Sohu.com (SOHU)

Non-Advertising Revenues

Non-advertising revenues include revenues principally from online game and wireless services.

Non-advertising Revenues

Non-advertising revenues are derived from online game, wireless and other services.

Non-advertising revenues were $75.1 million and $50.1 million, or 65% and 59% of total revenues for the three months ended March 31, 2009 and 2008, respectively.

For the three months ended March 31, 2009, non-advertising revenues consisted of revenues from online game of $61.6 million, from wireless of $13.4 million and from other services of $0.1 million. For the three months ended March 31, 2008, non-advertising revenues consisted of revenues from online game of $41.0 million, from wireless of $8.6 million and from other services of $0.5 million.

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Online game (conducted via Changyou). Our online game revenues are mainly derived from two MMORPGs, titled TLBB and BO. TLBB, launched on May 9, 2007, is our first in-house developed online game. BO was licensed from a Beijing-based independent game development studio and was launched in October 2004. We paid a one-time license fee in 2004 and we paid royalties until June 30, 2008 based on the revenues from the game. In 2007, we obtained the rights to the source codes of BO, and we own all enhancements and developments we make to BO.

For the three months ended March 31, 2009, online game revenues increased by $20.6 million to $61.6 million as compared to $41.0 million for the three months ended March 31, 2008. This was primarily due to the continuous revenue growth of TLBB during the year. For the three months ended March 31, 2009 and 2008, our revenues from TLBB in China were $54.4 million and $38.5 million, respectively. As of March 31, 2009, the total registered accounts of TLBB had reached 50.1 million, and its peak concurrent users were approximately 875,000 for the three months ended March 31, 2009.

The following table sets forth revenue derived from TLBB in China and related operating data:

Notes:

We started licensing our game TLBB to operators outside of the PRC in 2007. We began generating overseas licensing revenues from TLBB in Vietnam in August 2007 and in Taiwan and Hong Kong in April 2008. For the three months ended March 31, 2009 and 2008, our overseas licensing revenues were $2.3 million and $381,000, respectively. In addition, in 2008, we licensed TLBB in Malaysia and Singapore, and expect to begin generating revenues in Malaysia and Singapore in the second quarter of 2009.

For the three months ended March 31, 2009, our online game revenues from BO was $5.0 million, representing 8% of total online game revenues, as compared with $2.1 million for the three months ended March 31, 2008. For the three months ended March 31, 2009, we had approximately 154,000 active paying accounts for BO, and peak concurrent users of BO were approximately 95,000.

Substantially all of our online game revenues are collected through sale of our prepaid game cards, which we sell in both virtual and physical forms, to third party distributors and retailers, and through online sale of game points directly to game players. We account for proceeds from sale of prepaid game cards from distributors or retailers as receipts in advance from customers on our consolidated

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balance sheet, prior to activation or charge of the prepaid cards. Once a prepaid game card is activated or charged, to a specific game account, we account for the related amounts as deferred revenues. We account for proceeds from online sale of game points directly to game players as deferred revenues.

As of March 31, 2009, we had receipts in advance and deferred revenues of $21.3 million in China and overseas, as compared with $11.7 million as of March 31, 2008.

We expect online game revenue to increase in the second quarter of 2009 as compared to the first quarter of 2009.

Wireless. Our wireless revenues include SMS, RBT, WAP, MMS and IVR services. Because of restrictions on foreign companies operating in the PRC telecommunications industry, we have used our VIEs to contract on our behalf with PRC mobile network operators who provide the gateway for sending messages and collect our fees from customers. Our VIEs collect the fees from the operators and we then transfer the fees to our subsidiaries on a periodic basis. Our wireless services include news, weather forecast, chatting, entertainment information, music, ring tone, and logo downloads and various other related products provided to mobile phone users. Most of our services are charged on a monthly or per message/download basis. For the three months ended March 31, 2009, we normally charged monthly fees ranging from $0.073 to $3.658 and per message/download fee ranging from approximately $0.007 to $0.585.

For the three months ended March 31, 2009, our wireless revenues increased by $4.8 million to $13.4 million as compared to $8.6 million for the three months ended March 31, 2008, primarily due to an increase of $3.3 million in SMS revenues and an increase of $2.0 million in RBT and IVR revenues. This increase was partially offset by a decrease of $0.3 million in MMS and $0.2 million in WAP revenues. The increase in SMS and IVR revenue was primarily due to successful product distribution programs, and the increase in RBT revenue was because of our continued market development effort and product diversification.

We expect wireless revenues to steadily increase in the second quarter of 2009 as compared to the first quarter of 2009.

Others. Other services mainly consist of sales of software to third parties, provision of applications service provider (“ASP”) services, office space rental income and construction of websites. For the three months ended March 31, 2009 and 2008, revenues for other services were $117,000 and $506,000, respectively.

Non-Advertising Revenues

Non-advertising revenues include revenues principally from online game and wireless services.

Online game revenues from our current MMORPG operations in China are earned by providing online services to game players pursuant to the item-based revenue model. For periods prior to our upgrading and re-launching of BO in December 2006, we operated BO under the time-based revenue model, where game players are charged based on the time they spend playing the game. Under the item-based revenue model, game players play games free of charge and are charged for purchases of virtual items.

Online game revenues are collected through sale of our prepaid game cards. We sell virtual and physical prepaid game cards to regional distributors, who in turn sub-distribute to retail outlets, including Internet cafés, various websites, news stands, software stores, book stores and retail stores. We typically collect payment from our distributors upon delivery of our prepaid game cards.

Under both the item-based and the time-based revenue models, proceeds received from sales of prepaid cards are initially recorded as receipts in advance. For the item-based revenue model, revenue is recognized over the estimated lives of the virtual items purchased or as the virtual items are consumed. For the time-based revenue model, revenue is recognized based upon the actual usage of time units by the game players. The revenues are recorded net of business tax, sales discounts and rebates to our distributors.

Under our item-based revenue model, game players can access our games free of charge, but may purchase consumable virtual items, including those with a pre-determined expiration time, such as three months, or perpetual items, such as certain costumes that remain bound to a game player for the life of the game. Revenues in relation to consumable virtual items are recognized as they are consumed, as our services in connection with these items have been fully rendered to our game players as of that time. Revenues in relation to perpetual virtual items are recognized over their estimated lives. We will provide continual online game services in connection with these perpetual virtual items until they are no longer used by our game players. We have considered the average period that game players typically play our games and other game player behavior patterns to arrive at our best estimates for the lives of these perpetual virtual items. We have also considered that the estimated lives of perpetual virtual items may be affected by various factors, including the acceptance and popularity of expansion packs, promotional events launched and market conditions. However, given the relatively short operating history of our games, and of our most popular game TLBB in particular, our estimate of the period that game players typically play our games may not accurately reflect the estimated lives of the perpetual virtual items. We have adopted a policy of assessing the estimated lives of perpetual virtual items on a quarterly basis. All paying users’ data collected since the launch of the games are used to perform the relevant assessments. Historical behavior patterns of these paying users during the period between their first log-on date and last log-on date are used to estimate the lives of perpetual virtual items. While we believe our estimates to be reasonable based on available game player information, we may revise such estimates in the future as our games’ operation periods become longer and we continue to gain more operating history and data. Any adjustments arising from changes in

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the estimates of the lives of the virtual items would be applied prospectively on the basis that such changes are caused by new information indicating a change in the game player behavior patterns. Any changes in our estimate of lives of perpetual virtual items may result in our revenues being recognized on a basis different from prior periods’ and may cause our operating results to fluctuate.

Prepaid game cards will expire two years after the date of card production if they have never been activated. The proceeds from the expired game cards are recognized as revenue upon expiration of cards. In contrast, once the prepaid game cards are activated and credited to a player’s personal game account, they will not expire as long as the personal game account remains active. We are entitled to suspend and close a player’s personal game account if it has been inactive for a period of 180 consecutive days. The unused balances in an inactive player’s personal game account are recognized as revenues when the account is suspended and closed. For the years ended December 31, 2008, 2007 and 2006, we recognized revenues in connection with expired un-activated prepaid game cards and unused balances of activated prepaid game cards in an inactive account amounting to approximately $173,000 and $150,000 and $380,000, respectively.

We also derive online game revenues from licensing our games in other countries and territories. These licensing agreements provided for two revenue streams, namely an initial license fee and a monthly revenue-based royalty fee based on monthly revenues from the games and sales from ancillary products of the games. The initial license fee is based on both a fixed amount and additional amount receivable upon achieving certain sales targets. Since we are obligated to provide post-sales services such as technical support and provision of updates and when-and-if-available upgrades to the licensees during the license period, the initial license fee from licensing arrangement is recognized as revenue ratably over the license period. The fixed amount of the initial license fee is recognized ratably over the remaining license period from the launch of the game, and the additional amount is recognized ratably over the remaining license period from the date such additional amount is certain. The monthly revenue-based royalty fee is recognized when earned, provided that collectability is reasonably assured.

Wireless revenues are derived from providing SMS, RBT, WAP, MMS and IVR, mainly consisting of news, weather forecast, chatting, entertainment information, ring tones, and logo downloads and various other mobile related products provided to mobile phone users. Wireless service fees are charged on a monthly or per message/download basis. Wireless revenues and cost of revenues are recognized in the month in which the service is performed, provided no significant obligations remain. We rely on mobile network operators in China to bill mobile phone users for wireless service fees. In order to meet ownership requirements under PRC law which restrict or prohibit wholly foreign owned enterprises from providing Internet information and value-added telecommunication services such as wireless, we rely on Sohu Internet and GoodFeel to contract with the mobile network operators. Generally, (i) within 15 to 120 days after the end of each month, Sohu Internet or GoodFeel receives statements from each of the operators confirming the amount of wireless service charges billed to that operator’s mobile phone users and (ii) within 30 to 180 days after delivering monthly statements, each operator remits the wireless service fees, net of its service fees, for the month to Sohu Internet or GoodFeel. In order to recognize revenue and be paid for services provided, we rely on billing confirmations from the mobile network operators as to the actual amount of services they have billed to their mobile customers. We are unable to collect certain wireless services fees from an operator in certain circumstances due to technical issues with the operator’s network. This is referred to as the “failure rate”, which can vary from operator to operator. At the end of each reporting period, where an operator has not provided Sohu Internet or GoodFeel with the monthly statements for any month confirming the amount of wireless service charges billed to that operator’s mobile phone users for the month, we, using information generated from our own internal system and historical data, make estimates of the failure rate and collectable wireless service fees and accrue revenues accordingly. The quarterly historical differences in our estimated revenues which were recorded in the financial statements compared to the actual revenue have ranged from an underestimation of $538,000 (gross margin underestimate of $286,000) to an overestimation of $340,000 (gross margin overestimate of $171,000) since 2002 when wireless revenues began representing a significant portion of our total revenues. We believe we have the ability to make a reasonable estimate. However, differences between the actual failure rate and bad debt rate per an operator’s statement and our internal estimates could result in material differences in the amount and timing of our revenue and cost of non-advertising revenue for any period. For the three months ended December 31, 2008, 71% of our estimated wireless revenues were confirmed by the monthly statements received from the mobile network operators.

Our management must determine whether to record our wireless revenues using the gross or net method of reporting. Determining whether revenue should be reported gross or net is based on an assessment of various factors, the primary factor is whether we are acting as the principal in offering services to the customer or whether we are acting as an agent in the transaction. To the extent we are acting as a principal in a transaction, we report as revenue the payments received on a gross basis, and report as costs of revenue the amounts attributable to services provided by mobile network operators and other vendors. To the extent we are acting as an agent in a transaction, we report on a net basis as revenue the payments received less commission and other payments to third parties. Whether we are serving as principal or agent in a transaction is judgmental in nature and is determined by evaluating terms of the arrangement.

Based on our assessment, the majority of our wireless revenues are recorded on a gross basis. We have primary responsibility for fulfillment and acceptability of the wireless services. The content and nature of the wireless services are designed and developed by us (either independently or with third parties) and are originate from our Websites, our links located on third parties’ Websites, or one of our dedicated phone numbers. The mobile network operators that we contract with to deliver these services to the end customers are not involved in the design or development of the services that are provided by us. The end customers purchase the wireless

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content, community access or value-added services, such as news, weather forecast, chatting, entertainment information, ring tones, and logo downloads and various other mobile related products provided to mobile phone users. The end customers receive identical services from us regardless of which mobile network operator is used to deliver the message. In addition, we provide customer services to the end customers directly and we could be requested by the mobile network operators to assume the credit risk if the operators are not able to collect fees from the end customers. We have determined that in addition to the indicators of gross reporting, there are also certain indicators of net reporting, including the fact that the mobile network operators set maximum prices that we can charge and that the mobile network operators also have the right to set requirements and procedures associated with using their platform. However, we have determined that the gross revenue reporting indicators are stronger, because we are the primary obligor, who adds value to the products. We also have inventory risk related to content and products, and have reasonable pricing latitude.

To the extent revenues are recorded on a gross basis, any commissions or other payments to third parties are recorded as costs or expenses so that the net amount (gross revenues, less costs and expenses) flows through to operating income. Accordingly, the impact on operating income is the same whether we record the revenue on a gross or on a net basis.

Non-advertising Revenues

Non-advertising revenues are derived from online game, wireless and other services.

Non-advertising revenues were $69.7 million and $42.5 million, or 37% and 32% of total revenues for the years ended December 31, 2007 and 2006, respectively.

For the year ended December 31, 2007, non-advertising revenues consisted of revenues from online game of $42.1 million, from wireless of $26.3 million and from other services of $1.3 million. For the year ended December 31, 2006, non-advertising revenues consisted of revenues from online game of $8.5 million, from wireless of $32.6 million and from other services of $1.4 million.

Online game. Our online game revenues are mainly derived from two game titles, TLBB and BO. TLBB is our first in-house developed online game and was launched on May 9, 2007. BO was licensed from a local independent game development studio and was launched in October 2004.

For the year ended December 31, 2007, online game revenues increased by $33.6 million to $42.1 million as compared to $8.5 million for the year ended December 31, 2006. This was primarily due to the commercial launch of TLBB in May 2007, with total revenue of $35.2 million in 2007, representing 84% of total online game revenues. As of December 31, 2007, the total registered accounts of TLBB had reached 23 million. Peak concurrent users of TLBB had exceeded 500,000 for the year ended December 31, 2007.

The following table sets forth revenue derived from TLBB in China and related operating data:

Notes:

The success of TLBB in China has enabled us to license the game in the overseas market. In August 2007, we licensed TLBB to an operator in Vietnam. For the year ended December 31, 2007, we recorded revenues of $345,000 for the license fees and usage-based royalties from this arrangement.

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Substantially all of our online game revenues are collected through sale of our prepaid game cards, which we sell in both virtual and physical form, to third party distributors and retailers, and through online sale of game points directly to game players. We account for proceeds from sale of prepaid game cards from distributors as receipts in advance from customers in our consolidated balance sheet, prior to their activation or charge of the prepaid cards. Once a prepaid game card is activated or charged to a specific game account, we account for related amounts as deferred revenues.

As of December 31, 2007, we had receipts in advance from customers of $6.1 million and deferred revenues of $2.1 million, as compared with $0.7 million and $0.3 million, respectively, as of December 31, 2006.

Wireless. Our wireless revenues include SMS, RBT, WAP, MMS and IVR services. Because of restrictions on foreign companies operating in the PRC telecommunications industry, we have used our VIEs to contract on our behalf with PRC mobile network operators who provide the gateway for sending messages and collect our fees from customers. Our VIEs collect the fees from the operators and we then transfer the fees to our subsidiaries on a periodic basis. There was no material impact in 2007 on our revenues or margins from our reliance on these related party arrangements. Our wireless services include news, weather forecast, chatting, entertainment information, ring tone, and logo downloads and various other related products provided to mobile phone users. Most of our services are charged on a monthly or per message/download basis. For the year ended December 31, 2007, we ordinarily charged monthly fees ranging from approximately $0.065 to $4.037 and per message/download fees ranging from approximately $0.006 to $0.538.

For the year ended December 31, 2007, our wireless revenues decreased by $6.3 million to $26.3 million as compared to $32.6 million for the year ended December 31, 2006, primarily due to decreases of $5.7 million in SMS revenues and $4.6 million in WAP revenues and MMS revenues. This decrease was partially offset by an increase of $4.0 million in RBT revenues and IVR revenues. The decrease in SMS revenues was primarily due to the ongoing negative impact of policies such as double confirmation, billing reminders and details of promotion adopted by SPs issued by mobile network operators starting from July 2006. The decrease in WAP revenues was primarily due to the continuing negative impact of operational policy changes, which include limitations on promotion activities for WAP products and the sending of fee reminders to WAP service users, implemented by a mobile network operator in late 2006. The increase in RBT and IVR revenue in 2007 was because of our continued market development effort and product diversification.

Others. Our other services mainly consist of office space rental income, sales of software to third parties, provision of applications service provider (or ASP) services and construction of websites. For the years ended December 31, 2007 and 2006, revenues for other services were $1.3 million and $1.4 million, respectively.

Non-advertising Revenues

ii) Non-advertising revenues

Non-advertising revenues include revenue principally from online game and wireless services.

The Company earns online game revenue through providing MMORPGs to players pursuant to the item-based revenue model. Under the item-based model, the basic game play functions are free of charge and players are charged for purchases of in-game virtual items. Prior to December 2006, the MMORPGs were operated under the time-based revenue model, whereby players are charged based on the time they spend playing games.

Game revenues from domestic operations are collected through sale of the Company’s prepaid cards, which it sells in both virtual and physical forms to third-party distributors.

For games which use the item-based revenue model, proceeds from sale of prepaid cards are deferred when received and revenue is recognized over the estimated lives of the virtual items purchased or as the virtual items are consumed. If different assumptions were used in deriving the estimated lives of the virtual items, the timing in which the Company records its revenues would be impacted. For games which use the time-based revenue model, the proceeds from sale of prepaid cards from distributors are deferred when received and revenue is recognized based upon the actual usage of time units by the game players.

The revenues are recorded net of business tax, discounts and rebates to distributors.

Under both the item-based and the time-based revenue models, proceeds received from sales of prepaid cards are initially recorded as receipts in advance from customers and, upon activation or charge of the prepaid cards, transferred from receipts in advance from customers to deferred revenues. As we do not have control of, and generally do not know, the ultimate selling price of the prepaid cards sold by the distributors, net proceeds from distributors form the basis of revenue recognition.

Prepaid cards will expire two years after the date of card production if they have never been activated. The proceeds from the expired game cards are recognized as revenue upon expiration of cards.

In contrast, once the prepaid cards are activated and credited to a player’s personal game account, they will not expire as long as the personal game account remains active. The Company is entitled to suspend and close a player’s personal game account if it has been inactive for a period of 180 consecutive days. The unused balances in an inactive player’s personal game account are recognized as revenues when the account is suspended and closed.

For the years ended December 2008, 2007 and 2006, the Company recognized revenues in connection with expired un-activated prepaid cards and unused balances of activated prepaid cards in inactive account amounting to approximately $173,000, $150,000 and $380,000, respectively.

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The Company enters into licensing arrangements with overseas licensees to operate its MMORPGs in other countries or territories. These licensing agreements provided for two revenue streams, namely an initial license fee and a monthly revenue-based royalty fee based on monthly revenue and sales from ancillary products of the games. The initial license fee is based on both a fixed amount and additional amount receivable upon achieving certain sales targets. Since the Company is obligated to provide post-sales services such as technical support and provision of updates and when-and-if-available upgrades to the licensee during the license period, the initial license fee from the licensing arrangement is recognized as revenue ratably over the license period. The fixed amount of the initial license fee is recognized ratably over the remaining license period from the launch of the game and the additional amount is recognized ratably over the remaining license period from the date such additional amount is certain. The monthly revenue-based royalty fee is recognized when earned, provided that collectability is reasonably assured.

Wireless revenues are derived from providing short messaging services or SMS, Ring Back Tone or RBT, Wireless Application Protocol or WAP, multi-media messaging services or MMS and interactive voice response or IVR, mainly consisting of news, weather forecast, chatting, entertainments information, ring tones, and logo downloads and various other mobile related products provided to mobile phone users. The Company contracts with third party mobile network operators for wireless services provided to its users and records the fee charged by third party mobile network operators as cost of revenues. Wireless revenues are recognized in the month in which the service is performed, provided that no significant company obligations remain.

Wireless revenues are recorded on a gross basis as the Company is the primary obligor in the arrangement, which is evidenced by a number of factors including that the content and the nature of the wireless services are designed and developed by the Company (either independently or with third parties) and originates from the Company’s Websites, the links located on third parties’ Websites, or one of the dedicated phone numbers of the Company. Also, the mobile network operators that the Company contracts with to deliver these services to the end customers are not involved in the design or development of the services that are provided by the Company. The end customer purchases the wireless content, community access or value-added services that the Company provides. The end customer receives identical services from the Company regardless of which third party mobile network operator is used to deliver the message. In addition, the Company provides customer services to the end customers directly and it could be requested by the mobile network operators to assume the credit risk if the operators are not able to collect fees from the end customers. The Company is primarily responsible for fulfillment, adds value to the products, has inventory risk related to the content and products, and has reasonable pricing latitude.

ii) Non-advertising revenues

FACE="Times New Roman" SIZE="2">Non-advertising revenues include revenue principally from online game and wireless services.

The Company earns online game
revenue through providing MMORPGs to players pursuant to the item-based revenue model. Under the item-based model, the basic game play functions are free of charge and players are charged for purchases of in-game virtual items. Prior to December
2006, the MMORPGs were operated under the time-based revenue model, whereby players are charged based on the time they spend playing games.

Game revenues
from domestic operations are collected through sale of the Company’s prepaid cards, which it sells in both virtual and physical forms to third-party distributors.

FACE="Times New Roman" SIZE="2">For games which use the item-based revenue model, proceeds from sale of prepaid cards are deferred when received and revenue is recognized over the estimated lives of the virtual items purchased or as the virtual
items are consumed. If different assumptions were used in deriving the estimated lives of the virtual items, the timing in which the Company records its revenues would be impacted. For games which use the time-based revenue model, the proceeds from
sale of prepaid cards from distributors are deferred when received and revenue is recognized based upon the actual usage of time units by the game players.

SIZE="2">The revenues are recorded net of business tax, discounts and rebates to distributors.

Under both the item-based and the time-based revenue
models, proceeds received from sales of prepaid cards are initially recorded as receipts in advance from customers and, upon activation or charge of the prepaid cards, transferred from receipts in advance from customers to deferred revenues. As we
do not have control of, and generally do not know, the ultimate selling price of the prepaid cards sold by the distributors, net proceeds from distributors form the basis of revenue recognition.

Non-advertising Revenues

Non-advertising revenues are derived principally from online game, wireless and other services.

Non-advertising revenues were $69.6 million and $178.2 million or 58% of total revenues for both the three and nine months ended September 30, 2008, as compared with $20.0 million and $38.1 million, or 39% and 31% of total revenues for the three and nine months ended September 30, 2007. For the three and nine months ended September 30, 2008, non-advertising revenues consisted of online game revenues of $54.6 million and $143.5 million, wireless revenues of $14.5 million and $32.2 million, and other services revenues of $454,000 and $2.5 million, respectively. For the three and nine months ended September 30, 2007, non-advertising revenues consisted of online game revenues of $12.7 million and $18.1 million, wireless revenues of $6.8 million and $19.0 million, and other services revenues of $467,000 and $943,000, respectively.

Online game. Our online game revenues are mainly derived from two game titles, Tian Long Ba Bu (or TLBB) and Blade Online (or BO). TLBB is our first in-house developed online game launched on May 9, 2007. BO was licensed from a local independent game development studio and launched in October 2004.

For the three months ended September 30, 2008, online game revenues increased by $41.9 million to $54.6 million as compared with $12.7 million for the three months ended September 30, 2007. This was primarily due to the commercial launch of TLBB in May 2007, with total revenue of $51.0 million in the three months ended September 30, 2008, as compared with $10.9 million in the three months ended September 30, 2007. TLBB’s total registered accounts were approximately 39.4 million as of September 30, 2008, and its peak concurrent users were approximately 700,000 for the three months ended September 30, 2008.

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The following table sets forth revenue derived from TLBB in the PRC and related operating data:

Notes:

We began licensing our game TLBB to operators outside of the PRC in 2007. We licensed TLBB to an operator in each of Taiwan and Hong Kong in April 2008 and to an operator in Vietnam in August 2007. For the three months ended September 30, 2008, we generated overseas licensing revenues of $2.7 million, as compared with $116,000 for the three months ended September 30, 2007, as we started generating overseas revenues from Taiwan and Hong Kong in April 2008.

Online game revenues are collected through sale of our prepaid cards, which we sell in both virtual and physical form, to third party distributors and retailers, and through online sale of game points directly to game players. We account for proceeds from sale of prepaid game cards from distributors as receipts in advance in our consolidated balance sheet, prior to activation or charge of the prepaid cards. Once a prepaid game card is activated or charged to a specific game account, we account for the related amounts as deferred revenues. We account for proceeds from online sale of game points directly to game players as deferred revenues. As of September 30, 2008, we had receipts in advance from distributors and deferred revenues from domestic operations of $20.1 million, compared with $8.1 million as of December 31, 2007.

For the initial license fee received under our overseas licensing agreements, we recognize revenues ratably over the license period, during which we are obligated to provide post-sales services such as technical support and provision of updates and upgrades to the licensees. As of September 30, 2008, our deferred revenues associated with unrecognized initial license fee received were $1.0 million as compared with $0.1 million as of December 31, 2007.

We expect online game revenues to increase in the fourth quarter of 2008 as compared with the third quarter of 2008.

Wireless. Our wireless revenues include SMS, RBT, MMS, WAP and IVR services. Our wireless services include news, weather forecast, chatting, entertainment information, music, ring tone, and logo downloads and various other related products provided to mobile phone users. Most of our services are charged on a monthly or per message/download basis. For the nine months ended September 30, 2008, we normally charged monthly fees ranging from $0.070 to $4.187 and per message/download fees ranging from approximately $0.007 to $0.586.

For the three months ended September 30, 2008, our wireless revenues increased by $7.7 million to $14.5 million as compared with $6.8 million for the three months ended September 30, 2007, primarily due to an increase of $4.0 million in SMS revenues, an increase of $1.5 million in RBT revenues, an increase of $1.2 million in WAP and IVR revenues, and an increase of $1.0 million in MMS revenues. For the nine months ended September 30, 2008, our wireless revenues increased by $13.2 million to $32.2 million as

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compared with $19.0 million for the nine months ended September 30, 2007, primarily due to an increase of $6.4 million in SMS revenues, an increase of $4.2 million in RBT revenues, an increase of $2.6 million in MMS revenues, and an increase of $2.1 million in WAP and IVR revenues, which was netted off by certain business tax provision of $2.1 million business tax provision made in the three months ended June 30, 2008. The increase in wireless revenues was primarily due to successful product distribution programs, and a stable regulatory and business environment throughout the quarter.

Others. Other services mainly consist of sales of software to third parties, provision of applications service provider (or ASP) services, office space rental income and construction of websites. For the three months ended September 30, 2008 and 2007, revenues from other services were $454,000 and $467,000, respectively. For the nine months ended September 30, 2008 and 2007, revenues from other services were $2.5 million and $943,000, respectively.

Non-advertising Revenues

Non-advertising revenues are derived principally from online game, wireless and other services.

Non-advertising revenues were $58.6 million and $108.7 million or 57% and 58% of total revenues for the three and six months ended June 30, 2008, as compared to $10.6 million and $18.1 million, or 27% and 25% of total revenues for the three and six month periods in 2007. For the three and six months ended June 30, 2008, non-advertising revenues consisted of online game revenues of $47.9 million and $88.9 million, wireless revenues of $9.2 million and $17.8 million, and other services revenues of $1.5 million and $2.0 million, respectively. For the three and six months ended June 30, 2007, non-advertising revenues consisted of revenues from online game of $3.8 million and $5.4 million, wireless of $6.6 million and $12.2 million, and other services of $0.2 million and $0.5 million, respectively.

Online game. Our online game revenues are mainly derived from two game titles, Tian Long Ba Bu (or TLBB) and Blade Online (or BO). TLBB is our first in-house developed online game launched on May 9, 2007. BO was licensed from a local independent game development studio and launched in October 2004.

For the three months ended June 30, 2008, online game revenues increased by $44.1 million to $47.9 million as compared to $3.8 million for the three months ended June 30, 2007. This was primarily due to the commercial launch of TLBB in May 2007, with total revenues of $45.5 million in the three months ended June 30, 2008, as compared with $2.3 million in the three months ended June 30, 2007. TLBB’s total registered accounts were approximately 33.8 million as of June 30, 2008, and its peak concurrent users were approximately 700,000 for the three months ended June 30, 2008.

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The following table sets forth revenue derived from TLBB in China and related operating data:

Notes:

We began licensing our game TLBB to operators outside of the PRC in 2007. We licensed TLBB to an operator in each of Taiwan and Hong Kong in April 2008 and to an operator in Vietnam in August 2007. For the three months ended June 30, 2008, we generated overseas licensing revenues of $2.2 million, as compared to nil for the three months ended June 30, 2007 as we started generating revenues from overseas licensing in August 2007.

Online game revenues are collected through sale of our prepaid cards, which we sell in both virtual and physical form, to third party distributors and retailers, and through online sale of game points directly to game players. We account for proceeds from sale of prepaid game cards from distributors as receipts in advance in our consolidated balance sheet, prior to activation or charge of the prepaid cards. Once a prepaid game card is activated or charged to a specific game account, we account for related amounts as deferred revenues. We account for proceeds from online sale of game points directly to game players as deferred revenues. As of June 30, 2008, we had receipts in advance from distributors and deferred revenues from domestic operations of $16.3 million, compared with $8.1 million as of December 31, 2007.

For the initial license fees received under our overseas license agreements, we recognize revenues ratably over the license period, during which we are obligated to provide post-sales services such as technical support and provision of updates or upgrades to the licensed games. As of June 30, 2008, our deferred revenues associated with unrecognized initial license fees received were $1.0 million as compared with $0.1 million as of December 31, 2007.

We expect online game revenues to increase in the third quarter of 2008 as compared to the second quarter of 2008.

Wireless. Our wireless revenues include SMS, RBT, WAP, MMS and IVR services. Our wireless services include news, weather forecast, chatting, entertainment information, music, ring tone, and logo downloads and various other related products provided to mobile phone users. Most of our services are charged on a monthly or per message/download basis. For the six months ended June 30, 2008, we normally charged monthly fees ranging from $0.070 to $4.187 and per message/download fee ranging from approximately $0.007 to $0.580.

For the three months ended June 30, 2008, our wireless revenues increased by $2.6 million to $9.2 million as compared to $6.6 million for the three months ended June 30, 2007, primarily due to an increase of $1.8 million in RBT revenue, an increase of $1.3 million in SMS revenues, an increase of $1.6 million in MMS, WAP and IVR revenues, which was netted off by certain business tax provision of $2.1 million. For the six months ended June 30, 2008, our wireless revenues increased by $5.6 million to $17.8 million as compared to $12.2 million for the six months ended June 30, 2007, primarily due to an increase of $2.7 million in RBT revenues, an increase of $2.4 million in SMS revenues, an increase of $2.6 million in MMS, WAP and IVR revenues, which was netted off by

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certain business tax provision of $2.1 million. The increase in SMS, MMS and IVR revenues was primarily due to successful product distribution programs, and the increase in RBT revenues was because of the effective promotion activities held in this quarter, by ways of co-promoting with operators and expanding the promotion channels.

Others. Other services mainly consist of sales of software to third parties, provision of applications service provider (or ASP) services, office space rental income and construction of websites. For the three months ended June 30, 2008 and 2007, revenues for other services were $1.5 million and $0.2 million, respectively. For the six months ended June 30, 2008 and 2007, revenues for other services were $2.0 million and $0.5 million, respectively.

Non-advertising Revenues

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Non-advertising revenues are derived principally from online game, wireless and other services.

Non-advertising revenues were $50.1 million and $7.5 million, or 59% and 23% of total revenues for the three months ended March 31, 2008 and 2007, respectively.

For the three months ended March 31, 2008, non-advertising revenues consisted of revenues from online game of $41.0 million, from wireless of $8.6 million and from other services of $0.5 million. For the three months ended March 31, 2007, non-advertising revenues consisted of revenues from online game of $1.6 million, from wireless of $5.6 million and from other services of $0.3 million.

Online game. Our online game revenues are mainly derived from two game titles, Tian Long Ba Bu (or TLBB) and Blade Online (or BO). TLBB is our first in-house developed online game launched on May 9, 2007. BO was licensed from a local independent game development studio and launched in October 2004.

For the three months ended March 31, 2008, online game revenues increased by $39.4 million to $41.0 million as compared to $1.6 million for the three months ended March 31, 2007. This was primarily due to the commercial launch of TLBB in May 2007, with total revenue of $38.9 million in the three months ended March 31, 2008, representing 95% of total online game revenues. As of March 31, 2008, the total registered users of TLBB had reached 28 million and peak concurrent users of TLBB had reached 592,000.

The following table sets forth revenue derived from TLBB in China and related operating data:

Notes:

* Quarterly APA, or quarterly active paying accounts, is the aggregate number of accounts from which game points are utilized at least once during the quarter.

** Quarterly ARPU, or quarterly revenue per active paying accounts, is our online game net revenues during the quarter divided by the quarterly active paying accounts during the quarter; our definition of ARPU may not be comparable to similarly titled measures presented by other online game companies.

The success of TLBB in China has enabled us to license the game in the overseas market. In August 2007, we licensed TLBB to an operator in Vietnam. For the three months ended March 31, 2008, we recorded revenue of $381,000 for the license fees and usage-based royalties from this arrangement.

Online game revenues are collected through sale of our prepaid cards, which we sell in both virtual and physical form, to third party distributors and retailers. We account for proceeds from sale of prepaid game cards from distributors or retailers as receipts in advance from distributors in our consolidated balance sheet, prior to their registration to specific game accounts. Once a prepaid game card is registered to a specific game account, we account for related amounts as deferred revenues. As of March 31, 2008, we had receipts in advance from distributors of $8.9 million and deferred revenues of $2.4 million, as compared with $0.6 million and $0.2 million, respectively, as of March 31, 2007.

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We expected online game revenue to increase in the second quarter of 2008 as compared to the first quarter of 2008.

Wireless. Our wireless revenues include SMS, RBT, WAP, MMS and IVR services. Our wireless services include news, weather forecast, chatting, entertainment information, music, ring tone, and logo downloads and various other related products provided to mobile phone users. Most of our services are charged on a monthly or per message/download basis. For the three months ended March 31, 2008, we normally charged monthly fees ranging from $0.070 to $4.187 and per message/download fee ranging from approximately $0.007 to $0.558.

For the three months ended March 31, 2008, our wireless revenues increased by $3.0 million to $8.6 million as compared to $5.6 million for the three months ended March 31, 2007, primarily due to an increase of $1.1 million in SMS revenues and an increase of $2.1 million in RBT, MMS and IVR revenues. This increase was partially offset by a decrease of $0.2 million in WAP revenues. The increase in SMS, MMS and IVR revenue was primarily due to successful product distribution programs, and the increase in RBT revenue was because of our continued market development effort and product diversification.

Assuming that there are no further regulatory changes, we expect wireless revenues to increase in the second quarter of 2008 as compared to the first quarter of 2008.

Others. Other services mainly consist of sales of software to third parties, provision of applications service provider (or ASP) services, office space rental income and construction of websites. For the three months ended March 31, 2008 and 2007, revenues for other services were $506,000 and $280,000, respectively.