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  As Of               Filer                 Filing     As/For/On Docs:Pgs              Issuer               Agent

 4/12/04  Shanda Interactive Entertain..Ltd F-1/A                  5:243                                    Bowne Int'l Asia/FA

Document/Exhibit                   Description                      Pages   Size 

 1: F-1/A       Shanda Interactive Entertainment Limited Am#1       HTML  1,584K 
 2: EX-10.1     EX-10.1 2003 Stock Incentive Plan                     29    135K 
 3: EX-23.1     EX-23.1 Consent of Pricewaterhousecoopers              1      5K 
 4: EX-23.5     EX-23.5 Consent of Beijing East Ip Law Firm            1      6K 
 5: EX-23.6     EX-23.6 Consent of Allen & Gledhill                    2±    10K 

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SECURITIES AND EXCHANGE COMMISSION

Amendment No. 1 to Form F-1

Shanda Interactive Entertainment Limited

No. 1 Intelligent Office Building

CT Corporation System

Copies to:

         Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

         If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    o

         If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

         If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

         If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering.  o

         If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.    o

CALCULATION OF REGISTRATION FEE

(1)	American depositary shares evidenced by American depositary receipts issuable upon deposit of the ordinary shares registered hereby have been registered pursuant to a separate registration statement on Form F-6 filed with the Commission on                 , 2004 (File No.                 ). Each American depositary share represents                 ordinary shares.
(2)	Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(3)	Includes (a) ordinary shares represented by                 American depositary shares that are issuable upon the exercise of the underwriters’ option to purchase additional shares and (b) all ordinary shares represented by American depositary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of the distribution or within 40 days after the later of the effective date of this registration statement and the date the securities are first bona fide offered to the public. The ordinary shares are not being registered for the purpose of sales outside the United States.
(4)	Previously paid.

         The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject To Completion. Dated April 12, 2004.

       This is an initial public offering of American depositary shares, or ADSs, of Shanda Interactive Entertainment Limited, or Shanda. Shanda is offering                     ADSs, and the selling shareholders disclosed in this prospectus are offering an additional                     ADSs. Each ADS represents                     ordinary shares, par value US$0.01 per share. The ADSs are evidenced by American depositary receipts, or ADRs.

       Prior to this offering, there has been no public market for the ADSs or the shares. We currently estimate that the initial public offering price per ADS will be between US$                    and US$                    . Application has been made for quotation of the ADSs on The Nasdaq National Market under the symbol “SNDA”.

       See “Risk Factors” beginning on page 11 to read about risks you should consider before buying the ADSs.

       Neither the United States Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

       The underwriters have an option to purchase up to an additional                     ADSs from Shanda and the selling shareholders at the initial public offering price less the underwriting discount.

       The underwriters expect to deliver ADSs evidenced by the ADRs against payment in U.S. dollars in New York, New York on                     , 2004.

Goldman Sachs (Asia) L.L.C.

Bear, Stearns & Co. Inc.

	CLSA/CIBC World Markets

	The Hongkong and Shanghai Banking Corporation Limited

	Piper Jaffray

Prospectus dated                     , 2004.

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[ARTWORK]

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       In connection with this offering, Goldman Sachs (Asia) L.L.C. or any person acting for it may overallot or effect transactions with a view to supporting the market price of the ADSs at a level higher than that which might otherwise prevail for a limited period of time after the issue date. However, there is no obligation on Goldman Sachs (Asia) L.L.C. or its agent to do this. Such stabilization, if commenced, may be discontinued at any time, and must be brought to an end after a limited period.

       This prospectus contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader. Unless otherwise noted, all translations from Renminbi to U.S. dollars were made at the noon buying rate in The City of New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York, or the noon buying rate, as of December 31, 2003, which was RMB8.2767 to US$1.00. We make no representation that the Renminbi amounts referred to in this prospectus could have been or could be converted into U.S. dollars at any particular rate or at all. On April 7, 2004, the noon buying rate was RMB8.2769 to US$1.00.

CONVENTIONS WHICH APPLY TO THIS PROSPECTUS

       Unless we indicate otherwise, all information in this prospectus reflects the following:

	•	no exercise by the underwriters of their option to purchase up to                     additional ADSs representing                     ordinary shares;
	•	conversion of all outstanding preferred shares to ordinary shares upon the closing of this offering;

       Except where the context otherwise requires and for purposes of this prospectus only;

	•	“we,” “us,” “our company” and “our” refer to Shanda Interactive Entertainment Limited, its predecessor entities and subsidiaries, and, in the context of describing our operations, also include our PRC-incorporated affiliates, including Shanghai Shanda Networking Co., Ltd., or Shanda Networking;
	•	in certain instances, Shanda Networking is referred to as “Shanghai Shanda Internet Development Co., Ltd.”, which is an alternative English translation of its Chinese name;
	•	“China” or “PRC” refers to the People’s Republic of China, excluding Taiwan, Hong Kong and Macau; and
	•	all references to “RMB” or “Renminbi” are to the legal currency of China and all references to “U.S. dollars,” “dollars” and “US$” are to the legal currency of the United States.

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PROSPECTUS SUMMARY

       The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in the ADSs discussed under “Risk Factors”, before deciding whether to buy our ADSs.

Our Business

       We are the largest operator of online games in China in terms of estimated 2003 game revenues according to International Data Corporation, or IDC, a leading market research firm. We offer a portfolio of online games that users play over the Internet. The games that we operate are licensed to us by third parties as well as developed by us in-house. The games we offer include The Legend of Mir II, or Mir II, which is the most popular online game in China according to users surveyed by IDC, and The World of Legend, or Woool, which is the first online game that we developed in-house. In the first quarter of 2004, our commercially launched games had approximately 1.4 million peak concurrent users and 931,570 average concurrent users, which refer to the highest number and average number, respectively, of users playing our games at the same time during that period.

       We operate both massively multiplayer online games, including massively multiplayer online role-playing games, or MMORPGs, and casual online games. The interactive and group oriented nature of our games creates a strong sense of community among users, and the large size of our user base contributes to user loyalty and helps to attract new users.

	•	Our MMORPGs allow thousands of users to interact with one another in a virtual world by assuming ongoing roles or characters with different features. The games are continuous, and players accumulate features and communicate with one another through instant messaging. Because MMORPGs require a significant amount of time to master, they tend to have a high degree of user stickiness, which means that users tend to spend longer amounts of time playing these games than using other Internet applications.
	•	Our casual games are less complex and time consuming than MMORPGs, but attract a broader range of users as well as more home users. Our casual games include BNB, which was the highest ranked casual game in IDC’s survey of the top 10 most popular online games in China for 2003.

       According to the same survey, three of the games that we currently commercially operate, Mir II, Woool and BNB, ranked among the top five most popular online games in China for 2003, ranking first, fourth and fifth, respectively. The survey was conducted by IDC through the Internet, traditional media and mobile phones in connection with its research report “China Online Gaming Market Analysis 2003-2008”. Over 173,000 participants responded to IDC’s survey. We expect to launch six additional games in 2004, including four MMORPGs and two casual games.

       We believe that the popularity of the online games that we operate is attributable to our operational infrastructure and the services we offer that enhance our users’ game playing experience, in addition to our games’ quality or features. In particular:

	•	We maintain a dedicated product management team for each of our games, which forms operational plans, coordinates internal resources, and manages the online game’s virtual community on an hour-by- hour basis;
	•	We have both in-house development capabilities as well as localization experience for licensed games. After launching our first in-house developed game, Woool, which has become our second most important game in terms of revenues, we launched another in-house developed game, The Sign, for open beta testing in February 2004. Of the six new

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		online games that we plan to commercially launch in 2004, four will be in-house developed and two will be licensed;
	•	We have built a nationwide distribution and payment network in China. We estimate that our network reaches over 317,000 retail points of sale throughout China, over 40% of which are Internet cafes, which are the primary venue for users to play online games in China;
	•	We are developing a centralized Internet cafe communications and management system to link various Internet cafes in our distribution network, which would permit us to provide better information to the Internet cafes about our games, promotions and events, and allow us to gather more data from the Internet cafes;
	•	Our nationwide server network in China consists of approximately 9,500 servers with the capacity to accommodate approximately 3.4 million concurrent online users; and
	•	We have a developed customer service system, which includes a 24-hour call center.

       Our principal source of revenue is the fees paid by users to play our online games. Our users generally purchase pre-paid game cards, which are sold in both virtual and physical form, to obtain access codes and passwords that can be used to add value to their accounts. We offer our users two purchase options: hourly usage for a price per hour from RMB0.28 (US$0.03) to RMB0.55 (US$0.07), and unlimited access for a period of time, generally from two days to 30 days, for a price from RMB5 (US$0.60) to RMB45 (US$5.44) depending on the game. The usage and price options differ among our various games. In the first quarter of 2004, excluding BNB, we had 11.2 million active paying accounts for our games, which refers to the number of user accounts from which pre-paid playtime was used during that quarter. Users of our casual game, BNB, can play the game without any payment, but they must purchase “game points” from us in order to acquire premium features in the game that enhance users’ experience, such as advanced weapons or equipment for game characters. The two most significant factors that affect our MMORPG online games revenues are:

	•	the total number of hours that users play our games (which equals the average concurrent users for a given period multiplied by the number of hours in that period) and
	•	our average revenue per user-hour.

       We have experienced significant revenue and earnings growth since the commercial launch of our first online game in November 2001.

	•	Our net revenues increased by 83.9% to RMB600.0 million (US$72.5 million) in 2003 from RMB326.2 million in 2002.
	•	Our net income increased by 95.9% to RMB272.9 million (US$33.0 million) in 2003 from RMB139.3 million in 2002.

       In addition, we believe that our large user base and the frequency of pageviews of our game websites also provide an opportunity for us to generate advertising revenues. We initially intend to sell banner advertising on the web pages that provide information on the features of our games, rather than on pages in the game environment.

       In 2003, our total net cash receipts were RMB705.2 million (US$85.2 million), which includes direct expenditures by our users for playtime that was not used during the period, and accordingly was not reflected in our net revenues. Our total net cash receipts reflect spending by users for our games during the period, net of sales discounts, which currently equals 23% and 14% of the face value of our pre-paid game cards, that we give to our e-sales distributors and offline distributors, respectively.

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Our Industry

       According to IDC estimates dated December 2003, online game direct expenditures in China (including subscription and usage fees, but not including Internet connection charges, telecommunications charges or purchase of associated software or materials) was US$159 million in 2003, and will reach US$810 million in 2007.

       The online games industry has reached a relatively sizeable scale in China only in the last two years. We believe that this growth is attributable to the growing popularity of the Internet as an attractive source of entertainment, particularly for young people in China, over other forms of media which are predominantly state-owned. In addition, unlike offline games where software is generally made available on a disk or cartridge, software piracy generally does not pose a serious threat to the online games industry. The high degree of user loyalty, relatively low user entry cost and convenience of play for users and China’s strong Internet cafe culture have also contributed to the growth of the online games industry in China.

       We believe that infrastructure factors, including growth of Internet usage and increases in personal computer penetration and broadband adoption, as well as related recent government support for the industry, will continue to drive the growth of the online games market in China. We also believe that advances in game development technologies and the increase in locally developed games will make available more content that is tailored to local tastes in China. While online games today are predominantly played over personal computers, the potential emergence of other platforms, such as online game consoles, could significantly advance the penetration of online games in households in China.

Our Strategies and Risks

       Our objective is to maintain and enhance our position in the online games industry in China. Our strategies for achieving this objective include continuing to broaden our game offerings through in-house development, strategic joint ventures or alliances, acquisitions and licensing arrangements, enhancing our operational platform through additional investments in our technology infrastructure, expanding and diversifying our sources of revenues, including through banner advertising, and exploring alternative channels for delivering online entertainment across other media platforms, including online game consoles.

       Our ability to realize our business objective and execute our strategies is subject to certain risks and uncertainties, including risks related to our dependence on Mir II and Woool, our two most popular online games, for approximately 87.5% of our revenue in the first quarter of 2004, the fact that our two most popular online games are the subjects of pending legal proceedings and our ability to consistently license or develop additional successful online games. Other risks and uncertainties include the possibility that the PRC government could determine that the agreements that establish our operating structure do not comply with PRC government restrictions on foreign investment in the Internet industry, PRC government regulation affecting the online games industry or Internet cafes where our games are most frequently played, significant competition, rapid technological change and the fact that two of our shareholders, Skyline Media Limited and SB Asia Infrastructure Fund L.P., as a result of their substantial shareholdings in us, will continue to have significant influence in determining the outcome of any corporate transaction.

Our Corporate History and Structure

       We are currently 74.9% owned by Skyline Media Limited, or Skyline Media, a company whose sole shareholders are Tianqiao Chen, our chairman and chief executive officer, Danian Chen, our senior vice president, and Qianqian Luo, one of our directors. SB Asia Infrastructure Fund L.P., a private equity fund that focuses on the technology and telecommunications sectors and that is

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       Our business was founded in December 1999 when Tianqiao Chen and Danian Chen established Shanghai Shanda Networking Co., Ltd, or Shanda Networking. In November 2001, we commercially launched Mir II, our first online game. In July 2002, we established a holding company, Shanda Holdings Limited, or Shanda BVI, in the British Virgin Islands. In March 2003, we restructured our operations in connection with the venture capital investment in us by SB Asia Infrastructure Fund L.P. As part of this restructuring, we established Shengqu Information Technology (Shanghai) Co., Ltd., or Shengqu, a wholly owned subsidiary of Shanda BVI in China, which acquired substantially all of Shanda Networking’s operating assets.

       In November 2003, we established a new holding company, Shanda Interactive Entertainment Limited, in the Cayman Islands. In December 2003, the shareholders of Shanda BVI exchanged all of their shares of Shanda BVI for shares of Shanda Interactive Entertainment Limited. Following this share exchange, and assuming the conversion of all of our convertible redeemable preferred shares into our ordinary shares upon completion of this offering and as adjusted to reflect the sale of the ADSs offered in this offering, Skyline Media and SB Asia Infrastructure Fund L.P. will beneficially own           % and           % of our company, respectively.

       As a result of PRC legal considerations, we operate our online game business in China through Shanda Networking, a company wholly owned by Tianqiao Chen and Danian Chen, both of whom are PRC citizens. In order to comply with PRC regulations, Shanda Networking holds the licenses and approvals that are required to operate our online games business in China. We have entered into a series of contractual arrangements with Shanda Networking and its shareholders, including contracts relating to the transfer of assets, the provision of services, software licenses and equipment, and certain shareholder rights and corporate governance matters. As a result of these contractual arrangements, which provide us with the substantial ability to control Shanda Networking, we are considered the primary beneficiary of Shanda Networking and accordingly we consolidate Shanda Networking’s results in our financial statements. For a description of these contractual arrangements, see “Our Corporate Structure” and “Related Party Transactions.”

Our Offices

       Our principal executive office is located at No. 1 Intelligent Office Building, No. 690 Bibo Road, Zhangjiang Micro-Electronics Harbor, Pudong New Area, Shanghai 201203, China, and our telephone number is (86-21) 5050-4740. Our website address is www.shanda.com.cn. The information on our website is not a part of this prospectus.

Recent Developments

       Our board of directors declared a special cash dividend on March 5, 2004 of US$23.2 million. This special dividend is expected to be paid out of available cash to our existing shareholders on or about April 22, 2004.

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The Offering

       The following information assumes that the underwriters will not exercise their option to purchase additional ADSs in the offering, unless otherwise indicated.

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		deposited with a custodian for, and registered in the name of a nominee of, The Depository Trust Company, or DTC, in New York, New York. In general, beneficial interests in the ADSs will be shown on, and transfers of these beneficial interests will be effected only through, records maintained by DTC and its direct and indirect participants.
Use of proceeds		Our net proceeds from this offering are expected to be approximately US$                    million, assuming an initial public offering price per ADS of US$                    , the mid-point of the estimated public offering price range. We anticipate using approximately US$90 million for the enhancement of our existing business and operations, approximately US$60 million for acquisitions or investments in businesses, products or technologies that we believe are complementary to our existing business, and the balance of the net proceeds, or US$                    , for general corporate purposes.
		We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.
Risk factors		See “Risk Factors” and other information included in this prospectus for a discussion of risks you should carefully consider before deciding to invest in our ADSs.

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING INFORMATION

       The following summary consolidated financial information has been derived from our consolidated financial statements. Our statements of operations and comprehensive income for the years ended December 31, 2001, 2002 and 2003 and our balance sheets as of December 31, 2001, 2002 and 2003 have been audited by PricewaterhouseCoopers Zhong Tian CPAs Limited Company, independent accountants. The report of PricewaterhouseCoopers on those financial statements is included elsewhere in this prospectus. The summary consolidated financial information for those periods and as of those dates should be read in conjunction with those statements and the accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

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

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RISK FACTORS

       You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ADSs. Any of the following risks could have a material adverse effect on our business, financial condition and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.

Risks Relating to Our Business

We are substantially dependent on two online games, which accounted for approximately 87.5% of our revenues in the first quarter of 2004.

       Historically, we depended on The Legend of Mir II, or Mir II, which is an online game we license from a third party, for substantially all of our net revenues. On October 8, 2003, we commercially launched The World of Legend, or Woool, which is an online game we developed in-house. In the first quarter of 2004, we derived approximately 56.7% and 30.8% of our revenues from Mir II and Woool, respectively. We expect to continue to derive a substantial majority of our net revenues from Mir II and Woool for at least 2004. Accordingly, any of the following could materially and adversely affect our business, financial condition and results of operations:

	•	any reduction in the Mir II or Woool user base or any decrease in their popularity in the China market due to intensifying competition or other factors;
	•	failure by us to make improvements, updates or enhancements to Woool in a timely manner; or
	•	any lasting or prolonged server interruption due to network failures or other factors or any other adverse developments specific to Mir II or Woool.

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

       We derive the majority of our net revenues from online games that we license from third parties. In the first quarter of 2004, we derived approximately 67.8% of our revenues from licensed online games. If any of these licenses are terminated or not renewed at an acceptable cost or at all, or if we are unable to obtain from the licensor of any of our licensed games the technical support necessary for the satisfactory operation of these games, our financial condition and results of operations may be materially and adversely affected.

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

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Our license to operate Mir II in China is currently subject to an arbitration proceeding. If we lose in this arbitration, we may no longer be able to operate Mir II, which accounted for approximately 56.7% of our revenues in the first quarter of 2004, and may be required to pay additional royalty fees and an unspecified amount of damages.

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

       Wemade has, however, objected to our request for discontinuation of the arbitration, has filed counterclaims against us and has filed cross-claims against Actoz. In addition, Wemade has requested an injunction against our use of the Mir II software and payment of royalty fees and an unspecified amount of damages. We have appointed Allen & Gledhill, a Singapore law firm, to act on our behalf with respect to this arbitration.

       On January 9, 2004, the ICC appointed a sole arbitrator to determine the dispute. Determination of a dispute and publication of an ICC award typically takes approximately 6 to 12 months from the date of appointment of the arbitrator. If the arbitrator determines that Wemade validly terminated the Mir II license and that the settlement agreement and the amendment agreement are not binding with respect to Wemade, or that the Mir II license has expired, we may no longer be able to operate Mir II, which accounted for approximately 56.7% of our revenues in the first quarter of 2004. In addition, we may have to pay additional royalties or an unspecified amount of damages. Any lapse in our right to operate Mir II in China, as well as any additional royalties or damages we may be required to pay as a result of the arbitrator’s decision, may have a material adverse effect on our business, financial condition and results of operations.

       For a more complete description of this arbitration see “Business — Legal Proceedings”.

We may be subject to intellectual property infringement claims, which may force us to incur substantial legal expenses and, if determined adversely against us, may materially disrupt our business. In particular, we are currently subject to copyright infringement and unfair competition claims by Wemade with respect to the Woool software, which if determined adversely against us, could cause us to stop operating Woool, which in the first quarter of 2004 accounted for approximately 30.8% of our revenues.

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

       On October 8, 2003, Wemade filed claims against us in the Beijing First Intermediate People’s Court, or the Beijing Court, with respect to our operation of Woool. Wemade has alleged, among other things, that Woool copied Mir II and elements of the Legend of Mir III, which is another online game that Wemade developed, thereby infringing Wemade’s copyrights in these games. In addition, Wemade has alleged that our operation of Woool violates the PRC Anti-Unfair Competition Law. In particular, Wemade has alleged that the Chinese name for Woool, which includes two characters

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       If a court determines that we have breached Wemade’s copyright, we may no longer be able to operate Woool, which accounted for approximately 30.8% of our revenues in the first quarter of 2004. We may also have to pay legal fees and related costs, which could be significant. In addition, if a court determines that we have violated the PRC Anti-Unfair Competition Law, we may be required to modify certain aspects of Woool, including its name. Any lapse in our right to operate Woool in China, or any modifications to the game itself, as a result of this litigation, may have a material adverse effect on our business, financial condition and results of operations.

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

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

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

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

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

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

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There are risks associated with our business strategy contemplating growth through acquisitions and joint ventures.

       As a component of our growth strategy, we intend to continue to enhance our business development, including our game content offerings, by acquiring other businesses that complement our current online business or that we believe may benefit us in terms of user base or product or content offering, and by entering into strategic joint ventures with selected industry players. However, our ability to grow through such acquisitions and joint ventures will depend on the availability of suitable acquisition candidates at an acceptable cost or at all, our ability to compete effectively to attract and reach agreement with acquisition candidates or joint venture partners on commercially reasonable terms, the availability of financing to complete larger acquisitions or joint ventures as well as our ability to obtain any required governmental approvals. We lack experience in identifying, financing and completing large acquisition or joint venture transactions. In addition, the benefits of an acquisition or joint venture transaction may take considerable time to develop and we cannot assure you that any particular acquisition or joint venture will produce the intended benefits. Moreover, the identification and completion of these transactions may require us to expend significant management and other resources.

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

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

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

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

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

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

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

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

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

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

       Any failure to maintain the satisfactory performance, reliability, security and availability of our network infrastructure may cause significant harm to our reputation and our ability to attract and maintain users. All of the game servers operating two of our games, BNB and Tactical Commanders, and all of the servers handling log in, billing and data back-up matters for us are hosted and maintained by third party service providers in Shanghai. We do not maintain full backup for our server network hardware. Major risks involved in such network infrastructure include:

	•	any break-downs or system failures resulting in a sustained shutdown of all or a material portion of our servers, including failures which may be attributable to sustained power shutdowns, or efforts to gain unauthorized access to our systems causing loss or corruption of data or malfunctions of software or hardware; and
	•	any disruption or failure in the national backbone network, which would prevent our users outside Shanghai from logging on to any of our games or playing the games for which the game servers are all located in Shanghai.

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

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

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

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

       Although the use of personal computers in China has increased in recent years, the penetration rate for personal computers in China is much lower than in the United States. In addition, despite a decrease in the cost of Internet access in China due to a decrease in the cost of personal computers and the introduction and expansion of broadband access, the cost of Internet access remains relatively high in comparison to the average per capita income in China. The limited use of personal computers in China and the relatively high cost of Internet access may limit the growth of our business. Furthermore, any Internet access or telecommunications fee increase could reduce the number of users that play our online games.

We have a limited operating history, which may make it difficult for you to evaluate our business, and our limited resources may affect our ability to manage the growth we expect to achieve.

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

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

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

       Certain of our PRC companies, including Shengqu and Shanda Networking, enjoy preferential tax treatments, in the form of reduced tax rates or tax holidays, provided by the PRC government or

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       In 2003, we also received aggregate financial incentives of RMB17.9 million (US$2.2 million) and RMB45.0 million (US$5.4 million), which were calculated with reference to business tax and income tax, respectively, that we previously paid. These financial incentives have been granted by the municipal government and, in accordance with municipal policies, have a fixed term of 3 years with respect to financial incentives granted with reference to revenues on which we pay business tax and 8 years for financial incentives granted with reference to taxable income on which we pay income tax. Eligibility for the financial incentives we receive requires that we continue to meet a number of financial and non-financial criteria to continue to qualify for these financial incentives and our continued qualification is further subject to the discretion of the municipal government. Moreover, the central government or municipal government could determine at any time to immediately eliminate or reduce these financial incentives, generally with prospective effect. If we had not received these financial incentives in 2003, our net income would have been RMB219.4 million, a decrease of 19.6% from the reported amount. Because the receipt of the financial incentives are subject to periodic time lags and inconsistent municipal government practice on payment times, for so long as we continue to receive these financial incentives, our net income in a particular quarter may be higher or lower relative to other quarters based on the potentially uneven receipt by us of these financial incentives in addition to any business or operating related factors we may otherwise experience.

       We cannot assure you that we will continue to enjoy these preferential tax treatments or financial incentives in the future. The discontinuation of these preferential tax treatments or financial incentives could materially and adversely affect our business, financial condition and results of operations.

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

       Based upon the nature of our business activities, we may be classified as a passive foreign investment company, or PFIC, by the United States Internal Revenue Service, or IRS, for U.S. federal income tax purposes. Such characterization could result in adverse U.S. tax consequences to you if you are a U.S. investor. For example, if we are a PFIC, our U.S. investors will become subject to increased tax liabilities under U.S. tax laws and regulations and will become subject to burdensome reporting requirements. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, we will be classified as a PFIC for U.S. tax purposes if either: (1) 75% or more of our gross income in a taxable year is passive income, or (2) the average percentage of our assets by value in a taxable year which produce or are held for the production of passive income (which includes cash) is at least 50%. The calculation of the value of our assets will be based, in part, on the then market value of our ADSs, which is subject to change. In addition, the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raise in this offering. We cannot assure you that we will not be a PFIC for 2004 or any future taxable year. For more information on PFICs, see “Taxation — United States Federal Income Taxation — U.S. Holders — Anti-Deferral Rules — Passive Foreign Investment Company Status”.

We have limited business insurance coverage in China.

       The insurance industry in China is still at an early stage of development. In particular, PRC insurance companies offer limited business insurance products. As a result, we do not have

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Any future outbreak of severe acute respiratory syndrome in China, or similar adverse public health developments, may have a material adverse effect on our business operations, financial condition and results of operations.

       From December 2002 to June 2003, China and certain other countries experienced an outbreak of a new and highly contagious form of atypical pneumonia now known as severe acute respiratory syndrome, or SARS. On July 5, 2003, the World Health Organization declared that the SARS outbreak had been contained. Since September 2003, however, a number of isolated new cases of SARS have been reported, most recently in Guangdong province of the PRC, in January 2004. A new outbreak of SARS may result in health or other government authorities requiring the closure of Internet cafes, which is where many users access our online games, or of our offices. Such closures would severely disrupt our business and operations and have a material adverse effect on our financial condition and results of operations. During the period from early May to mid June in 2003, many Internet cafes in China were closed by the PRC government to prevent transmission of SARS, and average concurrent users of Mir II, our most popular game, in May 2003 were approximately 23% lower than in April 2003. Any recurrence of the SARS outbreak, or a development of a similar health hazard in China, may deter people from congregating in public places, including Internet cafes, and would significantly reduce our level of concurrent users and materially and adversely affect our revenues and profitability.

Risks Relating to Regulation of the Internet and to Our Structure

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

       PRC regulations currently limit foreign ownership of companies that provide Internet content services, which includes operating online games, to 50%. In addition, foreign and foreign invested enterprises are currently not able to apply for the required licenses for operating online games in China. We are a Cayman Islands company and we conduct our operations solely in China through Shengqu, our indirectly wholly owned subsidiary. We and Shengqu are foreign or foreign invested enterprises under PRC law and accordingly are ineligible to apply for a license to operate online games. In order to comply with foreign ownership restrictions, we operate our online games business in China through Shanda Networking, which is wholly owned by Tianqiao Chen, our chairman and chief executive officer, and Danian Chen, our senior vice president, both of whom are PRC citizens. Shanda Networking holds the licenses and approvals that are required to operate our online games business and Shengqu owns the substantial majority of physical assets required to operate our business. We have entered into a series of contractual arrangements with Shanda Networking, pursuant to which we provide services, software licenses and equipment to Shanda Networking in exchange for fees, and we have undertaken to provide financial support to Shanda Networking to the extent necessary for its operations. In addition, we have entered into agreements with Shanda Networking and its shareholders that provide us with the substantial ability to control Shanda Networking. As a result of these contractual arrangements, we are considered the primary beneficiary of Shanda Networking and accordingly we consolidate Shanda Networking’s results in our financial statements. For a description of these contractual arrangements, see “Our Corporate Structure” and “Related Party Transactions”.

       In the opinion of Grandall Legal Group (Shanghai), our PRC legal counsel, (1) the ownership structures of our company, Shengqu and Shanda Networking, both currently and after giving effect to this offering, are in compliance with existing PRC laws and regulations; (2) our contractual arrangements with Shanda Networking and its shareholders are valid and binding, and will not result

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       If we, Shengqu or Shanda Networking are found to be in violation of any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violations, including:

	•	revoking Shengqu’s or Shanda Networking’s business and operating licenses;
	•	discontinuing or restricting our, Shengqu’s or Shanda Networking’s operations;
	•	imposing conditions or requirements with which we, Shengqu or Shanda Networking may not be able to comply;
	•	requiring us, Shengqu or Shanda Networking to restructure the relevant ownership structure or operations;
	•	restricting or prohibiting our use of the proceeds of this offering to finance our business and operations in China; or
	•	taking other regulatory or enforcement actions, including levying fines, that could be harmful to our business.

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

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

       We conduct substantially all of our operations, and generate substantially all of our revenues, through contractual arrangements with Shanda Networking and its shareholders that provide us with the substantial ability to control Shanda Networking. Although we have been advised by Grandall Legal Group (Shanghai), our PRC legal counsel, that these contractual arrangements are valid, binding and enforceable under current PRC laws and regulations, these contractual arrangements may not be as effective in providing us with control over Shanda Networking as direct ownership. For example, Shanda Networking could refuse to pay the service fees due under the contractual arrangements or otherwise breach the contractual arrangements.

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

       Moreover, our corporate structure and arrangements with Shanda Networking result in the 5% PRC business tax being levied on both Shanda Networking’s revenues derived from its operations in China and Shengqu’s revenues derived from its contractual arrangements with Shanda Networking.

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

	•	increasing Shanda Networking’s tax liability without reducing Shengqu’s tax liability, which could further result in late payment fees and other penalties to Shanda Networking for under-paid taxes; or
	•	limiting Shengqu’s ability to maintain preferential tax treatments and financial incentives, which if the transfer pricing adjustment is significant, could result in Shengqu failing to qualify for those preferential tax treatments and financial incentives.

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

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

The laws and regulations governing the online games industry in China are developing and subject to future changes. If Shanda Networking fails to obtain or maintain all applicable permits and approvals, our business and operations would be materially and adversely affected.

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

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

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       As the online games industry is at an early stage of development in China, new laws and regulations may be adopted in the future to address new issues that arise from time to time. As a result, substantial uncertainties exist regarding the interpretation and implementation of current and any future PRC laws and regulations applicable to the online games industry. For example, we may be required to obtain an inter-regional ICP license in order to operate online games in multiple provinces, autonomous regions and centrally administered municipalities. We are in the process of applying for an inter-regional ICP license, and do not believe that while our application is pending, the regulatory authorities will take any action against us. However, we cannot assure you that we will obtain this license or that the regulatory authority will not take any action against us. While we believe that, with the exception of the inter-regional ICP license, we are in compliance with all applicable PRC laws and regulations currently in effect, we cannot assure you that we will not be found in violation of any current or future PRC laws and regulations.

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

       China has enacted laws and regulations governing Internet access and the distribution of news, information or other content, as well as products and services, through the Internet. In the past, the PRC government has stopped the distribution of information through the Internet that it believes violates PRC law. The Ministry of Information Industry, the State Press and Publication Administration and the Ministry of Culture recently promulgated new regulations which prohibit games from being distributed through the Internet if they contain content that is found to, among other things, propagate obscenity, gambling or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC, or compromise State security or secrets.

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

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

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

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

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Risks Relating to the People’s Republic of China

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

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

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

       The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although the PRC government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.

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

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

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

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

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

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

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

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

       Substantially all of our revenues are denominated in Renminbi, while a portion of our expenditures are denominated in foreign currencies, primarily the U.S. dollar and the Japanese yen. Fluctuations in exchange rates, primarily those involving the U.S. dollar and the Japanese yen, may affect our costs and operating margins. In addition, these fluctuations could result in exchange losses and increased costs in Renminbi terms. Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into U.S. dollars and Japanese yen.

Risks Related to This Offering

An active trading market for our ordinary shares or ADSs may not develop and the trading price for our ADSs may fluctuate significantly.

       Prior to this offering, there has been no public market for our ADSs or ordinary shares underlying the ADSs. If an active public market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs may be adversely affected. Our ADSs have been approved for quotation on The Nasdaq Stock Market’s National Market. We can provide no assurances that a liquid public market for our ADSs will develop.

       The initial public offering price for our ADSs will be determined by negotiation between us and the underwriters based upon several factors, and we can provide no assurance that the price at which the ADSs are traded after this offering will not decline below the initial public offering price.

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       In addition, The Nasdaq Stock Market’s National Market has from time to time experienced significant price and volume fluctuations that have affected the market prices for the securities of technology companies, particularly Internet companies. As a result, investors in our securities may experience a decrease in the value of their ADSs regardless of our operating performance or prospects. In the past, following periods of volatility in the market price of a company’s securities, shareholders have often instituted securities class action litigation against that company. If we were involved in a class action suit, it could divert the attention of senior management, and, if adversely determined, could have a material adverse effect on our business, financial condition and results of operations.

The sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.

       Sales of substantial amounts of our ADSs in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our future ability to raise capital through offerings of our ADSs.

       There will be                     ordinary shares (equivalent to                     ADSs) outstanding immediately after this offering, or                     ordinary shares (equivalent to                      ADSs) if the underwriters exercise their option to purchase additional ADSs in full. In addition, as of April 9, 2004, there were outstanding options to purchase 12,644,386 ordinary shares, including options to purchase 4,428,900 ordinary shares that are immediately exercisable. All of the ADSs sold in this offering will be freely tradeable without restriction or further registration under the Securities Act, unless held by our “affiliates” as that term is defined in Rule 144 under the Securities Act. The  outstanding ordinary shares to be held by Skyline Media Limited and SB Asia Infrastructure Fund L.P. immediately after this offering are “restricted securities” as defined in Rule 144 and may not be sold in the absence of registration other than in accordance with Rule 144 under the Securities Act or another exemption from registration. However, in connection with our sale of preferred shares in March 2003, we granted the purchaser of those shares the right to cause us to register for resale the ordinary shares into which such preferred shares will convert upon the closing of this offering. Therefore, that purchaser will be able to sell its ordinary shares into the market, subject to, among other things, limitations on minimum size of the registered offering, timing of the offering and other matters, without resort to, or availability of, an exemption from registration.

       In connection with this offering, we, our controlling shareholder, the holder of our convertible preferred shares and our directors and executive officers who have received options to purchase our ordinary shares have agreed, subject to specified exceptions, not to sell any of our ordinary shares or ADSs for            days after the date of this prospectus without the written consent of the underwriters. However, the underwriters may release these securities from these restrictions at any time. We cannot predict what effect, if any, market sales of securities held by these shareholders or the availability of these securities for future sale will have on the market price of our ADSs.

We are controlled by a small group of our existing shareholders, whose interests may differ from other shareholders, and we are exempt from some Nasdaq corporate governance requirements.

       Our two shareholders currently beneficially own substantially all of the outstanding ordinary shares (assuming the conversion of all outstanding preferred shares into ordinary shares and the exercise of all outstanding options to acquire ordinary shares), and following this offering will beneficially own approximately           % of our outstanding ordinary shares, or           % if the underwriters exercise their option to purchase additional ADSs in full. Accordingly, they will have significant influence in determining the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. They will

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       In addition, we are a “controlled company” as defined under Nasdaq Marketplace Rule 4350(c)(5) because one of our shareholders owns more than 50% of our outstanding ordinary shares. As a result, for so long as we remain a controlled company as defined in that rule, we are exempt from, and you are not provided with the benefits of, some of the Nasdaq corporate governance requirements, including that:

	•	a majority of our board of directors must be independent directors;
	•	the compensation of our chief executive officer must be determined or recommended by a majority of the independent directors or a compensation committee comprised solely of independent directors; and
	•	our director nominees must be selected or recommended by a majority of the independent directors or a nomination committee comprised solely of independent directors.

As a result our independent directors will not have as much influence over our corporate policy as they would if we were not a controlled company.

Because the initial public offering price is substantially higher than the pro forma net tangible book value per share, you will incur immediate and substantial dilution.

       If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of approximately US$                    per ADS (assuming the conversion of all outstanding preferred shares into ordinary shares and no exercise of outstanding options to acquire ordinary shares), representing the difference between our pro forma net tangible book value per ADS as of                     , after giving effect to this offering and the assumed initial public offering price per share of US$                    per share (the mid-point of the estimated offering price range set forth on the front cover page of this prospectus). In addition, you may experience further dilution to the extent that ordinary shares are issued upon the exercise of stock options. Substantially all of the ordinary shares issuable upon the exercise of currently outstanding stock options will be issued at a purchase price on a per ADS basis that is less than the initial public offering price per ADS in this offering.

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

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

	•	provisions that restrict the ability of our shareholders to call meetings; and
	•	provisions that authorize our board of directors, without action by our shareholders, to issue preferred shares and to issue additional ordinary shares, including ordinary shares represented by ADSs.

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

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We are a Cayman Islands company and, because the rights of shareholders under Cayman Islands law differ from those under U.S. law, you may have difficulty protecting your shareholder rights.

       We are a company incorporated under the laws of the Cayman Islands, and substantially all of our assets are located outside the United States. In addition, a majority of our directors and executive officers are nationals or residents of jurisdictions other than the United States and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon our directors or executive officers, or enforce judgments obtained in the United States courts against our directors or executive officers.

       Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Cayman Islands Companies Law and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws as compared to the United States, and some states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

       The Cayman Islands courts are also unlikely:

	•	to recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws; and
	•	to impose liabilities against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature.

       There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.

       As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a U.S. company.

We have not determined a specific use for a portion of the net proceeds from this offering and we may use these proceeds in ways with which you may not agree.

       We have not determined a specific use for a portion of the net proceeds of this offering. Our management will have considerable discretion in the application of these proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our profitability or increase our ADS price. The net proceeds from this offering may also be placed in investments that do not produce income or that lose value.

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

       A holder of our ADSs may only exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Upon receipt of voting instructions of a holder of ADSs in the manner set forth in the deposit agreement, the depositary will endeavor to vote the underlying ordinary shares in accordance with these instructions. Under our amended and restated articles of association and Cayman Islands law, the minimum notice period required for convening a general meeting is 10 days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your ordinary shares to allow you to cast your vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ordinary shares are not voted as you requested.

You may not be able to participate in rights offerings and may experience dilution of your holdings.

       We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell such undistributed rights to third parties in this situation. We can give no assurances that we will be able to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

       If the depositary is unable to sell rights that are not exercised or not distributed or if the sale is not lawful or reasonably practicable, it will allow the rights to lapse, in which case you will receive no value for these rights.

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FORWARD-LOOKING STATEMENTS

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

	•	our goals and strategies;
	•	our future business development, financial condition and results of operations;
	•	projected revenues, profits, earnings and other estimated financial information;
	•	expected changes in our margins and certain cost or expense items as a percentage of our net revenues;
	•	our plans to expand and diversify our sources of revenues;
	•	our plans to launch new in-house developed games and license additional games from third parties, including the timing of any such launches or licenses;
	•	the development of other delivery platforms for online games, including online game consoles;
	•	competition in the PRC online games industry;
	•	the outcome of ongoing, or any future, litigation or arbitration;
	•	the expected growth in the number of Internet and broadband users in China, growth of personal computer penetration and developments in the ways most people in China access the Internet; and
	•	PRC governmental policies relating to the Internet and Internet content providers.

       These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, we cannot assure you that our expectations will turn out to be correct. Our actual results could be materially different from and worse than our expectations. Important risks and factors could cause our actual results to be materially different from our expectations are generally set forth in the “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” sections and elsewhere in this prospectus.

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

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

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OUR CORPORATE STRUCTURE

       We are currently 74.9% owned by Skyline Media, a company whose sole shareholders are Tianqiao Chen, our chairman and chief executive officer, Danian Chen, our senior vice president, and Qianqian Luo, one of our directors. SB Asia Infrastructure Fund L.P., a private equity fund that focuses on the technology and telecommunications sectors and that is affiliated with SOFTBANK Corporation, with investment by Cisco Systems, Inc., owns the remaining 25.1% of our company.

       Our business was founded in December 1999 when Tianqiao Chen and Danian Chen established Shanda Networking. In July 2002, we established a holding company, Shanda Holdings Limited, or Shanda BVI, in the British Virgin Islands. In March 2003, we restructured our operations in connection with an investment by SB Asia Infrastructure Fund L.P. As part of this restructuring, we established Shengqu, a wholly owned subsidiary of Shanda BVI in China, which acquired substantially all of Shanda Networking’s operating assets. In November 2003, we established a new holding company, Shanda Interactive Entertainment Limited, in the Cayman Islands, and in December 2003, the shareholders of Shanda BVI exchanged all of their shares of Shanda BVI for shares of Shanda Interactive Entertainment Limited.

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       The following diagram illustrates our corporate and share ownership structure after giving effect to this offering, and assuming that: (1) all of our outstanding preferred shares are converted into ordinary shares upon completion of this offering and (2) the underwriters do not exercise their option to purchase additional ADSs:

       PRC regulations currently limit foreign ownership of companies that provide Internet content services, which includes operating online games, to 50%. In addition, foreign and foreign invested enterprises are currently not able to apply for the licenses required to operate online games in China. We are a Cayman Islands exempted company and we conduct our operations solely in China through Shengqu, our indirectly wholly owned subsidiary. We and Shengqu are foreign or foreign invested enterprises under PRC law and accordingly are ineligible to apply for a license to operate online games. In order to comply with foreign ownership restrictions, we operate our online games business in China through Shanda Networking, which is wholly owned by Tianqiao Chen, our chairman and chief executive officer, and Danian Chen, our senior vice president, both of whom are

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

	•	an amended and restated equipment leasing agreement, pursuant to which Shanda Networking leases a substantial majority of its operating assets from Shengqu;
	•	an amended and restated technical support agreement, pursuant to which Shengqu provides technical support for Shanda Networking’s operations;
	•	an amended and restated technology licensing agreement, pursuant to which Shengqu licenses certain billing technology to Shanda Networking;
	•	software license agreements, pursuant to which Shengqu licenses certain software to Shanda Networking; and
	•	an amended and restated strategic consulting agreement, pursuant to which Shengqu provides strategic consulting services to Shanda Networking.

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

	•	the shareholders of Shanda Networking have granted an irrevocable proxy to individuals designated by Shengqu to exercise the right to appoint directors, the general manager and other senior management of Shanda Networking;
	•	Shanda Networking will not enter into any transaction that may materially affect its assets, liabilities, equity or operations without our prior written consent;
	•	Shanda Networking will not distribute any dividend;
	•	Shengqu may purchase the entire equity interest in, or all the assets of, Shanda Networking for a purchase price of the lower of RMB10 million or the lowest price permitted under PRC law when and if such purchase is permitted by PRC law or the current shareholders of Shanda Networking cease to be directors or employees of Shanda Networking;
	•	the shareholders of Shanda Networking have pledged their equity interest in Shanda Networking to Shengqu to secure the payment obligations of Shanda Networking under all of the agreements between Shanda Networking and Shengqu; and
	•	the shareholders of Shanda Networking will not transfer, sell, pledge, dispose of or create any encumbrance on their equity interest in Shanda Networking without the prior written consent of Shengqu.

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

       In the opinion of Grandall Legal Group (Shanghai), our PRC legal counsel, (1) the ownership structures of our company, Shengqu and Shanda Networking, both currently and after giving effect to this offering, are in compliance with existing PRC laws and regulations, (2) our contractual

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

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USE OF PROCEEDS

       We estimate that we will receive net proceeds from this offering of approximately US$                     million, or approximately US$                     million if the underwriters’ option to purchase additional ADSs is exercised in full, after deducting underwriting discounts and the estimated offering expenses payable by us. These estimates are based upon an assumed initial offering price of US$                    per ADS (the mid-point of the range shown on the front cover page of this prospectus). We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.

       As of the date of this prospectus, we have not allocated any specific portion of the net proceeds of this offering for any particular purpose discussed below. Our use of the net proceeds may take the form of purchases of software, hardware or services, the hiring of personnel, the acquisition of businesses or portions thereof, or other general corporate purposes. We anticipate using the net proceeds of this offering as follows:

	•	approximately US$90 million for the enhancement of our existing business and operations, which is expected to include:

	•	approximately US$65 million for games development, including expansion of our game research and development center, acquisition of rights to new online games or related technologies, and acquisition of copyrights for materials that can be used to develop online games; and
	•	approximately US$25 million to enhance our operational platform, including a centralized user billing and verification system, a game testing and evaluation center, a centralized Internet data center management system, and a centralized Internet cafe communications system to enhance the relationship between us and our retail sales outlets;

	•	approximately US$60 million for acquisitions or investments in businesses, products or technologies that we believe are complementary to our own business or otherwise extend our business or brand, including investments to explore delivering online games through other platforms such as online game consoles; and
	•	the balance of approximately US$                    for general corporate purposes.

       For a discussion of our strategies and business plan, see “Business — Our Strengths and Strategies — Our Strategies”. We do not currently have any agreements or understandings to make any material acquisitions of, or investments in, other businesses. In utilizing the proceeds of this offering, we may make loans to our subsidiaries and consolidated PRC affiliated entities, or we may make additional capital contributions to these entities. Any loans or capital contributions to our PRC subsidiaries or consolidated PRC affiliated entities are subject to PRC regulation and approval. For example:

	•	loans by us to Shengqu, as a foreign invested enterprise, to finance its activities cannot exceed statutory limits and must be registered with the State Administration of Foreign Exchange; and
	•	loans by us to Shanda Networking or its subsidiaries, which are domestic PRC enterprises, must be approved by the relevant government authority and must also be registered with the State Administration of Foreign Exchange.

       We may also determine to finance Shengqu by means of capital contributions. These capital contributions must be approved by the Ministry of Commerce. Because Shanda Networking and its subsidiaries are not foreign invested enterprises, we are not likely to finance their activities by means of a capital contribution due to regulatory issues relating to foreign investment in domestic PRC enterprises, as well as the licensing and other regulatory issues discussed in “Regulation” elsewhere in this prospectus. We cannot assure you that we can obtain these government

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       The foregoing represents our current intentions with respect to the use and allocation of the net proceeds of this offering based upon our present plans and business conditions, but our management will have significant flexibility and discretion in applying the net proceeds of the offering. The occurrence of unforeseen events or changed business conditions could result in application of the proceeds of this offering in a manner other than as described in this prospectus.

       Pending these uses, we intend to invest our net proceeds in short-term, interest bearing, debt instruments or bank deposits. These investments may have a material adverse effect on the U.S. federal income tax consequences of your investment in our ADSs. It is possible that we may become a passive foreign investment company for United States federal income tax purposes, which could result in negative tax consequences for you. These consequences are described in more detail in “Taxation — United States Federal Income Taxation — U.S. Holders — Anti-Deferral Rules — Passive Foreign Investment Company Status.”

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DIVIDEND POLICY

       Our board of directors declared a special cash dividend on March 5, 2004 of US$23.2 million. This special dividend is expected to be paid out of available cash to our existing shareholders on or about April 22, 2004.

       Except for the special dividend distribution discussed above, we currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business, and do not anticipate paying any cash dividends on our ordinary shares, or indirectly on our ADSs, for the foreseeable future.

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

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

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CAPITALIZATION

       The following table sets forth our capitalization as of February 29, 2004:

	•	on an actual basis;
	•	on a pro forma basis to reflect the conversion of 25,112,870 of our Series A convertible redeemable preferred shares and 4,947,230 of our Series A-1 convertible redeemable preferred shares into 30,060,100 ordinary shares; and
	•	on a pro forma as adjusted basis to reflect (i) the conversion of all of the outstanding preferred shares, (ii) the special cash dividend of US$23.2 million to our existing shareholders as of March 5, 2004, and (iii) the sale of                     ADSs representing                     ordinary shares offered in this offering at an assumed initial public offering price of US$                    per ADS, the mid-point of the estimated public offering price range, after deducting underwriting discounts and estimated offering expenses payable by us.

       Except as set forth below, there has been no material change in our consolidated capitalization since February 29, 2004.

       You should read this table in conjunction with “Selected Consolidated Financial Information”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, included elsewhere in this prospectus.

       Upon the completion of this offering, under the terms of our convertible preferred shares, all of the outstanding preferred shares will mandatorily convert into ordinary shares if (1) the aggregate proceeds to us from this offering are not less than US$100 million and (2) our total market capitalization upon the completion of this offering is not less than US$500 million.

(1)	Translations of RMB amounts into U.S. dollars were made at a rate of RMB8.2767 to US$1.00, the noon buying rate in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2003.
(2)	Assumes that the underwriters do not exercise their option to purchase additional ADSs.

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DILUTION

       Our net tangible book value as of December 31, 2003 was approximately US$68.8 million, or US$0.77 per ordinary share outstanding on that date, and US$                    per ADS. Net tangible book value represents total consolidated tangible assets, including deferred licensing fees and related costs, minus the amount of our total consolidated liabilities. Our pro forma net tangible book value as of December 31, 2003 was approximately US$0.57 per ordinary share outstanding on that date, and US$                    per ADS. Pro forma net tangible book value adjusts net tangible book value to give effect to the conversion of all of our outstanding preferred shares into ordinary shares. Assuming we had sold the ADSs offered in this offering at an initial public offering price of US$                    per ADS, the mid-point of the estimated public offering price range, after giving effect to the sale of the ADSs offered in this offering and after deducting underwriting discounts and other estimated expenses of this offering payable by us, pro forma net tangible book value as of December 31, 2003 would have increased to US$                    , or US$                    per ordinary share and US$                    per ADS. This represents an immediate increase in net tangible book value of US$                    per ordinary share, or US$                    per ADS, to existing shareholders and an immediate dilution in net tangible book value of US$                    per ordinary share, or US$                    per ADS, to new investors purchasing ADSs at the initial public offering price. Dilution is determined by subtracting pro forma net tangible book value per ADS after this offering from the amount of cash paid by a new investor for one ADS. The following table illustrates such per ADS dilution. The assumed initial public offering price per share set forth below of US$                    is based on the mid-point of the range shown on the front cover of the prospectus.

       The following table summarizes the number of ordinary shares purchased from us as of December 31, 2003, the total consideration paid to us and the average price per ordinary share paid by existing investors and by new investors purchasing ordinary shares evidenced by ADSs in this offering at the initial public offering price of US$                    per ADS and without giving effect to underwriting discounts and other estimated offering expenses payable by us.

       The foregoing discussion and table assumes no exercise of any outstanding stock options. As of December 31, 2003, there were stock options outstanding to purchase an aggregate of 8,857,799 ordinary shares at a weighted average exercise price of US$1.516 per share. If all these options had been exercised on December 31, 2003, before giving effect to this offering, our pro forma net tangible book value would have been approximately US$82.2 million, or US$0.64 per ordinary share

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EXCHANGE RATE INFORMATION

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

Source:	Federal Reserve Bank of New York

       On April 7, 2004, the noon buying rate was RMB8.2769 to US$1.00.

       We publish our financial statements in Renminbi. This prospectus contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader. Unless otherwise noted, all translations from Renminbi to U.S. dollars were made at the noon buying rate in The City of New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York, as of December 31, 2003, which was RMB8.2767 to US$1.00. No representation is made that the Renminbi amounts referred to in this prospectus could have been or could be converted into U.S. dollars at any particular rate or at all.

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SELECTED CONSOLIDATED FINANCIAL INFORMATION

       The following selected consolidated financial information has been derived from our consolidated financial statements. Our statements of operations and comprehensive income information for the years ended December 31, 2001, 2002 and 2003 and our balance sheet information as of December 31, 2001, 2002 and 2003 have been audited by PricewaterhouseCoopers Zhong Tian CPAs Limited Company, independent accountants. The report of PricewaterhouseCoopers on those financial statements is included elsewhere in this prospectus. The selected consolidated financial information for those periods and as of those dates should be read in conjunction with those financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

       Our consolidated financial information as of December 31, 2000 have been derived from our unaudited consolidated financial statements which are not included in this prospectus, but which have been prepared on the same basis as our audited consolidated financial statements. Our date of inception was December 29, 1999, the date of incorporation of Shanda Networking, and our sole activity in 1999 was a contribution of RMB500,000 to the capital of Shanda Networking. As a result, we have not included any information for 1999 in the table set forth below.

       Our consolidated financial statements are prepared and presented in accordance with generally accepted accounting principles in the United States, or US GAAP, and reflect our recent reorganization in February and December 2003 and have been prepared as if our current corporate structure had been in existence throughout the relevant periods.

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