Good day, ladies and gentlemen, and welcome to The9 Limited’s third quarter earnings conference call. My name is Jacki and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. As a reminder, this conference is being recorded for replay purposes. (Operator Instructions) I would now like to turn the presentation over to your host for today’s conference, Ms. Dahlia Wei, Senior IR Manager of The9 Limited. Please proceed.

Thank you, Operator. Hello, everyone, and thank you for joining us today for The9’s third quarter 2006 financial results conference call. The management with me today is Mr. Jun Zhu, Chairman and CEO, and Ms. Hannah Lee, Vice President and Chief Financial Officer. Before we start, I would like to read you the Safe Harbor statement. During the course of today’s call, certain projections or forward-looking statements may be made regarding The9’s future financial performance or future events. We wish to caution you that such statements or predictions are based on current information and expectations, and actual results may differ materially from those projected in the forward-looking statements. We would also like to refer you to documents that the company has filed with the U.S. Securities and Exchange Commission. Those documents contain additional information concerning factors that could cause actual results to differ materially from those contained in management’s projections or forward-looking statements. Let me now turn the call over to Mr. Zhu, our CEO, to provide you with an overview of the quarter.

Good morning and good evening, ladies and gentlemen. I would like to thank you for participating in today’s discussion of The9’s third quarter 2006 earnings. First, let me present a quick overview of the key financial and operational highlights for the third quarter. Net revenues for the third quarter were $29.5 million. Net income was $8.1 million, for earnings of $0.33 per ADS. For the third quarter of 2006, we obtained WoW peak concurrent users of approximately 595,000, and average concurrent users of about 280,000. As of September 30, 2006, over 5.9 million paid accounts had been activated for the WoW game. Based on The9’s game operation experience, we had foreseen that in the third quarter, user growth would decelerate due to various anticipated factors, such as impact from student summer vacation. Thus, The9 together with Blizzard Entertainment planned and conducted a series of server merges in preparation for the cross server battleground function of WoW upgrade patch 1.12, as well as other following upgrades down the road. As you may know, we have successfully finished the server merges in mid-September, and cross server battleground function was launched on October 3rd, during the Golden Week holiday in China. I am glad to tell you that during the last one-and-a-half months into the fourth quarter, we have opened 37 rounds in the newly launched seventh server for the WoW game. We plan to open the last remaining 3 rounds in the near future. The PCUs of WoW has exceeded 670,000. These results once again prove The9’s comprehensive operational capabilities, which are based on our judgment, understanding, and execution in relation to our products and our users. Now, let me talk about The9 game pipeline from an online game operator’s perspective. Here I would like to first reiterate The9’s strategy, which is…

Thank you, Jun, and hello, everyone. I will take you through an overview of our third quarter 2006 results, focusing on the key highlights. For the third quarter of 2006, The9 reported net revenues of $29.5 million, a 9% decrease compared to the previous quarter, and a 26% increase from the same period last year. The sequential decline of our net revenue was mainly due to the temporary server suspension during the quarter to facilitate server mergers, which impacts our average concurrent user level temporarily. As Jun said earlier, the transition in the third quarter is behind us and we believe the server rearrangements will benefit us in the long run. Net revenues attributable to World of Warcraft, which include revenues from game playing time, merchandise, and installation package sales, were $29.1 million, a decrease of 10% from the previous quarter, and accounted for 99% of total revenues in the third quarter. ARPU, average revenue per user hour for the third quarter improved to RMB 0.39 from RMB 0.37 in the previous quarter. The increase in ARPU was mainly because of the launch of the seventh World of Warcraft server site, capacity of most of the rooms in the first six sites have been highly utilized compared to the previous quarter. We therefore offered the next accounts in the third quarter of 2006. For the third quarter of 2006, gross profit decreased to $13.6 million compared to $15.7 million in the previous quarter, with gross margins slightly decreased to 46% from 48% in the previous quarter. This decrease in gross margin was primarily because of our net revenues declined in the third quarter while certain fixed costs, such as server depreciation, Internet data center rentals, and intangible asset amortization did not decrease proportionately to that of our net revenues. Operating…

(Operator Instructions) Your first question comes from the line of Wallace Cheung with Credit Suisse. Please proceed.

Good morning. Good quarter. Just a couple of questions on the cost side. We are going to see more servers, more games will be launched in the next two quarters. Could you walk us through in terms of the cap-ex, depreciating expenses, potential growth in this area in the next maybe one or two quarters? The second question also relates to the marketing expense. You mentioned that you have the full spectrum of the marketing capabilities of World of Warcraft. That means we will be able to see quite a substantial jump in marketing expenses in the fourth quarter. Am I correct?

With respect to the first question, capital expenditure for this quarter, the remainder of this quarter, we are not anticipating to build another site for World of Warcraft in particular. But for Guild Wars, as Mr. Zhu said, we are going to be announcing when we will be starting closed beta testing for Guild Wars, which will be some time in Q4. To that respect, we have purchased servers for Guild Wars. For 2007, depending on when Burning Crusades comes out, and also the players’ demand, we will consider adding the eighth server site to meet the players’ demand. As you know, the latest server site cost us about $5 million to build. We anticipate the eighth server site, as we are building one for World of Warcraft, would be approximately in that ballpark. With respect to your question about marketing expenses, in Q3, as you know, in order to put in the appropriate technical structure for the new content upgrade, which was to facilitate the PVP, the player versus player battleground function, we have delayed the launch of the version 1.12 upgrades to the end of Q3. To that respect, we also have pushed back the marketing plan to the end of Q3 and early Q4. World of Warcraft, we are going to spend the usual marketing dollars to promote content upgrades as these content upgrades come along. But if you are looking at the company on an overall basis, marketing expense would definitely go up because we are in the pre-launch stage of Guild Wars. For that project, we are definitely going to have marketing expenses. On a percentage basis, Q4 marketing expenses will definitely increase. As Mr. Zhu has said, we are going to announce in a very short time who we are going to work with, with respect to the Guild Wars game.

Thank you. Just one more question regarding the free-to-play model. It seems like with Mr. Zhu stating about maybe you may try it on something like casual games, or even maybe think about the free-to-play business model. Could you elaborate a little bit more? In the future, will The9 try to defer some games, or you know, try and look at this area as a new potential driver?

As I said on the Q2 conference call, The9 is always keeping our eye on the casual games development and also the possible commercialization model for these kinds of games. The market condition of the casual games now have proved that the business model is mature and it has entered into appropriate time that we will consider to enter this area. In the future, we will make significant investment in this area to move either self-development or licensing casual games, or co-development to enter the casual online game market. We have a joint venture called [Shankur]. We own a minority equity interest in that joint venture. That is our first step into the casual online game area. Thank you.

Thank you.

Your next question comes from the line of Antonio Tambunan with Bear Stearns. Please proceed.

Good morning. Congratulations on a good quarter. I am generally curious about your execution challenges coming up. With so many games coming out over the next few months or few quarters, do you foresee challenges, for example, in marketing your games with your channel partners or distributors, who are likely not only to have choose among your own games but also your competitors’? That is the first part. Continuing with that challenging question, what are your expectations on ramping up your manpower and resources to operate these new titles? Are you expecting to double or triple your staff by the end of the year?

Yes, in the next few quarters, The9 will launch several games, both MMORPG games and casual games. In terms of channel, I think I have said before that as the game operation is just -- we would believe that good game content will surpass our marketing and channel efforts. I think the channels structure is very mature in China. If we have good content, the distributors will be willing to come to us to distribute our games. Our current strategy is to offer the best quality games into the market. I believe the distributors will be willing to work with us. I believe the manpower will increase with our launching of new games, but will not increase so much, as you have just said. Our customer service staff will grow proportionately to our new games, but other departments’ headcounts will not grow that much. I believe The9’s games current operational capabilities will avoid us to invest heavily into manpower and headcount, so we will not increase materially in that aspect.

Okay. Thank you.

Your next question comes from the line of Lin Chi with Lehman Brothers. Please proceed.

Good morning. Just to continue with Antonio’s question regarding your distribution channel, I noticed that during the quarter, two factors. One, ARPU increased quite a bit, and your advances from customers as a percentage of gross revenue or as a percentage of royalty, user paid as a percentage of that revenue is also increasing. Does that mean that you have changed a certain policy in your sales or distribution, or is it because the breakdown between your distribution sales through the distribution channel sales and your e-sales system is changing?

For your first question, with respect to ARPU, as I explained earlier in the presentation, in Q3 because our servers were practically maxed out in capacity, we have reduced the offering of trial accounts, and we will restart the trial account offering actually when we start this seventh server site. In Q3, on a relative basis compared to previous quarters, we have a reduction in the number of trials used. That actually helps increase our ARPU. On a go-forward basis, because in Q4 we have the seventh server site, we are starting to offer trial accounts. So in that respect, we expect Q4’s ARPU will stabilize back to the Q2 level. For the increase in deferred revenue and advance from customers, we have not changed our channel service policy or increased our demand. They basically draw it from the increased demand from both the players and the distributors because of the opening of the seventh server site and more content upgrades coming, a lot of the players are actually buying more content, earning them to their accounts. The overall percentage of discount that we have on a weighted average basis is 13%. That is very consistent with the previous quarter, which is exactly also 13%.

Did you say 15?

13.

Oh, 13, okay. Another question is related to your prepaid royalty. I noticed it has been increasing over the past several quarters. I just wonder how does that cash flow actually work?

We have ordered the cards from Blizzard Entertainment, from their vendor, Universal Games, in advance before we print these cards out and put them into the distribution channels. In anticipation from the demand from the players and the response from distributors, building up from the channels out in the cities, we have been preordering more cards from Blizzard so that we can ensure the channels will have sufficient inventory to distribute them to the players. That is why the royalties are increasing, but also, on the other hand, our advance in customers and deferred revenue has also increased.

Okay, that is good to know. Another thing is, we noticed in your press release that Nancy Zhou is going to leave the company. I understand that she is in charge of the overall business operations for all of your game products. Will that have any impact on your game pipeline or the timeline of any of the new products?

No, it will not impact our game operations, because The9 has a sophisticated operational system to operate our games. Our core competence of operating games lies in our mid-level management. The9’s value will not change based on one or two persons coming or going. There are always some changes at the upper level or middle level or lower level at the Company, but it will not impact the Company’s operational situation overall. Thank you.

Your next question comes from Ming Zhao with Susquehanna Financial Group. Please proceed. Ming Zhao – Susquehanna Financial Group: Thank you. Good morning, guys. Two questions. First question, I want to ask you about the Guild Wars. In your press release, you said the open beta will start before year end, but in the prepared remarks you said you are going to announce the closed beta date soon. I just wonder if you could clarify that. Also on Guild Wars, since this game adopts a different pricing model in other markets, I am wondering what kind of pricing model you will have for this game in China? I have another follow-up question.

As we have just mentioned, I think it is consistent that both our closed beta testing and open beta testing for Guild Wars game will begin in the fourth quarter of this year. For the pricing model, we will take into consideration the open beta testing results for the game to decide which model we will adopt for the game. Ming Zhao – Susquehanna Financial Group:

That peak number was achieved in September.

Your next question comes from Jason Brueschke with Citigroup. Please proceed. Jason Brueschke – Citigroup: Thank you. A number of my questions are basically follow-ups. Can you comment on free to play? What is the impact that you are seeing of the advent and rise of free to play games in China on the overall competitive landscape? And particularly the impact that you are seeing that these free to play games are having specifically on MMORPG games in China? I have a follow-up.

The free model is not really free. But people change from pay for time to free play time, but will soon pay for some virtual items. This model has now been widely accepted by Chinese players and the Chinese game operators. I think in the near future there will be two business models for online games. One is still paying by time model, which is still the mainstream model for online games. The other one you just mentioned, the free play, item-based model which will also exist in the market. With the free play model becoming more and more mature in the China market, The9 will also consider this kind of model for our future MMORPG games. I believe that free to play plus selling model for 3-dimensional games will have a lot of advantages over the 2D games. Based on The9’s game operational experience, I can give you an example. Our first 2.5D game, MU, at a peak time, we used to have 300,000 PCU. At that time, there was a tremendous number of servers, and during that time some virtual add-ons such as swords and blades are the fast sellers at the secondary market. At that time, The9 already thought about the free to play model, but at that time, this model is not mature for the market and we have some disagreement with the developer of this game, so we failed to launch this kind of business model for the game. I think for the 2D free to play games, it is more of a functional item selling. For 3D games, beside the functional item selling, there is more activation items that we can sell. Thank you.

Your next question comes from Dick Wei with JP Morgan. Please proceed. Dick Wei – JP Morgan: I have a question on Burning Crusade. I wonder if you have any read on whether there is a Burning Crusade upgrade to be launched in China? Also, has there been any new negotiations regarding revenue-sharing change or licensing fee change regarding Burning Crusade? A second question is, can you share your view on the next quarter revenue, from the early read that you see in October. I would think that next quarter revenue would be up, but some color would be great. Thanks.

I would like to take this opportunity to clarify some of the rumors that are spreading on the China market. Based on all of our communications with Blizzard, the two parties both always believed that Burning Crusade is part of our original license agreement with them. During the four years of exclusive license, there is no possibility that a company other than The9 can operate Burning Crusade in China. Now we are still in discussions, rather than renegotiations, with Blizzard regarding the margin arrangement and the timetable for Burning Crusades in the China market. That kind of communication has always been ongoing since day one of our operation of World of Warcraft, and we will continue to communicate with them in the coming two-and-a-half years. The increase in deferred revenues and the advances deal you saw is because of the obsession and popularity of WoW 1.12, the PVP function, among our users. After one holiday week, we also boosted the order from our distributor in preparation for that holiday week. Please note that this cost keeps increasing gradually against on entire distributor. Thank you.

Dick, with respect to your question about Q4 revenue, because we did not provide financial projections, we are not at liberty to provide any view to that respect. We have provided October’s PCU number for investors and for analysts reference in our press release.

Your next question comes from William Bean with Deutsche Bank. Please proceed. William Bean – Deutsche Bank: Just on Burning Crusade, I wanted to follow up. Could you give us a sense of what you expect for impact when the game does launch? Any update on timing there?

Burning Crusade is a very significant expansion and filler to the Chinese gamers’ tastes. According to our press release, by the end of the third quarter of this year, our registered paid accounts have reached 5.9 million. So far, I discussed that recently the PCU have hit 600,000 to 700,000. When we first commenced the WoW game, we had 1.5 million paid accounts activated. At that time, our PCU was 460,000. So I think there is a gap between numbers then and now. This reflects a problem with some of the old users, they have begun to spend less time on the game. We believe when we launch The Burning Crusade in China, a lot of old users will come back to play the game again and we also will attract a lot of new users, so you can imagine the user level after the launch of Burning Crusade.

Your next question comes from Leah Hao with Thomas Weisel Partners. Please proceed. Leah Hao – Thomas Weisel Partners: Good morning. Two quick questions. The first one is, other than the World of Warcraft 1.12, or the cross-server battleground feature that you are launching in Q4, are there any other major content upgrades for World of Warcraft that are in the plan for Q4? Secondly, I was wondering, what was the World of Warcraft related marketing expenses in Q3 and what is your budget for Q4 as well? Thank you.

We estimate there will be another upgrade version, 1.13, to be launched in Q4 of this year.

I think that all of us ask the same questions when we start the Q&A session. With respect to marketing, we will spend marketing dollars on two projects, mainly. One is continued promotion of World of Warcraft, and with respect to 1.13 upgrade, when it comes out, we will spend corresponding marketing dollars for that content upgrade. For the Guild Wars project, we will be in the pre-launch stage, where in Q4 we are starting the closed beta testing and open beta testing. To that respect, we will also spend corresponding marketing dollars to promote that game. As we said before, we will be announcing a cooperation with a famous and fast-moving brand and with that operation, we will also spend some marketing dollars, but it will be spread through Q4 and into 2007 when we start commercialization of the game. Throughout the life of that game, we will be promoting as usual. If there is new content or new chapters that come out, we will be promoting that to the players to ensure that they are aware of such content upgrades. We, based on our experience, content upgrades are very important in driving user demand and also in retention of user interest. Leah Hao – Thomas Weisel Partners: Thank you. If there is a 1.13 version in Q4, can you tell us a little bit more specifically which month it is going to be launched? Also, what is the key feature for that upgrade version?

Sorry, we cannot talk about it now. Leah Hao – Thomas Weisel Partners: Thank you.

Your next question comes from Michael Chu with Brean Murray, Carret. Please proceed. Michael Chu – Brean Murray, Carret & Co.: Given that there are quite a few new games that are being launched in the marketplace, and currently the core user for WoW is already playing a very high amount of hours per day, the question is what scenario do you expect to see when these games come out? Will they be competing for the same user, but that user group is not expanding fast enough? Or do you feel that with all of these new games coming out, that you will see a rapid expansion of your user base? And I have a follow-up.

There are two factors we can think about. One is the online game player group itself keeps growing. The second is with some older games, they have finished so some of the users will exit that game and enter into new games. The9 has already analyzed and realized that kind of situation. The9’s strategy for next year enables us to successfully operate several games. We hope that the new addition of game players in the market and some old users who exit from some very old games will enter into the WoW game and other games operated by The9. Michael Chu – Brean Murray, Carret & Co.: Just on the new game launch, take for example Guild Wars. Could you give us some color as to what level you would need to achieve for the game to break even? Maybe in another light, what kind of risk do you face when you launch a new game such as Guild Wars and Soul of the Ultimate Nation and so on, that you license from other developers?

For Guild War, it is inappropriate for us to comment on what level we need to reach to breakeven. I would like to say that we believe that the user level we can achieve after we commercialize this game will make this game break even. Your question may come from some market rumor that The9 offers high prices for licensed games, but the fact is the licensing we offer is very, very reasonable. Each clause in the contract, each payment we pay to the licensors are with the requirements, so I think it is very set and very reasonable.

Your next question comes from Evan Wilson with Pacific Crest. Please proceed. Evan Wilson – Pacific Crest: Hi, thanks for taking the question. I would like to ask you to characterize, if you could, the incremental product development expenses that are going to be associated with rolling out four new games next year. Also, with the Burning Crusade expansion pack rollout, could you give us some type of tracking to look at, either as a percentage of sales or absolute dollars. Also in 2007, what tax rate should we be using. Has that changed at all? Thanks.

For your question about product development for the rest of 2006, on a pure marketing R&D basis, we are spending about $1.5 million on a quarterly basis. However, as you know for accounting purposes, in Q4 when we launched a pre-launch for Guild Wars, all this related pre-launch cost -- server, depreciation, Internet data center rentals, direct salaries and expenses -- these are going to be classified under product development instead of under cost of services, so on an absolute dollar basis, that would be skewed up. Just like in Q2 of 05 where the product development costs shoot up during the localization stage of such a game. But if you are talking about pure R&D dollars for developing our in-house developed games or outsourcing purposes, we are still targeting $1 million to $1.5 million for 2006. For 2007, because we will have a couple of games in the pipeline, the second half of 2006 looks fantastic. Now [inaudible] is planning to be launched in the second half of 2007 and we do have other games in development. We will likely be spending about $2.5 million on a quarterly basis for 2007. With respect to tax breaks, the entity that operates World of Warcraft in China has been enjoying relief for enterprise income tax for last year and this year. In 2007, we are expecting a tax rate of 15%. Of course, on the other hand, we are also working with tax consultants and also with the local tax authorities to ensure that we will be, if we are entitled to certain benefits, we will be applying for these benefits to ensure we will minimize our tax dollars paid. Evan Wilson – Pacific Crest: Thanks, Hannah. Let me follow up really quickly. So just from a purely accounting perspective, would you expect on the product and development operating expense line, to see and to record product expenses in each of the quarters of 2007, something similar to what you saw in June 2005 with the rollout of World of Warcraft?

I would expect that to be of a lesser extent. You are specifically talking about Q4 of ’06, but as we launch new games, the requirement for each game with respect to the number of staff for customer service, the type of servers we need to purchase, that will directly impact the depreciation costs that we have and that would also impact the salaries and benefits that we have during the pre-launch stage. So I would say the World of Warcraft pre-launch level would be a good benchmark, but you have to adjust it slightly downwards or slightly upwards depending on which game we are launching, depending on the requirement of servers and the ratio between customer service and the number of players that we have. Evan Wilson – Pacific Crest: Thanks very much.

I want to add some points to Hannah’s comments. I want to talk about our point of view on the game development. There is only one purpose for game development -- to get the good game content. Our efforts include several aspects. One is in-house self-development, and the second is we will work with other partners and all kinds of game studios out in the market. We wish to make two achievements through this arrangement. One is we want to diversify the risks of self-development. The second, we can acquire and keep those games and talented people of game development. So to summarize, we have one purpose and two hopes for software development. One purpose is to have the best game quality and content. The two hopes are one, diversify our risks, and second, to acquire the best people in online gaming development. A classic example is our joint venture channel that is co-developing Super Girl Online now.

Your next question comes as a follow-up question from Antonio Tambunan with Bear Stearns. Please proceed.

Actually, the last answer answered my more detailed questions. What I will do is just ask a really quick, simple question. I know a lot of it has to do with your business model, but right now internally, let’s talk about the entire 2007 and not so much the first or second quarter. Which game do you have a better expectation for between SUN and Guild Wars?

Of Guild Wars or SUN or London, I think each of these games we are launching next year have a pretty good chance to be a hit game in the market. Because when we decide to license these games, we have done a thorough analysis and a very reasonable and mature analysis. This game has the unique features that are very good for the Chinese game market. We would like to communicate with you each of the features of these games, but we cannot elaborate on this due to time limits. Thank you.

Your final question comes as a follow-up question from Lin Chi with Lehman Brothers. Please proceed. Lin Chi – Lehman Brothers: Quickly on World of Warcraft, the user traction has been impressive after your launch of the new server site. I just wonder, do you see the current server capacity a bottleneck to your PCU goals? What is your criteria when you decide whether to open up new servers, and how many servers do you expect to open for Burning Crusade to get ready for the possible user demand? Thanks.

There are two aspects that contributed to the user traction after we launched the seventh server site. First is we upgraded the existing number one to number six server sites. Number two is the seventh server site, we have higher configuration and better equipment. Those two factors contributed to the user increase. Also, the cross-server PVP functions also attracted a lot of gamers to play the game more intensively. So actually, the server arrangements as well as new content launches are well planned and well managed by The9. That is why we see good results from user increase. In terms of the timing the eighth server site, we will base it on our experience and also the feedback from our users. We will also need to discuss with Blizzard Entertainment to decide when we are going to launch the next few server sites. Thank you.

There are no more questions in queue at this time. I would now like to turn the call over to Ms. Dahlia Wei for closing remarks.

Thank you again for participating in today’s call. Feel free to contact us if you have additional questions. Thank you.

Thank you for your attendance in today’s presentation. This concludes this conference. You may now disconnect. Good day.