Good day and welcome to NetEase fiscal second quarter 2006 financial results conference call. As a reminder, today's call is being recorded. For opening remarks and introductions, I would now like to turn the call over to Ms. Brandi Piacente, Investor Relations for NetEase.com.

Thank you, operator. Today you will first hear from Mr. William Ding, Chief Executive Officer; and Mr. Michael Tong, Chief Operating Officer; who will discuss some of the financial and operational highlights for the second quarter end June 30, 2006. Finally, Mr. Denny Lee, Chief Financial Officer, will review the financials. Before we continue, please note that the discussion today will contain forward-looking statements relating to future performance of the Company and are intended to qualify for the Safe Harbor from liability as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of future performance, and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the Company's control and could cause actual results to differ materially from those mentioned in today's press release and this discussion. Risks related to the fluctuation in the value of the renminbi with respect to other currencies could also adversely affect the Company's business and financial results. The Company does not undertake any obligation to update this forward-looking information, except as required by law. As a reminder, this conference is being recorded. In addition, a webcast replay of this conference call will be available on the NetEase corporate website at corp.netease.com. I will now turn the conference call over to Mr. Michael Tong, Chief Operating Officer, who will read the prepared remarks on behalf of Mr. William Ding, Chief Executive Officer of NetEase. Michael Tong for William Ding: Thank you for joining us today. I will begin with an overview of each of our services segments. In total, revenues for the quarter increased 8.6% quarter-over-quarter; and 38% year-over-year to $72 million, driven by strong sequential growth across all of our service categories. Online game revenues for the quarter grew 7.9% quarter-over-quarter; and…

(Operator Instructions) Your first question comes from Lu Sun - Lehman Brothers. Lu Sun - Lehman Brothers: Good morning. Thank you for taking my question. I have two questions. The first one is on your online advertising business. What is the driver behind very strong growth in the third quarter, and the relatively weak growth in the second quarter? Are you seeing any contracts from new customers going into the second half of the year? Do you expect margins to improve? Then I have two follow-ups. Thanks. Michael Tong: It is simply because of different season and also different companies have different seasonal effects. If you look at last year’s third quarter, we also grew very strongly, because most of our customers are more based on IP and FMCG where the third quarter there is more activities from the advertisers. It is simply just that, actually.

Our next question comes from Wallace Cheung - Credit Suisse First Boston. Wallace Cheung - Credit Suisse First Boston: Good morning. Thanks Michael and Denny. A great quarter. I wanted to ask about the impact of some events that happened in July and how does it impact your third quarter on the games guidance? In particular, the World Cup as well as the in-game protests that have been spreading around in Fantasy? Thank you very much. Denny Lee: I think if you look at our guidance, Wallace, I think for the World Cup it is over and it is obviously a one-time effect between the end of June and early July and it is spread over two quarters. You also asked about the in-game protests. That happened in the beginning of July where some of the players mistakenly believed that some of the graphics were Japanese-related, but they are actually not. It was totally unfounded. There were some protests inside the game, which also affected players who were playing the games and the revenue numbers. That is why you can see the guidance that we have given out for the online game business is a very conservative number. We do see such kinds of protests are over, as we see, in August. We think that both games have been stabilized from these two effects starting in August, so it should be a one-off event.

Our next question comes from Safa Rashtchy - Piper Jaffray. Michael Tong: Operator, I think we can let them follow-on with questions if they don’t understand our answers or if they have follow-on questions.

Certainly. Safa Rashtchy - Piper Jaffray: Hi everyone. Could you give us some insight into how you expect Datang to contribute in Q3? Also, what kind of growth rate do you expect for Fantasy and Westward Journey II? You mentioned that the effect of the World Cup and the protests are over. Could you give us some more color? Are you actually seeing growth again? What kind of pattern do you expect for those two games? And again, the contribution from Datang. Michael Tong: On Datang, the game went into commercial on the 19th of July, and after commercialization of this game we achieved peak concurrent users of a bit over 30,000 peak concurrent users. Obviously that is satisfactory, but not very good. What happens to this game is that we are still building up the content of this game to give more content to the users. Also, changing some of the game play right now. We are still confident about this game and we are expecting, with the new content which includes a new system that has just been released and also more marketing efforts, we continue to see more confidence in this game. For Fantasy Westward Journey, the guidance that we have given out for the total of online games is -1% to 1%, and that is mainly a breakdown of Fantasy Westward Journey growing around low single-digits. Then for Westward Journey II, a bit of a negative of single-digits as well. So what happens, of course we have already mentioned in July that there were two events that resulted in some negative events – the World Cup and also the in-game protest. As we see in August, those have stabilized and for September, because September is usually a school period, so we want to keep ourselves more…

Our next question comes from Wallace Cheung - Credit Suisse First Boston. Michael Tong: Wallace, did I answer your question? Wallace Cheung - Credit Suisse First Boston: I think Safa has already posed my questions. Michael Tong: Okay. Wallace Cheung - Credit Suisse First Boston: I will go back to the queue. Thank you.

Next we will hear from Richard Ji - Morgan Stanley. Richard Ji - Morgan Stanley: I have two questions. The first is regarding competition. Especially, can you comment on the new trend of free-to-play games and how that trend is going to impact your future game design? Then I have a follow-up. Michael Tong: Of course. On the free-to-play based games, obviously we have not tried on any of our games, if we are going into the free model, but we are definitely paying close attention to the market and also paying close attention to how these games are being operated by other competitors. Obviously we are very close to the market and we continue to learn from them. If it happens to some of our games, that is in the future. I have to make it very clear. The way we think about free games, it would only happen if we designed from the very beginning that this game was going to be a free game, otherwise we don’t think we would do it. In the future, if we have games that we think are suitable using this model, then we would have free games. We don’t think that is going to happen to any of our existing games. Richard Ji - Morgan Stanley: My second question is regarding your non-gaming operation. Especially I am interested in your plans to monetize your casual game service and also how you are going to monetize other services, including the email community, et cetera. Michael Tong: For casual games, obviously our focus has been on the release of Datang and also the release of Tianxia 2 and for casual games, we do have some new initiatives. We are going to have a new platform coming in these two months – actually at the end of this month. Obviously for casual games, we intend to make money by way of selling virtual items. Anyways, it is a very small part of the business right now. For email, I think it is still too early to say. I think the simplest thing to say is still through advertising. That actually, by just saying advertising, it actually means a lot for us because there is a lot of technology that we need to work on to understand the demographics better, to educate the advertisers on the performance of advertising on email is actually a lot of work and all of this is taking time. We are working on that. Richard Ji - Morgan Stanley: Thank you.

Next we will hear from Frank Shi - CLSA Limited. Frank Shi - CLSA Limited: Hi guys. Can you talk about your portal business strategy? Right now we see Sina and Sohu competing against each other for premium content. Is there anything that you guys are doing differently to enhance your position in the portal business? Thank you. Michael Tong: For the portal, I think competing for premium content is one way of doing it. We will be part of it, but we will not be as aggressive as our competitors. As you see the cost of content that we pay is obviously less. The way we have been doing that is to make sure and increase the quality of our content, the quality of our advertisers, and also be able to use technology to integrate together well with our portal by introducing different kinds of new services as well; also by integrating with our current applications, such as the emails, and so on and so forth. I think overall, we will not simply just put up more cost on buying a lot of premium content, but we have different strategies through both people and technologies. We believe this is the most reasonable way of competing in this market right now.

Our next question comes from Dick Wei - JP Morgan.

Good morning, I just have a quick question on your longer-term pipeline, like Westward Journey III and other games in 07/08. What is the development progress for those games in the pipeline? Thank you.

I think the simplest way to answer that is we currently have a total of four projects on hand, which are both related to either MMORPG or MMORPG-like games. On average, I would say the development process of these four games span between three months to about 15 months, in terms of the development on each of these games. Some of the games have been developing for three months and some have been developing for around 15 months, but I think it is still early to say the release time for these games. I would say that it is just too early to say that.

I have a follow-up to that. It seems like towards the end of this year or early next year, there are a couple of light upgrades and game launches. Will you be allocating more people from those longer-term games to these existing upgrades in Tianxia and Datang? I just wonder if there are any delays in these longer-term games.

We have not set the exact time for these games, so I think it is just too early to say if those games are going to be late. To give you a clearer picture of what is happening is in the fourth quarter, we are going to have a new expansion pack for Fantasy Westward Journey. By the end of this year, we are going to have the open beta for Tianxia 2. Early next year, we are also looking at expansion pack for Datang, and then later on, we also obviously have a new game for Westward Journey II players; we call it Westward Journey 2.5. Then, going forward, obviously we are looking at new expansion pack for Tianxia and also a new expansion pack of all the other games as well. Probably by the end of ’07, we are looking at new betas for totally new games. That is how I would give you a summary of our pipelines. We have different teams. We have a total of over 700 R&D people working on a lot of these. We think we will continue to hire more people to work on these. Right now, that is just the strategy in the pipeline.

Moving on, we will go to Lu Sun - Lehman Brothers.

Thank you for taking my follow-up. Actually, I just want to ask about the status of Tianxia. What are the current areas for improvement do you think that you need to accomplish before launching the game for open beta? My second follow-up is on your traffic growth for the portal. You finished at the 700 million number. How does that compare to the previous quarter and year? Do you see any marked improvement in this business going forward? Thank you.

Let me answer the Tianxia question first. Tianxia, we started our closed beta in March ’06. So far, we have released around 6,000 accounts, and obviously they are in high demand. We have released twice these accounts, the internal beta accounts. The response for the games continue to be great. I think for the area of improvements, it is just different kinds of minor things that we are improving. Making sure that the game is bug-free and all that. There are no particularly difficult points, such as a technical point or such as the game play or the graphics, but it is just aggregates of all the minor things that we are improving. That is why we are very confident about the release time of this game, which is by the end of this year for the open beta. For the traffic question, for June, we had 701.9 million. Actually, in March, we had 719.5 million daily average page views, so both numbers compared to last year, went up by more than 40% on average, if compared to last year’s similar quarter’s figures. I think it is a general understanding of the users, continually, that we have been providing the best services, both technologically, including the e-mails and other related community products on our web; and also, the improved contents that we have been working on for more than a year. I think it is just a general result of all of this together.

Our next question comes from James Mitchell - Goldman Sachs.

I just wanted to check, with Datang, did you say it had dropped from 160,000 peak users to about 30,000 peak users? Then, as a follow-on, given Datang’s experience, do you intend to spend more on marketing your next title, Tianxia when that goes into open beta and commercial launch? Thank you.

Right. I think for Datang, the problem with Datang is not simply with the marketing of the game. We continue to have a lot of ways of doing marketing for our games. For Tianxia, I think simply because the game that we are working on is a very different title, it is the development time, the effort given, and the expectation that we are having with this game, naturally we are going to put more marketing effort in Tianxia to comparing to Datang; but it is not really a function of the results of what happened in Datang.

Great. Maybe just a not very related follow-up, but just on the Westward Journey 2 to Westward Journey 2.5 transition, would that involve a shift from turn-based combat to real-time combat?

It will still be turn-based.

Next we will hear from William Bean - Deutsche Bank.

Just in terms of Westward Journey 2 to 2.5, are you basically rolling out a new game and trying to move people over, or am I mischaracterizing that?

You are actually quite correct. Westward Journey 2.5 is actually a new game; 2.5 is actually not a very good way to describe it, but this is our codename right now. It is a new game with totally new engine, totally new client side and new game play, new characters, new graphics -- so it is a new game. What is different is that the user data in Westward Journey will be transferred to Westward Journey 2.5 and we keep the old users’ data. We think that is the best way to continue to keep the users and also to generate new interest for the users.

Can you tell me some of the main differences?

It is just basically a new game. Even a lot of the game play, the graphics, if you have some time, we can show you but it is just a totally new game, actually.

Okay. Are there any changes for the Tianxia launch in the tier-one, tier-two cities? Or are you going to continue to do what you have done there before?

Tianxia launch will continue to be -- do you mean the open beta?

No, I mean in terms of marketing in the tier-one to tier-two cities. Do you intend on rolling out any new approaches versus your approach in the tier-three through six cities for the Tianxia 2 release?

Actually, our strength has been all throughout the country, so it is not just the tier-two cities, but we are also very strong in some of the tier-one cities, such as Xinjiang province and Jiangsu province, we are also very strong as well. I think the only difference is that for Tianxia 2, I think it is just the combination of home users and also the tier-one cities will be just a bit higher, but our network has the strength in both areas as well, so it does not make much of a difference.

Okay, a question on CapEx. Can you just give us a sense of the trends there? Is that a big pick-up in the quarter? Should we continue to see that as you get ready for the launch?

The CapEx increase in the second quarter was mainly due to the increase in the server capacity and for our services, including both online games, Datang, new games, and also our other portal services, like email, et cetera. Also, in the same quarter, we have incurred some renovation costs for our new offices in Beijing and also in Guangzhou, that also accounted for the increase in the CapEx. For the whole year, in 2005, our total CapEx was around RMB92 million, for the whole year last year. This year, we are planning for around RMB160 million for the whole year, including all the computer equipment, servers, laptops, and also some of the renovation costs, et cetera.

Now we will take a question from Antonio Tambunan - Bear Stearns.

Actually, William asked most of my questions. I do not want to beat a dead issue, but I am just kind of curious. Michael, you did mention that you are transferring the account users from Westward Journey. Now, is that just the users and all the users have to start at a level one, or are they keeping their accounts as well as the character attributes, so that for those users, even though the graphics are new, they are going to feel like they are continuing on, or is everyone a level 1 again?

Obviously it is not. We keep the users’ data, so we keep their levels. It is going to be the same. In other words, maybe some communities, the abilities and everything will be the same.

The other part of the question too, back at ChinaJoy, because of the number of games entering the market, a lot of people said that a game’s success, assuming that it is designed okay, is increasingly becoming a function of marketing spend. Do you guys agree with this, or is NetEase in particular shielded from extraordinary marketing spend because of your existing platform? Is marketing spend therefore more of a function for smaller companies?

I think it is the function of marketing spend for smaller companies, but it is not a function of marketing spend for us, because, as we have explained many times before, our marketing spend has been comparatively small in terms of dollars, but our power the marketing continues to be huge, given our company is a portal and also the user space that we have in our game business and all the networks that we also have in our business.

Next we will hear from Tian Hou – C.E. Unterberg.

Two quarters ago, when you guys were on the conference call, you guys mentioned about the lifecycle of a game. You mentioned something like the two existing games, they are towards the later stage of their life, so the games are supposed to naturally in terms of growth, grow slower and eventually going down. However, from last quarter, we saw a different trend, and from what you just said today on the call, and it seems like you do not agree with that view anymore. I just wonder, what do you think about the lifecycle of a game for your existing two games?

There is a life cycle for the product anyway, but it seems that we have been doing well and we continue to extend that longer and longer. Frankly, it is hard to forecast exactly when this peak or exactly when this whole lifecycle is going to be, but we have been continuing to prove ourselves in extending the lifecycle, especially compared to our competitors. I think it is just better not to say exactly when our forecast is, but we continue to prove ourselves in getting results.

So based on your success experience from last quarter, what is the medicine for turning an old game to a younger game? What did you exactly do?

I think it is just the assumption of continued effort in giving more content which is hospitable and to the taste of our users, continue to understand what the players need, continue to innovate with new content; it is just a function of that, actually.

For the Westward Journey 2 and Westward Journey 2.5 version, are they similar content, or content-wise are totally different?

They are totally different. It is basically a new game.

Now we will take Ming Zhao - Susquehanna.

Thank you for taking my questions. I have a question on the advertising business. It seems like your competitors have put very strong numbers during the second quarter, benefiting from the World Cup event, whereas your advertising revenue guidance for the third quarter is much better than those guys. Could you comment on the seasonality and what you saw during the World Cup? Was that good for your advertising business? Then I have a quick follow-up.

The World Cup I would not say it was especially good for our advertising business. It did move some of the budget of our advertisers to an earlier period, and also it is a way of showcasing our content that has improved a lot, and also showcasing our advertising performance for our advertisers; it has been very good. I would not say that it gave us a lot of advertising dollars, as you can see from the results. For the third quarter, as I have explained, the third quarter is simply that for us, because the base of our advertisers is different from that of our competitors, so the different seasons, and different quarters have different growth compared to our competitors as well. Our third quarter has always been strong. That happened last year and that is happening this year as well.

Next we will take a question from Catherine Leung with Citigroup.

Thank you for taking my question. I have one question about Datang. Firstly, can you share with us, where are you seeing the players for Datang come from? Is it players from other games and NetEase game players trying this game out, or is it new game players in the market? Also, is the performance after the commercialization of the game within your expectations, based on one-and-a-half month open beta of the game? Lastly, can you give some more color, what are the main areas in the changes that you are making to the game, and how significant these changes will be? Thank you.

Sure. The gamers actually come from everywhere. It is just a reflection of the market. We did some calculation on the overlap of the gamers that have ever played our other games or are they totally new gamers, and that is a very small number. If I remember right, it is under 20% who are overlapping with users who have ever played our other games. Given the base of the two games, which is such a huge base, under 20% is actually a very good number. The good thing is that out of this 20% of these players, actually most of them are churned players in our other games. I mean, these are gamers who have played Westward Journey or Fantasy Westward Journey, but who are already churned anyway. It does not really affect our active users in the old games, or in our existing games. For the areas that we are working on, it mainly includes the game play and the balancing of the characters and different professions. I would not say, since adding more new maps on, new characters, but it really is just the game play, the attributes, the calculation, and the balancing of those different professions. These are the areas that we are working on right now. A new system has just been released a few days ago and we are hopeful that this is going to bring more popularity to Datang as well.

Now we will go back to Wallace Cheung - Credit Suisse.

A question on Datang. Basically, if you always refer to the industry statistics, saying after the commercial launch then the peak users were up by 40% to 60%. But given the fact that your at 1,000 PCU versus 160 during the open beta test, it seems performance is actually lower than the industry performance. I think since management is still maintaining its relatively successful review or confidence in the future, can you comment on why the drop is relatively higher than the industry average? What kind of experience have you gained that you can make sure in the future, you can drive that Datang to grow further? Thank you.

I think you are right. The drop-off rate is actually less than satisfactory, to be more clear. I think, as I have just mentioned, we are working on a few areas, including the balancing of the difference professions. We have just released a new guild systems. We believe that with the new content, we will be able to drive the users and the popularity back to the game. I think it is still a function of how we work on content and continue to revise the game play.

Just as a final follow-up, so within your first quarter guidance, how much growth that you are attaching to it? What level, or what kind of general revenue do you expect from the Datang?

A very small and minor percentage to the total revenue base. We tend not to give you exact assumptions, but the way we have been working on this, estimates of our guidance is just almost like extending what is happening right now to the next six weeks.

Now we will go to Richard Ji - Morgan Stanley.

Okay, and this will be our last question, right?

For your 3Q guidance, you obviously incorporated some of the one-time impacts, including, as we mentioned before, in-game protests and World Cup. Can you help us to quantify in terms of percentage, how much impact to your guidance that has incorporated for 3Q?

We’ll put it this way. I think when we estimate our online game guidance for this quarter, Q3, we have already taken into consideration the actual results for the one-and-a-half months which have already passed. As Michael already explained this, there are some events or incidents happened during July, which impacted our revenue growth in July, which is the summer season which is supposed to be a busy season. On the other hand, we have seen that those incidents are likely to be one-time, because we have seen some return back of the growth rate in both of our games. In our projections for the third quarter, we have taken this into account, and actually because you as note in September, normally it will be a low seasons for online game industry because of the students going back to school. We have been using the same experience as last year’s in our projections.

That concludes the question-and-answer session today. At this time, I will turn the call back over to Brandi Piacente for any closing or additional remarks. Brandi Piacente : Thank you once again everyone for joining us today. Please feel free to contact us any time if you have any further questions. Thanks.

That does conclude this conference call. We thank you all for joining us. You may now disconnect.