affect the market price of our ADSs.

Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.

     We regard our copyrights, service marks, trademarks, trade secrets, patents and other intellectual property as critical to our success. Unauthorized use of the intellectual property used in our business, whether owned by us or licensed to us, may adversely affect our business and reputation.

     We rely on trademark, patent and copyright law, trade secret protection and confidentiality agreements with our employees, customers, business partners and others to protect our intellectual property rights. Despite our precautions, it may be possible for third parties to obtain and use the intellectual property used in our business without authorization. For example, we discovered that the server-end software of Mir II was unlawfully released into the China market in September 2002. This software leak enabled unauthorized third parties to set up local server networks to operate Mir II, which we believe diverts a significant number of users of our most popular online game from us. We have incurred and may continue to incur considerable costs to remedy the software leak and protect our rights against the unauthorized server networks.

     The validity, enforceability and scope of protection of intellectual property in Internet-related industries is uncertain and still evolving. In particular, the laws and enforcement procedures of the PRC and certain other countries are uncertain or do not protect intellectual property rights to the same extent as do the laws and enforcement procedures of the United States. Moreover, litigation may be necessary in the future to enforce our intellectual property rights. Future litigation could result in substantial costs and diversion of our resources, and could disrupt our business, as well as have a material adverse effect on our financial condition and results of operations.

Undetected programming errors or defects in our games and the proliferation of cheating programs could materially and adversely affect our business, financial condition and results of operations.

     Our games may contain undetected programming errors or other defects. In addition, parties unrelated to us may develop Internet cheating programs that enable our users to acquire superior features for their game characters that they would not have otherwise. Furthermore, certain cheating programs could cause the loss of a character’s superior features acquired by a user. The occurrence of undetected errors or defects in our games, and our failure to discover and disable cheating programs affecting the fairness of our game environment, could disrupt our operations, damage our reputation and detract from the game experience of our users. As a result, such errors, defects and cheating programs could materially and adversely affect our business, financial condition and results of operations.

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

     Any failure to maintain the satisfactory performance, reliability, security and availability of our network infrastructure may cause significant harm to our reputation and our ability to attract and maintain users. We maintain a distributed server network architecture with third party service providers hosting servers in more than sixty cities throughout China. Most of the servers handling log in, and all servers handling billing and data back-up matters for us, are hosted and maintained by third party service providers in Shanghai. We do not maintain full backup for our server network hardware. Major risks involved in such network infrastructure include:

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     In the past, our server network has experienced unexpected outages for several hours and occasional slower performance in a number of locations in China as a result of failures by third party service providers. Our network systems are also vulnerable to damage from fire, flood, power loss, telecommunications failures, computer virus, hackings and similar events. Any network interruption or inadequacy that causes interruptions in the availability of our games or deterioration in the quality of access to our games could reduce our users’ satisfaction. In addition, any security breach caused by hacking, which involve efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses could have a material adverse effect on our business, financial condition and results of operations. We do not maintain insurance policies covering losses relating to our systems and we do not have business interruption insurance.

Rapid technological change may limit our ability to recover game development costs.

     The online game industry is subject to rapid technological change. We need to anticipate the emergence of new technologies, games and platforms, and assess their market acceptance. New technologies in online game programming or operations could render Woool, The Sign, The Age or the online games that we are developing or expect to develop in the future obsolete or unattractive to users, thereby limiting our ability to recover development costs and potentially adversely affecting our future profitability and growth prospects.

Any failure to maintain a stable and efficient distribution and payment network could have a material and adverse impact on our business, financial condition and results of operations.

     Online payment systems in China are in a developmental stage and are not as widely available or acceptable to consumers in China as in the United States. As a result, we rely heavily on a multi-layer distribution and payment network composed of third party distributors for our sales to, and collection of payment from, our users. As we do not employ long-term agreements with any of our distributors, we cannot assure you that we will continue to maintain favorable relationships with them. If we fail to maintain a stable and efficient distribution and payment network, our business, financial condition and results of operations could be materially and adversely affected.

The limited use of personal computers in China and the relatively high cost of Internet access with respect to per capita gross domestic product may limit the development of the Internet in China and impede our growth.

     Although the use of personal computers in China has increased in recent years, the penetration rate for personal computers in China is much lower than in the United States. In addition, despite a decrease in the cost of Internet access in China due to a decrease in the cost of personal computers and the introduction and expansion of broadband access, the cost of personal Internet access, in contrast with Internet access through Internet cafes, remains relatively high in comparison to the average per capita income in China. While we have been exploring the use of other delivery platforms for our interactive entertainment business, we cannot assure you that these will be successful. The limited use of personal computers in China and the relatively high cost of personal Internet access may limit the growth of our business. Furthermore, any Internet access or telecommunications fee increase could reduce the number of users that play our online games.

We have a limited operating history, and our limited resources may affect our ability to manage the growth we expect to achieve.

     Our business was established in December 1999, and initially focused on investments relating to the development and operation of an online virtual community. In November 2001, we began commercially operating massively multi-player online role playing games, or MMORPGs, which are now our primary source of revenues. In addition, we have recently expanded our business focus from game operations to game development as well as into additional forms of interactive entertainment content. Furthermore, our senior management and employees have worked together at our company for only a relatively short period of time. In addition, China’s online game business is still in the developmental stage. Our future revenues and profits are substantially dependent upon the growth in the acceptance and use of fee-based online games in China. The use of and interest in fee-based online games is a recent phenomenon in China, and we cannot assure you that this acceptance and use will continue to develop or that a sufficiently broad base of consumers will accept, and continue to use, fee-based online games.

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     Our growth to date has placed, and our anticipated further expansion of our operations will continue to place, a significant strain on our management, systems, and resources. In addition to training and managing our workforce, we will need to continue to develop and improve our financial and management controls and our reporting systems and procedures. We cannot assure you that we will be able to efficiently or effectively manage the growth of our operations, and any failure to do so may limit our future growth and materially and adversely affect our business, financial condition and results of operations.

We depend on our key personnel, and our business and growth prospects may be severely disrupted if we lose their services.

     Our future success is heavily dependent upon the continued service of our key executives and other key employees. In particular, we rely on the expertise, experience and leadership ability of Tianqiao Chen, our founder, controlling shareholder and chief executive officer, in our business operations, and rely on his personal relationships with our employees, the relevant regulatory authorities, our game and service suppliers and Shanda Networking. We also rely on a number of key technology officers and staff for the development and operation of our online games. In addition, as we expect to focus increasingly on the development of our own online games, we will need to continue attracting and retaining skilled and experienced online game developers to maintain our competitiveness.

     If one or more of our key personnel are unable or unwilling to continue in their present positions, we may not be able to easily replace them and may incur additional expenses to recruit and train new personnel, our business could be severely disrupted, and our financial condition and results of operations could be materially and adversely affected. Furthermore, since our industry is characterized by high demand and intense competition for talent, we may need to offer higher compensation and other benefits in order to attract and retain key personnel in the future. We cannot assure you that we will be able to attract or retain the key personnel that we will need to achieve our business objectives. Furthermore, we do not maintain key-man life insurance for any of our key personnel.

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

     Certain of our PRC companies, including Shengqu and Shanda Networking, enjoy preferential tax treatments, in the form of reduced tax rates or tax holidays, provided by the PRC government or its local agencies or bureaus. These two subsidiaries, Shengqu, and Shanda Networking, benefit from a 15% preferential income tax rate. In addition, Shengqu was granted an income tax exemption for 2003 and 2004, to be followed by a three year tax holiday during which it will be subject to a 7.5% preferential income tax rate. As a result of these preferential tax treatments, our effective income tax rate for 2004 was 6%. Shengqu must continue to meet a number of financial and non-financial criteria to qualify for its current and future tax holidays.

     In 2004 we also received aggregate government financial incentives of RMB88.1 million (US$10.6 million), which was calculated with reference to business tax and income tax that we previously paid. These government financial incentives have been granted by the municipal government and were initially granted in 2003. These incentives have a fixed term of 3 years with respect to incentives granted with reference to revenues on which we pay business tax and 8 years for incentives granted with reference to taxable income on which we pay income tax. Eligibility for the government financial incentives we receive requires that we continue to meet a number of financial and non-financial criteria to continue and our continued qualification is further subject to the discretion of the municipal government. Moreover, the central government or municipal government could determine at any time to immediately eliminate or reduce these government financial incentives, generally with prospective effect. If we had not received these government financial incentives in 2004, our net income would have been RMB521.4 million (US$63.0 million), a decrease of 14.5% from the reported amount. As the receipt of these government financial incentives are subject to periodic time lags and inconsistent municipal government practice on payment times, for so long as we continue to receive these government financial incentives, our net income in a particular quarter may be higher or lower relative to other quarters based on the potentially uneven receipt by us of these government financial incentives in addition to any business or operating related factors we may otherwise experience.

     We cannot assure you that we will continue to enjoy these preferential tax treatments or government financial incentives in the future. The discontinuation of these preferential tax treatments or government financial incentives

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could materially and adversely affect our business, financial condition and results of operations. Please see Item 5 for a discussion of the duration of these preferential tax treatments or government financial incentives.

     Our PRC operating companies, Nanjing Shanda and Hangzhou Bianfeng, have submitted applications, which are currently pending, to the municipal governments where they are located for treatment as new high technology enterprises. If the municipal governments deny Nanjing Shanda and/or Hangzhou Biangfeng’s applications for being treated as new high technology enterprises, these two entities will not benefit from tax related financial incentives similar to those enjoyed by Shengqu and Shanda Networking, and this could adversely affect our business, financial condition and results of operations.

     The PRC government is now reviewing China’s tax policies and it is possible that in the near future, the different income tax rates imposed on enterprises of different ownership natures (i.e. state owned, collectively owned, privately owned and foreign-invested) may be unified, which reform may result in higher income tax rates applicable to our PRC companies and therefore could materially and adversely affect our business, financial condition and results of operations.

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

     Depending upon the value of our ordinary shares and ADSs and the nature of our assets and income over time, we could be classified as a passive foreign-investment company, or PFIC, by the United States Internal Revenue Service, or IRS, for U.S. federal income tax purposes. If we are classified as a PFIC in any taxable year in which you hold our ADSs and your are a U.S. investor, you would generally be taxed at higher ordinary income, rather than lower capital gain rates, if you dispose of ADSs at a gain in a later year, even if we are not a PFIC in that year. In addition, a portion of the tax imposed on your gain would be increased by an interest charge. Moreover, if we were classified as a PFIC in any taxable year, you would not be able to benefit from any preferential tax rate with respect to any dividend distribution that you may receive from us in that year or in the following year. Finally, you would also be subject to special U.S. tax reporting requirements.

     We have determined that we were not a PFIC for the taxable year 2004. Although in the past we have operated our business, and in the future we intend to operate our business, so as to minimize the risk of being classified as a PFIC, there can be no assurance that we will not be a PFIC for the taxable year 2005 and/or later taxable years, as PFIC status is re-tested each year and depends on your assets and income in such year. For example, we would be a PFIC for the taxable year 2005 if the sum of our average market capitalization, which is our share price multiplied by the total amount of our outstanding shares, and our liabilities over that taxable year is not more than twice the value of our cash, cash equivalents, and other assets that are readily converted into cash. We could also be a PFIC for any taxable year if the gross income that we and our subsidiaries earn from investing the portion of the cash raised in our initial public offering and debt offerings that exceed the immediate capital needs of our active online business is substantial in comparison with the gross income from our business operations.

     We cannot assure you that we will not be a PFIC for 2005 or any future taxable year. For more information on the U.S. tax consequences to you that would result from our classification as a PFIC, please, see the subsection “Taxation” included in Item 10 “Additional Information”.

We have limited business insurance coverage in China.

     The insurance industry in China is still at an early stage of development. In particular, PRC insurance companies offer limited business insurance products. As a result, we do not have any business liability or disruption insurance coverage for our operations in China. Any business disruption, litigation or natural disaster might result in our incurring substantial costs and the diversion of resources.

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Risks Relating to Regulation of the Internet and to Our Structure

If the PRC government finds that the agreements that establish the structure for operating our China business do not comply with PRC government restrictions on foreign investment in the online game industry, we could be subject to severe penalties.

     PRC regulations currently limit foreign ownership of companies that provide Internet content services, which includes operating online games, to 50%. In addition, foreign and foreign-invested enterprises are currently not able to apply for the licenses required to operate online games in China or to provide Internet information content, such as online advertising. We are a Cayman Islands exempted company and we conduct our operations in China primarily through Shengqu, our indirectly wholly owned subsidiary. We and Shengqu are foreign or foreign-invested enterprises under PRC law and accordingly are ineligible to apply for a license to operate online games or to sell online advertising. In order to comply with foreign ownership restrictions, we operate our online game business in China through Shanda Networking, which is wholly owned by Tianqiao Chen, our chairman and chief executive officer, and Danian Chen, our senior vice president, both of whom are PRC citizens and through Nanjing Shanda and Hangzhou Bianfeng, which are subsidiaries of Shanda Networking. Shanda Networking, Nanjing Shanda, Hangzhou Bianfeng and other subsidiaries of Shanda Networking hold the licenses and approvals that are required to operate our online game business and to sell online advertising on our web pages and Shengqu owns the substantial majority of physical assets. Shengqu has entered into a series of contractual arrangements with Shanda Networking and its shareholders. As a result of these contractual arrangements, we are considered the primary beneficiary of Shanda Networking and accordingly we consolidate the results of operations of Shanda Networking and its subsidiaries in our financial statements. For a description of these contractual arrangements, see “Organizational Structure” in Item 4, “Information About the Company” and Item 7 “Major Shareholders and Related Party Transactions”.

     In the opinion of Yao Liang Law Office, our PRC legal counsel, (1) the ownership structures of our company, Shengqu, and our PRC operating companies are in compliance with existing PRC laws and regulations; (2) our contractual arrangements with Shanda Networking and its shareholders are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect; and (3) the business operations of our company, Shengqu, and our PRC operating companies, as described in this annual report, are in compliance with existing PRC laws and regulations in all material aspects.

     There are, however, substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. Accordingly, we cannot assure you that the PRC regulatory authorities will not ultimately take a view that is contrary to the opinion of our PRC legal counsel. If we, Shengqu, or any of our PRC operating companies are found to be in violation of any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violations, including:

     Any of these actions could cause our business, financial condition and results of operations to suffer and the price of our ADSs to decline.

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Our contractual arrangements with Shanda Networking and its shareholders may not be as effective in providing operational control as direct ownership. In addition, these arrangements may be difficult to enforce, create a double layer of taxation and be subject to scrutiny by the PRC tax authorities.

     We conduct substantially all of our operations, and generate substantially all of our revenues, through our PRC operating companies. Our control over these entities is based upon contractual arrangements with Shanda Networking and its shareholders that provide us with the substantial ability to control Shanda Networking. Although we have been advised by Yao Liang Law Office, our PRC legal counsel, that these contractual arrangements are valid, binding and enforceable under current PRC laws and regulations, these contractual arrangements may not be as effective in providing us with control over our PRC operating companies as direct ownership. For example, the PRC operating companies could refuse to pay the service fees due under our contractual arrangements or otherwise breach the contractual arrangements.

     These contractual arrangements are governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. If Shanda Networking fails to perform its obligations under these contractual arrangements, we may have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot be sure would be effective. The legal environment in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements.

     Moreover, our corporate structure and arrangements with Shanda Networking result in a PRC business tax being levied on our PRC operating companies’ revenues derived from their operations in China and on Shengqu’s revenues derived from its contractual arrangements with our PRC operating companies.

     We also could face material and adverse tax consequences if the PRC tax authorities determine that our contracts with our PRC operating companies were not entered into based on arm’s length negotiations. Although we based our contractual arrangements on those of similar businesses, if the PRC tax authorities determine that these contracts were not entered into on an arm’s length basis, they may adjust our income and expenses for PRC tax purposes in the form of a transfer pricing adjustment. A transfer pricing adjustment could result in a reduction, for PRC tax purposes, of deductions recorded by our PRC operating companies, which could adversely affect us by:

We rely principally on dividends and other distributions on equity paid by our wholly-owned operating subsidiary to fund any cash and financing requirements we may have.

     We are a holding company, and we rely principally on dividends and other distributions on equity paid by Shengqu for our cash requirements, including the funds necessary to service any debt we may incur, or financing we may need for operations other than through Shengqu. If Shengqu incurs debt on its own behalf in the future, the instruments governing the debt may restrict Shengqu’s ability to pay dividends or make other distributions to the intermediate holding company and thus to us. In addition, we generate substantially all of our revenues through contractual arrangements with our PRC operating companies. However, PRC tax authorities may require us to amend these contractual arrangements in a manner that would materially and adversely affect Shengqu’s ability to pay dividends and other distributions to us. Furthermore, PRC legal restrictions permit payments of dividends by Shengqu only out of its retained earnings, if any, determined in accordance with PRC accounting standards and regulations. Under PRC law, Shengqu is also required to set aside a portion of its net income each year to fund certain reserve funds. These reserves are not distributable as cash dividends. As a result of these and other restrictions under PRC laws and regulations, our PRC subsidiaries and our affiliated PRC entities are restricted in

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their ability to transfer a portion of their net assets to us in the form of dividends, loans or advances, which restricted portion amounted to approximately RMB467.3 million (US$56.5 million), or 31.1%, of our total consolidated net assets as of December 31, 2004. Any limitation on the ability of our PRC subsidiaries and our affiliated PRC entities to transfer funds to us in the form of dividends, loans or advances could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay debt or dividends, and otherwise fund and conduct our business.

The PRC government has recently strengthened the regulation on investments made by PRC companies and residents in offshore companies and reinvestments in China made by these offshore companies. These new measures may have a significant impact on our business and operations, and our business and operations may be subject to more restrictive governmental supervision.

     Regulations were recently promulgated by the State Development and Reform Commission, or SDRC, and the State Administration of Foreign Exchange, or SAFE, that will require registration with, and approval from, PRC government authorities in connection with direct or indirect offshore investment activities by PRC residents and PRC corporate entities. The SAFE regulations retroactively require registration of overseas investments previously made by PRC residents. In particular, the SAFE regulations require PRC residents to file with competent SAFE offices information about offshore companies in which they have directly or indirectly invested and to make follow-up filings in connection with certain material transactions involving such offshore companies, such as mergers, acquisitions, capital increases and decreases, external equity investments or equity transfers. According to the SAFE regulations, a newly established foreign-invested enterprise is now required to provide detailed information about its controlling shareholders and to certify whether it is directly or indirectly controlled by a domestic entity or resident.

     In the event that a PRC shareholder with a direct or indirect stake in an offshore parent company fails to make the required SAFE registration, the PRC subsidiaries of such offshore parent company may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries. Further, failure to comply with the various SAFE registration requirements described above can result in liability under PRC law for foreign exchange evasion.

     In accordance with the SAFE regulations, with the exception of companies listed on overseas stock markets, foreign exchange income received by overseas special purpose companies directly or indirectly controlled by PRC residents for the purpose of raising funds for such PRC residents’ domestically controlled companies may not be retained by such offshore companies. Moreover, within thirty days of receiving any income, whether directly or indirectly through such overseas special purpose companies, a PRC resident must remit all such income back to China.

     These regulations may have a significant impact on our present and future structuring and investment. Following our inquiries with SAFE, we have been informed that internal implementing guidelines have yet to be issued so that details about the application and filing process can be clarified. We intend to take all necessary measures for ensuring that all required applications and filings will be duly made and all other requirements will be met. We further intend to structure and execute our future offshore acquisitions in a manner consistent with the new regulations and any other relevant legislation. However, because it is presently uncertain how the SDRC and SAFE regulations, and any future legislation concerning offshore or cross-border transactions, will be interpreted and implemented by the relevant government authorities, we cannot provide any assurances that we will be able to comply with, qualify under, or obtain any approvals required by the regulations or other legislation. In particular, we can give no assurances that we will be able to cause the PRC companies or residents with a direct or indirect stake in our company to comply with all SAFE and SDRC regulations. Our inability to secure required approvals or registrations may subject us to legal sanctions, restrict our ability to pay dividends from our PRC subsidiary, Shengqu, to our offshore holding company, restrict our overseas or cross-border investment activities or affect our ownership structure, as a result of which our ownership structure, acquisition strategies, business operations and profits could be materially and adversely affected.

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The laws and regulations governing the online game industry and related businesses in China are developing and subject to future changes. If we or any of our PRC operating companies fail to obtain or maintain all applicable permits and approvals, our business and operations would be materially and adversely affected.

     The Internet industry, including the operation of online games, in China is highly regulated by the PRC government. Various regulatory authorities of the central PRC government, such as the State Council, the Ministry of Information Industry, the State Administration of Industry and Commerce, the Ministry of Culture, the State Press and Publication Administration, and the Ministry of Public Security, are empowered to issue and implement regulations governing various aspects of the Internet and online game industries.

     Our PRC operating companies are required to obtain applicable permits or approvals from different regulatory authorities in order to provide their services. For example, an Internet content provider, or ICP, must obtain an ICP license from the Ministry of Information Industry in order to engage in any commercial ICP operations within China. In addition, an online game operator must also obtain a license from the Ministry of Culture and a license from the State Press and Publication Administration in order to distribute games through the Internet. If any of our PRC operating companies fails to obtain or maintain any of the required permits or approvals, they may be subject to various penalties, including fines and the discontinuation or restriction of their operations. Any such disruption in business operations would materially and adversely affect our financial condition and results of operations.

     As the online game industry is at an early stage of development in China, new laws and regulations may be adopted in the future to address new issues that arise from time to time, such as online advertising. Also, different regulatory authorities may have different opinions with regard to the licensing requirements imposed on online game operators. As a result, substantial uncertainties exist regarding the interpretation and implementation of current and any future PRC laws and regulations applicable to the online game industry and related businesses. While we believe that we are in compliance in all material respects with all applicable PRC laws and regulations currently in effect, we cannot assure you that we will not be found in violation of any current or future PRC laws and regulations.

     We currently operate a large number of websites, the domain names of which are registered under the names of Shengqu and our other PRC-incorporated affiliates. In order to streamline and optimize our Internet publication businesses, we have started to put all our Internet publication businesses, including our editing, content supervision, publication, and other related businesses, under Shanda Networking. We have reported to the Ministry of Information Industry of the change and Shanda Networking has applied to the State Press and Publications Administration for expanding its Internet publication license from the publication of online games to encompass books, newspapers, periodicals, music and video products, works in the fields of literature, art, natural science, social science, engineering, and other electronic publications. We believe that Shanda Networking has satisfied all qualifications required to obtain the permission for license expansion and we do not believe that, while its application is pending, the regulatory authorities will take any action against it. However, we cannot assure you that it will obtain this approval or that the regulatory authority will not take any action against it.

The PRC government may prevent us from distributing, and we may be subject to liability for, content that it believes is inappropriate.

     China has enacted laws and regulations governing Internet access and the distribution of news, information or other content, as well as products and services, through the Internet. In the past, the PRC government has stopped the distribution of information through the Internet that it believes violates PRC law. The Ministry of Information Industry, the State Press and Publication Administration and the Ministry of Culture recently promulgated new regulations which prohibit games from being distributed through the Internet if they contain content that is found to, among other things, propagate obscenity, gambling or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC, or compromise State security or secrets. In addition, certain PRC social organizations have recently discussed the possibility of implementing a rating system for online games. The effect that such a system could have on our business is unclear.

     If any games we offer were deemed to violate any such content restrictions, we would not be able to continue such offerings and could be subject to penalties, including confiscation of income, fines, suspension of business and revocation of our license for operating online games, which would materially and adversely affect our business, financial condition and results of operations.

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     We may also be subject to potential liability for unlawful actions of our users or for content we distribute that is deemed inappropriate. Furthermore, we may be required to delete content that violates the laws of the PRC and report content that we suspect may violate PRC law. It may be difficult to determine the type of content that may result in liability for us, and if we are wrong, we may be prevented from operating our games or other services in China.

The PRC government has announced its intention, and has begun, to intensify its regulation of Internet cafes, which are currently the primary venue for our users to play online games. Intensified government regulation of Internet cafes could restrict our ability to maintain or increase our revenues and expand our customer base.

     In April 2001, the PRC government began tightening its regulation and supervision of Internet cafes. In particular, a large number of unlicensed Internet cafes have been closed. The PRC government has also imposed higher capital and facility requirements for the establishment of Internet cafes. Furthermore, the PRC government’s policy, which encourages the development of a limited number of national and regional Internet cafe chains and discourages the establishment of independent Internet cafes, may slow down the growth of Internet cafes. Moreover, the State Administration of Industry and Commerce, one of the government agencies in charge of Internet cafe licensing, and other government agencies jointly issued a notice in February 2004 suspending the issuance of new Internet cafe licenses for a period of six months. Although the six-month period is over, in practice, the suspension is still in effect. It is unclear when this suspension will be lifted, if at all. So long as Internet cafes are the primary venue for our users to play online games, any reduction in the number, or slowdown in the growth, of Internet cafes in China, or any new regulatory restrictions on their operations, could limit our ability to maintain or increase our revenues and expand our customer base, thereby reducing our profitability and growth prospects.

Currently there are no laws or regulations in the PRC governing virtual asset property rights and therefore, it is not clear what liabilities, if any, online game operators may have for virtual assets.

     In the course of playing online games, some virtual assets, such as special equipment, player experience grades and other features of our users’ game characters, are acquired and accumulated. Such virtual assets can be important to online game players and in some cases are traded between players for monetary values. In practice, virtual assets can be lost for various reasons, often through unauthorized use of users’ IDs by other users and occasionally through data loss caused by delay of network service or by a network crash. Currently there are no PRC laws and regulations governing virtual asset property rights. As a result, it is unclear who is the legal owner of virtual assets and whether the ownership of virtual assets is protected by law. In case of a loss of virtual assets, we may be sued by online game players and may be held liable for damages, which may negatively affect our business, financial condition and results of operations.

Risks Relating to the People’s Republic of China

     Substantially all of our assets are located in China and substantially all of our revenues are derived from our operations in China. Accordingly, our business, financial condition, results of operations and prospects are subject, to a significant extent, to economic, political and legal developments in China.

The PRC’s economic, political and social conditions, as well as government policies, could affect our business.

     The PRC economy differs from the economies of most developed countries in many respects, including in the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past twenty years, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and to guide the allocation of resources. Some of these measures may benefit the overall PRC economy, but also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.

     The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although the PRC government has implemented measures since the late 1970s emphasizing the utilization of market

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forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Most recently, the PRC government implemented a number of measures, such as raising bank reserves rates in order to place additional limitations on the ability of commercial banks to make loans and slow down certain segments of the PRC economy. These actions, as well as future actions and policies of the PRC government, could materially affect general economic conditions in China and could have a material adverse effect on our business and results of operations.

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

     The PRC legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing general economic and business matters. The overall effect of legislation over the past 25 years has been a significant enhancement of the protections afforded to various forms of foreign-invested enterprises in mainland China. Our PRC operating subsidiary, Shengqu, is a wholly foreign owned enterprise, or WFOE, which is an enterprise incorporated in mainland China and wholly-owned by foreign investors. Shengqu is subject to laws and regulations applicable to foreign investment in mainland China in general and laws and regulations applicable to WFOEs in particular. However, these laws, regulations and legal requirements are constantly changing, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to us and other foreign investors, including you. In addition, we cannot predict the effect of future developments in the PRC legal system, particularly with regard to the Internet, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws.

Restrictions on currency exchange may limit our ability to utilize our revenues effectively.

     Substantially all of our revenues and operating expenses are denominated in Renminbi. The Renminbi is currently freely convertible under the “current account”, which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account”, which includes foreign direct investment and loans.

     Currently, Shengqu may purchase foreign exchange for settlement of “current account transactions”, including payment of dividends to us and payment of license fees to foreign game licensors, and our PRC operating companies may purchase foreign exchange for payment of license fees to foreign game licensors without the approval of the State Administration for Foreign Exchange. Shengqu may also retain foreign exchange in its current account, subject to a ceiling approved by the State Administration for Foreign Exchange, to satisfy foreign exchange liabilities or to pay dividends. However, we cannot assure you that the relevant PRC governmental authorities will not limit or eliminate our ability to purchase and retain foreign currencies in the future.

     Since a significant amount of our future revenues will be denominated in Renminbi, the existing and any future restrictions on currency exchange may limit our ability to utilize revenues generated in Renminbi to fund our business activities outside China, if any, or expenditures denominated in foreign currencies.

     Foreign exchange transactions under the capital account are subject to limitations and require registration with or approval by the relevant PRC governmental authorities. In particular, if we finance Shengqu by means of foreign currency loans, those loans cannot exceed certain statutory limits and must be registered with the State Administration for Foreign Exchange, and if we finance Shengqu by means of capital contributions, those capital contributions must be approved by the Ministry of Commerce. Our ability to use the U.S. dollar proceeds of the sale of our equity or debt to finance our business activities conducted through Shengqu will depend on our ability to obtain these governmental registrations or approvals. In addition, because of the regulatory issues related to foreign currency loans to, and foreign investment in, domestic PRC enterprises, we may not be able to finance Shanda Networking or its subsidiaries’ operations by loans or capital contributions. We cannot assure you that we can obtain these governmental registrations or approvals on a timely basis, if at all.

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Fluctuations in exchange rates could result in foreign currency exchange losses.

     Substantially all of our revenues are denominated in Renminbi, while a portion of our expenditures are denominated in foreign currencies, primarily the U.S. dollar and the Japanese yen. Fluctuations in exchange rates, particularly those involving the U.S. dollar and the Japanese yen, may affect our costs and operating margins. In addition, these fluctuations could result in exchange losses and increased costs in Renminbi terms. Where our operations conducted in Renminbi are reported in dollars, such fluctuations could result in changes in reported results which do not reflect changes in the underlying operations. The PRC government has indicated that it may be evaluating its decades-old policy of pegging the value of the Renminbi to the U.S. dollar. Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure at all.

     In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into U.S. dollars and Japanese yen. Conversely, an increase in the value of the Renminbi could increase our reported earnings in U.S. dollar terms without a fundamental change in our business or operating performance.

     Since our revenues are primarily denominated in Renminbi, our valuation could be materially and adversely affected by the devaluation of the Renminbi if U.S. investors analyze our value based on the U.S. dollar equivalent of our financial condition and results of operations. In addition, certain of our acquisitions may expose us to additional currency fluctuations that would affect our reported valuation of those holdings. Actoz, which we will account for under the equity method, is a South Korean company; changes in its valuation as a consequence of fluctuations in the Korean Won would be reflected in our valuation.

Inflation in China could negatively affect our profitability and growth.

     While the PRC economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products and services rise at a rate that is insufficient to compensate for the rise in our costs, our business may be materially and adversely affected. In order to control inflation in the past, the PRC government has imposed controls on bank credits, limits on loans for fixed assets, and restrictions on state bank lending. Such austerity measures can lead to a slowing of economic growth. A slow down in the PRC economy could also materially and adversely affect our business and prospects.

Risks Relating to our ADSs

One shareholder has significant control over the outcome of our shareholder votes.

     As of March 31, 2005, Skyline Media beneficially owned approximately 60.4% of our outstanding equity interests. Accordingly, Skyline Media has and is expected to maintain significant control over the outcome of any corporate transaction or other matter submitted to our shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets.

The price of our ADSs has been volatile historically and may continue to be volatile, which may make it difficult for holders to resell the ADSs when desired or at attractive prices.

     The trading price of our ADSs has been and may continue to be subject to wide fluctuations. Since May 13, 2004, the sale prices of our ADSs on the Nasdaq National Market ranged from $10.58 to $45.40 per ADS and the last reported sale price on May 26, 2005 was US$35.00. Our ADS price may fluctuate in response to a number of events and factors. In addition, the financial markets in general, and the market prices for Internet-related companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our ADSs, regardless of our operating performance. In addition, the existence of our Zero Coupon Senior Convertible Notes due 2014 that

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we issued in October 2004, or the convertible notes, may encourage short selling in our ADSs by market participants because the conversion of the convertible notes could depress the price of our ADSs.

You may face difficulties in protecting your interests, and our ability to protect our rights through the U.S. federal courts may be limited, because we are incorporated under Cayman Islands law.

     Our corporate affairs are governed by our memorandum and articles of association and by the Companies Law (2004 Revision) and common law of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of company law as compared to the U.S., and provides significantly less protection to investors. Therefore, our shareholders may have more difficulties in protecting their interests in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States. In addition, Cayman Islands companies may not have standing to sue before the federal courts of the United States. As a result, our ability to protect our interests if we are harmed in a manner that would otherwise enable us to sue in a United States federal court may be limited.

Anti-takeover provisions in our organizational documents may discourage our acquisition by a third party, which could limit your opportunity to sell your shares at a premium.

     Our amended and restated memorandum and articles of association include provisions that could limit the ability of others to acquire control of us, modify our structure or cause us to engage in change of control transactions, including, among other things, the following:

     These provisions could have the effect of depriving you of an opportunity to sell your ADSs at a premium over prevailing market prices by discouraging third parties from seeking to acquire control of us in a tender offer or similar transactions.

The voting rights of holders of ADSs are limited by the terms of the deposit agreement.

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

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You may be subject to limitations on transfer of your ADSs

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

Item 4. Information About the Company

A. HISTORY AND DEVELOPMENT OF THE COMPANY

     Our business was founded in December 1999 when Tianqiao Chen and Danian Chen established Shanda Networking which initially focused on investments relating to the development and operation of a Chinese language online virtual community. In November 2001, we commercially launched Mir II, our first massively multiplayer online role-playing game, or MMORPG. In March 2003, we commercially launched Fortress II, our first casual game, and in October 2003, we launched Woool, our first in-house developed online game. Currently, we commercially operate nine online games consisting of five MMORPGs and four casual games.

     In addition to our internal growth we have developed our business through a number of strategic acquisitions and investments, including the following:

B. BUSINESS OVERVIEW

     We are an interactive entertainment company and one of the largest operators of online games in China. We offer a portfolio of online games that users play over the Internet and we plan to offer additional content such as music and movies through our operating platform while also exploring new channels to deliver our expanded content offerings to end users.

     Our content offerings primarily consist of online games which we license from third-parties or develop in-house. In 2004, our commercially launched games, including Bianfeng’s online chess and board games, had approximately

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2.0 million peak concurrent users and 1.1 million average concurrent users. According to a 2004 survey of online game use in China conducted by International Data Corporation, or IDC, Shanda’s massively multiplayer online role-playing games, Mir II and Woool, were, respectively, the most popular online game and the most popular domestic online game in China. The IDC survey also reported that BNB and Maple Story, two of our casual games, were among the top ten casual games in China.

     Our MMORPGs allow thousands of users to interact with one another in a virtual world by assuming ongoing roles or characters with different features. The interactive and group-oriented nature of these games along with the large size of our user base significantly contributes to retaining our current users and attracting new users. These features allow our games to attract a high degree of user loyalty as the games require a significant amount of time to learn and master.

     Prior to October 2003, we licensed all of our online games from overseas developers, and localized these games for the China market. Beginning in the first half of 2002, we devoted substantial resources to establishing and expanding our in-house game development capability, and in October 2003, we launched Woool, which we developed in-house and which is now our second most popular game in terms of revenues. In 2004, we commercially launched two additional in-house developed games, The Sign and The Age, and in 2005 we have begun open beta testing for Magical Land, another in-house developed MMORPG, and closed beta testing for Three Kingdoms, an in-house developed casual game. We intend to continue diversifying our online game portfolio by developing additional games internally to complement our game licensing activities.

     Our operating platform includes our technological infrastructure, distribution and payment system, customer service center, game content management and marketing platform. Our technological infrastructure consists of a nation-wide server network with the capacity to accommodate approximately 5.5 million concurrent online users. Our nation-wide distribution and payment network includes approximately 129,000 e-sale and 178,000 offline distribution points; additionally, in 2004, we sold virtual pre-paid cards to approximately 15,200 purchasers through direct online sales. Our customer service system includes a 24-hour call center and a walk-in customer service center. In addition, for each of our online games we have a separate game content management team which manages the operation of the game and the online community for the game.

     Currently, our content is primarily accessed through personal computers. We are, however, exploring new channels to deliver our expanding content offerings to end users, including interactive television and mobile phone handsets.

Our Content

     Our content offerings primarily consist of online games, including MMORPGs and casual games. As a result of recent acquisitions, however, we also offer online chess and board games, mobile phone games and original literature content. In addition, we plan to further expand our content offerings to include music and movies.

MMORPGs

     Our MMORPGs are action-adventure based, and draw upon martial arts and combat themes. Each MMORPG creates a virtual world within which thousands of players interact with one another inside the game. Typical features of our MMORPGs include the following:

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     In preparation for the commercial launch of a new game, we conduct closed beta testing of the game in an effort to eliminate technical problems. This closed beta testing is followed by open beta testing in which we allow our registered users to play without charge in open market conditions to ensure performance consistency and stability of operation systems.

     The following table summarizes the MMORPGs or other massively multiplayer online games that we are currently offering or that are in the process of closed or open beta testing.

     In addition to the MMORPGs that we currently offer or are in the process of performing closed or open beta testing upon, we have recently entered into a license agreement with Turbine, Inc., a leading publisher of online subscription entertainment, to operate the online game version of Dungeons & Dragons, entitled Dungeons & Dragons Online, in China. Under the agreement, we will hold the exclusive rights in China to operate this 3-D massively multiplayer online role-playing game based on the Hasbro and Wizards of the Coast Dungeons & Dragons franchise.

Our Casual Games

     Casual games are easier to play than MMORPGs. Casual games are typically session based, meaning that a game can be played to a conclusion within a short period of time. Generally, fewer than ten players may interact with each other in an online casual game.

     Although we currently charge users only for accessing premium features in three of our four commercially launched casual games and not for accessing the games themselves, casual games are an important component of our overall growth strategy. We believe casual game users have gradually become accustomed to accessing and paying for the premium features of the game, resulting in an increase in the percentage of our revenues derived from casual games in 2004. In addition, casual games attract a broader range of users, as well as more home users, than MMORPGs. As a result, our casual games provide us with certain benefits and opportunities not typically available

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through MMORPGs, such as:

     The following table summarizes the casual games that we currently offer or that are in the process of closed or open beta testing:

     The license for Fortress II will expire in July 2005. We do not collect revenues for Fortress II under the same business model that we employ with our other casual games, which we refer to as an ‘avatar-based’ business model and, accordingly, we have not experienced the same opportunities for revenue with this game. For this reason, we have decided not to extend this license and will terminate game service upon its expiration.

Our Online Chess and Board Games

     Our casual games also include online chess and board games offered through Bianfeng, which we acquired in 2004. Bianfeng’s www.gameabc.com portal provides users with a variety of casual games, including card games, board games, mahjong and simple arcade games.

Other Game Content

     Haofang Network PC Game Platform, or Haofang, provides a virtual platform and game client to our end users. Users of PC games are able to find and connect through the Internet with other players of the same PC game. This enables users to form a large network through which to interact with others virtually, using software that has network capability. Without such an Internet based network, users of PC games would generally be limited to playing with other users that are either at the same PC or connected through a local area network. Unlike with our MMORPGs, we do not own or license the content provided through Haofang, but rather provide only the virtual platform, nevertheless, Haofang enhances our overall offering of online content.

Literature, Music and Movies

     In addition to online game content, we also offer original literature online and we intend to offer music and movies through our expanding online entertainment platform.

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     Through Qidian, a Chinese language original literature portal that we acquired in 2004, we publish works of independent writers, including magic fantasy works, science fiction works and works based upon the story lines of online games. Through Qidian’s literature platform, readers can interact and communicate with authors as well as subscribe for access to the published works. Qidian has published approximately 17,500 literature works from approximately 12,000 writers and has obtained the electronic copyrights to approximately 600 of the most popular works that it has published.

     In April 2005, we announced a strategic partnership with Universal Music, a leading music company, pursuant to which we will provide our users with access to Universal Music’s online music repertoire on both a streaming and a downloadable basis, and within the game operation platform. Universal Music will provide music, artist-related information and news materials which we expect to offer on our platform. We are in the process of negotiating a definitive agreement with Universal and intend to launch the music service in 2005.

     We are also exploring opportunities to partner with movie content providers in order to offer our users access to movies through our interactive entertainment platform.

Mobile Phone-Based Online Games

     We believe that China is an attractive market for the delivery of games and other entertainment content over mobile phones, as it is already the largest mobile phone market in the world in terms of numbers of subscribers.

     In October 2004, we completed our acquisition of 100% of the equity interest in Beijing Digital Red Software Application Technology Co., Ltd., or Digital Red. Digital Red is a developer of mobile phone games. It has developed approximately 280 game applications, many of which enjoy top-ranking in terms of download traffic. These games include Java, Smartphone and Sybian products and pre-loaded games for mainstream mobile phone manufacturers, including Nokia, Motorola, Sharp and Sony Ericson, as well as K-Java games for China Mobile’s game download portal. Digital Red’s K-Java game was among the first available on China Mobile’s game download portal since it was first launched in 2003.

     In connection with our investment, we acquired rights to distribute Digital Red’s wireless games in China. Through Digital Red, we intend to develop interactive mobile phone games in order to position ourselves to capture future growth opportunities in this market, including those that may be made available by the adoption of the third generation of mobile telecommunications systems. In addition, we plan to continue to explore alternative platforms for the delivery of mobile interactive game content. We believe that interactive game will play a significant role in the content provided on the next generation of mobile platforms and we are working closely with the top leaders, China Mobile and Unicom to further explore this market opportunity.

Game Related Content Publishing

     In order to take advantage of the commercial opportunities presented by the significant following generated by our games and game characters, we have begun marketing game related publications, such as game manuals, magazines and other related products, based on these games and characters. We market the merchandise through the same retail and Internet distribution points through which we market our pre-paid cards. We also intend to begin offering these products online through our game sites and using our existing payment system to allow users to pay for merchandise through deductions from their pre-paid accounts.

Sources of Content

Game Licensing

     As of December 31, 2004, we had licenses for nine online games, including six that we commercially operate.

     We license our games from developers in various countries where online game use is relatively established. We license new games in accordance with annual licensing plans and budgets that we develop based on market analyses and user surveys. We have a dedicated team monitoring each of the South Korean, Japanese, United States and

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European markets to identify and source new online games.

     The cost of licensing games from these developers generally consists of an upfront licensing fee, which we generally pay in several installments, and ongoing licensing fees, which are equal to a percentage of our revenues from the relevant licensed game. The ongoing licensing fee payments for games which have been commercially launched range from 21% of revenues to 22% of total sales before distributor discount, for massively multiplayer online games, and 15% to 30% of our revenues for casual games. As a result, aggregate licensing fees for our MMORPGs and casual games amounted to approximately 21.3% of our net revenues in 2004. Each of these licenses provides us with the exclusive right to operate the game in mainland China and Hong Kong. Most developers agree to timely provide us, without any additional charge, with updates, enhancements and improvements developed for the games licensed to us. The majority of our game licenses require the licensors to provide us with technical support. The Mir II license, as amended in August 2003, however, does not obligate the licensor to provide technical support or upgrade services to us. The amended Mir II license agreement does, under certain circumstances, permit us to provide our own technical support in the event that the licensor does not do so.

     We have also obtained rights or control to certain licenses through the acquisition of, or investment in, other businesses. Please see the section “Recent Acquisitions” in Item 5 “Operating and Financial Review and Prospects”.

Game Development

     We intend to expand our game offerings by continuing to license new games from third party developers but also by developing additional games in-house. Between October 2003 and June 2004, we commercially launched Woool, The Sign and The Age, each an in-house developed MMORPG. In addition, in 2005 we have begun open beta testing for Magical Land, another in-house developed MMORPG, and closed beta testing for Three Kingdoms, an in-house developed casual game. We have established our in-house game development capacity by building and staffing a research and development center and by acquiring game development companies. Please see the section “Recent Acquisitions” in Item 5 “Operating and Financial Review and Prospects” for a discussion of these acquisitions.

     We established our research and development center in 2002. As of December 31, 2004, we had approximately 400 research and development employees. We plan to continue to invest in, and to significantly expand, our research and development center for game development. We have also established a game testing and evaluation center that allows us to evaluate more thoroughly and systematically the technological performance of internally developed and licensed games, and to anticipate and respond more effectively to threats to the technological integrity of our existing games, such as cheating and hacking programs.

Other Content

     In addition to our game content, we have added and are developing other content, including our online chess and board games, literature, music and movies, our mobile phone based online games and short-messaging and multimedia-messaging services, and our game related content publishing. We intend to expand our content offering through in-house development, licensing and through acquisition and strategic agreements with other businesses. As examples of our addition of content through acquisitions, through Bianfeng, we have added our online chess and board games; Qidian has provided a literature portal, the Haofang network PC game platform has provided access to additional games, and Digital Red develops mobile phone games. We expect to add music content through an agreement with Universal Music.

Our Operating Platform

     In addition to our online games and other interactive entertainment content, we believe that our operating platform contributes to the experience of our users and enhances user loyalty. Our operating platform encompasses a variety of elements, including our product management system, distribution and payment network, unified billing platform, marketing and customer service, PC network game platform and technological infrastructure.

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Game Product Management

     We have a separate product management team for each of our MMORPG and casual games. Each product team acts as a product specialist in interaction with our functional departments, such as research and development, licensing, marketing, sales and distribution, technology support and customer services. Our product teams:

As of December 31, 2004, our product management teams consisted of 154 employees.

Short Messaging Service and Multimedia Messaging Service

     We have entered into arrangements with China Mobile and China Unicom, the primary mobile communications operators in China, to offer various mobile value-added services to our online game players. We believe that in addition to providing a supplemental source of revenue, mobile value-added services help enhance the user’s game playing experience, generate a strong sense of community among users and serve as an efficient marketing tool. The current mobile value-added service product offering focus is on short-messaging-service, or SMS, and multimedia-messaging-service, or MMS.

     We offer both in-game and out-of-game SMS, as well as certain SMS games. Our in-game SMS enables our online game users to communicate with China Mobile’s mobile phone users from their game screens in certain of our games by sending and receiving short messages. Our out-of game SMS enables users to acquire certain in-game equipment and other features by sending short messages to us from their mobile phones. In addition, we have developed interactive SMS games for users. For example, we have developed Woool Baby, which has many features in common with Woool, but which provides a different experience for the game player. We intend to commercially launch in-game SMS for additional in-house developed online games in future periods. Game content related multimedia clips, including game-based pictures, ringtones and stories, may be sent to MMS subscribers.

Pricing, Distribution and Payment

     In order to play our games or, in the case of our casual games other than Fortress II, in order to purchase enhancing features, users must purchase pre-paid cards, which are sold in both virtual and physical form. Each pre-paid card contains a unique access code and password that enables users to add value to their account for one of our online games. Currently, each pre-paid card may only be used to play one of our online games, although a user may choose which game account, among all accounts held by the user, to apply the pre-paid card’s value. Charges based on either the number of hours of playtime or unlimited playtime for a specified number of days are deducted against the value provided in the pre-paid cards.

     We generally develop a pricing curve to set the retail prices for the games we offer. Pricing curves are developed primarily based on the game cost, user game playing and payment patterns and the pricing of competing games in the market. Since the launch of our first online game in 2001, we have tracked and accumulated user data generated from our user base, which provides us with an extensive database to analyze user patterns and establish pricing curves for particular types of games. Once a game’s pricing is set, it is difficult to increase prices during the game’s commercial lifecycle. We have generally maintained stable pricing curves for our games.

     We distribute our pre-paid cards through three principal channels:

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     Other than direct online sales, we generally operate by selling pre-paid cards to a group of regional distributors from whom we generally collect payment on a prepaid basis. These distributors resell the cards to sub-distributors that, in turn, distribute the cards directly to Internet cafes and other retail points of sale. We estimate, based on a survey we conducted among our regional distributors in December 2004 and sales records in our e-sales system, that our e-sales and offline distribution networks include approximately 129,000 and 178,000 points of sale in China respectively. In addition, in 2004 we sold virtual pre-paid cards to approximately 15,200 purchasers through direct online sales. Our sales policies and distributor incentive systems generally discourage our regional distributors from distributing pre-paid cards of other online game operators. Our data center and servers maintain user information, including user registration information and data relating to usage patterns, and we do not rely on distributors for such information.

     The following table sets forth the percentage of pre-paid card sales from each of these distribution channels in 2004:

     In 2004, we offered sales discounts that averaged between approximately 23% and 15% to our e-sales distributors and offline distributors, respectively. The sales discount represents the difference between the price at which we sell games cards to distributors and the face value of the games cards. We generally offer a larger discount to our e-sales distributors than our offline physical card distributors, primarily because we intend to facilitate the expansion of our e-sales system that provides us with control of the distribution process. In addition, the cost of distributing virtual pre-paid cards through our e-sales system is lower than the costs involved in offline distribution of physical pre-paid cards. We expect the direct portion of our sales to increase and thus the portion of our sales subject to discount to decrease.

     We also collect online game revenues through two telecommunications service operators that bundle broadband access services with our online games to home users.

Our Unified User Platform

     In May 2004, we launched a centralized user and billing verification system, which allows users to hold a single Shanda account through which they can access our various online games and other interactive entertainment content. Users with pre-existing game accounts can upgrade those accounts to a new centralized account. Through the new centralized account, users can access or subscribe to a variety of our services in addition to our online game services, including our virtual communities, wireless content, and literature portal.

     The unified user platform provides a means to bind together our various content and services. By organizing our products into a common platform, we expect to leverage the value of our user base within any given application, to retain user loyalty, and to have an efficient means to manage our billing and user data as well as to organize promotional events and the introduction and testing of new products and services.

User Password Protection Product

     In July 2004, we introduced a password protection product for our users. The product contains a small digital card that provides an account password which changes each minute. With this new product, our users can enjoy

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additional protection of their game account. We believe that this protection will enhance user loyalty by reducing account theft and the loss of user in-game equipment.

Online Advertising

     We believe that our large user base presents an opportunity to generate revenues from the sale of online advertisements, and in 2004 we began generating online advertisement revenues. In October 2004, we entered into a strategic alliance with eBay EachNet, an eBay company, pursuant to which eBay EachNet places advertisements, including a variety of banners, displays and pop-ups, on the websites and user log-in pages for our games (but not in the game environment). In addition, we have selected eBay EachNet’s e-commerce platform as our preferred choice for our game users.

Marketing

     Due to the group interaction appeal of online games, word-of-mouth is a major medium for promoting our games. Our marketing strategy is to utilize our existing large user base and nationwide distribution network to retain our existing users and attract new users. We employ a variety of traditional and online marketing programs and promotional activities, including in-game events, in-game marketing, open beta testing and offline efforts.

     We frequently organize in-game events for our users, which we believe encourages the development of virtual communities among our users and increases user interest in our games. Examples of in-game events include special challenges or features, such as fortress raids, introduced to the game environments for a scheduled period. In addition, we use in-game events to introduce users to new features of our games.

     Moreover, we frequently post announcements in the game environment of our MMORPGs to promote new features, other improvements to the games, and in-game events. We generally use these announcements to promote the game in which they are displayed.

     We have also sponsored contests among users, including in 2004, a contest co-sponsored with China Unicom in which top teams of players from each of several provinces in the PRC were identified through competition and then matched against one another. During the course of this competition, the game in which the competition was conducted was changed in order to focus the attention garnered by the competition onto a variety of our games. Also in 2004, we conducted a contest entirely in BNB in which successful players from the PRC were matched against players from Korea.

     Our open beta testing system both tests the operation of new games under open market conditions and introduces new games to users. During open beta testing, we do not charge users to play the new game. Open beta testing provides an initial user base and creates initial excitement and word-of-mouth publicity to support the commercial launch of the game.

     We also market new games through posters in Internet cafes that are part of our distribution network. In addition, in 2004, we posted advertisements in approximately 28 trade and industry newspapers and magazines and on approximately 74 Internet portals and online game websites. We conduct exhibitions at popular venues, where we will stage exhibitions, distribute software and game content-related merchandise, and interact directly with our user base. Furthermore, we sponsor select media events, such as an award show with MTV China, to promote our brand names and our games. We also intend to establish sales offices in a number of provinces in China to assist our local distributors in organizing promotion activities for our game offerings.

     In addition, our marketing teams organize and sponsor promotional events at Internet cafes, distribution points, and other venues frequented by game users. These efforts have included incentive arrangements with Internet cafes.

Customer Service

     We regard customer service as one of our key marketing tools and we are committed to providing superior customer service to our users. We provide service to our customers through three principal channels:

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     In addition, we offer bulletin board services that allow users to post questions to, and receive responses from, other users.

Technology Infrastructure

     We have developed an extensive technology infrastructure that supports the operation of our games across China. As of December 31, 2004, our server network for our game operations consisted of approximately 11,200 servers and 2,500 server annex equipment units with the capacity to accommodate up to 5.5 million concurrent online users.

     Due to the real-time interaction among thousands of users, the stable operation of our MMORPGs requires a significant number of servers and a significant amount of connectivity bandwidth. Due to China’s large geographical area and limitations on bandwidth, we have located game servers for our MMORPGs in a number of regions throughout China. As a result, our MMORPG users can play our games using servers located in their region and without exchanging data across the national network, thereby increasing the speed at which our games operate and enhancing the user experience.

     As of December 31, 2004, we owned approximately 50.5% of the servers in the server network used for our game operations, and we leased the remainder from telecommunications operators. All of the servers in the server network for our game operations are located on the premises of our hosting telecommunications operators.

Our Delivery Channels

     The primary delivery channel for our online games and other interactive entertainment content is the personal computer or PC. In addition, through Digital Red, we develop game content to be delivered through mobile phones. We are also exploring opportunities to expand the home based interactive entertainment market by delivering content through consol devices that allow users to access the Internet through their televisions.

Competition

     We compete primarily with other online game operators based in China. We believe that domestic operators, including us, are likely to have a competitive advantage over international service providers who enter the China market, as these international service providers are likely to lack operational infrastructure in China and content localization experience for the China market. We cannot assure you, however, that this competitive advantage will continue to exist, particularly if international operators establish joint ventures or form alliances with, or acquire, domestic operators. In addition, we compete for users against various offline games, such as console games, arcade game and handled games, as well as various other forms of traditional or other online entertainment.

Intellectual Property and Proprietary Rights

     We rely on copyright, trademark, trade secret and other intellectual property law, as well as non-competition, confidentiality and license agreements with our employees, suppliers, business partners and others to protect our intellectual property rights. Our employees are generally required to sign agreements acknowledging that all inventions, trade secrets, works of authorship, developments and other processes generated by them on our behalf are our property, and assigning to us any ownership rights that they may claim in those works. Despite our precautions, it may be possible for third parties to obtain and use intellectual property that we own or license without consent. Unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.

     As of December 31, 2004, we were the registered owner of 18 software copyrights, each of which we have registered with the State Copyright Bureau of the PRC.

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     As of December 31, 2004, we owned approximately 50 trademarks registered with the China Trademark Office, including “Shanda” in English and Chinese and had approximately 300 trademark applications pending with the China Trademark Office. We have also filed applications for trademark registration of “Shanda” in English and Chinese in a number of other jurisdictions, including Taiwan, Hong Kong, South Korea, the United States, India, Canada and New Zealand.

Regulatory Matters

     The online game industry in China operates under a legal regime that consists of the State Council, which is the highest authority of the executive branch of the PRC central government, and the various ministries and agencies under its leadership. These ministries and agencies mainly include:

     The State Council and these ministries and agencies have issued a series of rules that regulate a number of different substantive areas of our business, which are discussed below.

Foreign Ownership Restrictions

     PRC regulations currently limit foreign ownership of companies that provide Internet content services, which includes operating online games, to 50%. In addition, foreign and foreign-invested enterprises are currently not able to apply for the required licenses for operating online games in China. In order to comply with foreign ownership restrictions, we operate our online game business in China through Shanda Networking, which is wholly owned by Tianqiao Chen, our chairman and chief executive officer, and Danian Chen, our senior vice president, both of whom are PRC citizens, and through Nanjing Shanda and Hangzhou Bianfeng, which are subsidiaries of Shanda Networking. Under PRC law, we cannot hold the licenses and approvals necessary to operate our online games because those licenses and approvals can only be held by domestic PRC persons. We are not considered to be a domestic PRC person for this purpose. In the opinion of Yao Liang Law Office, our PRC legal counsel, (1) the ownership structures of our company, Shengqu and our PRC operating companies are in compliance with existing PRC laws and regulations, (2) our contractual arrangements with Shanda Networking and its shareholders are valid and binding, and will not result in any violation of PRC laws or regulations currently in effect; and (3) the business operations of our company, Shengqu and our PRC operating companies, as described in this annual report, are in compliance with existing PRC laws and regulations in all material aspects. There are, however, substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. Accordingly, we cannot assure you that the PRC regulatory authorities will not ultimately take a view that is contrary to the opinion of our PRC legal counsel. If the PRC government finds that the agreements that establish the structure for operating our China business do not comply with PRC government restrictions on foreign investment in the online game industry, we could be subject to severe penalties.

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Licenses

     There are a number of aspects of our business which require us to obtain licenses from a variety of PRC regulatory authorities.

     As ICP service providers, our PRC operating companies are required to either hold value-added telecommunications business operation licenses, or ICP licenses, issued by the Ministry of Information Industry or its local offices or be sublicensed by qualified ICP license holders. Moreover, ICP operators providing ICP services in multiple provinces, autonomous regions and centrally administered municipalities may be required to obtain an Inter-regional ICP license. Shanda Networking and Shanghai Shulong Technology Development Co., Ltd. have already obtained inter-regional ICP licenses, which both cover SMS service. Shanda Networking’s license also covers online bulletin board service. Nanjing Shanda and Hangzhou Bianfeng currently conduct ICP businesses by having sublicensing arrangements with Shanda Networking.

     Each ICP license holder that engages in the supply and servicing of Internet cultural products, which include online games, must obtain an additional Internet culture business operations license from the Ministry of Culture. Shanda Networking holds an Internet culture business operations license issued by the Ministry of Culture.

     The State Press and Publications Administration and the Ministry of Information Industry jointly impose a license requirement for any company that intends to engage in online publishing, defined as any act by an Internet information service provider to select, edit and process content or programs and to make such content or programs publicly available on the Internet. Shanda Networking holds an online publishing license issued by the State Press and Publications Administration. In addition, the Ministry of Culture requires us to submit for its content review and approval any online games we would like to import. If we import games without that approval, the Ministry of Culture may impose penalties on us, including revoking our Internet culture business operations license required for the operation of online games in China.

     The Ministry of Public Security imposes a license requirement for any company that intends to engage in the development and sales of computer and information system safety guard products. Shanda Networking holds a computer and information system safety guard products sales license issued by the Ministry of Public Security.

ICP License Sublicensing

     According to rules promulgated by the Ministry of Information Industry, an ICP service provider that has obtained an inter-regional ICP license shall conduct its business operations in provinces, autonomous regions and centrally administered municipalities as covered by its license within one year after acquiring the license. An inter-regional ICP service provider may authorize its subsidiaries or its branches to conduct an ICP business in licensed regions. If it authorizes its subsidiaries, the ICP service provider’s shareholding in such subsidiaries must be greater than 51%. Moreover, an ICP service provider shall not authorize two or more subsidiaries or branches to conduct the same ICP business in the same region. Shanda Networking has authorized Nanjing Shanda and Hangzhou Bianfeng to conduct ICP business in several regions. Nanjing Shanda is responsible for the east and central-south of China. Hangzhou Bianfeng is responsible for north-east China. Shanda Networking will continue to conduct online game business in residual regions, with its Xian branch, Beijing branch and its subsidiary Chengdu Jisheng Technology Co., Ltd. being respectively responsible for north-west China, north China and south-west China. Shanghai Shulong Technology Development Co., Ltd. is now in the process of setting up subsidiaries/branches and applying to the Ministry of Information Industry for permission to authorize its subsidiaries/branches to conduct ICP business in several regions.

Regulation of Internet Content

     The PRC government has promulgated measures relating to Internet content through a number of ministries and agencies, including the Ministry of Information Industry, the Ministry of Culture and the State Press and Publications Administration. These measures specifically prohibit Internet activities, which includes the operation of online games, that result in the publication of any content which is found to, among other things, propagate obscenity, gambling or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC, or compromise State security or secrets. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its websites.

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Regulation of Information Security

     Internet content in China is also regulated and restricted from a State security standpoint. The National People’s Congress, China’s national legislative body, has enacted a law that may subject to criminal punishment in China any effort to: (1) gain improper entry into a computer or system of strategic importance; (2) disseminate politically disruptive information; (3) leak state secrets; (4) spread false commercial information; or (5) infringe intellectual property rights.

     The Ministry of Public Security has promulgated measures that prohibit use of the Internet in ways which, among other things, result in a leakage of state secrets or a spread of socially destabilizing content. The Ministry of Public Security has supervision and inspection rights in this regard, and we may be subject to the jurisdiction of the local security bureaus. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its websites.

Import Regulation

     Our ability to license online games from abroad and import them into China is regulated in several ways. We are required to register with the Ministry of Commerce any license agreement with a foreign licensor that involves an import of technologies, including online game software into China. Without that registration, we cannot remit licensing fees out of China to any foreign game licensor. Furthermore, the State Copyright Bureau requires us to register copyright license agreements relating to imported software. Without the State Copyright Bureau registration, we cannot remit licensing fees out of China to any foreign game licensor and are not allowed to publish or reproduce the imported game software in China.

Publishing Regulation

     Our publishing activities include both online publishing and offline publishing. In order to engage in any online publishing business, we have obtained licenses from both the State Press and Publications Administration and the Ministry of Culture. We do not hold the required license to engage in offline publishing. In order to conduct our game related content publishing business, we cooperate with companies that are licensed to conduct such businesses.

Advertising Regulation

     According to PRC laws and regulations, in order to conduct advertising and related business, a company must have an approved business scope that covers such businesses. Currently, we conduct our advertising and related businesses primarily through our subsidiary, Shanghai Shengyue Advertisement Co., Ltd., which is licensed to conduct these businesses.

Intellectual Property Rights

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

Internet Cafe Regulation

     Internet cafes are required to obtain a license from the Ministry of Culture and the State Administration of Industry and Commerce, and are subject to requirements and regulations with respect to location, size, number of computers, age limit of customers and business hours. Although we do not own or operate any Internet cafes, many Internet cafes distribute our virtual pre-paid cards. The PRC government has announced its intention, and has begun, to intensify its regulation of Internet cafes, which are currently the primary venue for our users to play online games. Recently, the State Administration of Industry and Commerce and other related government agencies issued a notice to suspend issuance of new Internet cafe licenses for a six month period. While the specified suspension period is nominally over, the suspension remains functionally in effect and it is unclear when this suspension will be lifted. Intensified government regulation of Internet cafes could restrict our ability to maintain or increase our revenues and expand our customer base.

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Privacy Protection

     PRC law does not prohibit Internet content providers from collecting and analyzing personal information from their users. We require our users to accept a user agreement whereby they agree to provide certain personal information to us. PRC law prohibits Internet content providers from disclosing to any third parties any information transmitted by users through their networks unless otherwise permitted by law. If an Internet content provider violates these regulations, the Ministry of Information Industry or its local bureaus may impose penalties and the Internet content provider may be liable for damages caused to its users.

C. ORGANIZATIONAL STRUCTURE

     We are a holding company with no operations of our own. We are a Cayman Islands exempted company and we conduct our operations in China primarily through Shengqu, our indirectly wholly owned subsidiary. We and Shengqu are foreign or foreign-invested enterprises under PRC law and accordingly are ineligible to apply for a license to operate online games. In order to comply with foreign ownership restrictions, we operate our online game business in China through Shanda Networking, which is wholly owned by Tianqiao Chen, our chairman and chief executive officer, and Danian Chen, our senior vice president, both of whom are PRC citizens, and through Nanjing Shanda and Hangzhou Bianfeng, which are subsidiaries of Shanda Networking. Shanda Networking, Nanjing Shanda, Hangzhou Bianfeng, and other subsidiaries of Shanda Networking hold the licenses and approvals that are required to operate our online game business and to sell online advertising on our web pages, and Shengqu owns the substantial majority of physical assets. Shengqu has entered into a series of contractual arrangements with Shanda Networking and its shareholders. As a result of these contractual arrangements, we are considered the primary beneficiary of Shanda Networking and its subsidiaries (including the other PRC operating companies) and accordingly we consolidate the results of operations of Shanda Networking and its subsidiaries in our financial statements. However, neither we nor Shengqu owns the equity of the PRC operating companies, and, although we consolidate the results of the PRC operating companies in our consolidated financial statements and we can utilize their cash and cash equivalents in our operations through our contractual arrangements with Shanda Networking, we do not have direct access to the cash and cash equivalents or future earnings of the PRC operating companies. As of December 31, 2004, we had approximately RMB3,124.0 million (US$377.5 million) in cash and cash equivalents, of which RMB535.8 million (US$64.7 million) was held by Shanda Networking and its subsidiaries.

     Pursuant to our contractual arrangements with Shanda Networking and the other PRC operating companies, we provide services, software licenses and equipment to the PRC operating companies in exchange for fees. The principal service, software license and equipment lease agreements that we have entered into are:

     In addition, we have entered into agreements with Shanda Networking and its shareholders that provide us with the substantial ability to control Shanda Networking. Pursuant to these contractual arrangements:

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     Each of Shengqu’s contractual arrangements with Shanda Networking and its shareholders may only be amended with the approval of our audit committee or another independent body of our board of directors.

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     The following diagram illustrates our corporate and share ownership structure as of March 31, 2005:

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     Subsidiaries and Investee Companies

     The following table sets forth the direct and indirect subsidiaries and investee companies of Shanda Interactive Entertainment Limited.

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     The following table sets forth the direct and indirect subsidiaries and investee companies of Shanda Networking. Although we consolidate our results of operations with those of Shanda Networking and its subsidiaries, we do not own Shanda Networking or its subsidiaries.

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D. PROPERTY, PLANTS AND EQUIPMENT

     Our principal executive offices are located in approximately 14,500 square meters of office space in the No. 1 Office Building in Shanghai under a lease that expires in December 2008. We occupy approximately 2,000 square meters of additional leased office space and warehouse space in a number of locations in Shanghai and approximately 6,500 square meters of additional leased office space in Beijing, Shenzhen, Chengdu, Hangzhou, Guangzhou and Wuhan, China; Tokyo, Japan; and Santa Clara, California. We believe that our existing facilities are adequate for our current requirements and that additional space can be obtained on commercially reasonable terms to meet our future requirements.

Item 5. Operating and Financial Review and Prospects

     The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated financial statements and their related notes included in this annual report on Form 20-F. This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934, or 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”, or similar language. All forward-looking statements included in this annual report are based on information available to us on the date hereof, and we assume no obligations 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 provided under the caption “Risk Factors” in this annual report on Form 20-F. We caution you that our businesses and financial performance are subject to substantial risks and uncertainties.

     Our consolidated financial statements and the financial data included in this annual report reflect our reorganization and have been prepared as if our current corporate structure had been in existence throughout the relevant periods. See note 1 to our audited consolidated financial statements.

Overview

     We are an interactive entertainment company and one of the largest operators of online games in China. In 2004, our commercially launched games had approximately 2.0 million peak concurrent users and 1.1 million average concurrent users, which refer to the highest number and average number, respectively, of users playing our games at the same time during that period. We have experienced significant revenue and earnings growth since the commercial launch of our first massively multiplayer online role-playing game, or MMORPG, in November 2001. Over the past two years, our net revenue and income have increased significantly:

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     Significant factors affecting our financial condition and results of operations include:

     We continue to explore areas of interactive entertainment in addition to our traditional online game business. In augmenting our online game business, we are exploring broadening both the scope of content that we provide and the delivery channels through which we provide that content. We have introduced online chess and board games as well as original literature, and we plan to offer music and movies. We have also added content related merchandise and value added services such as our SMS, MMS and user password protection products. In order to expand the accessibility of our content and our user base, we are developing additional delivery platforms, such as mobile telephones and interactive television.

     In May 2004, we raised approximately US$105.8 million through an initial public offering of ADSs in the United States and in October 2004, we raised approximately US$269.0 million through a private placement of convertible notes. Since these events, we have continued to develop our business and expand our game offerings and operational platform, both through our in-house development efforts and strategic acquisitions and investment in other businesses.

Recent Acquisitions

     We continue to develop and expand our business through strategic acquisitions and investments. Since the completion of our initial public offering and listing on Nasdaq in May 2004, we have completed acquisitions and investments in businesses that specialize in, among other things, online chess and board games, infrastructure platforms for online and network PC games, mobile phone games, online games and online media, wireless value-added services and Internet portal services. We expect that these and other recent investments will allow us to expand our product offerings and to grow our user base.

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     Our recent purchases and acquisitions have included the following:

     From time to time, we may engage in discussions with third parties with respect to additional acquisitions or investments. We are actively examining the merits, risks and feasibility of several potential transactions, and expect to actively search for additional acquisition opportunities in the future. Such search and examination efforts, and any related discussions with third parties may or may not lead to future acquisitions and investments. Our reported financial results may be affected by any such acquisitions and/or investments, including any acquisitions or dispositions undertaken by us in anticipation of or in connection with any such acquisitions and/or investments. See “Risk Factors” in Item 3 “Key Information”.

Related Party Arrangements

     In order to comply with current foreign ownership restrictions, we operate our online game business in China through Shanda Networking, a company wholly owned by Tianqiao Chen, our chairman and chief executive officer, and Danian Chen, our senior vice president, both of whom are PRC citizens, and through Nanjing Shanda and

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Hangzhou Bianfeng, which are subsidiaries of Shanda Networking. Tianqiao Chen and Danian Chen, together with Qianqian Luo, also own all of the shares of Skyline Media Limited, our controlling shareholder. We have entered into a series of contractual arrangements with Shanda Networking and its shareholders. Pursuant to these contractual arrangements, we provide services, software licenses and equipment to the PRC operating companies in exchange for fees, and we have undertaken to provide financial support to the PRC operating companies to the extent necessary for their operations. As a result of these contractual arrangements, we are considered the primary beneficiary of the PRC operating companies and accordingly we consolidate the results of operations of the PRC operating companies in our financial statements. For a description of our contractual arrangements with Shanda Networking and its shareholders and with Nanjing Shanda and Hangzhou Bianfeng, see “Organizational Structure” in Item 4 and “Major Shareholders and Related Party Transactions” in Item 7.

A. OPERATING RESULTS

Net Revenues

     In 2004, we had net revenues of RMB1,298.7 million (US$156.9 million), of which net revenues from our online games were RMB1,209.2 million (US$146.1 million), accounting for approximately 93.1% of total net revenues, and net revenues from other sources were RMB89.5 million (US$10.8 million), accounting for approximately 6.9% of our net revenues. Our online game revenues are net of a sales discount, which in 2004 averaged approximately 23% and 15% of the face value of our pre-paid cards that we sell to our e-sales distributors and offline distributors, respectively. The sales discounts represent the difference between the price at which we sell pre-paid cards to distributors and the face value of the pre-paid cards. In addition we have begun to experience growth in other revenue areas, including short-messaging-services, or SMS, online advertising, new value-added products such as our user password protection product, and from sales of publications and other related products based on our games and characters, including game manuals and magazines. While we expect online game revenues to increase in 2005, we expect that over the longer term the rate of revenue growth for our existing online games will decline as a consequence of the maturation of the industry and increasing competition. We expect online games will continue to be our primary source of revenues for the foreseeable future, even as we add additional sources of revenue through new content and new delivery channels.

     Our net revenues reflect a deduction from our revenues for business taxes and related surcharges incurred in connection with our China operations. Since Shanda Networking and its subsidiaries operate in China, their revenues are subject to a business tax, at an effective rate of 5%, on revenues earned from services provided in the PRC. We deduct these amounts from our revenues to arrive at our net revenues. Due to local government financial incentives for qualified high technology companies that we currently benefit from in China, a portion of our revenues for which we previously paid business taxes in connection with our operations in China are currently refunded to us in the form of government financial incentives, generally two quarters after they have been incurred. Upon receipt, these government financial incentives are recognized as other income in our statements of operations and comprehensive income. Please see “Taxation” in Item 10 “Additional Information” and note 10 to our consolidated financial statements.

Sources of Revenues

     Online game revenues. We derive our online game revenues, which constitute substantially all of our revenues, from online game usage fees paid by users of our MMORPGs and casual games. Mir II and Woool are our two most popular MMORPGs and together have historically accounted for most of our revenues. We expect that Mir II and Woool will continue to be significant contributors to our revenues during their respective commercial lifecycles, however, the rate of growth in Mir II has slowed and this is a trend that we expect to continue as Mir II matures in its lifecycle. Revenues from casual games are primarily derived from BNB, a licensed casual game that we commercially launched in the third quarter of 2003. In 2004, casual games grew to provide a material contribution to our total net revenues for the first time, increasing from 1.4% of total net revenues in 2003 to 16.5% of total net revenues in 2004, and now include the online chess and board games we offer through Bianfeng. In 2004, we commercially launched two new in-house developed MMORPGs, The Sign and The Age, and two new licensed casual games, GetAmped and Maple Story. As a general matter, online games have a relatively short commercial lifecycle,

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typically four to five years for successful games. Consequently, we expect the percentage of our net revenues derived from particular games to change substantially over relatively short periods.

     Other net revenues. Our other net revenues, which are related to our online games primarily include net revenues from our user password protection products, game related merchandise, short messaging services, or SMS, and online advertising. In the future, we expect to generate net revenues from literature, music and movies.

Significant Factors

     Our MMORPG online game revenues are primarily derived from the purchase and utilization of playing time by our users. Accordingly, the two most significant factors that affect our MMORPG online game revenues are:

     We calculate our total user-hours based on our average concurrent users, which is a commonly used industry statistic. In a given period, the number of total user-hours equals the average concurrent users for that period multiplied by the number of hours in that period. In measuring average concurrent users, we determine the number of users logged on to each of our commercially launched games at one minute intervals, then average that data over the course of a day to derive daily averages. Average daily information is further averaged over a particular period to determine average concurrent users for that period. For a discussion of factors that might affect total user-hours, see “Risk Factors” in Item 3, “Key Information”.

     Our effective revenue per user-hour is derived by taking the revenues from our online games for a period and dividing this number by total user-hours in that period. This provides us with a measure of the average revenue per user-hour that we receive from users that play our games.

     Our casual online game revenues are recognized over the life of the premium features acquired by the user or as these premium features are consumed. The premium features are acquired by converting game points which are purchased by our users. Accordingly, the two most significant factors that affect casual online game revenue are:

     The number of active paying accounts for our casual games in any given period is equal to the number of accounts from which game points are utilized during such period. Our average revenue per paying account is equal to our casual game revenue (excluding revenue generated by Fortress II) for the given period divided by our active paying accounts in that period. For a discussion of factors that might affect the number of active paying casual game account and the average revenue per active paying account, see “Risk Factors” in Item 3, “Key Information”.

Revenue Collection

     Our online game revenues are collected through the sale of pre-paid cards, which we sell in both virtual and physical form, to third party distributors and retailers, including Internet cafes, as well as, to a lesser extent, through direct online payment systems. In most cases, we receive cash payments from these parties in exchange for delivery of the pre-paid cards. As a result, we generally do not have any accounts receivable relating to our online game revenues. We do not provide refunds to these distributors or retailers with respect to unsold inventories of pre-paid cards. We also collect online game revenues through two telecommunications service operators that bundle broadband access services for home users with our online games.

     Our other revenues are collected through mobile telecommunications service operators, in the case of certain of our SMS services, and through traditional sales channels in the case of our game-related publications, game content related products, online advertising sales and sales of our user password protection product. As of December 31, 2004, we had accounts receivable of RMB39.3 million (US$4.7 million) due mainly from mobile

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telecommunications service operators, which collect payment for SMS services from their customers and remit these amounts, net of commissions, to us, and from credit sales to telecommunications service providers.

Revenue recognition and deferred revenue

     We recognize revenues as the credits for playing time purchased by our users are used in playing our online games, and, in the case of our casual games (other than Fortress II), as credits are used to purchased premium features. We also recognize revenues when our users who had previously purchased playing time and/or points are no longer entitled to access the online games in accordance with our published expiration policy. We account for the amounts received upon the sale of pre-paid cards, but prior to usage or expiration of the value sold, as deferred revenue in our consolidated balance sheets. Deferred revenue is reduced as revenues are recognized. As our online game business has grown, our deferred revenue balances have increased from RMB111.2 million as of December 31, 2002, to RMB197.5 million as of December 31, 2003, and to RMB247.3 million (US$29.9 million) as of December 31, 2004.

Cost of Services

     Our cost of services primarily consists of ongoing licensing fees for online games, amortization of upfront licensing fees, server leasing and maintenance fees, salary and benefits, depreciation of property, equipment and software, and manufacturing costs of pre-paid cards.

     Upfront and ongoing licensing fees. The cost of licensing games from developers consists of upfront licensing fees, which are generally paid in several installments, and ongoing licensing fees, which are equal to a percentage of our revenues from the relevant licensed game. The ongoing licensing fee payments range from 21% of revenues to 22% of total sales before distributor discount for our commercially launched massively multiplayer online games, and from 15% to 30% of our revenues for our commercially launched casual games. The cost of licensing games accounted for approximately 24.3% of our net revenues in 2003 and 21.3% of our net revenues in 2004, and constituted the largest component of our cost of services in each such period. Six of the nine online games we offer commercially are licensed from third parties.

     In August 2003, we entered into an amendment agreement with Actoz that extended our license for Mir II, our most popular game, at least until September 2005 at which point we expect to again renew the license. Pursuant to the amendment agreement, we paid Actoz an upfront licensing fee of US$4.0 million, a portion of which has been amortized and reflected in our cost of services in 2003 and 2004. Since September 2003, our ongoing licensing fee for Mir II has been approximately 21% of the face value of the pre-paid cards that we sell with respect to Mir II without deducting discounts to distributors. As a result, any increase or decrease in our average distributor discount would result in a relative increase or decrease, respectively, of our ongoing Mir II licensing fees as a percentage of our net revenues.

     Server leasing and maintenance fees. Server leasing and maintenance fees totaled approximately 6.6% of our net revenues in 2003 and approximately 6.2% of our net revenues in 2004. We currently lease approximately 49.5% of our servers, primarily from telecommunications companies. These companies host our server network, and receive maintenance fees from us in addition to the lease payments. The majority of our server leases have variable payment obligations based on the number of our users logging on to each relevant server. This allows us to have excess capacity without incurring significant fixed costs. See “Contractual Obligations and Commercial Commitments” in this Item 5. We expect our costs for servers to increase in the future, as we add new games, add features to advance our network security and data traffic management systems, and address additional growth in our user base. Moreover, to ensure that we have sufficient network capacity to meet the needs of our users at all times, we generally increase our server capacity in line with the rate of increase in our peak concurrent users. In addition, recently we have been experiencing increases in our server leasing rates in connection with renewals of expiring server leases, which has led to an increase in our server leasing fees. We expect our server leasing rates to continue to increase as our server leases expire and we enter into new leases at higher rates.

     Depreciation of property, equipment and software. Depreciation of property, equipment and software, which consisted primarily of servers and other computer equipment, totaled approximately 2.3% of our net revenues in 2003 and approximately 2.2% of our net revenues in 2004. We include depreciation expenses within our cost of

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services when the relevant assets are directly related to the operations of our online game network and provision of online game services. Depreciation expenses are characterized as operating expenses in all other cases. As with server leasing and maintenance fees, our depreciation expenses have been significantly affected by the acquisition of additional servers (and related operating system software and data security software) as a result of our increased user base, and we expect that this trend will continue during 2005.

     Salary and benefits. Salary and benefits expense totaled approximately 2.3% of our net revenues in 2003 and for approximately 1.8% of our net revenues in 2004. Salary and benefits expense includes employee wages and welfare benefits, such as medical insurance, housing subsidies, unemployment insurance and pension benefits. Salary and benefits expense included in our cost of services primarily relates to employees involved in the operation of our online games, including network maintenance, billing systems and our call center. In 2003 and 2004, approximately 26.4% and 18.2%, respectively, of our salary and benefits expense was included in our cost of services, with the remainder constituting operating expenses. While our salary and benefits costs of services increased in absolute terms, the increase in our net revenues was greater, causing the cost of salary and benefits as a percentage of net revenues to decline in 2004 as compared to 2003. While we expect to continue to expand our workforce and incur growing costs of salary and benefits, we do not expect these costs to materially increase as a percentage of net revenues.

     Gross profit/margin. Gross profit represented 61.0% of our net revenues in 2003 and 63.7% of our net revenues in 2004.

Operating Expenses

     Our operating expenses consist of product development expenses, sales and marketing expenses, general and administrative expenses and share-based compensation expenses.

     Product development expenses. Our product development expenses primarily consist of salary and benefits expenses of personnel engaged in the research and development of our products, amortization of software used by our research and development center and outsourcing fees for the development of our online game products. We expect our product development expenses to continue to increase in the future, as we plan to increase expenditures relating to the research and development of in-house games. However, this will allow us to offer more in-house developed games, which will help us broaden our game offering and potentially reduce our licensing fees and cost of services as a percentage of our total net revenues in the future.

     Sales and marketing expenses. Our sales and marketing expenses primarily consist of promotion, advertising and sponsorship of media events, and salary and benefits of our sales and marketing department. We have increased, and plan to continue to increase, our marketing and promotional activities, both to increase our brand awareness and to promote new games and other content. Accordingly, we expect our sales and marketing expenses to increase in the future as we introduce more games and expand our product and service offerings.

     General and administrative expenses. General and administrative expenses primarily consist of salary and benefits for general management, finance and administrative personnel, depreciation of office equipment and other office expenses, and professional service fees. General and administrative expenses also include business tax expenses of RMB14.0 million, RMB19.8 million and RMB38.5 million (US$4.7 million) incurred due to intra-company transactions during the years ended December 31, 2002, 2003 and 2004, respectively. The nature of the business tax expenses incurred during 2002 was primarily due to the intra-company sale of pre-paid cards, while in 2003 (following our restructuring in March 2003) and in 2004, business tax expenses incurred related primarily to services and licensing fees paid by Shanda Networking to Shengqu pursuant to a number of agreements entered into in connection with our restructuring. We expect our general and administrative expenses to continue to grow as a result of a number of factors, including increases in our workforce and additional costs relating to compliance with the requirements of the Sarbanes-Oxley Act of 2002. See the sections entitled “Our Corporate Structure” and “Related Party Transactions” in Item 7 “Major Shareholders and Related Party Transactions”.

     Share-based compensation expenses. Share-based compensation expense consists of the amortized portion of deferred share-based compensation recognized by us. We recognized deferred share-based compensation expense when we issued options to purchase 1,537,367 of our ordinary shares to some of our managers in December 2003 at

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an exercise price of US$1.516 per share, which was below the fair value of our ordinary shares at that time. The amount of deferred share-based compensation expense was determined based on the estimated fair value of our ordinary shares at the time of grant, which was assumed to be the value per ordinary share implied by the initial public offering price of our ADSs. As a result, we recognized share-based compensation expense of RMB18.2 million in 2003 and RMB28.8 million (US$3.5 million) in 2004, of which RMB3.1 million (US$0.4 million) and RMB4.8 million (US$0.6 million), respectively, were recognized as cost of services, relating to the portion of these granted options that had vested during those respective periods. As of December 31, 2004, we had RMB20.6 million (US$2.5 million) of deferred share-based compensation, which will be amortized to the statements of operations and comprehensive income over the next one and a half years as the granted options vest. See notes 2(19) and 3 to our audited consolidated financial statements. We expect to adopt the guidelines established by the Financial Accounting Standards Board’s Statement No. 123R “Accounting for Share Based Compensation”, or Statement 123R, beginning January 1, 2006. Upon adoption, we will recognize share-based compensation relating to the unvested portion of the outstanding grants based on the fair value of the options as determined under SFAS No. 123 as discussed in note 2(19) to our consolidated financial statements. In the event that we grant share-based awards in the future, expense will be recognized based on the provisions of Statement 123R.

     Income from operations/margin. In 2003, our income from operations accounted for 35.5% of our net revenues. In 2004, our income from operations accounted for 39.3% of our net revenues.

Other Income

     Our other income consists primarily of government financial incentives that certain of our PRC incorporated affiliates receive from municipal governments and that are calculated with reference to taxable income and revenues. In 2003 and 2004, we received aggregate government financial incentives of RMB62.9 million and RMB88.1 million (US$10.6 million), respectively, from municipal governments. We expect to continue receiving government financial incentives relating to our 2004 taxable income and revenues into 2005, until those 2004 financial incentives are completed and we also expect to begin receiving certain similar financial incentives for periods beginning on January 1, 2005, although we cannot assure you that we will receive any of these financial incentives. See note 10 to our audited consolidated financial statements and the sections “PRC Enterprise Income Tax” and “PRC Business Tax and Financial Incentives” below in this Item 5 for a discussion of the financial incentives and their relationship to our tax expenses.

     Under the current laws of the Cayman Islands and the British Virgin Islands, neither Shanda Interactive Entertainment Limited nor Shanda BVI, our wholly owned subsidiary, is subject to tax on its income or capital gains. In addition, payment of dividends by either company is not subject to withholding tax in those jurisdictions.

     PRC enterprise income tax. Our PRC incorporated affiliates, including Shengqu, Shanda Networking, Nanjing Shanda and Hangzhou Bianfeng, are subject to PRC enterprise income tax on their taxable income.

     Under PRC Law, enterprise income tax is generally assessed at the rate of 33% of taxable income. However, because some of our PRC incorporated affiliates are registered in districts or zones with preferential tax rates, these companies either receive, or are in the process of applying to receive, preferential tax treatment. In particular, Shengqu and Shanda Networking are registered in the Pudong New District in Shanghai and as a result are entitled to a preferential tax rate of 15%. In addition, Nanjing Shanda and Hangzhou Bianfeng are located in high technology development zones and are currently applying for high technology enterprise status. If Nanjing Shanda and Hangzhou Bianfeng receive this status, they will enjoy one and two year income tax exemptions, respectively, beginning from January 1, 2005, and will subsequently enjoy a preferential tax rate of 15% and financial incentives. We expect that Nanjing Shanda and Hangzhou Bianfeng will receive approval for preferred tax rates and financial incentives before October 2005. Before receiving approval, Nanjing Shanda and Hangzhou Bianfeng will be subject to an assessed income tax rate of 33%, covering the period from January 2005 to September 2005. However, after receiving approval for financial incentive treatment, income tax already paid in 2005 prior to receipt of approval will be refunded.

     Shengqu, as a foreign-invested software development company, was also granted a two year enterprise income tax exemption by the central government tax bureau, commencing in 2003 and ending in 2004. During this period Shengqu was exempted from the requirement to pay enterprise income tax. This two year exemption is to be

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followed by a three year tax holiday during which Shengqu will be subject to a 7.5% enterprise income tax rate on its taxable income. PRC law specifies certain financial and non-financial criteria for a company to comply with in order to maintain its status as a software development company, including:

     Shengqu’s status as a software development company is re-assessed on an annual basis.

     PRC business tax and financial incentives. Our PRC entities are also subject to PRC business tax. We primarily pay business tax on gross revenues generated from online game operations, rentals, service fees and license fees. Shanda Networking, Hangzhou Bianfeng and Nanjing Shanda pay business tax on their gross revenues derived from online game operations at a rate of 5%, 5% and 3%, respectively, and this business tax is deducted from total revenues. In addition, Shengqu pays a 5% business tax on the gross revenues derived from its contractual arrangements with Shanda Networking, Hangzhou Bianfeng and Nanjing Shanda, and these taxes are primarily recorded in operating expenses.

     Shengqu and Shanda Networking currently receive government financial incentives from the municipal government that are calculated with reference to both their taxable income and taxable revenues. Government financial incentives are recognized as other income when received. To obtain these government financial incentives, these entities must qualify as new high technology enterprises. Although this qualification is granted at the discretion of the municipal government, the entity generally must meet certain financial and non-financial criteria, including:

     We also expect Nanjing Shanda to begin to receive government financial incentives for the period beginning January 1, 2005 in an amount equal to approximately 2.4% of Nanjing Shanda’s revenues recognized in prior periods and upon which business tax was previously paid at a rate of 3%. Hangzhou Bianfeng is also in discussions regarding certain government financial incentives that may also commence for periods beginning from January 1, 2005. Once granted, the income tax exemption will be retroactive to that date.

     In 2003 and 2004, Shengqu and Shanda Networking received aggregate government financial incentives of RMB64.9 million and RMB88.1 million (US$10.6 million), respectively. We expect to receive government financial incentives equal to 5% of Shengqu’s and Shanda Networking’s revenues recognized in prior periods and upon which business tax was previously paid at a rate of 5%. These government financial incentives are generally received on a two-quarter lag, subject to government practice which can be inconsistent. For example, we did not receive any such payments in the first quarter of 2004, but we have received payments in the subsequent quarters. For Shanda Networking, these government financial incentives expired at the end of 2004, with the final incentive payment expected to be received in 2005. For Shengqu, these government financial incentives will expire at the end of 2005, with the final incentive payment expected to be received in 2006.

     In addition, in 2005 we expect to receive government financial incentives equal to 3.5% of Shanda Networking’s taxable income for the year ended 2004 and upon which enterprise income tax was previously paid at a rate of 15%. For the years 2005 through 2008, we expect Shanda Networking to continue to receive these government financial incentives in an amount equal to 3.5% of its taxable income for the years ended 2004 through 2007. We also expect

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that Shengqu may be able to receive government financial incentives equal to 3.5% of Shengqu’s taxable income for the three years commencing in 2008, pursuant to a municipal government financial incentive that we qualify for, but that we cannot benefit from concurrently with the existing tax holiday granted by the central government tax bureau. The term and amount of any benefit we may receive under this municipal government financial incentive cannot be determined with certainty at this time, and could be reduced or eliminated prior to the expiration of our existing tax holiday granted by the central government tax bureau.

     Upon expiration of these government financial incentives, we will consider available options, in accordance with applicable law, that would enable us to qualify for further government financial incentives to the extent they are then available to us. The central government or municipal government could determine at any time to immediately eliminate or reduce these government financial incentives. If we had not received these government financial incentives in 2003, our net income would have been RMB219.4 million, a decrease of 19.6% from the reported amount. If we had not received these government financial incentives in 2004, our net income would have been RMB521.4 million (US$63 million), a decrease of 14.5% from the reported amount.

     We record income tax expense on our taxable income in our consolidated statements of operations and comprehensive income using the balance sheet liability method at the effective rate applicable to each of our PRC-incorporated affiliates. When we receive government financial incentives relating to taxable income on which enterprise income tax is levied or revenues on which business tax is levied, we record the amounts received as other income.

Critical Accounting Policies

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

Revenue Recognition

     Substantially all of our revenues are collected through the sales of pre-paid cards, which we sell in both virtual and physical form, to third party distributors and retailers. We recognize revenues as the credits for playing time purchased by our users are used in playing our online games, and, in the case of our casual games (other than Fortress II), as credits are used to purchase premium features. We also recognize revenues when our users who had previously purchased playing time and/or points are no longer entitled to access the online games in accordance with our published expiration policy. Our users must “activate” their pre-paid cards by using access codes and passwords to transfer the value of those cards to their personal game accounts. Under our current expiration policy, if a user’s personal game account remains unused and the user does not transfer additional value to the account over a six month period, we suspend the use of that account. Users may reactivate their suspended accounts by purchasing a new card and transferring its value to that account within one month after suspension. After this one month suspension, the account expires and any unused balance in that account may no longer be used. We account for the amounts received upon the sale of pre-paid cards, but prior to usage and expiration of the value sold, these amounts are accounted for as deferred revenue in our consolidated balance sheets. Deferred revenue is reduced as revenues are recognized.

     Portions of our deferred revenue are composed of the value from pre-paid cards which are activated but not fully used, or not used at all, and the value from cards which are sold to distributors, retailers or end users, for which we have received payment, but which have not yet been activated by users. In accordance with our published expiration policy described above and because we believe that the likelihood of our being required to render online game services in connection with certain inactive accounts are remote, we recognize revenues and related amounts of deferred expenses with respect to game accounts that have neither been utilized nor had value added to them for a

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period of seven months. As a result of this policy, we recognized additional net revenues of RMB21.6 million in 2003 and additional net revenues of RMB40.8 million (US$4.9 million) in 2004. We also recognized related expenses, mainly licensing costs, of RMB5.6 million and RMB10.3 million (US$1.2 million) in 2003 and 2004, respectively. We do not recognize revenues for pre-paid cards which are sold but not yet activated as we believe it is more likely than not that a majority of these cards will be activated in the future and we will be required to provide services related to those cards. Future usage may differ from the historical usage patterns on which we based our revenue recognition policy. The sales of our pre-paid cards to distributors and retailers include certain discounts from the face value of the cards. As we do not have control over, and generally do not know the ultimate selling prices of, these pre-paid cards, we recognize revenues from these transactions net of the discounts provided to the distributors.

Consolidation of Variable Interest Entities

     PRC regulations currently limit foreign ownership of companies that provide Internet content services, which includes the operation of online games, to 50%. In addition, foreign and foreign-invested enterprises are currently not able to apply for the licenses required to operate online games in China or to provide Internet information content (such as online advertising). We are a Cayman Islands exempted company and we conduct our operations in China solely through Shengqu, our indirect wholly owned subsidiary. We and Shengqu are foreign or foreign-invested enterprises under PRC law and accordingly are ineligible to apply for a license to operate online games or to sell online advertising. In order to comply with foreign ownership restrictions, we operate our online games business in China through Shanda Networking, which is wholly owned by Tianqiao Chen, our chairman and chief executive officer, and Danian Chen, our senior vice president, both of whom are PRC citizens, and through Nanjing Shanda and Hangzhou Bianfeng, which are subsidiaries of Shanda Networking. Shanda Networking, Nanjing Shanda and Hangzhou Bianfeng hold the licenses and approvals that are required to operate our online game business and to sell online advertising on our web pages and Shengqu owns the substantial majority of physical assets. Shengqu has entered into a series of contractual arrangements with Shanda Networking and its shareholders. As a result of these contractual arrangements, we are considered the primary beneficiary of Shanda Networking and accordingly we consolidate Shanda Networking’s results of operations in our financial statements.

Capitalized Development Costs

     We account for capitalized software development costs in accordance with Statement of Financial Accounting Standards, or SFAS, No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed”, as described in note 2(8) to our consolidated financial statements. Costs incurred prior to the establishment of technological feasibility are expensed when incurred and are included in product development expense. Once an online game product has reached technological feasibility, all subsequent online game product development costs are capitalized until that product is available for marketing. Technological feasibility requires significant judgment and is evaluated on a product-by-product basis, occurring once the online game has a proven ability to operate in a massively multiplayer environment in the PRC market. With respect to Woool, The Age and The Sign, we determined that technological feasibility was reached upon completion of closed beta testing, which involves inviting users to play the game in order to identify problems. After an online game is released, the capitalized product development costs are amortized as a component of cost of services over the estimated life of the game. During the year ended December 31, 2003, we capitalized game development costs of RMB1.3 million, which related to the development of Woool. During 2004, we did not capitalize any game development costs. We evaluate the recoverability of capitalized software development costs on a product-by-product basis. When our forecast of a particular game indicates that the unamortized capitalized costs exceed the net realizable value of the game, a charge will be made to cost of services to reduce the carrying amount of such asset to its net realizable value.

Property, Equipment and Software, Intangible Assets and Long-Lived Assets

     Our accounting for long-lived assets, including property, equity investments, equipment and software, and intangible assets, is described in notes 7 and 8 to our consolidated financial statements. The recorded values of long-lived assets, including property, equity investments, equipment and software, and intangible assets, are affected by a number of management estimates, including estimated useful lives and residual values and impairment charges. We assess impairment for long-lived assets whenever events or changes in circumstances indicate that the applicable carrying amount may not be recoverable. During the years ended December 31, 2002, 2003 and 2004, we did not record any impairment charges. If different judgments or estimates had been utilized, material differences could

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have resulted in the amount and timing of the impairment charge and the related depreciation and amortization charges.

     Our purchase of approximately 38.1% of the outstanding shares of Actoz included an open market purchase of approximately 9.1% and a negotiated purchase of the remaining 29%. Our aggregate purchase price and current carrying amount for this equity stake represents an 81% premium over the open market price at the time that we entered into the purchase purchase agreement in October 2004. Our willingness to pay a premium was primarily due to the potential synergies associated with closer cooperation between Actoz and Shanda, including securing access to existng and future Actoz game content for the China market, and gaining control of the board of directors of Actoz. Actoz is the co-licensor of Mir II, which accounted for approximately 47.4% of our net revenues in 2004. In the event that we do not realize the benefits that we expect from the purchase of the equity stake in Actoz commensurate with the premium paid, however, we may need to recognize impairment of our investment in Actoz, which may have a material and adverse impact upon our reported financial results.

Contingencies

     We are currently involved in various legal proceedings. We account for loss contingencies under the provisions of SFAS No. 5, “Accounting for Contingencies”, with the required disclosures as described in note 21 to our consolidated financial statements. We record loss contingencies when, based on information available, it is likely that a loss has been incurred and the amount of the loss can be reasonably estimated. Based on our current knowledge, which includes consultation with outside counsel handling our defense in these matters, we believe that we have made adequate provisions for current or unasserted claims. It is possible, however, that our future results of operations could be materially affected by changes in our estimates or in the effectiveness of our strategies relating to these proceedings. In connection with an alleged underpayment of royalty fees relating to Mir II, we have recorded an accrual of RMB23.4 million (US$2.8 million) as of December 31, 2004. See “Legal Proceedings” in Item 8, “Financial Information”.

Share-Based Compensation

     We have a stock option plan, which allows for the granting of stock options to certain senior executives, management, employees and directors. We account for this plan under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, or APB No. 25, the intrinsic value approach, with the required disclosures under the related accounting guidance described in note 2(19) to our consolidated financial statements.

     Intrinsic value, if any, is determined as the difference between estimated fair value of our ordinary shares on the grant date of an option and the exercise price for the option. On March 31, 2003, we granted options to purchase 7,320,436 of our ordinary shares to some of our directors and officers at an exercise price of US$1.516 per share, which approximated the estimated fair value of our ordinary shares on the grant date. When estimating the fair value of our ordinary shares, we review both internal and external sources of information. The sources utilized to determine the fair market value of the underlying shares at the date of measurement were, prior to our initial public offering in May 2004, subjective in nature. For our March 2003 option grants, the estimated fair value of our ordinary shares was based on, among other factors, our (1) financial condition as of the date of grant, (2) operating history and (3) financial and operating prospects at that time with reference to our issuance of convertible preferred shares in March 2003. On December 18, 2003, we granted options to purchase an additional 1,537,367 of our ordinary shares to some of our officers and managers at the same exercise price. Compensation expense was recognized based on the intrinsic value of our ordinary shares measured on that date. Estimated fair value of the Company’s ordinary shares on December 18, 2003 was determined with reference to the initial public offering price of our ordinary shares. In 2004, we granted options to purchase an additional 4,258,503 ordinary shares to some of our officers, directors and other employees, which have an exercise price equal to the market value of our ordinary shares at the time of grant. Accordingly, no share-based compensation expenses have been incurred in connection with our 2004 option grants to date. For purposes of 2004 grants made prior to our initial public offering in May of 2004, the fair value of our shares was equal to the initial public offering price of our ordinary shares. For purposes of 2004 grants made after the initial public offering, the fair value of our ordinary shares equaled the market value of such shares (in the form of ADS equivalents) on the Nasdaq at the time of grant.

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     We recognized compensation expense of RMB18.2 million in 2003 with respect to the options granted in December 2003. These options had the same exercise price as the options granted to our directors and officers in March 2003. We recognized compensation expense of RMB28.8 million (US$3.5 million) in 2004 with respect to options granted in 2003. See “Share-Based Compensation” included in this Item 5 and notes 2(19) and 3 to our consolidated financial statements for a discussion of the accounting methods applied to share-based compensation and expected changes to those accounting methods that we expect will increase our reported compensation expenses.

     We intend to adopt the guidelines established by Statement No. 123R beginning January 1, 2006. The guidelines set forth by Statement No. 123R require companies to expense the value of employee stock options and similar awards in a different manner than APB No. 25, which it supersedes. We expect that our share-based compensation expense would increase under Statement No. 123R for a given number of shares granted. Upon adoption, we will recognize share-based compensation relating to the unvested portion of the outstanding grants based on the fair value of the options as determined under SFAS No. 123. New options to be issued after the effective date will be recognized based on the provisions of Statement No. 123R. If we had applied the method prescribed by Statement No. 123R to our 2003 and 2004 figures for net income attributable to ordinary shareholders, these figures would have been reduced by approximately 3.7% and 6.8%, respectively. See note 3 to our consolidated financial statements for a discussion of these changes in accounting standards.

Income Taxes

     We account for income taxes under the provisions of SFAS No. 109, “Accounting for Income Taxes”, with the required disclosures as described in note 11 to our consolidated financial statements. Accordingly, we record valuation allowances to reduce our deferred tax assets when we believe it is more likely than not that we will not be able to utilize the deferred tax asset amounts based on our estimates of future taxable income and prudent and feasible tax planning strategies. As of December 31, 2002, 2003 and 2004, valuation allowances recognized were RMB2.4 million, RMB2.7 million and RMB3.8 million (US$0.5 million), respectively. Valuation allowances were provided for because it was more likely than not that we would not be able to utilize certain tax loss carryforwards generated by certain indirectly held subsidiaries. As of December 31, 2002, 2003 and 2004, we have recorded net deferred tax assets of RMB15.0 million, RMB22.1 million and RMB29.6 million (US$3.6 million), respectively. We do not believe any further valuation allowances to reduce our net deferred tax assets are necessary as we currently anticipate future taxable profits which will allow us to fully utilize our net deferred tax assets in the foreseeable future. If, however, events were to occur in the future which are not currently contemplated, that would not allow us to realize all or part of our net deferred tax assets in the future, an adjustment would result by way of a charge to income tax expense in the period in which such determination was made.

     Results of Operations

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

     Net revenues. Our net revenues increased from RMB600.0 million in 2003 to RMB1,298.7 million (US$156.9 million) in 2004.

     Our online game net revenues increased from RMB588.6 million in 2003 to RMB1,209.2 million (US$146.1 million) in 2004. Net revenues from MMORPGs increased by 71.4% from RMB580.3 million in 2003 to RMB994.7 million (US$120.2 million) in 2004. Net revenues from casual games increased from RMB8.3 million in 2003 to RMB214.5 million (US$25.9 million) in 2004.

     The increase in our net revenues from MMORPGs was primarily due to an increase in our average concurrent users. The average concurrent users of our MMORPGs increased by 73.1% from approximately 425,000 in 2003 to approximately 736,000 in 2004, although the average revenue per user-hour for our MMORPGs decreased 5.9% from RMB0.17 in 2003 to RMB0.16 (US$0.02) in 2004.

     The increase in net revenue from casual games was primarily due to an increase in the number of active paying accounts and average revenue per paying account, in particular with our casual game BNB and further with the addition of Bianfeng’s online chess and board games. For most of our casual games, users can play the game without any payment, but they are encouraged to purchase “game points” from us, which can be used to acquire

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premium features in the game that enhance users’ experience. The number of active paying accounts for our casual games increased by 51.6% from approximately 2,044,000 in the first quarter of 2004 to approximately 3,100,000 in the fourth quarter of 2004.

     Our other net revenue also increased from RMB11.4 million in 2003 to RMB89.5 million (US$10.8 million) in 2004. This increase in other net revenue was primarily due to increases in sales of user password protection products, SMS services, and to a significantly lesser extent, the commencement of online advertising sales in 2004. While we expect our other net revenue to continue to increase as we develop additional content and delivery platforms, we expect our online game revenues to continue to be the primary source of our net revenues.

     Cost of services. Our cost of services increased from RMB233.7 million in 2003 to RMB471.2 million (US$56.9 million) in 2004. This increase was primarily due to increases in our ongoing licensing fees for online games, amortization of upfront licensing fees, server leasing and maintenance fees, depreciation of property, equipment and software, salary and benefits, and manufacturing costs for pre-paid games cards, all of which were generally attributable to the significant increase in our business activity in 2004 relative to 2003.

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     Gross profit. As a result of the foregoing, our gross profit increased from RMB366.3 million in 2003 to RMB827.5 million (US$100.0 million) in 2004. Our gross profit margin, which is equal to our gross profit divided by our net revenues, was 63.7% in 2004 compared to 61.1% in 2003.

     Operating expenses. Our operating expenses increased from RMB153.1 million in 2003 to RMB316.6 million (US$38.3 million) in 2004. This increase was primarily due to increases in our product development, sales and marketing and general and administrative expenses as a result of the continued growth of our business in 2004. In addition, we incurred share-based compensation expense attributable to options granted in 2003.

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     Income from operations. As a result of the foregoing, our operating income increased from RMB213.2 million in 2003 to RMB511.0 million (US$61.7 million) in 2004. Our operating margin, which is equal to our operating profit divided by our net revenues, increased from 35.5% in 2003 to 39.3% in 2004.

     Income before minority interests and income tax expenses. Our income before minority interests and income tax expenses increased from RMB287.9 million in 2003 to RMB654.3 million (US$79.1 million) in 2004. This increase was primarily the result of a significant increase in income from operations, as well as the following:

     Income tax expenses. Our income tax expenses increased from RMB18.6 million in 2003 to RMB38.9 million (US$4.7 million) in 2004.

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     Net income. As a result of the foregoing, our net income increased by RMB336.6 million from RMB272.9 million in 2003 to RMB609.5 million (US$73.6 million) in 2004.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

     Net revenues. Our net revenues increased 83.9% from RMB326.2 million in 2002 to RMB600.0 million in 2003. This significant increase in net revenues was primarily due to the continued significant growth in our online game net revenues, which increased 80.5% from RMB326.1 million in 2002 to RMB588.6 million in 2003. The increase in our online game net revenues was principally a result of:

     The average revenue per user-hour for our MMORPGs was RMB0.17 in 2003 compared to RMB0.14 in 2002. In 2003, we also launched casual games, including BNB, our most popular casual game. Average revenue per user-hour for all our online games (including casual games) was RMB0.15 in 2003 compared to RMB0.14 in 2002.

     Our other net revenue, which primarily consisted of net revenues from our SMS, sales of game-related merchandise and provision of technical services, also increased from RMB0.1 million in 2002 to RMB11.4 million in 2003.

     Cost of services. Our cost of services increased 91.4% from RMB122.1 million in 2002 to RMB233.7 million in 2003. This increase was primarily due to increases in our ongoing licensing fees for online games, amortization of upfront licensing fees, server leasing and maintenance fees, salary and benefits, depreciation of property, equipment and software and manufacturing costs for pre-paid games cards, all of which were generally attributable to the significant increase in our business activity in 2003.

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     Gross profit. As a result of the foregoing, our gross profit increased 79.4% from RMB204.1 million in 2002 to RMB366.3 million in 2003. Our gross profit margin, which is equal to our gross profit divided by our net revenues, was 61.0% in 2003 compared to 62.6% in 2002.

     Operating expenses. Our operating expenses increased from RMB41.5 million in 2002 to RMB153.1 million in 2003. This increase was primarily due to increases in our product development, sales and marketing and general and administrative expenses as a result of the continued growth of our business in 2003. In addition, we incurred share-based compensation expense attributable to options granted in December 2003.

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     Income from operations. As a result of the foregoing, our operating income increased 31.1% from RMB162.6 million in 2002 to RMB213.2 million in 2003. Our operating margin, which is equal to our operating profit divided by our net revenues, decreased from 49.9% in 2002 to 35.5% in 2003.

     Income before minority interests, income tax expenses and extraordinary gain. Our income before minority interests, income tax expenses and extraordinary gain increased 77.3% from RMB162.4 million in 2002 to RMB287.9 million in 2003. This increase was primarily the result of a significant increase in other income, as well as increases in our interest and investment income.

     Income tax expenses. Our income tax expenses decreased 19.2% from RMB23.1 million in 2002 to RMB18.6 million and our effective tax rate decreased from 14% in 2002 to 6% in 2003. The decrease in our effective tax rate resulted primarily from the preferential tax treatment granted to Shengqu, as a software development company, exempting it from payment of enterprise income tax in 2003. The effects of the decrease in our effective tax rate were partially offset by an increase in non-deductible expenses, such as share-based compensation expense we incurred in 2003.

     Net income. As a result of the foregoing, our net income increased 95.9% from RMB139.3 million in 2002 to RMB272.9 million in 2003.

B. LIQUIDITY AND CAPITAL RESOURCES

Cash Flows and Working Capital

     To date, we have primarily financed our operations through internally generated cash, the sale of our preferred shares to an investor in March 2003, our initial public offering of ADSs in May of 2004 and the offering of the convertible notes in October 2004. As of December 31, 2004, we had approximately RMB3,124.0 million (US$377.5 million) in cash and cash equivalents, of which RMB535.8 million (US$64.7 million) was held by Shanda Networking and its subsidiaries. As of the same date, we had outstanding debt of RMB2,276.2 million (US$275.0 million) pursuant to the convertible notes. Our cash and cash equivalents primarily consist of cash on

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hand, demand deposits, and liquid investments with original maturities of three months or less that are placed with banks and other financial institutions. Although we consolidate the results of Shanda Networking and its subsidiaries in our consolidated financial statements and we can utilize its cash and cash equivalents in our operations, we do not have direct access to the cash and cash equivalents or future earnings of Shanda Networking or the other PRC operating companies. However, these cash balances can be utilized by us for our normal operations pursuant to our agreements with Shanda Networking that provide us with the substantial ability to control the PRC operating companies and their operations. See “Organizational Structure” in Item 4 and “Exchange Controls” in Item 10.

     The following table shows our cash flows with respect to operating activities, investing activities and financing activities in the years ended December 31, 2002, 2003 and 2004:

     We had net cash provided by operating activities of RMB807.3 million (US$97.5 million) in 2004, which was primarily attributable to an increase in our net income derived from our online games with additional contribution from advertising revenues, wireless value-added services revenue, and revenues from sales of game related merchandise. We had net cash provided by operating activities of RMB278.4 million in 2003 compared to RMB329.1 million in 2002. This decrease was primarily attributable to increases in upfront licensing fees, as well as decreases in licensing fees payable and taxes payable even though our net income and deferred revenue increased substantially during 2003.

     We had net cash used in investing activities of RMB615.7 million (US$74.4 million) in 2004. This was primarily due to our purchase of marketable securities, our purchase of property, equipment, software and intangible assets, and our acquisitions and investments in associated companies. This amount was partially offset by the repayment of an outstanding loan to an unrelated party and the proceeds from the disposition of short-term investments. We had net cash used in investing activities of RMB21.5 million in 2003. This was primarily attributable to our purchase of property, equipment and software, principally servers, a loan made by us, and the acquisition by Shanda Networking of two subsidiaries. This amount was partially offset by a decrease in our short-term investments. We had net cash used in investing activities of RMB159.9 million in 2002. Our net cash used in investing activities in 2002 was principally attributable to an increase in our holdings of short-term investments and our purchase of property, equipment and software.

     We had net cash provided by financing activities of RMB2,333.4 million (US$281.9 million) in 2004. This was primarily attributable to the net proceeds from our initial public offering in May 2004 of RMB875.5 million (US$105.8 million) and the net proceeds of our offering of the convertible notes in October 2004 of approximately RMB269 million (US$32.5 million). This amount was partially offset by a special dividend paid to our shareholders in March 2004 and the repurchase of 5,326,250 of our ordinary shares from SB Asia Infrastructure Fund for US$75.0 million, or $14.08 per ordinary share. We had net cash provided by financing activities of RMB165.0 million in 2003. This was primarily attributable to the proceeds from the sale of our preferred stock to an investor in March 2003, which was partially offset by deemed capital distributions related to the acquisition in March 2003 of substantially all of the business and operations of a related company. We did not engage in any financing activities in 2002.

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     We believe that our current cash and cash equivalents, cash flow from operations will be sufficient to meet our anticipated cash needs, including for working capital and capital expenditures, for at least the next twelve months. We may, however, require additional cash resources due to changed business conditions or other future developments. If these sources are insufficient to satisfy our cash requirements, we may seek to sell additional debt securities or equity securities or obtain a credit facility. The sale of additional convertible debt securities or equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in debt service obligations and could result in operating and financial covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. Please see “Exchange Controls” in Item 10 for a discussion of impediments to capital flows in and out of China.

     From time to time, we evaluate possible investments, acquisitions or divestments and may, if a suitable opportunity arises, make an investment or acquisition or conduct a divestment. Please see “Recent Acquisitions” in this Item 5 for a description of our significant investments, acquisitions and divestments.

     In connection with our recent acquisition of Digital Red and our agreement to increase our stake in Haofang to a majority stake, we have agreed to make additional payments based upon each company’s 2005 net income. Although it is difficult for us to estimate the 2005 net income for Digital Red and Haofang, and therefore difficult to estimate the amount of these earn-out payments, we currently do not expect such payments to exceed approximately $45 million. The actual amount of these payments will, however, depend upon the financial performance of Digital Read and Haofang, and may exceed our estimated maximum payment.

     Certain transactions out of the ordinary course of business have occurred since December 31, 2004 and have significantly affected our liquidity and capital resources. In February of 2005, we completed our acquisition of a 29% equity stake in Actoz, following our purchase in December 2004 of a 9% equity stake in Actoz, for an aggregate purchase price of US$106.1 million in cash. In February 2005, we also completed our acquisition of an approximately 19.5% stake in Sina at an aggregate purchase price of US$230.4 million. As a result of these purchases, as of February 28, 2005, our cash and cash equivalents were US$128.9 million, of which US$78.1 million was held by Shanda Networking and its subsidiaries.

C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.

     Our research and development efforts and plans consist of:

D. TREND INFORMATION

     Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2002 to December 31, 2004 that are reasonably likely to have a material effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

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E. OFF-BALANCE SHEET ARRANGEMENTS

We have not entered into any off-balance sheet arrangements:

F. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

     The following table sets forth our contractual obligations as of December 31, 2004:

     As of December 31, 2004, substantially all of our operating lease arrangements for servers and related services provide for the calculation of lease payments based on formulas that reference the actual number of users of the relevant servers. Our rental expenses under these operating leases were RMB11.4 million, RMB25.0 million and RMB55.7 million (US$6.7 million) in 2002, 2003 and 2004, respectively. As future lease payments for these arrangements are based on the actual number of users and thus cannot be reasonably estimated, they are not included in the minimum lease payments shown above. As of December 31, 2004, we did not have any material capital lease obligations.

     Apart from the foregoing, the convertible notes and certain of the earn-out commitments described above, as of December 31, 2004, we did not have any long-term debt obligations, operating lease obligations or purchase obligations. However, pursuant to the contractual arrangements between Shengqu, Shanda Networking and the shareholders of Shanda Networking, Shengqu has an option, exercisable at such time, if any, as it is legally permissible, to acquire 100% of the equity interest in Shanda Networking for RMB10.0 million or such lower amount as permitted by applicable law. In addition, Shengqu has agreed to indemnify the shareholders of Shanda Networking to the extent that they are subject to any legal or economic liabilities as a result of performing their obligations pursuant to their agreements with Shengqu. Furthermore, we have undertaken to provide financial support to Shanda Networking to the extent necessary for its operations. See Item 7 “Major Shareholders and Related Party Transactions” and “Organizational Structure” in Item 4.

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Capital Expenditures

     The following table sets forth our historical capital expenditures for the periods indicated. Actual future capital expenditures may differ from the amounts indicated below.

     Our capital expenditures in 2003 and 2004 principally consisted of purchases of, or investments in, our online game network infrastructure. We expect our capital expenditures in 2005 to primarily consist of purchases of additional servers, computer software, and equipment. In addition, we expect that our capital expenditures will increase significantly in the future as our online game business continues to develop and expand, and as we make technological improvements to our network infrastructure and enter into strategic investments or acquisitions. We also intend to upgrade our financial and accounting systems and internal control infrastructure. In addition to capital expenditures, we have substantial future cash needs for our planned future increases in sales, marketing, promotional and work force expenses.

Item 6. Directors, Senior Management and Employees

A. DIRECTORS AND SENIOR MANAGEMENT

     The following table sets forth certain information relating to our directors and executive officers. The business address of each of our directors and executive officers is No. 1 Office Building, No. 690 Bibo Road, Pudong New Area, Shanghai 201203, China.

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     Tianqiao Chen one of our co-founders, has served as the chairman of our board of directors and our chief executive officer since our inception in December 1999. Mr. Chen established Shanda Networking with Danian Chen in December 1999. Prior to establishing Shanda Networking, Mr. Tianqiao Chen served as the vice director of the office of the president of Kinghing Trust & Investment Co., Ltd. from 1998 to 1999. From 1994 to 1998, Mr. Chen served in various management positions with Shanghai Lujiazui Group. Mr. Tianqiao Chen holds a bachelor’s degree in economics from Fudan University. Mr. Tianqiao Chen was granted the Rising Business Star award by China Central TV, China’s official national television network, in its recent selection of China’s top annual business personalities for 2003. Mr. Tianqiao Chen is the brother of Danian Chen, our co-founder, and is married to Qianqian Luo, one of our directors.

     Jun Tang has served as our president since February 2004 and as our director since April 2004. Prior to joining us, Mr. Tang served as the president of Microsoft China Co., Ltd. from March 2002 to January 2004 and the general manager of Microsoft Asia product support and service and Microsoft Global Technical Engineering Center from January 1998 to March 2002. He received the Microsoft Chairman Bill Gates Award in 1998 and the Microsoft Top Honor Award in 2002 from Microsoft Corporation, and remains the honorary president of Microsoft China Co. Ltd. In 2002, he founded Intertex Company, a software and entertainment company, in California. Mr. Tang received his doctorate degree, master’s degree and bachelor’s degree in the U.S., Japan and China, respectively.

     Danian Chen one of our co-founders, established Shanda Networking with Tianqiao Chen in December 1999. Mr. Danian Chen served as our vice president and director of products until July 2003 and has served as a senior vice president since that time. Mr. Danian Chen has served on our board of directors since our inception. Prior to co-founding Shanda Networking, Mr. Danian Chen worked as an employee in Xinghui International Transport Company, Haijie Shipping Agency Company and Jinyi Network from September 1996 to November 1999. Mr. Danian Chen is Tianqiao Chen’s brother.

     Qianqian Luo has served as our director since our inception in December 1999. Ms. Luo previously served as our director of administration from November 1999 to July 2003 and vice president from July 2003 to February 2004. Ms. Luo served as a project manager at the investment banking department of Kinghing Trust & Investment Co., Ltd. from 1998 to 1999. Ms. Luo holds a bachelor’s degree in economics from Financial & Banking Institute of China. Ms. Luo is married to Tianqiao Chen.

     Hongliang Lu has served as our director since April 2004. Mr. Lu has been the president, chief executive officer and a director of UTStarcom, Inc., a prominent Chinese high-tech company, since June 1991. Mr. Lu holds a bachelor’s degree in civil engineering from the University of California, Berkeley.

     Ruigang Li has served as our director since April 2004. Mr. Li has served as the president of Shanghai Media Group, a multimedia conglomerate in Shanghai, since October 2002 and served as its assistant president from April 2002 to October 2002. Mr. Li currently serves as the chairman of board of directors of a number of subsidiaries of Shanghai Media Group. Mr. Li started his career in broadcast journalism as a reporter, then producer at Shanghai TV Station. From May 1998 to August 2001, Mr. Li worked for the Shanghai Municipal Government. Mr. Li holds a bachelor’s and master’s degree in journalism from Fudan University in Shanghai. He was a visiting scholar at Columbia University in New York from August 2001 to April 2002. Mr. Li has had extensive experience in the media and entertainment industry over the last ten years.

     W. Mark Evans has served as our director since April 2004. Mr. Evans has been a General Partner of Benchmark Capital, a U.K. based venture capital firm, since 2002 and currently serves on the boards of a number of private companies. Mr. Evans previously held a variety of senior management positions within Goldman Sachs, including serving as the Chairman of Goldman Sachs Asia from 1993 to 1997. Mr. Evans holds an MLitt in Economics from the University of Oxford and a BA in Economics from Queen’s University in Canada.

     Haibin Qu has served as our senior vice president since July 2003 and as our director since April 2004. Mr. Qu previously served as our vice president from September 2002 to June 2003, and served as our director of business development from February 2000 to August 2002. Previously, Mr. Qu served as a vice president of Shanghai Fuwei Technology Development Co., Ltd. from September 1996 to December 1999. Mr. Qu holds a bachelor’s degree in mechanics from Fudan University.

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     Shujun Li has served as our chief financial officer since November 2003 and vice president since July 2003. Mr. Li became a member of our board of directors in April 2005. Mr. Li previously served as our director of investment and overseas business from March 2002 to July 2003. Prior to joining us, Mr. Li served as a fund manager responsible for the establishment of Zhongrong Fund Management Company from January 2001 to October 2001 and a senior manager at the international business department of China Southern Securities Co., Ltd. from August 1997 to December 2000. Mr. Li holds a master’s degree in economics from Nankai University and a bachelor’s degree in English from Hebei Normal University.

     Qunzhao Tan has served as our chief technology officer since July 2003. Mr. Tan previously served as our director of research and development from November 1999 to July 2003. Prior to joining us, Mr. Tan worked as an assistant in the Institute of Clean Coal Technology of East China University of Science and Technology from July 1996 to November 1999. Mr. Tan holds a bachelor’s degree in chemical engineering from East China University of Science and Technology.

     Yanmei Zhang has served as our vice president since January 2005. Prior to joining us, Ms. Zhang served as Vice President at Sony China Corp. from January 1994 until December 2004. Ms. Zhang joined Sony America in New York in 1991 as international Human Resources specialist and served in that position until 1993. Ms. Zhang holds a master’s degree in Business Administration from University of South Carolina and a bachelor’s degree in English from Shanxi University.

     Jingying Wang has served as our vice president since July 2003. Ms. Wang previously served as our director of customer services from May 2002 to July 2003. Prior to joining us, Ms. Wang served as the customer services manager of Shanghai Waterman Drinks Co., Ltd. from December 2000 to May 2002, and the customer services supervisor of Hangzhou Marykay Cosmetics Co., Ltd. from 1998 to December 2000. Ms. Wang holds a bachelor’s degree in radio technology from Shanghai University.

Duties of Directors

     Under Cayman Islands law, our directors have a duty of loyalty to act honestly in good faith with a view to our best interests. Our directors also have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our amended and restated memorandum and articles of association. A shareholder has the right to seek damages if a duty owed by our directors is breached.

     The functions and powers of our board of directors include, among others:

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Terms of Directors and Executive Officers

     Each of our directors holds office until a successor has been duly elected and qualified unless the director was appointed by the board of directors, in which case such director holds office until the next following annual meeting of shareholders at which time such director is eligible for reelection. All of our executive officers are appointed by and serve at the discretion of our board of directors.

B. COMPENSATION

     In 2004, the aggregate cash compensation paid to our directors and executive officers as a group was RMB5.9 million (US$0.7 million). In addition, options to acquire an aggregate of 2,697,826 ordinary shares were granted to our directors and executive officers in 2004. We have no service contracts with any of our directors or executive officers that provide benefits to them upon termination.

Stock Option Plan

Stock Options

     The Shanda Interactive Entertainment Limited Incentive Plan, or the 2003 Plan, was adopted by the board of directors of Shanda BVI at a meeting on March 31, 2003. At the time, Shanda BVI was the ultimate holding company for our business. As a result of our restructuring in November 2003, Shanda BVI became our wholly owned subsidiary. Options to purchase 7,320,436 ordinary shares of Shanda BVI were initially granted by Shanda BVI in March 2003 to some of our directors and officers, and those options were replaced by options relating to ordinary shares of Shanda Interactive Entertainment Limited in December 2003 in connection with the share swap between Shanda Interactive Entertainment Limited and Shanda BVI. The 2003 Plan is intended to promote our success and to increase shareholder value by providing an additional means to attract, motivate, retain and reward selected directors, employees and other eligible persons.

     An aggregate of 13,309,880 ordinary shares, or 8.9% of our share capital, as diluted by the issuance of such ordinary shares, were reserved for issuance under the 2003 Plan. A total of 13,601,119 stock options have been granted, 8,857,803 were granted in 2003, 4,258,503 were granted in 2004, and 484,813 were granted in 2005. As of March 31, 2005, 4,147,856 stock options had been exercised and 326,027 had been cancelled, leaving 9,127,236 outstanding.

     The exercise price for all of the stock options we granted in 2003 is US$1.516 per share, the estimated fair market value of our ordinary shares on March 31, 2003, the date the first options were granted. We have recognized compensation expense of RMB18.2 million (US$2.2 million) in the year ended December 31, 2003 in connection with options granted in December 2003. The exercise price for the options granted by us in 2004 and 2005 was equal to the estimated fair value for those options at the time of grant.

     Our compensation committee administers the 2003 Plan and has wide discretion to award options. Subject to the provisions of the 2003 Plan and the above allocation targets, our compensation committee determines who will be granted options, the type and timing of options to be granted, vesting schedules and other terms and conditions of options, including the exercise price. Any of our employees may be granted options. The number of options awarded to a person, if any, is based on the person’s potential ability to contribute to our success, the person’s position with us and other factors chosen by our compensation committee.

     Generally, to the extent an outstanding option granted under the 2003 Plan has not become vested on the date the grantee’s employment by or service with us terminates, the option will terminate and become unexercisable. The maximum term of any option granted under the 2003 Plan is ten years.

     Our board of directors may amend, alter, suspend, or terminate the 2003 Plan at any time, provided, however, that our board of directors must first seek the approval of our shareholders and, if such amendment, alteration, suspension or termination would adversely affect the rights of an optionee under any option granted prior to that date, the approval of such optionee. Without further action by our board of directors, the 2003 Plan will terminate on March 30, 2013.

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     The table below sets forth the option grants made to our directors and executive officers pursuant to the 2003 Plan as of March 31, 2005:

C. BOARD PRACTICES

Board Committees

     Our board of directors has established an audit committee and a compensation committee.

Audit Committee

     Our audit committee currently consists of W. Mark Evans, Hongliang Lu and Ruigang Li. Our board of directors has determined that all of our audit committee members are independent directors within the meaning of Nasdaq Marketplace Rule 4200(a)(15) and meet the criteria for independence set forth in Section 10A(m)(3)(B)(i) of the Exchange Act.

     Our audit committee is responsible for, among other things:

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Compensation Committee

     Our current compensation committee consists of Ruigang Li, who is an independent director, Tianqiao Chen and Qianqian Luo.

     Our compensation committee is responsible for:

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Controlled Company

     We are a controlled company as defined under Nasdaq Marketplace Rule 4350(c)(5). As a result, for so long as we remain a controlled company as defined in that rule, we are exempt from some of the requirements of Nasdaq Marketplace Rule 4350(c), including the requirements that:

Corporate Governance

     Our board of directors has adopted a code of ethics, which is applicable to our senior executive and financial officers. In addition, our board of directors has adopted a code of conduct, which is applicable to all of our directors, officers and employees. We have made our code of ethics and our code of conduct publicly available on our website.

     In addition, our board of directors has adopted a set of corporate governance guidelines. The guidelines reflect certain guiding principles with respect to our board’s structure, procedure and committees. The guidelines are not intended to change or interpret any law or our amended and restated memorandum and articles of association.

     We also have established a disclosure committee, which is comprised of certain members of senior management. Pursuant to the disclosure committee’s charter, which was ratified by our board of directors, the disclosure committee is responsible for adopting, evaluating and overseeing our disclosure controls and procedures and internal financial controls.

D. EMPLOYEES

     As of December 31, 2004, we had 1,429 full-time employees. The following table sets forth the number of our employees by department as of December 31, 2004:

     As required by PRC regulations, we participate in various employee benefit plans that are organized by municipal and provincial governments, including housing, pension, medical and unemployment benefit plans. We are required under PRC law to make contributions to the employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local

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government from time to time. Members of the retirement plan are entitled to a pension equal to a fixed proportion of the salary prevailing at the member’s retirement date. In addition to the benefits that we are required to provide to our employees pursuant to PRC regulations, we also provide life insurance and supplemental medical insurance. The total amount of contributions we made to employee benefit plans in 2001, 2002, 2003 and 2004 was RMB0.4 million, RMB1.4 million, RMB5.4 and RMB13.7 million (US$1.7 million) respectively.

     Our employees who are PRC citizens are members of a labor union that represents employees with respect to labor disputes and other employee matters. The labor union does not, however, represent employees for the purpose of collective bargaining. We believe that we maintain a good working relationship with our employees and we have not experienced any significant labor disputes or any difficulty in recruiting staff for our operations.

     We enter into a standard annual employment contract with most of our officers, managers and employees. These contracts include a covenant that prohibits the officer, manager or employee from engaging in any activities that compete with our business during, and for three years after, the period of their employment with us.

E. SHARE OWNERSHIP

Please see Item 7.

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Item 7. Major Shareholders and Related Party Transactions

A. MAJOR SHAREHOLDERS

     The following table sets forth information with respect to the beneficial ownership, within the meaning of Section 13(d)(3) of the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act, of our ordinary shares, as of March 31, 2005, assuming the conversion of all preferred shares into ordinary shares for:

     Beneficial ownership includes voting or investment power with respect to the securities. Except as indicated below, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all ordinary shares shown as beneficially owned by them. Percentage of beneficial ownership is based on 139,992,110 ordinary shares outstanding as of March 31, 2005.

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     None of our existing shareholders has voting rights that will differ from the voting rights of other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.

     As of December 31, 2004, of the 139,960,328 outstanding ordinary shares, 20.66% percent of those ordinary shares are held in the United States by 71 institutional holders of record. The 71 institutional holders of record include Cede & Co., which holds shares as nominee for The Depository Trust Company, which itself holds shares on behalf of over 300 beneficial owners of our ordinary shares.

B. RELATED PARTY TRANSACTIONS

Shengqu/Shanda Networking Arrangements

     In order to comply with PRC regulations, through December 31, 2004, we have operated our online game business in China through Shanda Networking, a company wholly owned by Tianqiao Chen and Danian Chen, our founders and controlling shareholders, who are also PRC citizens. We have entered into a series of contractual arrangements with Shanda Networking and its shareholders, including contracts relating to the transfer of assets, the provision of services, software licenses and equipment, and certain shareholder rights and corporate governance matters.

     Each of Shengqu’s contractual arrangements with Shanda Networking and its shareholders may only be amended with the approval of our audit committee or another independent body of our board of directors.

     In December 2004, with an effective date of January 2005, we reorganized our online game operations in China, splitting such operations between three different companies, Shanda Networking, Nanjing Shanda and Hangzhou Bianfeng. Nanjing Shanda and Hangzhou Bianfeng are subsidiaries of Shanda Networking. Following this reorganization, each of these companies operates our online games in distinct provinces and regions across China. In connection with this reorganization, we entered into a series of contractual arrangements with Shanda Networking, Nanjing Shanda and Hangzhou Bianfeng and modified certain existing contractual arrangements with Shanda Networking.

     The following is a summary of the material provisions of these agreements. For more complete information you should read these agreements in their entirety. Directions of how to obtain copies of those agreements are provided in this annual report under “Documents on Display” included in Item 10 “Additional Information”.

Services, Software Licenses and Equipment

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Shareholder Rights and Corporate Governance

     Transfer of Ownership when Permitted by Law. Pursuant to a purchase option and cooperation agreement, or the purchase option agreement, entered into among Shengqu, Tianqiao Chen, Danian Chen and Shanda Networking on December 30, 2003, Tianqiao Chen and Danian Chen jointly granted Shengqu an exclusive option to purchase all of their equity interest in Shanda Networking, and Shanda Networking granted Shengqu an exclusive option to purchase all of its assets if and when (1) such purchase is permitted under applicable PRC law or (2) to the extent permitted by law, with respect to his individual interest, either Tianqiao Chen and Danian Chen ceases to be a director or employee of Shanda Networking or desires to transfer his equity interest in Shanda Networking to a third party. Shengqu may purchase such interest or assets by itself or designate another party to purchase such interest or assets. The exercise price of the option will be equal to the lower of RMB10 million or the lowest price permitted by PRC law, or a pro rata portion thereof for a purchase of a portion of the equity interest in, or assets of, Shanda Networking. Shengqu will bear the tax consequences of Tianqiao Chen and Danian Chen caused by any exercise by Shengqu of the option to purchase the equity interest in Shanda Networking. Following any exercise of the option, the parties will enter into a definitive share or asset purchase agreement and other related transfer documents within 30 days after written notice of exercise is delivered. Pursuant to the purchase option agreement, at all times before Shengqu acquires 100% of Shanda Networking’s shares or assets, Shanda Networking may not (1) sell, transfer, assign, dispose of in any manner or create any encumbrance in any form on any of its assets unless such sale, transfer, assignment, disposal or encumbrance is relating to the daily operation of Shanda Networking or has been disclosed to and consented to in writing by Shengqu; (2) enter into any transaction which may have a material effect on Shanda Networking assets, liabilities, operations, equity or other legal interests unless such transaction relates to the daily operation of Shanda Networking or has been disclosed to and consented to in writing by Shengqu; and (3) distribute any dividends to its shareholders in any manner, and Tianqiao Chen and Danian Chen may not cause Shanda Networking to amend its articles of association to the extent such amendment may have a material effect on

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Shanda Networking’s assets, liabilities, operations, equity or other legal interests except for pro rata increases of registered capital required by law.

     Voting Arrangement. Pursuant to two proxies executed and delivered by Tianqiao Chen and Danian Chen to Haibin Qu and Qunzhao Tan, respectively, on December 30, 2003, Tianqiao Chen and Danian Chen have granted Haibin Qu and Qunzhao Tan, who are employees of Shengqu, the power to exercise their rights as the shareholders of Shanda Networking to appoint directors, the general manager and other senior managers of Shanda Networking. Under the purchase option agreement, Tianqiao Chen and Danian Chen have agreed that (1) they will only revoke the proxies granted to Haibin Qu or Qunzhao Tan when either of the two individuals ceases to be an employee of Shengqu or Shengqu delivers a written notice to Tianqiao Chen and Danian Chen requesting such revocation, and (2) they, or either of them, as the case may be, will execute and deliver another proxy in the same format as the one dated December 30, 2003 to any other individual as instructed by Shengqu. Tianqiao Chen and Danian Chen have agreed that they will cause their successors to continue to fulfill such undertaking if and when either ceases to be a shareholder or director of Shanda Networking.

     Share Pledge Agreement. Pursuant to a share pledge agreement, dated December 30, 2003, Tianqiao Chen and Danian Chen have pledged all of their equity interest in Shanda Networking to Shengqu to secure the payment obligations of Shanda Networking under all of the agreements between Shanda Networking and Shengqu. Under this agreement, Tianqiao Chen and Danian Chen have agreed not to transfer, assign, pledge or in other manner dispose of their interests in Shanda Networking or create any other encumbrance on their interests in Shanda Networking which may have a material effect on Shengqu’s interests without the written consent of Shengqu.

     Financing Support. Pursuant to the purchase option agreement, Shengqu has agreed to provide or designate one of its affiliates to provide financing to Shanda Networking to the extent Shanda Networking needs such financing. To the extent that Shanda Networking is unable to repay the financing due to its losses, Shengqu agrees to waive or cause other relevant parties to waive all recourse against Shanda Networking with respect to the financing.

     Indemnifications. Shengqu has agreed to provide necessary support to and to indemnify Tianqiao Chen and Danian Chen to the extent that they are subject to any legal or economic liabilities as a result of performing their obligations pursuant to their agreements with Shengqu.

Other Related Party Transactions

     Shareholders Agreement. Pursuant to the terms of the shareholders agreement with shareholders who held shares prior to our initial public offering, at any time six months after the closing of the initial public offering, any such shareholder(s) holding of record at least 50% of registrable securities then outstanding may, on three occasions only, require us to effect the registration, on a form other than Form F-3, of all or part of the registrable securities then outstanding. Registrable securities are ordinary shares issued or issuable to the parties to the shareholders agreement other than ordinary shares which have been issued to the public.

     In addition, any holder of registrable securities may require us to effect a registration statement on Form F-3 (or any successor form or any comparable form for a registration in a jurisdiction other than the United States) for a public offering of registrable securities so long as the reasonably anticipated aggregate price to the public (net of selling expenses) would be at least US$1,000,000 and we are entitled to use Form F-3 (or a comparable form) for such offering. Holders of registrable securities may demand a registration on Form F-3 on unlimited occasions, although we are not obligated to effect more than one such registration in any six month period. Under certain circumstances, such demand registration may also include ordinary shares other than registrable securities.

     We are generally required to bear all of the registration expenses incurred in connection with one demand registration on a form other than Form F-3, unlimited Form F-3 and piggyback registrations, except underwriting discounts and selling commissions, as well as the registration expenses incurred in connection with any registration of ordinary shares owned by Skyline Media Limited.

     Special Dividend. Our board of directors declared a special cash dividend of US$23.2 million on March 5, 2004, which represented all of the distributable profits of Shengqu at the end of 2003. At the time this special dividend was approved, our board of directors was comprised of Tianqiao Chen, Danian Chen, Qianqian Luo, Andrew Yan and

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Jingsheng Huang. This special dividend was paid on April 29, 2004 out of available cash to our existing shareholders, Skyline Media Limited and SB Asia Infrastructure Fund L.P., pro rata in accordance with their existing shareholdings. Skyline Media Limited received approximately US$17.4 million and SB Asia Infrastructure Fund L.P. received approximately US$5.8 million. Tianqiao Chen, Danian Chen, and Qianqian Luo each own through their respective holding companies 40%, 30% and 30%, respectively, of the ownership interests in Skyline Media Limited. We do not expect to pay dividends on our ordinary shares in the foreseeable future.

     Repurchase of Ordinary Shares from SB Asia Infrastructure Fund L.P. On October 28, 2004 we repurchased 5,326,250 ordinary shares from SB Asia Infrastructure Fund for a price US$14.08 per ordinary share, or an aggregate price of US$75 million.

     Authorization Skyline Media Limited, Skyline Capital International Limited and Shanda Media Limited to purchase shares of Sina on behalf of the Company. On February 14, 2005, we entered into an agreement to purchase 688,015 shares of Sina Corp, an online media company, value-added service provider and Internet portal in China, at an aggregate purchase price of US$10.7 million from Skyline Media Limited, Skyline Capital International Limited and Shanda Media Limited, in connection with our strategic investment in Sina. This aggregate purchase price is equivalent to a US$15.59 per share purchase price, which represents the actual cost incurred by the sellers in purchasing the Sina shares less certain past profits realize by the sellers on behalf of us in connection with trading Sina shares.

Item 8. Financial Information

A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

     Please see Item 18 “Financial Statements” for our audited consolidated financial statements filed as a part of this annual report.

Legal Proceedings

     From time to time we may initiate legal proceedings in order to protect our contractual and property rights. On July 3, 2003, we initiated an arbitration in Singapore, under the auspices of the International Chamber of Commerce, or the ICC, against Actoz and Wemade, which are two online game developers based in South Korea, in order to resolve, among other things, certain disputes relating to the software license agreement between Shanda Networking and Actoz for Mir II.

     On June 29, 2001, we entered into a software license agreement with Actoz, pursuant to which Actoz granted us an exclusive license to operate Mir II in China for two years from the beginning of beta testing, with an automatic renewal for one year if not terminated by either party. Among other things, the agreement obligates Actoz to provide ongoing technical support to us in respect of Mir II, and to provide newer versions of the software to us as they are developed. We believe that, among other things, Actoz failed to provide technical support and failed to provide newer versions of the software as they were developed. The agreement provided that if one party violates any terms of the agreement, the other party is entitled to its rights under the agreement without fulfilling its obligations until the violating party provides an indemnity or remedy for its violation. Accordingly, from April 2002, we withheld payment of royalty fees from Actoz.

     In July 2002, Actoz informed us that it was unable to provide technical support for Mir II and that Wemade possessed the necessary know-how and was willing to provide the necessary technical support. On July 14, 2002, we entered into a supplemental agreement with Actoz and Wemade, pursuant to which the parties agreed, among other things:

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     In July 2002, we paid Actoz all of the royalty fees that we had withheld, subject to final audit. We believe, however, that additional breaches of the software license agreement occurred, and accordingly we withheld royalty payments again beginning in August 2002. On November 12, 2002, Wemade issued a termination notice with respect to the software license agreement and the supplemental agreement, and on January 24, 2003, Actoz issued a termination notice with respect to these agreements.

     In August 2003, we entered into a settlement agreement and an amendment agreement to the software licensing agreement with Actoz. Pursuant to the settlement agreement, we paid all outstanding royalty fees to Actoz, and we have continued to make all royalty payments to Actoz. The amendment agreement extended the term of the software license for Mir II for at least two years.

     Although we settled our disputes with Actoz and requested the discontinuation of the arbitration, Wemade has objected to our request for discontinuation of the arbitration, has filed counterclaims against us, and has filed cross-claims against Actoz. Wemade alleges, among other things, that it validly terminated the Mir II license on November 12, 2002. Wemade has requested an injunction against our use of the Mir II software, the return of the Mir II software and related databases, declarations that the software license agreement and the supplemental agreement have been terminated and that the settlement agreement and the amendment agreement are null and void, and payment of royalty fees and an unspecified amount of damages arising from, among other things, our use of the Mir II software after the alleged termination of the software license agreement and the supplemental agreement and alleged PRC-related intellectual property claims.

     On January 9, 2004, the ICC appointed a sole arbitrator to determine the dispute. On September 28, 2004, the terms of reference were finalized. In December 2004, the parties exchanged written submissions on certain jurisdictional issues that the arbitrator has indicated he will decide prior to determining the dispute. Oral hearings for the jurisdictional issues are scheduled to take place in June 2005. Determination of a dispute and publication of an ICC award typically takes approximately six months from the date the terms of reference are signed by the parties. In this case, however, a longer time period will be required before the ICC award is published, because of the necessity for the arbitrator to first make a determination on the jurisdictional issues.

     We understand that various claims have been made by both Wemade and Actoz in the Seoul District Court in South Korea concerning, among other things, Wemade’s lack of receipt from Actoz of a portion of the settlement payment that we paid to Actoz. We are not party to those proceedings in South Korea. On April 30, 2004, Actoz publicly announced that the Seoul District Court had made a ruling on a settlement with respect to certain disputes between Actoz and Wemade pending before the court. According to Actoz’s press release, the settlement between Actoz and Wemade provides for, among other things, recognition by Wemade of the validity of our license of Mir II. On May 3, 2004, Actoz and Wemade both informed the arbitrator in the ICC arbitration of their settlement in Korea.

     We believe we have valid defenses to Wemade’s counterclaims made against us in the arbitration. There are uncertainties associated with any arbitration, however, and we cannot assure you that Wemade will not make further claims in connection with the arbitration, or that the arbitrator would determine the issues in our favor or in the expected time period. We have and we will continue to vigorously defend against these and any other claims by Wemade.

     On October 8, 2003, Wemade filed a claim with the Beijing First Intermediate People’s Court, or the Beijing Court, against us and Beijing Lian Jin Century Scientific and Commercial Centre, a Beijing based distributor of our games, which alleged that we have infringed upon Wemade’s copyright and violated the PRC Anti-Unfair Competition Law with respect to Mir II in connection with our development and operation of Woool. In particular, Wemade has alleged that the Chinese name for Woool, which includes two characters from the Chinese name for Mir II, misleads users and that we previously encouraged users to switch from Mir II to Woool by permitting the transfer of game characters developed in Mir II to Woool. The claim was served on us on December 29, 2003. Wemade has alleged, among other things, that we have copied Mir II and elements of the Legend of Mir III, another game developed by Wemade, in developing Woool and that customers have been misled into thinking that Woool is

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a new version of Mir II. Wemade has requested the court to order us to stop operating Woool, destroy all data relating to Woool, stop distributing and marketing products related to Woool, take down the Woool website, stop selling pre-paid cards and related products with respect to Woool, and pay Wemade’s legal fees and related costs incurred by Wemade in connection with this litigation. On May 24, 2004, the Beijing court informed us that Actoz joined Wemade as a co-plaintiff in these proceedings.

     We believe that we have valid defenses to Wemade’s claims and we intend to vigorously defend against them. There are, however, uncertainties associated with any litigation, and we cannot assure you that Wemade will not make further claims in connection with the litigation, or that a court will determine the issues in our favor.

     In late March 2004, we received notice from Actoz relating to an audit on Mir II royalty fees prepared on behalf of Actoz pursuant to the settlement agreement. The audit alleged certain potential underpayments of royalty fees in respect of the period from July 1, 2002 to September 30, 2003 amounting to approximately RMB35 million. In addition, we received notice from Actoz relating to an audit of Mir II royalty fees prepared on behalf of Actoz for royalties accrued during the fourth quarter of 2003. The audit alleged certain potential underpayments of royalty fees for such period in an amount of approximately RMB2 million. Pursuant to our agreements with Actoz, we have the right to have an audit of the royalty fees prepared on our behalf. We are currently considering the details of these audits and believe adequate provision has been made. We cannot assure you, however, that further provisions will not need to be made in future periods. Please see note 21 to our consolidated financial statements included as a part of this annual statement.

Dividend Policy

     We declared a special cash dividend in the first quarter of 2004, that was paid on April 29, 2004, pro-rata out of available cash to our existing shareholders. We do not, however, expect to pay dividends on our ordinary shares in the foreseeable future. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business, and do not anticipate paying any cash dividends on our ordinary shares, or indirectly on our ADSs, for the foreseeable future.

     Future cash dividends, if any, will be declared at the discretion of our board of directors and will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors as our board of directors may deem relevant.

     Holders of ADSs will be entitled to receive dividends, subject to the terms of the deposit agreement, to the same extent as the holders of our ordinary shares, less the fees and expenses payable under the deposit agreement. Cash dividends will be paid by the depositary to holders of ADSs in U.S. dollars, subject to the terms of the deposit agreement. Other distributions, if any, will be paid by the depositary to holders of ADSs in any means it deems legal, fair and practical.

B. SIGNIFICANT CHANGES

     Since the date of the audited financial statements included as a part of this annual report, the following significant changes have occurred:

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     Please see “Recent Acquisitions” in Item 5, and note 23 to the audited financial statements included as part of this annual report.

Item 9. The Offer and Listing

A. OFFER AND LISTING DETAILS

Price Range of American Depositary Shares

     Our ADSs, each representing two of our ordinary shares, have been listed on The Nasdaq National Market since May 13, 2004. Our ADSs trade under the symbol “SNDA.” The following table provides the high and low sale prices for our ADSs on The Nasdaq National Market for each of the most recent six months. On May 26, 2005, the last reported sale price for our ADSs was US$35.00 per ADS.