Edgar Filing: NETEASE COM INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the fiscal year ended December 31, 2002

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ________to _________.

Commission file number: 333-11724

NETEASE.COM, INC.
------------------------------------------------------------
(Exact name of Registrant as specified in its charter)

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

Cayman Islands
------------------------------------------------------------
(Jurisdiction of incorporation or organization)

Suite 1901, Tower E3
The Towers, Oriental Plaza, Dong Cheng District
Beijing 100738, People's Republic of China
------------------------------------------------------------
(Address of principal executive offices)

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

NONE
------------------------------------------------------------
Securities registered or to be registered pursuant to Section 12(g) of the Act.

Name of each exchange and Title of each class on which registered:
American Depositary Shares, each representing 100 ordinary shares, par value
US$0.0001 per share, Nasdaq National Market
------------------------------------------------------------
(Title of Class)
------------------------------------------------------------
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.

NONE
------------------------------------------------------------
(Title of Class)

Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by the
annual report: 3,100,162,536 ordinary shares, par value US$0.0001 per share.

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

[X] Yes [_] No

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

[_] Item 17 [X] Item 18

TABLE OF CONTENTS

INTRODUCTION

PART I

Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Selected Financial Data
Risk Factors
Item 4. Information on the Company
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholder and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other than Equity Securities

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds
Item 15. Controls and Procedures
Item 16. Reserved

PART III

Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits

INTRODUCTION

This annual report on Form 20-F includes our audited consolidated financial
statements as of December 31, 2001 and 2002, and for the years ended December
31, 2000, 2001 and 2002.

We completed the initial public offering of 4,500,000 American Depositary
Shares, each representing 100 of our ordinary shares, par value US$0.0001 per
share, on July 6, 2000. On June 30, 2000, we listed our American Depositary
Shares on the Nasdaq National Market, or Nasdaq, under the symbol "NTES."

Forward-Looking Information

This annual report on Form 20-F contains statements of a forward-looking
nature. These statements are made under the "safe harbor" provisions of the U.S.
Private Securities Litigation Reform Act of 1995. You can identify these
forward-looking statements by terminology such as "will," "expects,"
"anticipates," "future," "intends," "plans," "believes," "estimates" and similar
statements. The accuracy of these statements may be impacted by a number of
business risks and uncertainties that could cause actual results to differ
materially from those projected or anticipated, including risks related to:

. the risk that we will not be able to continue to successfully monetize
the user base of the NetEase Web sites and that our e-commerce and
other fee-based services revenues will not continue to grow;

. the risk that the current popularity of short messaging services (SMS)
in China will not continue for whatever reason, including SMS being
superseded by other technologies for which we are unable to offer
attractive products and services;

. the risk that we may not be able to continuously develop new and
creative online services;

. the risk that the online game market will not continue to grow or that
we will not be able to maintain our position in that market;

. the risk that the online advertising market in China will not continue
to grow and will remain subject to intense competition;

. the impact of the outbreak in China of severe acute respiratory
syndrome, or SARS, on our business and results of operations;

. the risk that we will not be able to control our expenses in future
periods;

. the possibility that our company and our board of directors have not
implemented effective or complete steps to ensure that the
circumstances which led to the restatement of our financial statements
for the year ended December 31, 2000 will not recur;

. our ability to develop and implement additional operational and
financial systems to manage our operations;

. governmental uncertainties, general competition and price pressures in
the marketplace;

. uncertainty as to future profitability and the risk that security,
reliability and

confidentiality concerns may impede broad use of the Internet and
e-commerce and other services; and

. other risks outlined in our filings with the Securities and Exchange
Commission, including our registration statement on Form F-1, as
amended.

We do not undertake any obligation to update this forward-looking
information, except as required under applicable law.

PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not Applicable.

Item 2. Offer Statistics and Expected Timetable

Not Applicable.

Item 3. Key Information

A. Selected Financial Data

The following table presents the selected consolidated financial
information for our business. You should read the following information in
conjunction with Item 5 "Operating and Financial Review and Prospects" below.
The following data have been derived from our audited consolidated financial
statements for the years ended December 31, 2000, 2001 and 2002 and as of
December 31, 2001 and 2002, which were prepared in accordance with United States
generally accepted accounting principles, or U.S. GAAP, and should be read in
conjunction with those statements, which are included in this annual report
beginning on page F-1.

For the Year Ended December 31,
-------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
RMB RMB RMB RMB RMB

Statement of Operations Data:
Revenues:
Advertising services ......................... 172,850 10,796,074 30,067,477 14,163,952 34,209,376
E-commerce and other services ................ -- 2,459,101 2,455,834 14,103,151 197,357,067
Software licensing and related integration
projects .................................. 2,942,582 3,515,831 450,350 33,218 1,002,025
---------------------------------------------------------------------------------
Total revenues ........................ 3,115,432 16,771,006 32,973,661 28,300,321 232,568,468
Sales and value-added taxes .................. (230,749) (1,150,169) (2,476,444) (2,274,784) (11,627,216)
---------------------------------------------------------------------------------
Net revenues ................................. 2,884,683 15,620,837 30,497,217 26,025,537 220,941,252
---------------------------------------------------------------------------------
Cost of revenues:
Advertising, e-commerce and other
services .................................. (242,657) (5,540,600) (38,738,335) (60,058,488) (69,769,449)
Software licensing and related integration
projects .................................. (946,531) (258,819) -- -- --
Share compensation cost* ..................... -- (6,296,816) (1,171,084) -- (1,908,125)
---------------------------------------------------------------------------------
Total cost of revenues ................ (1,189,188) (12,096,235) (39,909,419) (60,058,488) (71,677,574)
---------------------------------------------------------------------------------
Gross profit (loss on revenues) ................. 1,695,495 3,524,602 (9,412,202) (34,032,951) 149,263,678
Operating expenses:
Selling, general and administrative
expenses ................................... (311,957) (16,709,221) (162,922,561) (181,560,624) (92,785,244)
Asset impairment loss ........................ -- -- -- (2,766,543) (746,857)
Research and development expenses ............ (951,000) (964,855) (9,525,436) (11,169,454) (13,808,360)
Share compensation cost* ..................... -- (39,116,583) (12,668,476) (2,357,758) (1,898,733)
Class action settlement ...................... -- -- -- -- (36,005,385)
---------------------------------------------------------------------------------
Total operating expenses .............. (1,262,957) (56,790,659) (185,116,473) (197,854,379) (145,244,579)
---------------------------------------------------------------------------------
Operating profit (loss) ......................... 432,538 (53,266,057) (194,528,675) (231,887,330) 4,019,099
Other income (expenses):
Sale of 163.net usage right .................. -- 1,500,000 -- -- --
Investments impairment loss .................. -- -- -- (8,924,381) --
Interest income .............................. 5,719 357,160 27,858,710 17,571,187 7,562,322
Interest expense ............................. -- -- (2,589,735) (9,882,874) (1,401,041)

2002
----
US$
(Note)

Statement of Operations Data:
Revenues:
Advertising services ......................... 4,131,567
E-commerce and other services ................ 23,835,395
Software licensing and related integration
projects .................................. 121,018
-----------------
Total revenues ........................ 28,087,980
Sales and value-added taxes .................. (1,404,253)
-----------------
Net revenues ................................. 26,683,727
-----------------
Cost of revenues:
Advertising, e-commerce and other
services .................................. (8,426,262)
Software licensing and related integration
projects .................................. --
Share compensation cost* ..................... (230,450)
-----------------
Total cost of revenues ................ (8,656,712)
-----------------
Gross profit (loss on revenues) ................. 18,027,015
Operating expenses:
Selling, general and administrative
expenses ................................... (11,205,948)
Asset impairment loss ........................ (90,200)
Research and development expenses ............ (1,667,676)
Share compensation cost* ..................... (229,316)
Class action settlement ...................... (4,348,476)
-----------------
Total operating expenses .............. (17,541,616)
-----------------
Operating profit (loss) ......................... 485,399
Other income (expenses):
Sale of 163.net usage right .................. --
Investments impairment loss .................. --
Interest income .............................. 913,324
Interest expense ............................. (169,208)

For the Year Ended December 31,
-------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
RMB RMB RMB RMB RMB

Other, net ....................................... (71,056) (494,018) (9,099) (40,516) 3,725,370
----------------------------------------------------------------------------
Income (loss) before tax ......................... 367,201 (51,902,915) (169,268,799) (233,163,914) 13,905,750
Provision for income tax ......................... (34,464) (71,338) -- -- 2,395,888
----------------------------------------------------------------------------
Net income (loss) ................................ 332,737 (51,974,253) (169,268,799) (233,163,914) 16,301,638
============================================================================

Net income (loss) per ADS, basic ................. 0.02 (2.73) (6.78) (7.74) 0.53
----------------------------------------------------------------------------
Net income (loss) per ADS, diluted ............... 0.02 (2.73) (6.78) (7.74) 0.52
----------------------------------------------------------------------------
Weighted average number of shares
Outstanding, basic ............................ 1,868,817,200 1,900,430,600 2,497,467,200 3,013,419,400 3,051,395,100
============================================================================
Weighted average number of ADSs
Outstanding, basic ............................ 18,688,172 19,004,306 24,974,672 30,134,194 30,513,951
============================================================================
Weighted average number of shares
Outstanding, diluted .......................... 1,868,817,200 1,900,430,600 2,497,467,200 3,013,419,400 3,127,837,900
============================================================================
Weighted average number of ADSs
Outstanding, diluted .......................... 18,688,172 19,004,306 24,974,672 30,134,194 31,278,379
============================================================================

*Share compensation cost
Cost of revenues - advertising, e-commerce
and other services ........................... -- (6,296,816) (1,171,084) -- (1,908,125)
Selling, general and administrative expenses ..... -- (34,346,268) (7,437,230) (204,423) (1,522,369)
Research and development expenses ................ -- (4,770,315) (5,231,246) (2,153,335) (376,364)
----------------------------------------------------------------------------
-- (45,413,399) (13,839,560) (2,357,758) 3,806,858
============================================================================

Other Financial Data:
Capital expenditures ............................. (1,083,248) (9,312,383) (33,970,794) (21,095,334) (12,567,218)
Net cash provided by (used in):
Operating activities .......................... 1,232,379 (15,687,474) (124,653,301) (185,689,512) 26,798,362
Investing activities .......................... (1,083,248) (9,312,383) (53,037,513) (67,263,076) 42,676,950
Financing activities .......................... -- 142,600,415 904,853,021 (22,310,060) (78,125,861)

2002
----
US$

Other, net ............................................. 449,924
----------------
Income (loss) before tax ............................... 1,679,439
Provision for income tax ............................... 289,358
----------------
Net income (loss) ...................................... 1,968,797
================

Net income (loss) per ADS, basic ....................... 0.06
----------------
Net income (loss) per ADS, diluted ..................... 0.06
----------------
Weighted average number of shares
Outstanding, basic .................................. 3,051,395,100
================
Weighted average number of ADSs
Outstanding, basic .................................. 30,513,951
================
Weighted average number of shares
Outstanding, diluted ................................ 3,127,837,900
================
Weighted average number of ADSs
Outstanding, diluted ................................ 31,278,379
==============

*Share compensation cost
Cost of revenues - advertising, e-commerce
and other services ................................. (230,450)
Selling, general and administrative expenses ........... (183,861)
Research and development expenses ...................... (45,455)
--------------
459,766
==============

Other Financial Data:
Capital expenditures ................................... (1,517,781)
Net cash provided by (used in):
Operating activities ................................ 3,236,517
Investing activities ................................ 5,154,221
Financing activities ................................ (9,435,491)

As of December 31,
------------------
1998 1999 2000 2001 2002 2002
---------- ---------- ----------- ---------- ---------- ---------
RMB RMB RMB RMB RMB US$

Balance Sheet Data:
Cash ......................................... 199,538 117,800,096 708,561,012 479,608,534 560,069,711 67,641,269
Working capital (deficit) .................... (345,804) 126,556,803 717,438,219 507,101,314 551,182,770 66,567,968
Property, equipment and software, net ........ 1,171,483 9,508,437 35,362,091 36,356,088 26,379,182 3,185,892
Total assets ................................. 2,388,242 143,728,182 921,095,550 674,793,068 619,678,196 74,840,362
Total current liabilities .................... 1,562,563 7,662,942 148,555,114 119,763,534 38,654,444 4,668,411
Total shareholders' equity ................... 825,679 136,065,240 772,540,436 555,029,534 581,023,752 70,171,951

_____________

Note: Translations of amounts from RMB into U.S. dollars for the
convenience of the reader were calculated at the noon buying rate of
US$1.00: RMB8.2800 on December 31, 2002 in The City of New York for cable
transfers of RMB as certified for customs purposes by the Federal Reserve
Bank of New York. No representation is made that the RMB amounts could have
been, or could be, converted into United States dollars at that rate on
December 31, 2002, or at any other rate.

Exchange Rate Information

We have published our financial statements in Renminbi, or RMB. Our
business is currently conducted in and from China in Renminbi. In this
annual report, all references to Renminbi and RMB 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. The conversion of Renminbi into U.S. dollars in
this annual report is based on the noon buying rate in The City of New York for
cable transfers of Renminbi as certified for customs purposes by the Federal
Reserve Bank of New York. For your convenience, this annual report contains
translations of some Renminbi or U.S. dollar amounts for 2002 at US$1.00:
RMB8.2800, which was the prevailing rate on December 31, 2002. The prevailing
rate at June 20, 2003 was US$1.00: RMB8.2772. We make no representation that any
Renminbi or U.S. dollar amounts could have been, or could be, converted into
U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates
stated below, or at all. The Chinese government imposes control over its foreign
currency reserves in part through direct regulation of the conversion of
Renminbi into foreign exchange and through restrictions on foreign trade.

The following table sets forth the average buying rate for Renminbi
expressed as per one U.S. dollar for the years 1998, 1999, 2000, 2001 and 2002.

---------------------------------------------------
Year Renminbi Average/(1)/
---------------------------------------------------
1998 8.2969
---------------------------------------------------
1999 8.2785
---------------------------------------------------
2000 8.2784
---------------------------------------------------
2001 8.2772
---------------------------------------------------
2002 8.2772
---------------------------------------------------
_________________________________

(1) Determined by averaging the rates on the last business day of each month
during the relevant period.

The following table sets forth the high and low exchange rates for Renminbi
expressed as per one U.S. dollar during the past six months.

-------------------------------------------------------------
Renminbi Average
----------------
-------------------------------------------------------------
Month Ended High Low
----------- ---- ---
-------------------------------------------------------------
December 31, 2002 8.2800 8.2771
-------------------------------------------------------------
January 31, 2003 8.2800 8.2766
-------------------------------------------------------------
February 28, 2003 8.2800 8.2768
-------------------------------------------------------------
March 31, 2003 8.2776 8.2770
-------------------------------------------------------------
April 30, 2003 8.2774 8.2769
-------------------------------------------------------------
May 31, 2003 8.2771 8.2768
-------------------------------------------------------------

B. Capitalization and Indebtedness

Not Applicable.

C. Reasons for the Offer and Use of Proceeds

Not Applicable.

D. Risk Factors

Risks Related to Our Company

Our business prospects are difficult to evaluate because we commenced our
operations in 1997, changed our business focus in 1998 and introduced several
new revenue sources in 2001.

Our business was established in June 1997 as an Internet software
developer. In mid-1998, our business focus changed to an Internet technology
provider, and we commenced developing the NetEase Web sites. In July 1999, we
commenced our e-commerce services, and in September 1999, we restructured our
operations to place our Internet portal operations in Guangzhou NetEase Computer
System Co., Ltd., or Guangzhou NetEase. In 2001, we began focusing on fee-based
premium services and online entertainment services, including wireless
value-added services, premium e-mail services, online games and other
subscription-type products. In 2002, certain of these new services, in
particular wireless value-added services and online games, enjoyed greater
popularity (and generated greater profit) than our other fee-based premium
services, but we cannot be certain whether this trend will continue. For a
discussion of these and other services, please refer to Item 4.B. "Information
on the Company--Business Overview--Our Products and Services."

Because we have a limited operating history, when you evaluate our business
and prospects you must consider the risks and difficulties frequently
encountered by companies in the early stages of development, particularly
companies in the new and rapidly evolving Internet service markets. In addition,
our change of business focus from developing Web-based software products to
developing and providing technological services to the NetEase Web sites and
then to also providing e-commerce and other services makes it difficult to
evaluate our future prospects. We cannot assure you that we will be able to
increase or maintain our revenues from online advertising and e-commerce and
other services.

We incurred significant losses in the past and may incur additional losses in
the future.

Although we had a net profit of US$2.0 million in 2002, we incurred
significant net losses in 2001, 2000 and 1999 and had only minimal profit in
1998. Accordingly, as of December 31, 2002, we had an accumulated deficit of
approximately US$52.9 million. The markets in which we operate are highly
competitive, and given the relatively short period of time during which we have
achieved profitability, we cannot be certain that we will be able to maintain or
increase our profits. Moreover, as our business expands, we may incur additional
expenses which would also adversely affect our profitability.

The market for the delivery of wireless value-added services is rapidly
evolving, and our ability to generate revenues from our wireless value-added
services could suffer if this market does not develop or we fail to address this
market effectively.

We must continue to adapt our strategy for wireless value-added services,
which contributed the bulk of our fee-based premium services and online
entertainment services revenue in 2002, to compete in the rapidly evolving
wireless value-added services market. We currently offer products and services
for users of short messaging services (SMS) and, beginning in 2003, for
multi-media messaging services (MMS), both of which enable mobile phone users to
communicate with each other and receive information on their phone screens.
Competitors have introduced or developed, or are in the process of introducing
or developing, competing wireless value-added services accessible through a
variety of handheld devices. We cannot assure you that there will be demand for
the wireless value-added services provided by us. In addition, there are
numerous other technologies in varying stages of development, such as third
generation cellular phone technology (3G), which could radically alter or
eliminate the SMS

and MMS markets. Accordingly, it is extremely difficult to predict which
services will be successful in this market or the future size and growth of this
market. In addition, given the limited history and rapidly evolving nature of
this market, we cannot predict the price that wireless subscribers will be
willing to pay for these services. If acceptance of our wireless value-added
services is less than anticipated, our results from operations could be
impacted.

Currently, we are dependent on our relationship with the two mobile phone
companies in China for our wireless value-added services revenues and the
alteration or termination of either or both of these relationships could
adversely impact our business.

Our wireless value-added services are conducted in conjunction with the two
mobile phone companies in China, China Mobile and China Unicom. If our strategic
relationship with either company is terminated or scaled-back, it may be
difficult, if not impossible, to find appropriate replacement partners with the
requisite licenses and permits, infrastructure and customer base to offer these
services, which could adversely affect our business. Our wireless value-added
services are provided through a number of contracts with the provincial
affiliates of China Mobile and with China Unicom, and each of these contracts is
non-exclusive and of a limited term (generally six months or one year). These
contracts may also be terminated in advance under certain circumstances. We
cannot be certain that we will be able to renew these contracts as necessary or
enter into new arrangements with these or other affiliates of China Mobile and
China Unicom. We may also be compelled to amend our arrangements with these
mobile phone carriers in ways which adversely affect our business.

We experienced a decline in the rate of growth of our online games which appears
to be a result of the outbreak of severe acute respiratory syndrome, or SARS,
and any recurrence of SARS or another widespread public health problem could
further adversely affect our business and results of operations.

During April and May 2003, we experienced a decline in the rate of growth
of our online game services which we believe resulted from the Chinese
government's closure of Internet cafes in Beijing and elsewhere to prevent the
spread of SARS. Many users of our online game services can only access those
services at Internet cafes. A renewed outbreak of SARS or another widespread
public health problem in China where virtually all of our revenue is derived and
in Beijing, Shanghai and Guangzhou where most of our employees are located could
have a negative effect on our operations. Our operations may be impacted by a
number of health-related factors, including, among other things:

. quarantines or closures of some of our offices which would severely
disrupt our operations,

. the sickness or death of our key officers and employees,

. closure of Internet cafes and other public areas where people access
the Internet, and

. a general slowdown in the Chinese economy.

Any of the foregoing events or other unforeseen consequences of public
health problems could adversely affect our business and results of operations.
We will continue to monitor the impact of SARS on our business.

E-commerce and other services have become the significant part of our revenue,
but continued growth in the popularity of these services and customers'
willingness and ability to pay for them is uncertain.

Our revenue growth depends on the increasing acceptance and use of our
e-commerce services, fee-based premium services, wireless value-added services
and online entertainment services. We have, however, only limited experience in
offering these services and cannot be certain that they will generate
sustainable revenue. Further, these services may never become widely accepted
for various reasons, many of which are beyond our control, including:

. inexperience with these technologies, some of which are largely new to
China, and customers' willingness to pay for online services;

. rapid changes in technology and customer tastes which could adversely
impact the popularity of our services, such as our fee-based wireless
value-added services and online games; and

. concerns about security, reliability, cost, ease of deployment,
administration and quality of service associated with conducting
business over the Internet.

Further, online payment systems in China are not as widely available or
acceptable to consumers in China as in the United States and elsewhere. Although
major Chinese banks have instituted online payment systems, these systems are
still at an early stage. In addition, a limited number of consumers in China
have credit cards or debit cards. The perceived lack of secure online payment
systems may limit the number of e-commerce transactions that we can service. If
online payment services do not develop, our ability to grow our e-commerce
business would be limited.

In connection with the introduction of our first online game, "Westward
Journey Online," at the end of 2001, we introduced a prepaid debit point card
which we believe has facilitated the usability and growth of all of our online
game services. To address the difficulty of making online payments in China,
users can buy this card at local stores and other locations in China. The points
contained in the card can then be used to pay for online services, such as
playing time for online games. We cannot be certain, however, that Internet
users in China will be willing to adopt this payment method on a wide-spread and
consistent basis or that it will be immune to the security and other concerns
which have thus far contributed to the relatively low level of e-commerce
activity in China. If the Internet does not become more widely accepted as a
medium for e-commerce and our other fee-based services, our ability to generate
increased revenue will be negatively affected.

If we fail to develop and introduce new fee-based services timely and
successfully, we will not be able to compete effectively and our ability to
generate revenues will suffer.

We operate in a highly competitive, quickly changing environment, and our
future success depends not only on the popularity of our existing fee-based
services but also on our ability to develop and introduce new fee-based services
that our customers and users choose to buy. If we are unsuccessful at developing
and introducing new fee-based services that are appealing to users with
acceptable prices and terms, our business and operating results would be
negatively impacted because we would not be able to compete effectively and our
ability to generate revenues would suffer. The development of new services can
be very difficult and requires high levels of innovation. The development
process can also be lengthy and costly, in particular for developing new online
games. If we fail to anticipate our users' needs and technological trends
accurately or are otherwise unable to complete the development of

services in a timely fashion, we will be unable to introduce new services into
the market to successfully compete.

The demand for new services is difficult to forecast, in part due to the
relative immaturity of the market for our fee-based services in China and
relatively short life cycles of Internet-based technologies. As we introduce and
support additional services and as competition in the market for our services
intensifies, we expect that it will become more difficult to forecast demand. In
particular, competition in the online game market is growing as more and more
online games are introduced by existing and new market participants.

We depend on China Mobile and China Unicom to maintain accurate records
concerning the fees paid by customers for wireless value-added services and our
portion of those fees, and we have had to make estimates on occasion as to what
revenues we should record in this regard. Any mistakes in this process could
adversely affect our business.

China Mobile and China Unicom pay us a portion of the fees they receive
from their customers for the wireless value-added services we provide, and we
are dependent on their ability to maintain accurate records of the services
provided and concomitant fees paid. We do not collect fees from these operators
in certain circumstances due to technical issues with their billing and
transmission systems. The rate of these billing and transmission failures varies
among the operators and also changes from month to month. Billing and
transmission failures may result in a significant reduction in our wireless
value-added services revenue.

In addition, we have only limited means to independently verify the
information provided to us in this regard, and our business could be adversely
affected if these mobile phone companies miscalculate the net revenue from the
services and our portion of that revenue. Further, we normally recognize revenue
based on statements from the mobile phone companies, but in very limited
circumstances, we may recognize revenue based on our own statistical records and
after consultation with the mobile phone companies. Recognizing revenue based on
such estimates could potentially require us to later make adjustments in our
financial records when the mobile phone companies' statements and cash payments
are received. Such estimates are never made in connection with the fiscal
year-end accounts, such as those appearing in this document.

We expect that a portion of our future revenues will continue to come from our
advertising services, but the online advertising market in China is still
relatively new and subject to intense competition.

Although we anticipate that the revenues generated by our fee-based premium
services and online entertainment services will continue to constitute the major
portion of our future revenues, we believe that we will continue to rely on
advertising revenues as one of our primary revenue sources for the foreseeable
future. Online advertising in China is still relatively new and many of our
current and potential advertisers have limited experience with the Internet as
an advertising medium, have not traditionally devoted a significant portion of
their advertising expenditures or other available funds to Web-based
advertising, and may not find the Internet to be effective for promoting their
products and services relative to traditional print and broadcast media. Our
ability to generate and maintain significant advertising revenue will depend on
a number of factors, many of which are beyond our control, including:

. the development of a large base of users possessing demographic
characteristics attractive to advertisers;

. the development of software that blocks Internet advertisements
before they appear on a user's screen;

. downward pressure on online advertising prices; and

. the effectiveness of our advertising delivery and tracking system.

In addition, China's entry into the World Trade Organization, and the
resulting gradual opening of its telecommunications sector, may facilitate more
foreign participation in the Chinese Internet market by such companies, for
example, as Yahoo! and American Online. Many of these Internet companies have
longer operating histories in the Internet market, greater name and brand
recognition, larger customer bases and databases and significantly greater
financial, technical and marketing resources than we have. The entry of
additional, highly competitive Internet companies into the Chinese market would
further heighten competition for advertising spending in China.

If the Internet does not become more widely accepted as a medium for
advertising, our ability to generate increased revenue will be negatively
affected.

Our advertising revenues are subject to the overall state of the online
advertising industry which is itself subject to general economic conditions.

Expenditures by advertisers tend to be cyclical, reflecting overall
economic conditions as well as budgeting and buying patterns. The demand for
Internet advertising in China has been generally stabilizing in recent quarters
but it still remains relatively soft as companies are reluctant to expand their
marketing and advertising budgets or delay spending their budgeted resources.
This has resulted in intense market competition which affected the general
pricing in the Internet advertising market in China, and we have had to devote
significant resources to maintain and enhance our revenue from advertising.

Because a portion of our revenue is derived from Internet advertising services,
our future revenue could be materially and adversely affected if we cannot adapt
successfully to new Internet advertising pricing models.

It is difficult to predict which Internet advertising pricing model, if
any, will emerge as the industry standard. This makes it difficult to project
our future online advertising rates and revenues. For example, in past periods,
our obligations to advertisers typically included guarantees of a minimum number
of impressions or times that an advertisement appears in pages viewed by users.
We have been largely successful in 2002 in moving to advertising contracts whose
fees are based on the actual time period that the advertisements appear on the
NetEase Web sites rather than based on guaranteed minimum impressions. We cannot
predict whether advertisers will continue to agree to this form of advertising
arrangement in the near-term or whether new pricing models will emerge which we
can successfully adopt and implement. Our advertising services revenues could be
materially and adversely affected if we are unable to adapt to new forms of
Internet advertising or if we fail to adopt the most profitable form.

Our business and our reputation were materially harmed because we had to restate
our financial statements.

Our rapid growth has placed and continues to place a significant strain
on our resources. In one particular instance in our history, we have not been
able to manage our growth effectively. Specifically, in the second quarter of
2001, our board of directors through its audit committee initiated an
investigation into whether the terms of certain contracts between our company
and third party advertisers had been appropriately reflected in our financial
statements. The audit committee subsequently determined by the

end of the investigation that the terms and execution status of certain
advertising contracts between our company and third party advertisers and the
nature of certain barter transactions were such that revenue could not be
recognized in fiscal year 2000.

We have taken a number of steps to strengthen our controls and
procedures to minimize the recurrence of this problem. We are also continuously
working to bolster our management team to ensure that the controls and
procedures are implemented in a consistent, effective manner. We believe that
these improved controls and procedures have been effective, but it is possible
that the same or new problems will arise as our business continues to expand.
Further, as noted below, we cannot be certain that we will be able to employ and
retain suitable senior managers to oversee the implementation of our controls
and procedures in the future.

If we make any mistakes in operating our business, our operating
results may fluctuate and cause the price of our ADSs to decline.

The success of our business is dependent on our ability to retain our existing
key employees and to add and retain new senior officers to our management.

We depend on the services of our existing key employees. Our success
will largely depend on our ability to retain these key employees and to attract
and retain qualified senior and middle level managers to our management team. We
also depend on our ability to attract and retain highly skilled technical,
editorial, marketing and customer service personnel in the future. We cannot
assure you that we will be able to attract or retain such personnel or that any
personnel we hire in the future will successfully integrate into our
organization or ultimately contribute positively to our business. The loss of
any of our key employees would significantly harm our business. We do not
maintain key person life insurance on any of our employees.

In the past, we have not been able to accurately or comprehensively track the
delivery of advertisements through the NetEase Web sites, which problem, if it
recurs, may make us less attractive to our present and potential advertisers.

We depend on third party proprietary and licensed advertisement serving
technology, as well as software which we developed ourselves, to deliver and
track all types of advertisements we offer to our advertising customers, such as
banner ads, text links, logo displays and pop-up advertisements. Advertisement
serving technology allows us to measure the demographics of our user base and
the delivery of advertisements on the NetEase Web sites. This technology is
still developing. It is important to advertisers that we accurately measure the
demographics of the user base of the NetEase Web sites and the delivery of
advertisements through the NetEase Web sites. To date, we believe that we have
implemented this system successfully, but we cannot be certain that it will be
effective as new forms of online advertising arise from time to time. Companies
may choose not to advertise on the NetEase Web sites or may pay less for
advertising if our advertisement serving system is not perceived to be reliable.

We believe we were a passive foreign investment company for the 2000, 2001 and
2002 taxable years, which will result in adverse U.S. tax consequences to U.S.
investors who held our shares or American Depositary Shares during any of those
taxable years, and we cannot be certain whether we will be treated as a passive
foreign investment company for the 2003 taxable year.

Based upon the nature of our income and assets, we believe we were a
passive foreign investment company for U.S. federal income tax purposes for the
2000, 2001 and 2002 taxable years, and we cannot be certain whether we will be
treated as a passive foreign investment company for the 2003 taxable year. The
determination of whether or not we are a passive foreign investment company is
made on an annual basis

and depends on the composition of our income and assets, including goodwill,
from time to time. The calculation of goodwill is based, in part, on the then
market value of our American Depositary Shares, which is subject to change. In
addition, we have made a number of assumptions regarding the calculation of
goodwill and the allocation of goodwill among active and passive assets. While
we believe our approach is reasonable, the relevant authorities in this area are
unclear, so we cannot assure you that our belief that we were a passive foreign
investment company for the 2000, 2001 and 2002 taxable years is accurate and we
cannot predict with certainty whether we will be treated as a passive foreign
investment company for the 2003 taxable year. U.S. investors who owned our
shares during any taxable year in which we were a passive foreign investment
company generally will be subject to increased U.S. tax liabilities and
reporting requirements for those taxable years and all succeeding years,
regardless of whether we continue to be a passive foreign investment company for
the 2003 taxable year and any succeeding years, although a shareholder election
to terminate such deemed passive foreign investment company status may be made
in certain circumstances. The same adverse U.S. tax consequences will apply to
our U.S. investors who acquire our shares during the 2003 taxable year or any
subsequent taxable year if we are treated as a passive foreign investment
company for that taxable year. Even if we were not a passive foreign investment
company for the 2000, 2001 or 2002 taxable years and/or are not treated as a
passive foreign investment company for the 2003 taxable year, we cannot assure
you that we will not become a passive foreign investment company for any future
taxable year. See Item 10.E. "Taxation--United States Federal Income
Taxation--U.S. Holders--Passive Foreign Investment Company."

Our revenues fluctuate significantly and may adversely impact the trading price
of our American Depositary Shares or any other securities which become publicly
traded.

Our revenues and results of operations have varied significantly in the
past and may continue to fluctuate in the future. Many of the factors that cause
such fluctuation are outside our control. Steady revenues and results of
operations will depend largely on our ability to:

. attract and retain users to the NetEase Web sites in the
increasingly competitive Internet market in China;

. successfully implement our business strategies as planned; and

. update and develop our Internet applications, services,
technologies and infrastructure.

Usage of our wireless value-added services and online games has
typically increased around the Chinese New Year holiday and other traditional
Chinese holidays. In contrast, advertising expenditures in China have
historically been significantly lower during the first calendar quarter of the
year due to the Chinese New Year holiday and the traditional close of
advertisers' annual budgets. Expenditures for our e-commerce services have also
historically followed the seasonal trend for advertising. If our revenues
decrease or expenses increase during these periods, we may not be able to offset
our expenses with sufficient revenues.

Accordingly, you should not rely on quarter-to-quarter comparisons of
our results of operations as an indication of our future performance. It is
possible that future fluctuations may cause our results of operations to be
below the expectations of market analysts and investors. This could cause the
trading price of our American Depositary Shares or any other securities of ours
which may become publicly traded to decline.

If Guangzhou NetEase, Guangyitong Advertising or Guangyitong Advertising's
ultimate shareholders violate our contractual arrangements with them, our
business could be disrupted, our reputation may be harmed and we may have to
resort to litigation to enforce our rights which may be time consuming and
expensive.

Because of current Chinese laws and restrictions, Guangzhou NetEase
operates the NetEase Web sites and Beijing Guangyitong Advertising Co., Ltd., or
Guangyitong Advertising, an 80%-owned subsidiary of Guangzhou NetEase, operates
the online advertising business pursuant to contractual arrangements with us.
Guangzhou NetEase is 80% owned by our founder, Chief Architect and a director,
William Lei Ding, and 20% owned by our former employee Bo Ding, William Lei
Ding's brother. Bo Ding owns the remaining 20% of Guangyitong Advertising.

The interests of the shareholders of Guangzhou NetEase may differ from
ours and those of our shareholders because they own a larger percentage of
Guangzhou NetEase than of our company. In addition, Guangzhou NetEase, as an
Internet content provider, and Guangyitong Advertising, as an advertising firm,
may be subject to laws and regulations in China that are incompatible with the
business strategies or operations of our company. Guangzhou NetEase, Guangyitong
Advertising or Guangyitong Advertising's ultimate shareholders could violate our
agreements with them by, among other things, failing to operate and maintain the
NetEase Web sites or advertising business in an acceptable manner, failing to
remit revenues to us on a timely basis or at all or diverting customers or
business opportunities from our company to Guangzhou NetEase. A violation of
these agreements could disrupt our business and adversely affect our reputation
in the market. If Guangzhou NetEase, Guangyitong Advertising or Guangyitong
Advertising's ultimate shareholders violate our agreements with them, we may
have to resort to litigation to enforce our rights. This litigation could result
in the disruption of our business, diversion of our resources and the incurrence
of substantial costs.

Because our contractual arrangements with Guangzhou NetEase, Guangyitong
Advertising and Guangyitong Advertising's ultimate shareholders do not detail
the parties' rights and obligations, our remedies for a breach of these
arrangements are limited.

Our current relationship with Guangzhou NetEase, Guangyitong
Advertising and Guangyitong Advertising's ultimate shareholders is based on a
number of contracts. The terms of these agreements are often statements of
general intent and do not detail the rights and obligations of the parties. Some
of these contracts provide that the parties will enter into further agreements
on the details of the services to be provided. Others contain price and payment
terms that are subject to monthly adjustment. These provisions may be subject to
differing interpretations, particularly on the details of the services to be
provided and on price and payment terms. It may be difficult for us to obtain
remedies or damages from Guangzhou NetEase, Guangyitong Advertising or
Guangyitong Advertising's ultimate shareholders for breaching our agreements. In
addition, we have limited experience in implementing these agreements. Because
we rely significantly on Guangzhou NetEase and Guangyitong Advertising for our
business, the realization of any of these risks may disrupt our operations or
cause degradation in the quality and service provided on, or a temporary or
permanent shutdown of, the NetEase Web sites.

Increased government regulation of the information industry in China may result
in the Chinese government requiring us to obtain additional licenses or other
governmental approvals to conduct our business which, if unattainable, may
restrict our operations.

The telecommunications industry, including Internet content provision
(known as ICP) services, is highly regulated by the Chinese government, the main
relevant government authority being the Ministry of Information Industry or MII.
Prior to China's entry into the World Trade Organization, or the WTO, the
Chinese government generally prohibited foreign investors from taking any equity
ownership

in or operating any telecommunications business. ICP services are classified as
telecommunications value-added services and therefore fell within the scope of
this prohibition. This prohibition was partially lifted following China's entry
into the WTO. Pursuant to the Administrative Rules for Foreign Investments in
Telecommunications Enterprises promulgated by the State Council dated December
5, 2001, foreign investors may now hold in the aggregate up to 49% of the total
equity in any value-added telecommunications business in China, subject to
certain geographic limitations. This percentage ceiling is to be increased to
50% by the second anniversary of China's entry into the WTO.

To operate the NetEase Web sites in compliance with all the relevant
ICP-related Chinese regulations, Guangzhou NetEase has successfully obtained an
ICP license issued by the Guangdong Provincial Telecommunications Bureau, or
Guangdong Bureau, dated as of December 14, 2000. On February 15, 2001, the News
Office of the Beijing Municipal People's Government approved Guangzhou NetEase's
application in respect of its news displaying services on the NetEase Web sites.
As for special approvals for other online services, Guangzhou NetEase has
submitted applications for online dissemination of health- and drug-related
information and Internet publishing. We believe that Guangzhou NetEase will also
have to apply for approval of our online game activities with the Ministry of
Culture by September 1, 2003 in accordance with recently adopted regulations.

We rely exclusively on our contractual arrangements with Guangzhou
NetEase and its approval to operate as an Internet content provider for our
business operations. We believe that our present operations are structured to
comply with Chinese law. However, many Chinese regulations are subject to
extensive interpretive powers of governmental agencies and commissions. We
cannot be certain that the Chinese government will not take action to prohibit
or restrict our business activities. We are uncertain as to whether the Chinese
government will reclassify our business as a media or retail company, due to our
acceptance of Internet advertising fees and e-commerce related services fees as
sources of revenues, or as a result of our current corporate structure. Such
reclassification could subject us to penalties or fines or significant
restrictions on our business. Also, we may fail to obtain some or all the
licenses, permits or clearances we may need in the future, including, for
example, the requisite approvals for our online game business from the Ministry
of Culture. In addition, we may have difficulties enforcing our rights under our
agreements with Guangzhou NetEase and Guangyitong Advertising if either of these
parties breaches any of our agreements with them because we do not have approval
from appropriate Chinese authorities to provide Internet content services or
Internet advertising services. Future changes in Chinese government policies
affecting the provision of information services, including the provision of
online services, Internet access, e-commerce services and online advertising,
may impose additional regulatory requirements on us or our service providers or
otherwise harm our business.

Our business would be materially harmed if the Chinese government were to take
any action against us for the content on the NetEase Web sites.

The Chinese government has enacted regulations governing Internet
access and distribution of news and other information over the Internet. In the
past, the Chinese government has stopped the distribution of information over
the Internet that it believed to be inappropriate. We cannot predict the effect
of further developments in the Chinese legal system, particularly with regard to
the Internet, including the promulgation of new laws, changes to existing laws
or the interpretation or enforcement of laws.

If we are found to be in violation of any existing or future Chinese
laws or regulations, the relevant Chinese authorities would have broad
discretion in dealing with such a violation, including, without limitation, the
following:

. levying fines;

. revoking our business license;

. requiring us to restructure our corporate structure, operations or
relationship with Guangzhou NetEase or Guangyitong Advertising; and

. requiring us to discontinue any portion or all of our Internet
business or our relationship with Guangzhou NetEase or Guangyitong
Advertising.

Any such action would have a material adverse effect on our business,
financial condition and results of operations and on the holders of our ordinary
shares and American Depositary Shares.

We may not be able to conduct our operations without the services provided by
Guangzhou NetEase and Guangyitong Advertising.

Our operations are currently dependent upon our commercial
relationships with Guangzhou NetEase and Guangyitong Advertising, and we derive
most of our revenues from these companies. A portion of our revenues under our
contracts with these companies are based upon arbitrary amounts that have been
agreed upon in advance. If these companies are unwilling or unable to perform
the agreements which we have entered into with them, we may not be able to
conduct our operations in the manner in which we currently plan. In addition,
Guangzhou NetEase and Guangyitong Advertising may seek to renew these agreements
on terms that are disadvantageous to us. Although we have entered into a series
of agreements that provide us with substantial ability to control these
companies, we may not succeed in enforcing our rights under them. If we are
unable to renew these agreements on favorable terms, or to enter into similar
agreements with other parties, our business may not expand, and our operating
expenses may increase.

Guangzhou NetEase and Guangyitong Advertising are controlled by our controlling
shareholder, who may cause these agreements to be amended in a manner that is
adverse to us.

Our majority shareholder, William Lei Ding, is also the controlling
shareholder of Guangzhou NetEase and Guangyitong Advertising. As a result, Mr.
Ding may be able to cause these agreements to be amended in a manner that will
be adverse to our company, or may be able to cause these agreements not to be
renewed, even if their renewal would be beneficial for us. Prior to our initial
public offering of American Depositary Shares, a number of these agreements were
amended. Although we have entered into an agreement that prevents the amendment
of these agreements without the approval of the members of our Board other than
Mr. Ding, we can provide no assurances that these agreements will not be amended
in the future to contain terms that might differ from the terms that are
currently in place. These differences may be adverse to our interests.

Unexpected network interruption caused by system failures may reduce visitor
traffic and harm our reputation.

Both the continual accessibility of the NetEase Web sites and the
performance and reliability of our technical infrastructure are critical to our
reputation and the ability of the NetEase Web sites to attract and retain users
and advertisers. Any system failure or performance inadequacy that causes
interruptions in the availability of our services or increases the response time
of our services could reduce user satisfaction and traffic, which would reduce
the NetEase Web sites' appeal to users and advertisers. As the number of NetEase
Web pages and traffic increase, we cannot assure you that we will be able to
scale our systems proportionately. In addition, any system failures and
electrical outages could materially and adversely impact our business.

Computer viruses may cause delays or interruptions on our systems and may reduce
visitor traffic and harm our reputation.

Computer viruses may cause delays or other service interruptions on our
systems. In addition, the inadvertent transmission of computer viruses could
expose us to a material risk of loss or litigation and possible liability. We
may be required to expend significant capital and other resources to protect the
NetEase Web sites against the threat of such computer viruses and to alleviate
any problems. Moreover, if a computer virus affecting our system is highly
publicized, our reputation could be materially damaged and our visitor traffic
may decrease.

Computer hacking could damage our systems and reputation.

Any compromise of security, such as computer hacking, could cause
Internet usage to decline. "Hacking" involves 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. Hackers, if
successful, could misappropriate proprietary information or cause disruptions in
our service. We may have to spend significant capital and human resources to
rectify any damage to our system. In addition, we cannot assure you that any
measures we take against computer hacking will be effective. A well publicized
computer security breach could significantly damage our reputation and
materially adversely affect our business.

If our exclusive providers of bandwidth and server custody service fail to
provide these services, our business could be materially curtailed.

We rely on affiliates of China Netcom and China Telecom to provide us
with bandwidth and server custody service for Internet users to access the
NetEase Web sites. If China Netcom, China Telecom or their affiliates fail to
provide such services, we may not be able to find a reliable and cost-effective
substitute provider on a timely basis or at all. If this happens, our business
could be materially curtailed.

If our exclusive providers of bandwidth and server custody service increase
their prices, our results of operations would suffer.

NetEase Beijing and Guangzhou NetEase contract with affiliates of China
Netcom and China Telecom for bandwidth and server custody services. Pursuant to
our contractual arrangements with Guangzhou NetEase, we pay for bandwidth and
server custody service costs incurred by Guangzhou NetEase. We have no control
over the costs of the bandwidth and server custody services provided by China
Netcom, China Telecom or their affiliates. China Netcom or China Telecom or both
may increase the prices we pay for these services. If this happens, our
operating costs may be higher than we anticipate and our results of operations
would suffer.

If third party content providers fail to develop and maintain the content we
need, the NetEase Web sites could lose viewers and advertisers.

We rely on a number of third parties to create traffic and provide
content in order to make the NetEase Web sites more attractive to advertisers
and consumers. Third parties providing content to the NetEase Web sites include
both commercial content providers with which we have contractual relationships
and our registered community members who post articles and other content on the
NetEase Web sites. If these third parties fail to develop and maintain
high-quality content, the NetEase Web sites could lose viewers and advertisers.
Most of our contractual arrangements with third party content

providers are not exclusive and are short-term or may be terminated at the
convenience of either party. There can be no assurance that our existing
relationships with commercial content providers will result in sustained
business partnerships, successful service offerings, traffic on the NetEase Web
sites or revenues for us.

We may be held liable for information displayed on, retrieved from or linked to
the NetEase Web sites.

We may face liability for defamation, negligence, copyright, patent or
trademark infringement and other claims based on the nature and content of the
materials that are published on the NetEase Web sites. We are currently
defending a number of defamation claims against NetEase Beijing and are involved
in several intellectual property infringement claims or actions. We believe that
the amounts claimed in these actions, in the aggregate, are not material to our
business. However, these amounts may be increased for a variety of reasons as
the claims progress, and we and our affiliates could be subject to additional
defamation or infringement claims which, singly or in the aggregate, could have
a material adverse effect on our business and results of operations, if
successful. We also could be subject to claims based upon content that is
accessible on the NetEase Web sites such as content and materials posted by
users on message boards, online communities, voting systems, e-mail or chat
rooms that are offered on the NetEase Web sites. By providing technology for
hypertext links to third-party Web sites, we may be held liable for copyright or
trademark violations by those third party sites. Third parties could assert
claims against us for losses incurred in reliance on any erroneous information
distributed by us. Moreover, users of the NetEase Web-based e-mail services
could seek damages from us for:

. unsolicited e-mails;

. lost or misplaced messages;

. illegal or fraudulent use of e-mail; or

. interruptions or delays in e-mail service.

We may incur significant costs in investigating and defending these
claims, even if they do not result in liability.

We may be subject to product liability claims because of our e-commerce
services.

There is the potential for product liability, warranty, commodity fraud
and similar claims against us by users who purchase goods and services through
our e-commerce services. We do not carry insurance to cover these kinds of
claims.

Information displayed on, retrieved from or linked to the NetEase Web sites may
subject us to claims of violating Chinese laws.

Violations or perceived violations of Chinese laws arising from
information displayed on, retrieved from or linked to the NetEase Web sites
could result in significant penalties, including a temporary or complete
cessation of our business. Chinese government agencies have announced
restrictions on the transmission of "state secrets" through the Internet. The
term "state secrets" has been broadly interpreted by Chinese governmental
authorities in the past. We may be liable under these pronouncements for content
and materials posted or transmitted by users on message boards, virtual
communities, chat rooms or e-mails. The Ministry of National Security and the
Ministry of Public

Security have authority to cause any local Internet service provider to block
any Web site. These ministries have, in the past, stopped the online
distribution of information that they believed to be socially destabilizing or
politically improper. If the Chinese government takes any action to limit or
eliminate the distribution of information through the NetEase Web sites, or to
limit or regulate any current or future community functions available to users
or otherwise block the NetEase Web sites, our business would be significantly
harmed.

Privacy concerns may prevent us from selling demographically targeted
advertising in the future which could make the NetEase Web sites less attractive
to advertisers.

We collect demographic data, such as geographic location, income level
and occupation, from our registered users in order to better understand users
and their needs. We provide this data to online advertisers, on an anonymous
aggregate basis, without disclosing personal details such as name and home
address, to enable them to target specific demographic groups. If privacy
concerns or regulatory restrictions prevent us from collecting this information
or from selling demographically targeted advertising, the NetEase Web sites may
be less attractive to advertisers.

Security and confidentiality concerns may impede our e-commerce and other
services and our growth.

A significant barrier to e-commerce and our other fee-based services
has been public concern over security and privacy of confidential information
transmitted over the Internet. If this concern is not adequately addressed, it
may inhibit the growth of the Internet as a means of conducting commercial
transactions. In addition, China's regulation of encryption technology is still
evolving, and it is possible that such regulations may limit the methods of
encryption that we can employ. If a well-publicized breach of Internet security
were to occur, general Internet usage could decline, which could reduce traffic
to the NetEase Web sites and impede our growth.

We may not be able to adequately protect our intellectual property, and we may
be exposed to infringement claims by third parties.

We rely on a combination of copyright, trademark and trade secrecy laws
and contractual restrictions on disclosure to protect our intellectual property
rights. Our efforts to protect our proprietary rights may not be effective to
prevent unauthorized parties from copying or otherwise obtaining and using our
technology. Monitoring unauthorized use of our products is difficult and costly,
and we cannot be certain that the steps we take will effectively prevent
misappropriation of our technology.

From time to time, we may have to resort to litigation to enforce our
intellectual property rights, which could result in substantial costs and
diversion of our resources. In addition, third parties have initiated litigation
against us for alleged infringement of their proprietary rights, and additional
claims may arise in the future. In the event of a successful claim of
infringement and our failure or inability to develop non-infringing technology
or content or license the infringed or similar technology or content on a timely
basis, our business could suffer. Moreover, even if we are able to license the
infringed or similar technology or content, license fees that we pay to
licensors could be substantial or uneconomical.

If our subsidiaries are restricted from paying dividends to us, our primary
internal source of funds would decrease.

We are a holding company with no significant assets other than our
equity interests in NetEase Information Technology (Beijing) Co., Ltd., or
NetEase Beijing, our wholly owned subsidiary formed in 1999. As a result, our
primary internal source of funds is dividend payments from NetEase Beijing. If
NetEase Beijing incurs debt on its own behalf in the future, the instruments
governing the debt may restrict NetEase Beijing's ability to pay dividends or
make other distributions to us, which in turn would limit our ability to pay
dividends on our shares and ADSs. Under current Chinese tax regulations,
dividends paid to us are not subject to Chinese income tax. In addition, Chinese
legal restrictions permit payment of dividends only out of net income as
determined in accordance with Chinese accounting standards and regulations.
Under Chinese law, NetEase Beijing 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.

Risks Related to Doing Business in China

A slow-down in the Chinese economy may slow down our growth and profitability.

The growth of the Chinese economy has been uneven across geographic
regions and economic sectors. There can be no assurance that growth of the
Chinese economy will be steady or that any slow down will not have a negative
effect on our business. Several years ago, the Chinese economy experienced
deflation, which may reoccur in the foreseeable future. The Chinese economy
overall affects our profitability as expenditures for advertisements and
e-commerce and other services may decrease due to slowing domestic demand.

Government regulation of the Internet may become more burdensome.

Government regulation of the Internet industry is burdensome and may
become more burdensome. New regulations could increase our costs of doing
business and prevent us from efficiently delivering our products and services
over the Internet. These regulations may stop or slow down the expansion of our
customer and user base and limit the access to the NetEase Web sites. In
addition to new laws and regulations, existing laws not currently applicable to
the Internet industry may be applied to the Internet.

The uncertain legal environment in China could limit the legal protections
available to you.

The Chinese 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 the late 1970s, the Chinese government began
to promulgate a comprehensive system of laws and regulations governing economic
matters. The overall effect of legislation enacted over the past 20 years has
significantly enhanced the protections afforded to foreign invested enterprises
in China. However, these laws, regulations and legal requirements are relatively
recent and are evolving rapidly, and their interpretation and enforcement
involve uncertainties. These uncertainties could limit the legal protections
available to foreign investors, including you.

Changes in China's political and economic policies could harm our business.

The economy of China has historically been a planned economy subject to
governmental plans and quotas and has, in certain aspects, been transitioning to
a more market-oriented economy. Although we believe that the economic reform and
the macroeconomic measures adopted by the Chinese government have had a positive
effect on the economic development of China, we cannot predict the

future direction of these economic reforms or the effects these measures may
have on our business, financial position or results of operations. In addition,
the Chinese economy differs from the economies of most countries belonging to
the Organization for Economic Cooperation and Development, or OECD. These
differences include:

. economic structure;

. level of government involvement in the economy;

. level of development;

. level of capital reinvestment;

. control of foreign exchange;

. inflation rates;

. methods of allocating resources; and

. balance of payments position.

As a result of these differences, our business may not develop in the
same way or at the same rate as might be expected if the Chinese economy were
similar to those of the OECD member countries.

Fluctuation in the exchange rate between the U.S. dollar and the Renminbi could
adversely affect the value of our ADSs and any cash dividend declared on them.

Fluctuations in the currency exchange rate between the U.S. dollar and
the Renminbi could adversely affect the U.S. dollar value of our ADSs. Because
holders of our ADSs may elect to receive cash dividends, if any, in U.S.
dollars, fluctuations in the exchange rate could also affect the value of any
cash dividend declared in Renminbi and paid in U.S. dollars. In addition,
because our revenues are primarily denominated in Renminbi, our valuation could
be materially and adversely impacted by the devaluation of the Renminbi if U.S.
investors analyze our value based on the U.S. dollar equivalent of our financial
condition and results of operations.

Restrictions on currency exchange may limit our ability to receive and use our
revenues effectively.

Because almost all of our future revenues may be in the form of
Renminbi, any future restrictions on currency exchanges may limit our ability to
use revenue generated in Renminbi to fund our business activities outside China
or to make dividend payments in U.S. dollars. Although the Chinese government
introduced regulations in 1996 to allow greater convertibility of the Renminbi
for current account transactions, significant restrictions still remain. We
cannot be certain that the Chinese regulatory authorities will not impose more
stringent restrictions on the convertibility of the Renminbi, especially with
respect to foreign exchange transactions.

Risks Related to the Internet Industry in China

Underdeveloped telecommunications infrastructure may limit the growth of the
Internet market in China.

The telecommunications infrastructure in China is not well developed.
Although private sector Internet service providers exist in China, almost all
access to the Internet is maintained through ChinaNet, which is owned in part by
each of China Telecom and China Netcom, under the administrative control and
regulatory supervision of China's Ministry of Information Industry. In addition,
the government's interconnecting national networks connect to the Internet
through a government-owned international gateway. This international gateway is
the only channel through which a domestic Chinese user can connect to the
international Internet network. We rely on this infrastructure and China Netcom
to provide data communications capacity primarily through local
telecommunications lines. Although the government has announced plans to develop
aggressively the national information infrastructure, we cannot assure you that
this infrastructure will be developed. In addition, we will have no access to
alternative networks and services, on a timely basis if at all, in the event of
any infrastructure disruption or failure. The Internet infrastructure in China
may not support the demands associated with continued growth in Internet usage.

The limited use of personal computers in China limits our pool of potential
customers and restricts the growth of our business.

The Internet penetration rate in China is, and is expected to continue
to be, lower than that in the United States and other developed countries.
Alternate methods of obtaining access to the Internet, such as through mobile
phones, cable television modems or set-top boxes for televisions, are not widely
available in China at present. There can be no assurance that the number or
penetration rate of personal computers in China will increase rapidly or at all
or that alternate means of accessing the Internet will develop and become widely
available in China. If significant numbers of Chinese consumers are unable to
access the Internet, our ability to grow our business would be impeded.

There has been a steady decrease in the rate of the growth of Internet users in
China which could limit the overall size of our market and adversely affect our
revenues.

While the number of Internet users in China has been growing since its
introduction and continues to grow currently, we believe that the rate of this
growth has slowed in recent years. We cannot predict whether this trend will
continue at its current pace or at all, and the factors which will affect future
growth in the Internet industry in China, as described elsewhere in these Risk
Factors, are largely beyond our control. If this trend does continue, our
potential market may not be as large as we had expected, and there will be even
greater competition for Internet users in China. In that case, our ability to
generate revenues from advertising, e-commerce and other services could be
adversely affected.

The relatively high cost of accessing the Internet in China limits our potential
customer base and restricts the growth of our business.

Our growth is limited by the relatively high cost to Chinese consumers
of obtaining the hardware, software and communications links necessary to
connect to the Internet in China. If the costs required to access the Internet
do not significantly decrease, most of China's population will not be able to
afford to use our services. The failure of a significant number of additional
Chinese consumers to obtain affordable access to the Internet would make it
difficult to grow our business.

We may be unable to compete successfully against new entrants and established
industry competitors.

The Chinese market for Internet content and services is intensely
competitive and rapidly changing. Barriers to entry are minimal, and current and
new competitors can launch new Web sites at a relatively low cost. Many
companies offer competitive products or services including Chinese
language-based Web search, retrieval and navigation services, wireless
value-added services, online games and extensive Chinese language content,
informational and community features and e-mail. In addition, as a consequence
of China joining the World Trade Organization, the Chinese government has
partially lifted restrictions on foreign-invested enterprises so that foreign
investors may hold in the aggregate up to 49% of the total equity ownership in
any value-added telecommunications business, including an Internet business, in
China. This percentage ceiling is to be increased to 50% by the second
anniversary of China's entry into the WTO.

Currently, our competition comes from Chinese language-based Internet
portal companies as well as U.S.-based portal companies. Some of our current and
potential competitors are much larger and better capitalized than we are, and
currently offer, and could further develop or acquire, content and services that
compete with the NetEase Web sites. We also face competition from online game
developers and operators, Internet service providers, wireless value-added
service providers, Web site operators and providers of Web browser software that
incorporate search and retrieval features. Any of our present or future
competitors may offer products and services that provide significant
performance, price, creativity or other advantages over those offered by us and,
therefore, achieve greater market acceptance than ours.

Because many of our existing competitors as well as a number of
potential competitors have longer operating histories in the Internet market,
greater name and brand recognition, better connections with the Chinese
government, larger customer bases and databases and significantly greater
financial, technical and marketing resources than we have, we cannot assure you
that we will be able to compete successfully against our current or future
competitors. Any increased competition could reduce page views, make it
difficult for us to attract and retain users, reduce or eliminate our market
share, lower our profit margins and reduce our revenues.

Item 4. Information on the Company

A. History and Development of the Company

Our business was founded in June 1997, and we began offering search
services and free Web-based e-mail starting mid-1997 and early-1998,
respectively. In mid-1998, we changed our business model from a software
developer to an Internet technology company and commenced developing the NetEase
Web sites. In July 1999, we began to offer e-commerce platforms and to provide
online shopping mall and other e-commerce services in China through Guangzhou
NetEase, a related party. In 2001, we also began focusing on fee-based premium
services and online entertainment services, including wireless value-added
services, online games, premium e-mail services and other subscription-type
products. Our focus on these services continued throughout 2002.

In connection with the restructuring of our operations which is
discussed below in Item 7.B. "Major Shareholders and Related Party
Transactions--Related Party Transactions," NetEase.com, Inc. was incorporated in
the Cayman Islands on July 6, 1999 and it operates under the Cayman Islands
Companies Law (2003 Revision). Our principal place of business was 15th Floor,
North Tower, Beijing Kerry Centre, No. 1 Guang Hua Road, Chao Yang District,
Beijing, People's Republic of China until January 13, 2003 when we moved to
Suite 1901, Tower E3, The Towers, Oriental Plaza, Dong Cheng

District, Beijing, People's Republic of China. Our telephone number is (86-10)
8518-0163. Our agent for service of process in the United States is CT
Corporation System, 111 Eighth Avenue, New York, New York 10011.

In July 2000, we completed the initial public offering of our American
Depositary Shares, representing our ordinary shares, and listed those securities
on the Nasdaq National Market.

Our principal capital expenditures for 2002 consisted of computer
equipment as well as software for a total of approximately RMB12.6 million
(US$1.5 million). Our principal capital expenditures for 2000 and 2001 also
consisted of computer equipment as well as software for a total of RMB34.0
million (US$4.1 million) and RMB21.1 million (US$2.5 million), respectively.

We have spent approximately RMB4.3 million (US$0.5 million) from
January 1, 2003 until March 31, 2003, principally for purchases of additional
computer equipment in order to accommodate the expected increase in traffic on
the NetEase Web sites and our online game servers. Our capital expenditure plans
for the remainder of 2003 have not yet been fixed, but we expect to spend an
additional approximately RMB16.4 million (US$2.0 million), primarily for further
purchases of additional computer equipment in order to accommodate the expected
increase in traffic on the NetEase Web sites and our online game servers.
Capital expenditures in 2003 have been, and are expected to continue to be,
funded through operating cash flows and through our existing capital resources.

B. Business Overview

We are an Internet technology company supporting a leading interactive
online and wireless community in China. Our innovative communities and
personalized premium services, which allow users to interact with other
community members, have established a large and stable user base for our
Internet portal business, and more recently, for our wireless value-added
services and online games businesses.

The Internet portal business, which is conducted through the NetEase
Web sites, provides Internet users with Chinese language online services
centered around content, community and e-commerce. In particular, the NetEase
content channels offer users an extensive range of local, regional and
international Chinese language content, Web-based communication services and
sophisticated search capabilities and provide a destination for Chinese Internet
users to identify and access resources, services, content and information on the
Internet. Registered community members can personalize their online experience
by publishing their own content and interacting with other users that have
similar interests. Under the NetEase and 163.com brands, we provide various free
services, including Chinese language-based e-mail, online chat rooms and
discussion forums.

In addition, the NetEase wireless value-added services offer users
timely information (such as news and stock quotes), community interaction and
games via wireless short-messaging, or SMS. Our online games provide community
and entertainment via multi-player online role-playing games, in which users can
simultaneously connect and interact on a massive scale.

Guangzhou NetEase, which has received approval from the
Telecommunications Office of Guangzhou City to engage in the Internet content
provider business, operates and maintains the NetEase Web sites pursuant to
contractual arrangements with us. Guangzhou NetEase also provides our wireless
value-added services and online games.

We believe that demand for our services is growing as the number of
users of Internet portals, wireless value-added services and online games in
China increases. Furthermore, the NetEase Web sites' market position as one of
the leading destinations for such users offers our online advertisers,
e-commerce

vendors and other partners such as mobile phone operators, value-added service
providers and online game operators a strong marketing platform and access to
this large and growing market of Chinese online consumers. The monthly average
daily page views of the NetEase Web sites for the month ended May 31, 2003
exceeded 280 million, and as of May 31, 2003, those sites had registered
approximately 120 million registered accounts.

Our Business Strategy

With our strong focus on the Chinese domestic market, we aim to have
the NetEase Web sites become the leading online network in China. Key strategies
for achieving our goal are to:

Expand Our Fee-Based Value-Added Services. We believe that Chinese
Internet users have started to understand the benefits of fee-based value-added
services. Accordingly, we have introduced a wide variety of such services,
including wireless value-added services, online games and premium e-mail, many
of which are targeted at the large portion of our registered user base which is
under the age of 25. We believe that our concerted effort to capture a portion
of this market as it first emerges, combined with our strong background in
developing Internet technologies, will enable us to offer services which are
valued by our users and establish our company as a reliable, secure and
innovative online value-added service provider in the minds of China's Internet
users. Moreover, we intend to continuously refine and improve these services,
while at the same time looking for additional market opportunities and
developing new services to address them. We will also strive to quickly
familiarize the large user base of the NetEase Web sites with each of these
services as they are introduced through outdoor advertising, notices on the
NetEase Web sites and other promotional activities and thereby attempt to
achieve a critical mass of users which we hope will create significant economies
of scale.

Continue to Develop User-Friendly Internet Applications, Services and
Technologies for the Chinese Market. We intend to continue our focus on
developing user-friendly technologies for the Internet industry in China. We
will adapt and modify existing technologies for Chinese language-based Internet
applications as well as develop our own proprietary Chinese language Internet
applications, such as our online games. We plan to continue to enhance our
platforms with user-friendly interfaces and with easy to understand user
instructions. While the market in China is not yet mature enough to allow the
widespread adoption of broadband Internet services and next generation wireless
technologies, we continue to explore ways in which we can utilize these
technologies to increase the number of our users. We employed approximately 220
technology and product development professionals as of May 31, 2003.

Enrich, Expand and Personalize NetEase Content. The NetEase Web sites
contain content from approximately 100 local and international content
providers, including Xinhua News Agency, Chinanews.com, Beijing Daily, Nanfang
Weekend, Yangcheng Night Newspaper, Guangzhou Daily, China Daily, People's
Daily, China Youth Daily, and Reuters. To expand our channel offerings, we are
working with vertical portal developers and purchasing or licensing existing
content from traditional media providers. We intend to continue to offer content
that will be more tailored for and relevant to our users' daily lives. We
believe this will:

. further differentiate the NetEase Web sites from competing Web
sites and enhance our competitive position;

. provide users with a more customized, comprehensive and satisfying
Internet experience; and

. increase the number of visits to the NetEase Web sites and the
length of time each user stays on those sites.

Expand the Number of Our Registered Users and Registered Community
Members. We believe that a Web site must maintain a critical mass of users in
order to generate online advertising, e-commerce and fee-based services
revenues. Therefore, we strive to keep the NetEase Web sites in their position
as one of the top three Web sites in China in order to achieve our goal of
converting our registered users into paying customers. To expand the number of
registered community members, we plan to enhance the quality of our community
services and introduce new applications, services and technology for our online
community that will make the Internet in China an increasingly important medium
for exchanging ideas. We plan to leverage our technology and Web-based products
to increase the NetEase community.

Expand Our E-commerce Services. We believe that a growing number of
consumers in China will look to the Internet as an alternative source of
commerce in the future. We have established an online shopping mall with 13
merchants as of May 31, 2003. We will build upon this experience and our
registered users and registered community members to actively develop and pursue
e-commerce opportunities. We intend to continue partnering with e-commerce
merchants by leveraging our user profile information, which allows them to
market products to specific demographic groups, and using our registered user
database to develop direct marketing opportunities.

Expand the Base of Online Advertisers on Our Network. Online
advertisers on the NetEase Web sites have traditionally consisted primarily of
merchants from the information technology and telecommunications industries as
well as an increasing number of advertisers from "traditional" industries such
as consumer products and media. However, in recent quarters, advertisers in a
broader range of industries have begun to advertise online, and we intend to
encourage this trend by attracting premier online advertisers through promoting
our brand name and providing attractive solutions to online advertisers. We will
continue to promote the Internet as an alternative method for advertisers to
reach end users through integrated marketing campaigns using banner advertising,
direct e-mail, interactive media-rich Web sites, special events, games and
contests and other formats and techniques. In addition, we intend to continue to
use third party advertising networks to increase the NetEase online advertiser
base and improve our ability to collect and correlate information regarding our
users and their habits, interests and related items to the extent permitted by
law.

Our Products and Services

The NetEase Web Sites

The Internet portal business, which is conducted through the NetEase
Web sites, offers Chinese Internet users a network of Chinese language-based
online content channels, community products, e-commerce services and other
Web-based applications and services to enhance their Internet experience. The
NetEase Web sites offer content channels, a full text Chinese language search
engine, a Web directory, e-mail, Web hosting, electronic greeting cards, dating
services and community tools. We also provide e-commerce services that allow
vendors to sell their products online through our online shopping mall. Our
content, community and e-commerce services are all designed with user friendly
interfaces and easy to understand instructions.

Our Members

The NetEase Web sites have registered and unregistered users. Any user
may visit the NetEase Web sites without registering. Only registered users can
use our personalized services such as our free e-mail system and instant
messaging, our fee-based premium services such as our premium e-mail and dating
services. The NetEase users provide us with valuable demographic and preference
information that will allow us to target audiences with relevant online
advertising.

Our Content

The NetEase Web sites' homepage provides a destination for Chinese
Internet users to identify and access resources, services, content and
information on the Internet. The NetEase Web sites aggregate, organize and
deliver information to meet the needs of Internet users in China. Our media
channels provide users with an efficient and easy way to explore and utilize a
wealth of information and content organized around a variety of topics. Our
content distribution platform enables the NetEase Web sites to offer in-depth
local content as well as a variety of locally relevant regional and
international content. We do not produce our own content for the NetEase Web
sites, but rather obtain content from our content partners.

We believe that our broad and relevant content offering increases the
number of visits and the amount of time our users spend on the NetEase Web
sites. We adopt a significant amount of user-generated content from the
community forums on the NetEase Web sites. We believe that this user-generated
content is highly effective in maintaining user interest and ensuring repeat
visits to the NetEase Web sites.

The NetEase Web sites currently include 18 media channels in the
following categories:

. News . Jobs and careers . Information technology

. Sports . Culture . Education

. Games . Female . Travel

. Finance . Entertainment . Mobile phone

. Real estate . Automobiles . Guangdong Local

. Health . Lifestyle . Shanghai Local

The NetEase Web sites also include several specialty content channels
such as Astrology, Jokes, Flash Cartoons and mini-sites for Movies and Concerts
which provide even more variety of content to our users.

Our Community

The NetEase Web sites have established a large online community member
base as a result of our leading online community technology. We launched what we
believe to be one of the first online communities in China in December 1998.
Users can register with us online to interact with other registered community
members. We believe that as users become more involved with our online
community, they will return to the NetEase Web sites frequently.

NetEase users can interact through a variety of community products and
services. We offer many products and services free of charge. They include:

. E-mail. Our technology and services provide registered users with a
free Web-based e-mail service which supports both the Chinese and
English languages. Registered users can access and send e-mail
through their Web browsers or through the POP3 and SMTP standards,

which allow users to handle e-mails on their own e-mail
applications without opening their browsers. The free Web-based
e-mail service also includes the convenience of an address book
to maintain user contact lists online, and by paying a fee, users
can upgrade this service and receive anti-virus and anti-spam
protections and extra memory storage. We also offer a separate
fee-based premium e-mail service which is described below.

. Online Community. We offer NetEase registered community members
over 2,000 community forums where they can post messages and
articles for viewing by other registered community members and
other users. Due to regulatory issues, we no longer allow users to
create their own forums in addition to the ones we offer. The
NetEase online communities are hosted by volunteers, who are
chosen by us based on their contributions to the communities. The
NetEase community volunteers monitor our community forums and
select appropriate articles for posting. In addition, they monitor
the personal homepages hosted by the NetEase Web sites.

. Instant Messaging. We offer NetEase registered users a
communications platform to notify their online friends and other
users with similar interests when they are online and to send and
receive text messages seen by both parties nearly instantaneously,
allowing NetEase registered users to participate in real-time
dialogues.

. Chat. Our chat services allow NetEase registered users to interact
in real-time groups or one-on-one discussions. Unlike hyper text
markup language, or HTML, our Java-based chat technology allows
users to participate in chats without downloading chat software.
The NetEase chat rooms are arranged around topics of interest
including, among others, relationships and dating, campus life and
technology. Registered users can also create their own personal
chat rooms.

. Voting System. We conduct numerous polls on various social,
cultural and other topics to provide our registered users with the
opportunity to express their views and also to learn about the
opinions of other Internet users.

We also offer these additional fee-based services:

. Premium E-mail Service. In November 2001, we began offering
value-added e-mail services for both individuals, known as VIP,
and corporations which provide subscribers with the latest
anti-virus and anti-spam filtering capabilities. The VIP e-mail
service also includes enhanced security features as well as
several convenient online and offline payment methods and 24-hour
customer support. As of May 31, 2003, we had more than 190,000 VIP
e-mail subscribers. In response to limited market interest, we
discontinued our premium corporate e-mail activities in October
2002.

. Web Page Hosting. In March 2001, we introduced a fee-based premium
Web page hosting service which allows subscribers to create and
maintain personal homepages. This service was re-launched in March
2002 with enhanced features and, thereafter, renamed "Personal
Space." The NetEase personal homepages create a Web-based
community for Internet users to express themselves, to share
ideas, interests and expertise, and to publish personal content
accessible by other users with common interests. While we believe
most of the NetEase personal homepages are of interest to a small
circle of friends and families, there is a core group of users who
create homepages with content having broader appeal. Traffic comes
from both inside our network of Web sites and from non-registered
users visiting from

outside. Non-registered users typically find registered users'
personal homepages through search engines. With this fee-based
premium service, individual users are able to choose from service
packages available at different rates to improve the overall
quality of their personal homepages.

Until December 2001, we also offered free computer storage space
for personal homepages. We have allowed free personal homepages
which were established before that date to remain in existence,
though we actively encourage those users to transition their
homepages to our premium service. Our premium Web page hosting
service provides a more reliable platform as well as improved
customer service in comparison to our prior free service. Users of
our premium Web page hosting service also benefit from greater
storage space, a more secure and faster server, and 24-hour
customer support. As of May 31, 2003, we had approximately 27,000
personal homepages which were established under our non-fee based
service and more than 74,000 personal homepages which were
established under our premium service.

. Love. Love is an online friend-finder, and we believe it is one of
the largest in China with more than 7 million registered members
and more than 200,000 paid subscribers. With this service,
registered users post their own profiles for periods of two years
or more, including photos, background, interests and contact
details, and interested parties contact them directly. Our "V
member" service provides enhanced features such as complete member
profile access and search capability, customizable personal
homepage design, front-page photo postings and publishing of
detailed friend-find requirements.

. Dating. A portion of the NetEase Web sites serves as a dedicated
dating center where subscribers can make new friends and find
someone to go out on dates or do other social activities, such as
hiking, sports, games and movies. With this service, registered
users post their dating announcements, along with their background
and other information, and interested parties can either search
online or contact our company through our SMS service to obtain
more details about the user. We will then send an SMS message to
the user to confirm that they want to have a date with the
interested party. We charge a fee for each posting by a male user,
but female users may post messages for free. During May 2003, the
dating service attracted more than 200,000 new registered users.

. Premium Electronic Greeting Cards. We believe that we were the
first Internet company to offer Chinese Internet users free online
greeting cards in Chinese. Subsequently, we began offering premium
fee-based electronic greeting cards with enhanced features and no
advertisements in March 2002, and we ceased offering free
electronic greeting cards. Our greeting cards have different
designs for various occasions, including New Year's Day, Chinese
New Year, Christmas, birthdays, Valentine's Day, and other
celebrations. We make new designs available on a regular basis.
Users pay a monthly membership fee for this service of RMB10 which
entitles them to send an unlimited number of cards per month. As
of May 31, 2003, we had over 125,000 electronic greeting card
subscribers.

Our E-commerce Services

We believe e-commerce will become a rapidly growing sub-sector of
China's Internet market, despite the fact that there are a number of obstacles
that need to be overcome. These obstacles include a low credit card penetration
rate, perceived lack of secure online payment systems and the lack of reliable
and efficient product distribution networks. However, we believe that these
obstacles will be overcome in time, and that e-commerce will generate
significant revenues in the future. For example, as discussed below in "Online
Games," we introduced a prepaid debit point card in connection with the
introduction of

our first massively multi-player online game, which we expect will facilitate
the usability and growth of all of our fee-based premium services.

Our e-commerce services focus on partnering with quality vendors to provide
the convenience of online shopping to users. Currently, those vendors support
their own e-commerce platforms which appear on the NetEase online shopping mall
Web site that we maintain. Previously, we also helped those vendors with their
e-commerce platforms. As of May 31, 2003, the mall hosted 13 vendors.

Our co-branded auction and trading Web site with EachNet terminated in July
2002. Subsequently, we offered free auction services on the NetEase Web sites
but discontinued those services in June 2003.

Web Directory, Web Search and Classified Ads

The NetEase Web sites also provide a Web directory, Web search and
classified ad services. Our Web directory is based on an open architecture
system with over 3,000 volunteer editors working to build a categorized
directory of Chinese Web sites. Our Web search is now powered by Baidu, a local
Chinese search technology provider. We currently sell classified advertisements
and key words exclusively through various local agents throughout China.

Wireless Value-added Services

SMS. In conjunction with China Mobile, in January 2001, we began offering
value-added services through short messaging services (SMS) to allow users to
send and receive messages from the Internet. Subsequently, we entered into a
similar arrangement with China Unicom. We charge a fee for these services which
are added onto the user's China Mobile or China Unicom bill and subsequently
collected from the user and paid to us by the applicable wireless operator.
These new services have experienced strong growth since their launch. At
December 31, 2002, we had more than 17 million registered accounts and sent more
than 1.6 billion short messages for the year. We expect that the usage of this
service will continue to increase in the near term as the popularity of SMS
increases but that there will be a transition to next generation technologies
such as multi-media messaging services as they become more widely available, as
discussed in next subsection below.

We offer over 200 different SMS products and subscription packages, which
allow users, for example, to receive news and information such as stock quotes
and e-mails, download ring tones and logos for their mobile phones and
participate in matchmaking communities and interactive games. We utilize content
from our Internet portal (both user-generated and from our content partners)
with our applications developed in-house to offer this wide variety of products
and services. Our products and services can be generally classified into four
main categories, namely, news and information subscription, community,
Internet-related products and services and multi-media downloading:

News and Information Multi-Media
Subscription Community Internet-related Downloading
------------ --------- ---------------- -----------

.. Current news . Matchmaking . E-mail notification . Ring tones

.. Financial news . SMS girlfriend . E-card notification . Logos

.. Sports news . SMS pet . Instant messaging . Screensavers

.. TV guide . Educational products

.. Weather forecast . Games & quizzes

WAP and Other Emerging Mobile Phone Technologies. We are also focusing on
developing products and services that can be utilized in emerging mobile phone
technologies. For example, beginning in late 2002, Guangzhou NetEase derived
wireless value-added services revenue under separate cooperative arrangements
with China Mobile and China Unicom by providing wireless application protocol
(known as WAP) services to mobile users with phones using the GPRS (General
Packet Radio Service) and CDMA1X technology standards. More recently, in April
2003, we started to derive revenue from activities related to multi-media
messaging services (known as MMS) under a cooperative agreement with China
Mobile. We expect that our revenue derived from new services we develop that are
compatible with these and other new mobile phone technologies will represent a
larger portion of our wireless value-added services revenue in the future as
these new technologies becomes more widely available.

Online Games

Massively Multi-player Online Role-Playing Games. In 2001, we began
offering massively multi-player online role-playing games. As part of this
initiative, we acquired technology assets from Guangzhou Tianxia Technology Co.
Ltd., a China-based game software developer which we believe was the first
company to introduce a domestically developed massively multi-player online
role-playing game to the China market. We launched our first massively
multi-player online role-playing game, "Westward Journey Online," in December
2001. In connection with the introduction of this game, we introduced a prepaid
debit point card which has facilitated the usability and growth of our online
game services and, to a lesser extent, of our other fee-based value-added
services. To address the difficulty of making online payments in China, users
can buy this card at local stores and other locations in China. The points
contained in the card can then be used to pay for our online services, such as
playing time for online games. Subsequently, we launched "Westward Journey
Online Version 2.0" and a massively multi-player online role-playing game
licensed from a Korean company, "PristonTale," in August 2002. For the month of
March 31, 2003, our online games had an average of 85,000 concurrent users and a
total of 890,000 unique users.

Partnerships and Strategic Alliances

We have entered into partnerships and strategic alliances with companies
that complement our products and services in a number of areas.

Content Partnerships and Alliances

With our content partnerships, our users have access to a broad offering of
Chinese language content through the NetEase Web sites and our wireless
value-added services. Our content partners display their content on one or more
of the NetEase Web sites and media channels free of charge or in exchange for a
share of revenue, a licensing fee, online advertising, access to original
content produced by the NetEase community or a combination of these
arrangements. We distribute this content through our content distribution system
to Guangzhou NetEase, which determines the appropriate content to publish on the
NetEase Web sites and to distribute to users of our wireless value-added
services. Our content alliances are generally non-exclusive.

Payment Solutions

We have partnered with several domestic companies to facilitate e-commerce
transactions, including China Merchants Bank, Capinfo (formerly China
Information Highway Corporation), iPayment and ChinaPay. Through these
partnerships, we can provide secure and reliable online payment solutions.

The News Corporation

In connection with the issuance of our Series B preference shares, we
entered into an agreement with News Digital Ventures, an affiliate of The News
Corporation Limited, which provided for cooperation between us and The News
Corporation. As part of the consideration for the issuance of our Series B
preference shares, The News Corporation and its affiliates have agreed to
provide us with on-air advertising and promotional inventory with a value of
US$5 million on The News Corporation's media properties, including Channel [V],
ESPN Star Sports, Phoenix TV and STAR TV. As of May 31, 2003, we had used US$3
million of the inventory and agreed to use the remaining inventory by March 28,
2004. In addition, The News Corporation and its affiliates have agreed to spend
US$5 million on online advertising on the NetEase Web sites. As of May 31, 2003,
The News Corporation had used approximately US$1 million of this advertising
inventory and agreed to use the remaining amount by March 28, 2004. All other
aspects of our strategic cooperation agreement with The News Corporation
terminated in March 2003.

Sales and Marketing

Sales Organization

We believe the growing number of Internet users in China represents an
attractive demographic target for advertisers because it represents an affluent,
educated and technically sophisticated market. To capitalize on this advertising
opportunity, we established an advertising sales force in May 1999.

Guangyitong Advertising sells banner advertisements on the NetEase Web
sites, including animated and interactive banner advertisements, button
advertisements, sponsorships, text links as well as advertising on our
electronic newsletters. In addition, we have been appointed by Guangzhou NetEase
to solicit advertising customers outside of China for the NetEase Web sites.
Together with Guangyitong Advertising, we had 49 advertising sales professionals
located in Beijing, Shanghai and Guangzhou as of May 31, 2003. In addition,
online advertising on the NetEase Web sites is also sold through online
advertising sales networks and advertising agencies. We believe that our focus
on widely-used services that are designed to appeal to a broad base of Internet
users attracts a variety of blue chip advertisers, ranging from technology
products to consumer brands (including increasingly Chinese companies). We
intend to continue to attract online advertisers by promoting the NetEase brand
name to potential advertisers. We also engage in providing cooperative
promotional advertising solutions in which we act as the official sponsor or
co-sponsor of special events or online content, such as Web sites that feature
movies or television series, athletic events, music awards, charity concerts and
industry exhibitions.

Furthermore, we perform analyses of our registered users' habits and
preferences on a frequent basis and have used that information to tailor our
advertising services. For example, we can deliver advertisements via electronic
greeting cards to users who fit within certain criteria based on their user
profile. By developing user profiles and user behavior analyses, we intend to
increase our ability to target specific user groups and thereby identify users
who are attractive to online advertisers.

Marketing

We employ a variety of traditional and online marketing programs and
promotional activities to build our brand as part of our overall marketing
strategy. In an effort to control our costs, we reduced the financial and other
resources devoted to our marketing and branding efforts in 2001. However, we
continue to build brand awareness through proactive public relations and
traditional and online advertising, and during 2002, we conducted an increasing
number of traditional marketing events promoting specific products and services,
such as wireless value-added services, online games and other fee-based premium
services. We plan to continue investing in various forms of marketing to further
build awareness of our brand.

Research and Development

We believe that an integral part of our future success will depend on our
ability to develop and enhance our products and services. Our product
development efforts and strategies consist of incorporating new technologies
from third parties as well as continuing to develop our own proprietary
technology in order to produce user-friendly Internet applications, services and
technologies for the Chinese market.

We have utilized and will continue to utilize the products and services of
third parties to enhance our platform of technologies and services to provide
competitive and diverse Internet services to our users. We also have utilized
and will continue to utilize third-party advertisement serving technologies in
conjunction with our own proprietary software. In addition, we plan to continue
to expand our technologies, products and services and registered user base
through diverse online products and services developed internally. We will seek
to continually improve and enhance our existing products and services to respond
to rapidly evolving competitive and technological conditions. Two areas of
particular focus are the development of our proprietary online games and our
wireless value-added services.

Infrastructure and Technology

Our infrastructure and technology have been designed for reliability,
scalability and flexibility and are administered by our technical staff. The
NetEase Web sites are made available primarily through network servers
co-located in the facilities of China Netcom's Beijing affiliate (this was an
affiliate of China Telecom until its reorganization) and China Telecom's
Changzhou affiliate. As of May 31, 2003, there were 1,056 such co-located
servers, operating with Web server software from Apache and Netscape. We lease
dedicated lines with 900 megabits per second capacity from China Netcom's
Beijing affiliate as well as shared lines from China Telecom's Changzhou
affiliate.

We license and optimize StoryServer from Vignette Corporation to provide
efficient and responsive management of the content on www.163.com, the main
homepage of the NetEase Web sites. We also license NetGravity's advertisement
serving technology to provide internal advertising inventory management, and we
have developed our own advertisement tracking system.

Our Web directory is based on an open architecture system with over 3,000
volunteer editors. We use Oracle's database systems to manage our registered
user database. NetEase has established a comprehensive user profile system, and
we analyze user information on a weekly basis. We also deploy a single sign-on
system that allows users to access all services within the NetEase Web sites. We
intend to continue to use a combination of internally developed software
products as well as third party products to enhance our Internet media services
in the future.

Seasonality

Historically, advertising and e-commerce revenues followed the same general
seasonal trend throughout each year with the first quarter of the year being the
weakest quarter due to the Chinese New Year holiday and the traditional close of
advertisers' annual budgets and the fourth quarter as the strongest. Although we
have only limited historical data, usage of our wireless value-added services
and online games has typically increased around the Chinese New Year holiday and
other Chinese holidays, in particular winter and summer school holidays. Our
holiday-related electronic greeting cards have been especially popular during
those periods.

Competition

A number of companies offer competitive products or services in China, our
main operating market. These include Sina, Sohu, Tom.com, 263.net, Chinadotcom
and 21cn.com.

We also face competition from U.S.-based portals such as Yahoo! and Yahoo!
Chinese which have translated some of their content from the English language to
the Chinese language. We expect that China's entry into the World Trade
Organization, and the resulting gradual opening of its telecommunications
sector, may facilitate more foreign participation in the Chinese Internet
market. Many of these Internet companies have longer operating histories in the
Internet market, greater name and brand recognition, larger customer bases and
databases and significantly greater financial, technical and marketing resources
than we have. The entry of additional, highly competitive Internet companies
into the Chinese market would further heighten competition. Finally, we face
competition from Web sites that operate outside our market and offer content in
the English language, which may be attractive to a portion of Chinese Internet
users.

Further, we face competition from other Web sites that offer online
community products and from other e-commerce service providers servicing our
market including Sina, Sohu, Tom.com and Tencent.com. Moreover, Sina, Sohu and
Tom.com are major providers of wireless value-added services in the China
market, and like our company, they also have partnership arrangements with both
China Mobile and China Unicom, the two current mobile phone operators in China.
Although the number of competitors for SMS services did not grow materially in
2002, there has been a recent consolidation in the industry, resulting in an
overall strengthening of competition in 2003.

We are also encountering competition from companies offering massively
multi-player online role-playing games that target the China market, such as
Shanda Networking, Softworld, Joypark and Waei International (with whom we had a
strategic partnership until March 2002). Additionally, the producers of
traditional video game consoles, such as Sony's Play Station 2 and Microsoft's
Xbox, offer massively multi-player games to their users, although the consoles
and games have not yet been released in China. Some of our existing and
potential competitors in these areas have significantly greater financial and
marketing resources than we do.

In the future, we expect to face increased competition from new Internet
media companies that choose to target general, special interest and/or
demographic markets (such as vertical portals). We may encounter indirect
competition from providers of Web-based software and other Internet related
products. We also compete with traditional forms of media for
advertising-related revenue. Further, we compete with domestic and
multi-national Internet solutions providers. There can be no assurance that we
will be able to compete successfully against our current or future competitors
or that competition will not have a material adverse effect on our business,
results of operations and financial condition.

We believe the principal competitive factors in the Internet market in
China are:

. brand recognition;

. user-friendliness;

. focus on Internet users in China;

. development of technology tailored for the Chinese Internet industry;

. comprehensiveness, quality and responsiveness of products and
services;

. availability of targeted content; and

. personalized experience and online community applications, services
and technologies.

Governmental Regulations

The telecommunications industry, including computer information and
Internet access services, is highly regulated by the Chinese government.
Regulations issued or implemented by the State Council, the Ministry of
Information Industry, or the MII, and other relevant government authorities
cover virtually every aspect of telecommunications network operation, including
entry into the telecommunications industry, the scope of permissible business
activities, interconnection and transmission line arrangements, tariff policy
and foreign investment.

In March 1998, the National People's Congress approved a government
restructuring plan that directed the MII to assume, among other things, the
regulatory, administrative and other responsibilities of, and rights previously
exercised by, the former Ministry of Posts and Telecommunications.

The MII, under the leadership of the State Council, is responsible for,
among other things:

. formulating and enforcing telecommunications industry policy,
standards and regulations;

. granting licenses to provide telecommunications and Internet access
services;

. formulating tariff and service charge policies for telecommunications
and Internet access services;

. supervising operations of telecommunications and Internet access
service providers;

. maintaining fair and orderly market competition among operators; and

. managing the day-to-day administration of the national
telecommunications sector.

In September 2000, China's State Council promulgated the Telecommunications
Regulations, or the Telecom Regulations. The Telecom Regulations categorize all
telecommunications businesses in China as either infrastructure
telecommunications businesses or value-added telecommunications businesses, with
Internet content provider (ICP) services and e-mail services classified as
value-added telecommunications businesses. According to the Telecom Regulations,
the commercial operator of such services must obtain an operating license. The
Telecom Regulations also set forth extensive guidelines with respect to
different aspects of telecommunications operations in China.

In December 2001, in order to comply with China's commitments with respect
to its entry into the WTO, the State Council promulgated the Administrative
Rules for Foreign Investments in Telecommunications Enterprises, or the Telecom
FIE Rules. The Telecom FIE Rules set forth detailed requirements with respect to
capitalization, investor qualifications and application procedures in connection
with the establishment of a foreign invested telecom enterprise. Pursuant to the
Telecom FIE Rules, foreign investors may now hold an aggregate of no more than
49% of the total equity in any value-added telecommunications business in China,
subject to certain geographic limitations. This percentage ceiling is to be
increased to 50% by the second anniversary of China's entry into the WTO.

In addition to the regulations promulgated by the central Chinese
government, some local governments have also promulgated local rules applicable
to Internet companies operating within their respective jurisdictions. In
Beijing, where our head office is located, the Beijing Municipal Administrative
Bureau of Industry and Commerce, or the Beijing AIC, has promulgated a number of
Internet-related rules. In September 2000, the Beijing AIC invalidated a
previously issued circular and adopted a new set of rules requiring owners of
the domain names of commercial Web sites located within Beijing to conduct both
a Web site name registration and a commercial Web site registration with the
Beijing AIC. In March 2001, the Beijing AIC also promulgated the Online
Advertising Tentative Administrative Measures requiring all ICPs within Beijing
which provide online advertising services to obtain an advertising operating
license. In addition, the Beijing AIC issued a circular requiring bulletin board
services (BBS) providers to obtain approval from the Beijing AIC. Since these
local rules or circulars promulgated by the Beijing AIC do not explicitly
require a non-Beijing registered Internet company or a non-ICP company to comply
with these rules or circulars and it is not clear under the rules that the
NetEase Web sites are "located within Beijing," we believe that these local
rules do not apply to Guangzhou NetEase and NetEase Beijing.

Regulation of Internet Content Services; Publications

Subsequent to the State Council's promulgation of the Telecom Regulations
in September 2000, MII formulated and implemented a number of Internet-related
regulations, including but not limited to the Internet Information Service
Administrative Measures, or the ICP Measures, the Internet Electronic Bulletin
Board Service Administrative Measures, or the BBS Measures, and the Tentative
Administrative Measures Concerning Internet Portals Carrying on the News
Displaying Business, or the Internet News Measures. The ICP Measures require
that commercial ICP operators must obtain an ICP license from the appropriate
telecommunications authorities in order to carry on any commercial ICP
operations within China. In addition, the ICP Measures also provide that ICP
operators which operate in sensitive and strategic sectors, including news,
publishing, education, health care, medicine and medical devices, must obtain
additional approvals from the relevant authorities in charge of those sectors as
well. The BBS Measures provide that any ICP operator engaged in providing online
bulletin board services is subject to a special approval and filing process with
the relevant government telecommunications authorities. The Internet News
Measures require that any ICP operator engaging in any news displaying services
must obtain approval for those services from the appropriate government news
department.

The Ministry of Health and the State Drug Administration have also adopted
regulations regarding the online dissemination of online health- or drug-related
information. These regulations require that, among other things, medical, health
and drug information must be scientific and accurate and the sources of the
information must be identified. Web sites which have received approval to
disseminate such information must also publish or reprint health policies,
information on epidemics and major health-related incidents and other
information in this area in accordance with law. Medical and drug-related
advertisements published by such Web sites are also prohibited from exaggerating
the efficacy or promoting the medical uses of the advertised products.

In addition, the State News and Publication Bureau, or SNPB, is the
government agency responsible for regulating publishing activities in China. On
June 27, 2002, MII and SNPB jointly promulgated the Internet Publishing
Tentative Administrative Measures, or the Internet Publishing Measures, which
took effect on August 1, 2002. The Internet Publishing Measures require Internet
publishers to secure approval from SNPB. The term "Internet publishing" is
defined as an act of online dissemination whereby Internet information service
providers select, edit and process works created by themselves or others
(including content from books, newspapers, periodicals, audio and video
products, electronic publications, etc. that have already been formally
published or works that have been made public in other media) and subsequently
post the same on the Internet or transmit the same to users via the Internet for
browsing, use or downloading by the public.

Currently, the NetEase Web sites are operated by our affiliated company,
Guangzhou NetEase Computer System Co., Ltd., or Guangzhou NetEase. To operate
the NetEase Web sites in compliance with all the relevant ICP-related Chinese
regulations, Guangzhou NetEase has successfully obtained an ICP license issued
by the Guangdong Provincial Telecommunications Bureau dated as of December 14,
2000. On February 15, 2001, the News Office of the Beijing Municipal People's
Government approved Guangzhou NetEase's application in respect of its news
displaying services on the NetEase Web sites. Our current ICP license also
authorizes Guangzhou NetEase to provide bulletin board services. As for special
approvals for other online services, Guangzhou NetEase has submitted
applications for online dissemination of health- and drug-related information
and Internet publishing.

Under the relevant regulations, ICP operators and Internet publishers are
prohibited from posting or displaying any content that:

. opposes the fundamental principles determined in China's Constitution;

. compromises state security, divulges state secrets, subverts state
power or damages national unity;

. harms the dignity or interests of the state;

. incites ethnic hatred or racial discrimination or damages inter-ethnic
unity;

. sabotages China's religious policy or propagates heretical teachings
or feudal superstitions;

. disseminates rumors, disturbs social order or disrupts social
stability;

. propagates obscenity, pornography, gambling, violence, murder or fear
or incites the commission of crimes;

. insults or slanders a third party or infringes upon the lawful rights
and interests of a third party; or

. includes other content prohibited by laws or administrative
regulations.

Failure to comply with this content censorship requirement may result in
the revocation of ICP licenses and the closing down of the concerned Web sites.
To ensure compliance with this regulatory requirement, Guangzhou NetEase has
taken all reasonable steps to avoid displaying any of the prohibited content on
the NetEase Web sites.

Regulation of Advertisements

The State Administration of Industry and Commerce, or the SAIC, is the
government agency responsible for regulating advertising activities in China.
While there are no nation-wide uniform laws or regulations in China specifically
governing online advertising businesses, certain local government authorities,
such as the Beijing AIC, have issued a number of regulations governing online
advertising businesses. The SAIC has not expressly asserted or issued any
regulatory documents stating that the Internet is considered an advertising
medium under its rules, nor has the SAIC extended its jurisdiction to online
advertisements. However, we cannot predict what stance the SAIC or any other
Chinese governmental agencies may adopt in the future.

Guangyitong Advertising holds an advertising operating license and operates
our online advertising business on an exclusive basis. If the SAIC were to treat
our current technological service to Guangyitong Advertising as being an online
"Advertisement Publisher", we would need to apply to the local SAIC to amend our
business license to authorize us to conduct an online advertising business in
accordance with the Administrative Regulations on Advertising and the Detailed
Implementing Rules thereof. We cannot assure you that such application would be
approved by the SAIC. Failure to obtain such approval may result in penalties
including:

. being banned from engaging in online advertising activities,

. confiscation of illegal earnings and

. fines.

On the other hand, if an application were approved by the SAIC and we were
deemed to be an online "Advertisement Publisher," we would be held responsible
for examining relevant documents and verifying the content of advertisements we
post online.

Regulation of E-Commerce

At present, there are no specific Chinese laws at the national level
governing e-commerce or defining e-commerce activities, and no Chinese
government authority has been designated to regulate e-commerce. There are
existing regulations governing retail and auction businesses which require
companies to obtain licenses in order to engage in these businesses. However, it
is unclear whether these existing regulations will be applied to e-commerce.
There is no assurance that the Chinese government will not, in the future,
promulgate specific regulations governing e-commerce, designate a government
agency to regulate e-commerce activities or apply existing retail and auction
regulations to e-commerce activities, any of which events could restrict our
business activities.

In addition, at least one provincial government has adopted regulations in
this area, and other provincial or local governmental agencies may do so in the
future. Specifically, in December 2002, Guangdong Province promulgated the
Electronic Transactions Regulations which require electronic transaction service
providers to obtain governmental approval and regulate electronic signatures,
records and contracts. It is not entirely clear whether these regulations apply
to Guangzhou NetEase, and, accordingly, we have not sought any approvals under
these regulations. However, our ability to operate our business may be adversely
affected if the Guangdong provincial authorities determine that the regulations
are applicable to Guangzhou NetEase. Further, the adoption of multiple
e-commerce regulations by different provincial or local agencies could have a
material adverse effect on our business, particularly if such regulations are
inconsistent with each other.

Regulation of Wireless Value-Added Services

Similar to e-commerce activities, there are no specific Chinese laws at the
national level governing wireless value-added services, such as our services
related to SMS, and no Chinese government authority has been designated to
regulate these services. At the moment, most, if not all, providers of
SMS-related services have obtained ICP licenses such as the ICP license which
our affiliate, Guangzhou NetEase, possesses. However, we cannot be certain that
an ICP license will be deemed sufficient by the relevant governmental
authorities for the provision of this category of service, and it is possible
that new national legislation might be adopted to regulate such services.

Moreover, one province has adopted regulations on a trial basis that
require SMS providers to obtain licenses from or register with the local MII
branch office before conducting SMS operations in that province. Due to the
uncertainty surrounding the applicability of these regulations, we have not
applied for such provincial license. If these regulations are determined to be
applicable to our business and/or additional provincial or local regulations
arise in this area, our business could be adversely affected, particularly if
such regulations are inconsistent with each other or we cannot obtain the
requisite approvals.

Regulation of Online Games

On May 10, 2003, the Ministry of Culture promulgated the Internet Culture
Administration Tentative Measures, or Internet Culture Measures, which will come
into effect on July 1, 2003. The Internet Culture Measures require Internet
content providers which engage in "Internet Culture Activities" to submit an
application for approval by the Ministry of Culture by September 1, 2003. The
term "Internet Culture Activities" includes, among other things, acts of online
dissemination of "Internet Cultural Products," such as audio-visual products,
gaming products, performances of plays or programs, works of art and cartoons,
and the production, reproduction, importation, sale (wholesale or retail),
leasing and broadcasting of Internet Cultural Products. In addition, these
regulations require a separate review of the content of any online games which
are imported into China.

We believe that our provision of online games will necessitate obtaining
approval from the Ministry of Culture under the Internet Culture Measures and
that any games which we import, such as PristonTale, will have to be reviewed.
Because the Internet Culture Measures are so new and have yet to be implemented,
we cannot be certain whether we can obtain such approvals or how long the
application process will take. In addition, it has been reported that the SNPB
will be adopting regulations affecting online games, and we cannot be certain
when these regulations will become effective, what form they will take or how
they will affect our business.

Foreign Exchange Controls

Our Chinese subsidiaries are subject to various foreign exchange controls
which are discussed in Item 10 in this Form 20-F.

Intellectual Property and Proprietary Rights

We rely primarily on a combination of copyright laws and contractual
restrictions to establish and protect our intellectual property rights. We
require our employees to enter into agreements requiring them to keep
confidential all information relating to our customers, methods, business and
trade secrets during and after their employment with us. Our employees are
required to acknowledge and recognize that all inventions, trade secrets, works
of authorship, developments and other processes, whether or not

patentable or copyrightable, made by them during their employment are our
property. They also sign all necessary documents to substantiate our sole and
exclusive right to those works and to transfer any ownership that they may claim
in those works to us.

While we actively take steps to protect our proprietary rights, such steps
may not be adequate to prevent the infringement or misappropriation of our
intellectual property. Infringement or misappropriation of our intellectual
property could materially harm our business. We own the intellectual property
(other than the content) relating to the NetEase Web sites and the technology
that enables on-line community, personalization and e-commerce services on those
sites. We license content from various freelance providers and other content
providers.

We have full legal rights over and have registered the following domain
names with Network Solutions, Inc.:

. www.netease.com;

. www.163.com;

. www.yeah.net;

. www.126.com; and

. www.nease.net.

China's trademark law adopts a "first-to-file" system for obtaining
trademark rights. As a result, the first applicant to file an application for
registration of a mark will preempt all other applicants. Prior use of an
unregistered mark is generally irrelevant except for "well known" marks.
Guangzhou NetEase and NetEase Beijing have successfully registered numerous
trademarks with China's Trademark Office, including marks incorporating the
words "NetEase" and "Yeah" in English and for marks for "NetEase" as written in
Chinese in traditional and simplified Chinese characters. In addition, they have
registered trademarks involving Chinese characters and phrases that have
meanings relating to our Web pages, products and services, including our travel
Web page, dating and friends matching services, chat services, online gaming and
our search engine. Guangzhou NetEase has transferred all but two of those marks
to us, and we will cause the remaining two marks to be transferred to us
shortly. Guangzhou NetEase and NetEase Beijing also have applications pending
for several other trademarks, and we will cause Guangzhou NetEase to transfer to
us any of its newly registered trademarks. We may not be able to successfully
defend or claim any legal rights in those trademarks that Guangzhou NetEase has
registered but not yet transferred to us, and those trademarks for which
applications have been made but for which the Trademark Office has not issued a
registration certificate.

We have also registered a number of trademarks in Hong Kong incorporating
the words "NetEase" in English and the marks for "NetEase" as written in Chinese
in traditional and simplified Chinese characters. In addition, we have also
filed similar trademark applications in the United States.

Many parties are actively developing and seeking patent protection for
community, e-commerce and related Web technologies. We expect these parties to
continue to take steps to protect these technologies, including seeking patent
protection. There may be patents issued or pending that are held by others and
that cover significant parts of our technology, business methods or services.
For example, we are aware that a number of patents have been issued in areas of
e-commerce, Web-based information indexing and retrieval and online direct
marketing. Disputes over rights to these technologies are likely to

arise in the future. We cannot be certain that our products do not or will not
infringe valid patents, copyrights or other intellectual property rights held by
third parties. We may be subject to legal proceedings and claims from time to
time relating to the intellectual property of others.

Legal Proceedings

Beginning in October 2001, four substantially identical purported class
action complaints alleging violations of the federal securities laws were filed
in the United States District Court for the Southern District of New York naming
our company, certain of our current and former officers and directors, and the
underwriters of our initial public offering as defendants. In general, the
complaints alleged, among other things, that (i) our initial public offering
violated the U.S. securities laws because the financial statements accompanying
the offering's registration statement misstated our revenue; and (ii) we
committed securities fraud by materially misstating our revenue in our 2000
financial statements.

The parties to this litigation entered into a definitive settlement
agreement to settle all claims, which was approved and declared final by the
District Court on May 16, 2003. The aggregate settlement amount, which was paid
to those persons who purchased our American Depositary Shares during the period
from July 3, 2000 to August 31, 2001, was US$4.35 million. This settlement has
been reflect in our third quarter and full-year financial statements for 2002 as
a one-time charge.

C. Organizational Structure

The following table sets out the details of our subsidiaries:

Country of Ownership
Name Incorporation Interest
---- ------------- --------

NetEase Information Technology (Beijing) Co., Ltd. China 100%
NetEase Information Technology (Shanghai) Co., Ltd. China 100%
NetEase (U.S.) Inc. U.S. 100%
NetEase Interactive Entertainment Ltd. British Virgin 100%
Islands

NetEase Interactive Entertainment Limited also has a wholly owned
subsidiary, Guangzhou NetEase Interactive Entertainment Limited.

Beijing NetEase Interactive Network Technology Co., Ltd., an 80% owned
subsidiary, remained dormant since its establishment and was dissolved on
October 11, 2002. In addition, NetEase (U.S.) Inc. was dormant in 2002, and we
expect that it will remain so in the near-term.

D. Property, Plant and Equipment

Our principal executive offices are currently located at Suite 1901, Tower
E3, The Towers, Oriental Plaza, Dong Cheng District, Beijing, People's Republic
of China 100738. We lease our principal executive offices at an effective annual
rent of approximately US$0.4 million (RMB2.9 million), including management
fees, for 1,592 square meters under a lease that expires in May 2006. We also
occupy 756 square meters under a lease in Shanghai that expires in December
2004. Guangzhou NetEase occupies a total of 2,200 square meters under leases
that expire in February 2005 and February 2006, respectively. We also have a
lease for an office in the United States located in Newark, California. This
lease expires in October 2005, but we are negotiating with the landlord for an
early termination of it. We believe that we will be able to obtain adequate
facilities, principally through the leasing of appropriate properties, to
accommodate our future expansion plans.

We lease dedicated lines with a total capacity of approximately 900
megabits per second from China Netcom's Beijing affiliate under a contract
expiring in September 2003. In addition, we lease shared lines from China
Telecom's Changzhou affiliate under contracts expiring in June 2003, January
2004 and March 2004. Our bandwidth fees were approximately US$1.9 million for
the year ended December 31, 2002 and approximately US$0.5 million for the first
quarter of 2003.

Item 5. Operating and Financial Review and Prospects

The following discussion of our financial condition and results of
operations is based upon and should be read in conjunction with our consolidated
financial statements and their related notes included in this annual report on
Form 20-F. This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including, without limitation, statements regarding our
expectations, beliefs, intentions or future strategies that are signified by the
words "expect", "anticipate", "intend", "believe", or similar language. All
forward-looking statements included in this annual report are based on
information available to us on the date hereof, and we assume no obligation to
update any such forward-looking statements. Actual results could differ
materially from those projected in the forward-looking statements. In evaluating
our business, you should carefully consider the information provided under the
caption "Risk Factors" in this annual report on Form 20-F. We caution you that
our businesses and financial performance are subject to substantial risks and
uncertainties.

Overview

NetEase is a leading Internet technology company in China. Our
innovative online communities and personalized premium services, which allow
registered users to interact with other community members, have established a
large and stable user base for the NetEase Web sites which are operated by our
affiliate. As of May 31, 2003, we had registered approximately 120 million
accounts, and our average daily page views exceeded 280 million for the month
ended May 31, 2003.

In 2002, we continued to develop our various fee-based premium services
and online entertainment services, including wireless value-added services,
online games, premium e-mail services for individual users and other
subscription-type products. Our fee-based revenue accounted for approximately
85% of our total revenue for the year ended December 31, 2002. We believe that
we will continue to rely on advertising revenue as one of our significant
revenue sources for the foreseeable future, but we anticipate that the revenue
generated by these fee-based premium services and online entertainment services
will continue to constitute the major portion of our future revenue.

We achieved a net profit of RMB16.3 million (US$2.0 million) for the
year ended December 31, 2002 and generated positive operating cash flows of
RMB26.8 million (US$3.2 million) during the year. Our accumulated deficit was
reduced from RMB454.1 million (US$54.9 million) as of December 31, 2001 to
RMB437.8 million (US$52.9 million) as of December 31, 2002. These accumulated
losses have been funded principally with proceeds from the issuance of our
American Depositary Shares at our initial public offering, which was completed
in July 2000, and our previous private share offerings.

Our Corporate Structure

NetEase.com, Inc. was incorporated in the Cayman Islands on July 6,
1999 as an Internet technology company in China. As of December 31, 2002, we had
four directly wholly owned subsidiaries, NetEase Information Technology
(Beijing) Co., Ltd., or NetEase Beijing, NetEase Information Technology
(Shanghai) Co., Ltd., or NetEase Shanghai, NetEase (U.S.) Inc., or NetEase US,
and NetEase Interactive Entertainment Limited, or NetEase Interactive, which has
a direct wholly owned subsidiary, Guangzhou NetEase Interactive Entertainment
Limited, or Guangzhou Interactive.

NetEase Beijing and NetEase Shanghai were established in China on
August 30, 1999 and May 14, 2000, respectively. NetEase US was established in
the United States of America on September 10, 1999. NetEase Interactive was
established in the British Virgin Islands on April 12, 2002, and Guangzhou
Interactive was established in China on October 15, 2002.

Apart from the above-mentioned wholly owned subsidiaries, we also
established a joint venture company in China, Beijing NetEase Interactive
Network Technology Co., Ltd., or NetEase INT. NetEase INT was established on
November 28, 2000 by our company and NetEase Beijing, which owned 80% and 20%,
respectively, of the equity interest in NetEase INT. NetEase INT remained
dormant since its establishment and was dissolved on October 11, 2002.

As the exclusive Internet technology provider to Guangzhou NetEase
Computer System Co. Ltd., or Guangzhou NetEase, we provide a variety of Internet
applications, technologies and services to support Guangzhou NetEase's operation
of the NetEase Web sites and our e-commerce related services.

Guangzhou NetEase is a limited liability company organized under the
laws of China and is controlled and owned by our principal shareholder.
Guangzhou NetEase has been approved by the Chinese authorities to operate as an
Internet content provider and operates the NetEase Web sites. Guangzhou
NetEase's 80% owned subsidiary, Beijing Guangyitong Advertising Co., Ltd., or
Guangyitong Advertising, is licensed by the Chinese authorities to operate an
advertising business and engages in Internet-related advertising design,
production and dissemination.

We have entered into a series of contractual arrangements with
Guangzhou NetEase and Guangyitong Advertising with respect to the operation of
the NetEase Web sites and the provision of advertising services. Our services to
Guangyitong Advertising constitute the majority of our advertising-related
operations.

NetEase US remained inactive during the year ended December 31, 2002.

Revenues

Our total revenue increased from RMB28.3 million in 2001 to RMB232.6
million (US$28.1 million) in 2002. We generate our revenue from advertising
services, ecommerce and other services, and software licensing and related
integration projects. In mid-1998, we changed our business model from a software
developer to an Internet technology company. In July 1999, we began to offer
e-commerce platforms and to provide online auction services in China through
Guangzhou NetEase, a related party. Thereafter, we operated a co-branded auction
Web site with EachNet which was ultimately terminated in July 2002, at which
time we restarted our own online auction platform providing free auction
services to our registered users until June 2003. In 2001, we also began
focusing on fee-based premium services and online entertainment services,
including wireless value-added services, online games, premium e-mail services
and other subscription-type products. Our focus on these services continued
throughout 2002.

Other than revenue from our related parties, Guangzhou NetEase and
Guangyitong Advertising, no customer individually accounted for greater than 10%
of our total revenue for 2000, 2001 and 2002.

Advertising Services Revenue

We derive all our advertising services revenue from fees we earn from
Guangyitong Advertising, a related party, for services that we provide in
connection with advertisements placed on the NetEase Web sites and
advertising-related technical consulting services. We have entered into an
agreement with Guangyitong Advertising under which we are the exclusive provider
of advertising-related technical consulting services to Guangyitong Advertising
and under which we receive a service fee. The service fee that we charge
includes substantially all of the advertising revenue of Guangyitong Advertising
less all of the accrued expenses incurred by Guangyitong Advertising, and net of
a 5% business tax, a 3% cultural development fee and certain surcharges that
apply to these revenues.

E-commerce and Other Services Revenue

We currently derive all our e-commerce and other services revenue from
fees earned pursuant to a series of agreements with Guangzhou NetEase, a related
party, under which we provide Internet portal and e-commerce technologies and
advertising services to Guangzhou NetEase in exchange for a service fee. The
service fee that we charge includes substantially all of the e-commerce and
other services revenue recognized by Guangzhou NetEase, net of a 5.5% business
tax and certain surcharges that apply to these revenues. Prior to 2001, we
derived our e-commerce related services revenues from third parties as well as
from Guangzhou NetEase.

Guangzhou NetEase earns its e-commerce related services revenue from
wireless value-added services, online games and other fee-based premium
services.

Wireless Value-Added Services

Guangzhou NetEase receives wireless value-added services revenue which
are currently predominantly derived from activities related to short messaging
services (known as SMS). Guangzhou NetEase derives wireless value-added services
revenue principally from providing value-added services through SMS to users
such as friends matching, news and information services, ring-tone and logo
downloads and various other related products that mobile phone users can access
under co-operative arrangements between Guangzhou NetEase and two Chinese mobile
phone operators, China Mobile and China Unicom. Recently, there has been a
consolidation in the market for products and services for users of SMS,
resulting in an overall strengthening of competition in 2003. To maintain and
grow our position in this market, we intend to continue improving our existing
products and services and developing new ones, but these efforts may not be
successful.

We are also focusing on developing products and services that can be
utilized in emerging wireless technologies. For example, beginning in July 2002,
Guangzhou NetEase also derived wireless value-added services revenue under a
separate cooperative arrangement with one of the Chinese mobile phone operators
by providing wireless application protocol (known as WAP) services to mobile
phone users with phones using the General Packet Radio Service (known as GPRS)
or CDMA1X wireless standards. More recently, in April 2003, we started to offer
products and services for users of multi-media messaging services (known as MMS)
under an additional co-operative agreement with one of the Chinese mobile phone
operators. We expect that our revenue derived from new services we develop that
are compatible with these and other new wireless technologies will represent a
larger portion of our wireless value-added services revenue in the future as
these new technologies becomes more widely available. However, we cannot be
certain that these new technologies or the products and services we develop for
them will be successful, and we expect to see increasing competition in this
area.

Online Games

Guangzhou NetEase receives all its online games revenue from its
customers through the sale of prepaid point cards. Customers can purchase
prepaid point cards in different locations in China, including Internet cafes,
convenience stores, supermarkets and bookstores, etc. Customers can register
their point cards in our system and use the points in the cards to play our
online games and use our other fee-based services. We develop our own
proprietary online games, as well as license games from third party developers.
We expect that we will face continued competition as online game providers,
mainly from South Korea and to a lesser extent from the U.S., expand their
presence in this market or enter it for the first time.

Other Fee-Based Premium Services

Other fee-based premium services include premium e-mail, friends
matching and dating services, personal homepage hosting and online shopping
mall.

Software Licensing and Related Integration Projects Revenue

Prior to 2000, software licensing and related integration projects
revenue consisted of fees received from licensing, integration services and
post-contract customer support. We ceased providing licensing and integration
services in 1999. In 2002, this category of revenue also included certain
corporate solution services to a customer in connection with the purchase of
servers and computer equipment, development of software and custody and
maintenance of servers.

Although we continue to perform occasional corporate solutions services
for customers upon request, we expect this category of revenue to remain
immaterial to our business.

Cost of Revenues

Advertising, E-commerce and Other Services Costs

Advertising, e-commerce and other services costs represent those direct
costs for operating the NetEase Web sites, which consist primarily of server
custody and bandwidth fees, content fees, staff costs, share compensation cost,
depreciation and amortization of computers and software and other direct costs.

NetEase Beijing, NetEase Shanghai and Guangzhou NetEase lease bandwidth
from China Telecom and China Netcom affiliates. NetEase Beijing and Guangzhou
NetEase have network servers co-located in facilities owned by China Telecom's
and China Netcom's affiliates, for which they pay custody fees to China Telecom
and China Netcom. In addition, as a result of our arrangements with Guangzhou
NetEase, we also pay for Guangzhou NetEase's bandwidth lease payments and server
custody fees on a monthly basis. These costs are recognized in full as incurred.

Staff costs consist primarily of compensation expenses for our
e-commerce and editorial professionals and also for our staff in our online
games business department, in particular, a group of employees known as the
"Game Masters" who are responsible for the daily co-ordination and regulation of
the activities inside our games' virtual worlds.

We depreciate our computer equipment, software and other assets (other
than leasehold improvement) on a straight-line basis over their estimated useful
lives, which range from one to five years.

Software Licensing and Related Integration Projects Costs

We did not incur any direct costs relating to software licensing and
related integration projects in 2000, 2001 and 2002.

Operating Expenses

Operating expenses include selling, general and administrative expenses
and research and development expenses.

Selling; General and Administrative Expenses

Selling, general and administrative expenses consist primarily of
marketing and advertising; salary and welfare expenses and share compensation
costs; office rental; recruiting expenses; travel expenses and depreciation
charges. We depreciate leasehold improvements, which are included in our
operating expenses, on a straight-line basis over the lesser of the relevant
lease term or their estimated useful lives.

Research and Development Expenses

Research and development expenses consist principally of compensation
for our research and development professionals.

Share Compensation Cost

In December 1999, we adopted a stock incentive plan, called the 1999
Stock Option Plan, for our employees, senior management and advisory board. In
2000, we replaced the 1999 Stock Option Plan with a new stock option plan,
called the 2000 Stock Option Plan. The 2000 Stock Option Plan was subsequently
amended and restated in May 2001. During 2000, 2001 and 2002, we granted options
to our employees, directors, consultants, a member of our advisory board and
certain members of our senior management under the 2000 Stock Option Plan. The
vesting periods for these options generally range from two years to four years.
In addition, certain of the options granted were cancelled as a result of the
resignation of these personnel.

For 2002, we recorded share compensation cost of approximately RMB3.8
million (US$0.5 million). This cost has been allocated to (i) cost of revenue
(advertising and e-commerce and other services costs), (ii) selling, general and
administrative expenses and (iii) research and development expenses, depending
on the functions for which these personnel and employees are responsible.

As of December 31, 2002, deferred compensation cost relating to share
option grants in 2002 or prior years amounted to RMB0.5 million (US$57,336),
which is to be amortized and charged to expense in subsequent periods. We may
also incur additional share compensation cost in 2003 as a result of the
possible recruitment of additional management personnel and the granting of new
share options to these personnel and other members of our staff.

Income Taxes

Under the current laws of the Cayman Islands, we are not subject to tax
on income or capital gain. However, our revenues are primarily derived from our
Chinese subsidiaries. Chinese companies are generally subject to a 30% national
enterprise income tax, or EIT, and a 3% local income tax. Our subsidiary,
NetEase Beijing, received the relevant approval to be recognized as a "New and
High Technology Enterprise". According to the approval granted by the Haidian
State Tax Bureau in November 2000, NetEase Beijing is entitled to a reduced EIT
rate of 15% commencing from the year 2000. In addition, the approval also
granted NetEase Beijing with a full exemption from EIT from 2000 to 2002, a 50%
reduction in EIT from 2003 to 2005, and a full exemption from the local tax from
2000 onwards. However, these preferential tax treatments may be subject to
review by higher authorities. If these preferential tax treatments were not
available to NetEase Beijing, then it would be subject to the normal tax rate of
30% EIT and a 3% local tax.

NetEase Shanghai and Guangzhou Interactive are subject to EIT at the
rate of 30% plus a local tax of 3%.

Guangzhou NetEase and Guangyitong Advertising are Chinese domestic
enterprises and are generally subject to a 33% EIT. However, Guangzhou NetEase
was categorized as a small-sized tax payer by the local tax bureau of Guangzhou,
China. According to the relevant tax circulars issued by the local tax bureau of
Guangzhou, Guangzhou NetEase is subject to different EIT rates depending on the
nature of its taxable revenues.

If the activities of NetEase.com, Inc. constitute a permanent
establishment in China, the income it earns in China would also be subject to a
30% EIT and 3% local income tax. Income of our company that is not connected to
a permanent establishment in China would be subject to a 10% withholding tax on
gross receipt from profit, interest, rentals, royalties and other income earned
in China. Dividends from NetEase Beijing to our company are exempt from Chinese
withholding tax.

We are subject to a business tax on our revenues derived from services
which is generally 5%. In addition, we are subject to a value-added tax ranging
from 6% to 17% for revenues we earn from the sale of computer hardware purchased
on behalf of our customers. During the year ended December 31, 2002, our
effective value-added tax rate was 6%. In addition, Guangyitong Advertising is
subject to a cultural development fee at 3% on its Internet advertising fees,
which effectively reduces the revenues we derive from Guangyitong Advertising.

Subject to the approval of the relevant tax authorities, NetEase
Beijing and NetEase Shanghai had total tax loss carryforwards of approximately
RMB64.8 million (US$7.8 million) as of December 31, 2002 for EIT purposes.
Approximately RMB23.2 million (US$2.8 million), RMB29.5 million (US$3.6 million)
and RMB12.1 million (US$1.5 million) of such losses will expire in 2005, 2006
and 2007, respectively.

The above tax loss carryforwards give rise to potential deferred tax
assets totaling RMB19.1 million (US$2.3 million). As noted below under "Critical
Accounting Policies and Estimates", a valuation allowance has been provided to
partly offset potential deferred tax assets due to the uncertainty surrounding
the realizability of such assets.

Critical Accounting Policies and Estimates

The preparation of financial statements often requires the selection of
specific accounting methods and policies from several acceptable alternatives.
Further, significant estimates and judgments may be required in selecting and
applying those methods and policies in the recognition of the assets and
liabilities in our consolidated balance sheet, the revenues and expenses in our
consolidated statement of operations and the information that is contained in
our significant accounting policies and notes to the consolidated financial
statements. Management bases its estimates and judgments on historical
experience and various other assumptions that are believed to be reasonable
under the circumstances. Actual results may differ from these estimates and
judgments under different assumptions or conditions.

We believe that the following are some of the more critical judgment
areas in the application of our accounting policies that affect our financial
condition and results of operation.

Critical Accounting Policies and Estimates Regarding Revenue Recognition

Advertising Services Revenue

Since December 1999, we have recognized advertising services revenue
that we earn through our arrangement with Guangyitong Advertising as services
are rendered and the service revenues are earned under the advertising
agreements, which is the same time Guangyitong Advertising recognizes such
revenue.

Guangyitong Advertising derives its advertising fees principally from
short-term advertising contracts, though recently we have seen an increasing
number of advertisers who are willing to enter into long-term contracts.
Revenues from advertising contracts are generally recognized ratably over the
period in which the advertisement is displayed and collection of the resulting
receivables is probable. Guangyitong Advertising's obligations to the
advertisers have traditionally also included guarantees of a minimum number of
impressions or times that an advertisement appears in pages viewed by users.
These types of advertising contracts are known as CPM contracts. As a result, to
the extent that minimum guaranteed impressions were not met within the
contractual time period, Guangyitong Advertising deferred recognition of the
corresponding revenues until the remaining guaranteed impression levels were
achieved. In 2002, we began focusing on entering into advertising contracts
which fees are based on the actual time period that the advertisements appear on
the NetEase Web sites rather than based on guaranteed minimum impressions. This
transition is largely complete, and Guangyitong Advertising currently has only a
few CPM contracts in effect. However, it has entered into several "cost per
action" advertising contracts (known as CPA contracts) whereby revenue is
received by Guangyitong Advertising when an online user performs a specific
action such as purchasing a product from or registering with the advertiser.
Revenue for CPA contracts is recognized when the specific action is completed.
In 2002, CPA contracts represented only a small portion of our advertising
revenue, and we expect that this will continue in the near-term.

E-commerce and Other Services Revenue

Since December 1999, we have recognized e-commerce and other services
revenue that we earn through our arrangements with Guangzhou NetEase as the
services are rendered and the services revenues are earned under the e-commerce
and other services agreements, which is the same time Guangzhou NetEase
recognizes such revenue.

SMS and Other Wireless Value-Added Services

Wireless value-added services revenue, which represents Guangzhou
NetEase's share of the revenues under its cooperative arrangements with China's
two mobile phone operators, is recognized by us primarily based on monthly
statements received from those operators. The revenue is recognized net of the
mobile phone operators' share of revenue and uncollectible amounts because we
consider those operators to be the primary obligors in the information
transmission and delivery process which is a critical and integral part of our
wireless value-added services. In addition, this revenue recognition approach is
supported by the fact that the mobile phone operators must approve all products
and services pricing and they have significant influence over other terms under
our co-operative arrangements with them. Uncollectible amounts mainly represent
the mobile phone operators' transmission and billing problems resulting from
technical issues with their systems. We are unable to estimate or separately
confirm the amount of uncollectibles which is reflected in any particular
monthly statement and are totally reliant on the information provided by the
mobile phone operators in their monthly statements for purposes of our record
keeping.

Online Games

We recognize revenue at the time when the points on our prepaid point
cards are consumed and services are provided.

Other Fee-Based Premium Services

We recognize revenue for these services ratably over the period when
the services are provided, except in the case of the following services:

Online Shopping Mall - Guangzhou NetEase launched our online
shopping mall platform in July 2000. As of May 31, 2003, this
online shopping mall had 13 "online stores" operated by merchant
tenants. From the fourth quarter of 2001, most online stores pay
Guangzhou NetEase fixed service fees, which Guangzhou NetEase
recognizes ratably over the period of the leases of the e-commerce
platforms. Additionally, a small portion of the online stores pay
Guangzhou NetEase commissions based on that merchant's revenues
which are recognized on a monthly basis. Prior to 2002, we also
received referral fees from online shopping mall partners of the
NetEase Web sites which Guangzhou NetEase recognized when services
were rendered. As of May 31, 2003, there were no active referral
arrangements for which we were recognizing revenue, but we are
currently seeking to enter into new referral arrangements.

Online Auction - Prior to October 2000, Guangzhou NetEase earned
revenues from services to online auction sellers, whether
businesses or consumers, which Guangzhou NetEase recognized
ratably over the relevant period. In October 2000, we established
a co-branded online trading and auction channel in partnership
with EachNet. On June 25, 2002, we entered into an agreement with
EachNet to terminate our strategic co-operation agreement and the
co-branded Web site. We earned both fixed upfront fees and
referral fees from EachNet during the period of co-operation. In
July 2002, we re-started our own online auction platform providing
free services to our registered users after the termination of the
co-branded Web site with EachNet, but we discontinued such
services in June 2003.

Software Licensing and Related Integration Projects

Our revenue from software licensing and related integration projects in
2000 and 2001 consisted only of the recognition of deferred revenue which was
brought forward for post-contract customer support. We generally provide our
customers with post-contract support, for one year or less, on our software
products. Such support is generally hotline support and may involve unspecified
upgrades or enhancements. These unspecified upgrades or enhancements offered
during postcontract customer support arrangements historically have been and are
expected to continue to be minimal and infrequent. The estimated costs of
providing such support are insignificant. Sufficient vendor-specific evidence
does not exist to allocate the revenue from software and related integration
projects to the separate elements of such projects. For post-contract support
services that are for a period of one year or less, we recognize revenue when
the following criteria are met:

. persuasive evidence of an arrangement;
. delivery has occurred and services have been performed;
. the sales amount is fixed or determinable; and
. the collectibility is probable.

We occasionally provide post-contract support services that extend
beyond one year. In such event, we would recognize revenue for applicable
contracts ratably over the terms of those contracts.

For the corporate solution services we provided in 2002, the revenue
was recognized at the completion of the respective services.

Barter Transactions

Revenue from barter transactions primarily relate to advertising and
decreased in 2000, 2001 and 2002 as a result of the development of our business.
As our business grew and our cash resources improved, we were able to enter into
more cash transactions and became less reliant on barter transactions in
providing or receiving services. Prior to January 20, 2000, barter transactions
were recorded at the estimated fair market value of the services received or
estimated fair market value of the services provided, whichever was more readily
determinable. Effective from January 20, 2000, we adopted the consensus reached
in Emerging Issue Task Force, or EITF, Issue No. 99-17, to account for barter
transactions. According to EITF Issue No. 99-17, revenue and expense should be
recognized at fair value from an advertising barter transaction only if the fair
value of the advertising surrendered in the transaction is determinable based on
the entity's own historical practice of receiving cash, marketable securities,
or other consideration that is readily convertible to a known amount of cash for
similar advertising from buyers unrelated to the counterparty in the barter
transaction. In 2000 and 2001, the recognized revenues and expenses derived from
barter transactions were RMB0.7 million (US$0.1 million) for each of those
years. There was no revenue and expense derived from barter transactions in
2002. We also engaged in some advertising barter transactions in 2000, 2001 and
2002 for which the fair value is not determinable within the limits of EITF
Issue No. 99-17, and therefore no revenues or expenses derived from these barter
transactions were recognized. These transactions primarily involved exchanges of
advertising services rendered by us for advertising, promotional benefits and
information content provided by the counterparties.

Other Critical Accounting Policies and Estimates

Deferred Tax Valuation Allowance

Management judgment is required in determining our provision for income
taxes, deferred tax assets and liabilities and the extent to which deferred tax
assets can be recognized. We make a valuation allowance to reduce deferred tax
assets to the amount which is more likely than not to be realized. There can be
no assurance that NetEase Beijing and NetEase Shanghai will be able to utilize
all the net operating loss carryforwards before their expiration.

Allowances for Doubtful Accounts

We maintain allowances for doubtful accounts receivable based on
various information, including aging analysis of accounts receivable balances,
historical bad debt rates, repayment patterns and credit worthiness of customers
and industry trend analysis. We also make specific provisions for bad debts if
there is strong evidence showing that the debts are likely to be irrecoverable.

Litigation Reserve

No material litigation reserve existed as of December 31, 2002 because
management believed, and continues to believe, that the ultimate resolution of
the claims described below under the heading "Outstanding Litigation and
Contingent Liabilities" will not result in any material financial impact on our

company.

Material Commitments

As of December 31, 2002, we had lease commitments for office rentals of
RMB4.7 million (US$0.6 million), RMB3.7 million (US$0.4 million) and RMB2.4
million (US$0.3 million) payable in 2003, 2004 and 2005, respectively. In
addition, we had lease commitments for server custody fees and other capital
expenditure commitments of RMB10.3 million (US$1.2 million) and RMB0.5 million
(US$0.1 million), respectively, payable in 2003.

Outstanding Litigation and Contingent Liabilities

In January 2003, Guangzhou NetEase was named in a copyright
infringement lawsuit in China, and the plaintiffs have claimed damages of US$1.0
million. We intend to vigorously defend our position and believe the ultimate
resolution of the matter will not have a material financial impact on our
company.

Consolidated Results of Operations

The following table sets forth a summary of our audited consolidated
statements of operations for the periods indicated both in Renminbi and as a
percentage of total revenues:

For the year ended December 31,
----------------------------------------------------------------------
2000 2001 2002
----------------------------------------------------------------------
RMB % RMB % RMB %

Revenues:
Advertising services from related parties 30,067,477 91.2 14,163,952 50.0 34,209,376 14.7
E-commerce and other services (including
revenues of RMB1,094,859,
RMB14,103,151 and RMB197,357,067
(US$23,835,395) from a related party
in 2000, 2001 and 2002, respectively) 2,455,834 7.4 14,103,151 49.9 197,357,067 84.9
Software licensing and related integration
projects 450,350 1.4 33,218 0.1 1,002,025 0.4
----------------------------------------------------------------------
Total revenues 32,973,661 100.0 28,300,321 100.0 232,568,468 100.0
Sales and value-added taxes (2,476,444) (7.5) (2,274,784) (8.0) (11,627,216) (5.0)
----------------------------------------------------------------------
Net revenues 30,497,217 92.5 26,025,537 92.0 220,941,252 95.0

Cost of revenues:
Advertising, e-commerce and other
services (including cost
reimbursements to a related party of
RMB2,098,127, RMB796,454 and
RMB22,737,436 (US$2,746,067) in
2000, 2001 and 2002, respectively) (38,738,335) (117.4) (60,058,488) (212.3) (69,769,449) (30.0)
Share compensation cost* (1,171,084) (3.6) - - (1,908,125) (0.8)
----------------------------------------------------------------------
Total cost of revenues (39,909,419) (121.0) (60,058,488) (212.3) (71,677,574) (30.8)
----------------------------------------------------------------------
Gross profit (Loss on revenues) (9,412,202) (28.5) (34,032,951) (120.3) 149,263,678 64.2
Operating expenses:
Selling, general and administrative
expenses(including cost
reimbursements to a related party of
RMB3,124,247, RMB1,884,823 and
RMB5,542,383 (US$669,370) in 2000,
2001 and 2002, respectively) (162,922,561) (494.1) (181,560,624) (641.5) (92,785,244) (39.9)

Assets impairment loss - - (2,766,543) (9.8) (746,857) (0.3)

Research and development expenses
(including cost reimbursements to a
related party of RMBnil, RMBnil and
RMB1,346,824 (US$162,660) in 2000,
2001 and 2002, respectively) (9,525,436) (28.9) (11,169,454) (39.5) (13,808,360) (5.9)

Share compensation cost* (12,668,476) (38.4) (2,357,758) (8.3) (1,898,733) (0.8)

Class action settlement - - - - (36,005,385) (15.5)
----------------------------------------------------------------------
Total operating expenses (185,116,473) (561.4) (197,854,379) (699.1) (145,244,579) (62.4)
----------------------------------------------------------------------
Operating profit (loss) (194,528,675) (589.9) (231,887,330) (819.4) 4,019,099 1.8

Other income (expenses):
Investment impairment loss - - (8,924,381) (31.5) - -
Interest income 27,858,710 84.5 17,571,187 62.1 7,562,322 3.3
Interest expense (2,589,735) (7.9) (9,882,874) (35.0) (1,401,041) (0.6)
Other, net (9,099) - (40,516) (0.1) 3,725,370 1.6

Profit (loss) before tax (169,268,799) (513.3) (233,163,914) (823.9) 13,905,750 6.1
Income tax benefit - - - - 2,395,888 1.0
----------------------------------------------------------------------
Net profit (loss) (169,268,799) (513.3) (233,163,914) (823.9) 16,301,638 7.1
* Share compensation cost
Advertising, e-commerce and other
services cost of revenues (1,171,084) (3.6) - - (1,908,125) (0.8)
Selling, general and administrative
expenses (7,437,230) (22.6) (204,423) (0.7) (1,522,369) (0.6)
Research and development expenses (5,231,246) (15.8) (2,153,335) (7.6) (376,364) (0.2)
----------------------------------------------------------------------
Total (13,839,560) (42.0) (2,357,758) (8.3) (3,806,858) (1.6)
======================================================================

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

In 2002, revenue from advertising services, e-commerce and other
services and software licensing and related integration projects constituted
14.7%, 84.9% and 0.4%, respectively, of our total revenue. This compares with
50.0%, 49.9% and 0.1%, respectively, of our total revenue in 2001. Our revenue
from e-commerce and other services increased significantly during 2002 mainly as
a result of the substantial increase in revenue generated from our wireless
value-added services and to a lesser extent from our online games. Our
advertising services revenue also increased during 2002 due to the expansion of
our sales team and a general increase in demand for online advertising in China
during 2002. Our software licensing and related integration projects revenue
remained low in 2002, as we had previously ceased providing licensing and
integration services in 1999 but continued to earn fees for post-contract
customer support and also earned a small amount of fees for certain corporate
solution services in 2002.

The rise in e-commerce and other services revenue as a percentage of
our total revenue to 84.9% in 2002 resulted from the fact that the growth in
such revenue significantly exceeded the growth in our advertising services
revenue during that period. We expect that our revenue from e-commerce and other
services will continue to constitute the major portion of our total revenue but
that advertising services revenue will also continue to be one of the
significant sources of our future revenue.

Revenues

Total revenues increased by 721.8% to RMB232.6 million (US$28.1
million) in 2002 from RMB28.3 million in 2001. Advertising services revenues
increased by 141.5% to RMB34.2 million (US$4.1 million) in 2002 from RMB14.2
million in 2001, primarily as a result of the expansion of our sales team from
27 employees to 41 employees and a general increase in demand for online
advertising in China during 2002. In particular, we gained several new
China-based advertising clients, including leading mobile phone and car
manufacturers, and were able to increase the number of advertising contracts
which are long-term (one year or more) in 2002. Average revenue per advertiser
increased from approximately RMB36,000 (US$4,300) in the first quarter to
RMB69,000 (US$8,300) in the fourth quarter of 2002. The number of contracted
advertisers using the NetEase Web sites increased from 174 in 2001 to 280 in
2002, with revenues from our top ten advertisers comprising 23.2% of our total
advertising services revenues in 2002 as compared to 40.3% in 2001. We expect
that the online advertising market in China will continue to grow as Internet
usage in China increases and as more companies, in particular China-based
companies in a variety of industries, accept the Internet as an effective
advertising medium.

Based on our recent experience, we also expect that as advertisers generally
become more familiar with online advertising, they will be increasingly willing
to enter into longer term contracts of up to six months or more.

Revenues from e-commerce and other services increased by 1299.4% to
RMB197.4 million (US$23.8 million) in 2002 from RMB14.1 million in 2001, mainly
as a result of the substantial increase in revenue generated from our wireless
value-added services and to a lesser extent from our online games. In addition,
revenues from our other fee-based services, including dating and friends
matching, e-mail services and other premium services, also increased during
2002.

Wireless Value-Added Services and Other Fee-Based Premium Services - The
substantial increase in revenue generated from our wireless value-added
services was primarily due the increase in the overall popularity of SMS in
China and in the range and popularity of our proprietary products and
services among the expanding population of mobile phone users in China. We
started the development of our wireless business in 1999 and launched our
SMS.163.com Web page and first fee-based services in February 2001. At that
time, the number and variety of products and services offered were very
limited and included ring-tone and logo downloading and a few other
services. As of May 31, 2003, we offered more than 200 different products
and services, which can be classified into four main categories, namely,
news and information subscription, multi-media downloading, community and
communication and Internet-related products and services.

The increase in revenue in 2002 from our other fee-based premium services
(excluding online games), including premium e-mail, dating and friends
matching and personal homepage hosting, was primarily due to the
commercialization of our dating and friends matching services at the
beginning of the year (these services were provided to our users free of
charge in 2001 and prior periods), and to a lesser extent, due to the
increase in the number of paying subscribers of our other fee-based
services in 2002.

Our wireless value-added services and other fee-based premium services
together represented approximately 81.2% (2001: 100%) of our total
e-commerce and other services revenue in 2002. The major portion of this
amount was derived from our wireless value-added services in both 2002 and
2001.

Online Games - Our online games accounted for approximately 18.8% (2001:
nil) of our total e-commerce and other services revenue in 2002. In 2001,
we acquired all the assets of a China-based online game software
development company and started the development of massively multi-player
online role-playing games, or "MMORPGs", at the beginning of 2001. We
launched our first MMORPG, "Westward Journey Online", for beta testing in
December 2001, and started charging our users for their playing time in
January 2002. Subsequently, we launched "Westward Journey Online Version
2.0" and a MMORPG licensed from a Korean company, "PristonTale", in August
2002.

Prior to 2000, software licensing and related integration projects revenues
consisted of fees received from licensing, integration services and
post-contract customer support. We ceased providing licensing and integration
services in 1999. Our revenues in 2001 consisted only of the recognition of
deferred revenue which was brought forward for post-contract customer support.
In 2002, this category of revenue also included certain corporate solution
services to a customer in connection with the purchase of servers and computer
equipment, development of software and custody and maintenance of servers. We
cannot predict whether we will continue to earn revenues from similar
transactions in the foreseeable future, but we expect that we will provide these
or other similar services to customers upon request. Such revenue totaled RMB1.0
million (US$121,000) in 2002, compared to RMB33,000 in 2001.

Cost of Revenues

Our cost of revenues increased by 19.3% to RMB71.7 million (US$8.7 million)
in 2002 from RMB60.1 million in 2001, primarily due to the expansion of our
online games business in 2002. A substantial portion of this increase was due to
franchise and revenue share fees related to the "PristonTale" and "Westward
Journey Online" games and, to a lesser extent, increased staff costs of our
online games team.

As a result of the strong revenue growth in 2002, we achieved a gross
profit of RMB149.3 million (US$18.0 million) in 2002 as compared to a loss on
revenues of RMB34.0 million in 2001. Our gross margins increased from 30.8% in
the first quarter to 72.7% in the fourth quarter in 2002. The significant
improvement in gross margins was driven by economies of scales as revenue
continued to increase with a relatively stable cost of revenues. The gross
margin for the year ended December 31, 2002 was 64.2%.

Staff costs consisted primarily of compensation expenses for our online
game and other e-commerce and editorial professionals and comprised 27.8% of our
total cost of revenues in 2002, compared with 15.2% in 2001. The increase was
mainly due to the increase in the number of employees during 2002, in particular
for the online games business department, which increased from 62 employees to
95 employees. We expect that staff costs as a percentage of our total cost of
revenues will remain stable in the near-term.

Depreciation and amortization of computers and software comprised 24.9% of
our total cost of revenues in 2002, compared with 22.6% in 2001. The increase
was mainly due to the increase in the number of servers from 486 servers to 663
servers and to a lesser extent the increase in personal computer equipment
during 2002. As we have spent or plan to spend approximately RMB21.0 million
(US$2.5 million) towards the purchase of additional servers and switches in
2003, we expect our depreciation expenses to increase in 2003.

Operating Expenses

Total operating expenses decreased by 26.6% to RMB145.2 million (US$17.5
million) in 2002 from RMB197.9 million in 2001. Operating expenses as a
percentage of total revenues decreased from 699.1% in 2001 to 62.5% in 2002. The
decrease in 2002 was mainly due to the fact that the substantial fees charged by
third parties in 2001 as discussed in the next paragraph did not recur in 2002.

Selling, general and administrative expenses decreased by 48.1% to RMB94.3
million (US$11.4 million) in 2002 from RMB181.8 million in 2001, primarily due
to certain expenses of more than RMB50.0 million (US$6.0 million) for legal and
professional fees and consultancy fees in 2001 which substantially decreased in
2002, and to a lesser extent due to our cost control measures in 2002.

In 2002, we also paid RMB36.0 million (US$4.35 million) into an escrow
account for the settlement of all claims brought in connection with the class
action lawsuit in the United States which is described under "Outstanding
Litigation and Contingent Liabilities" above. This amount was released from
escrow and paid to the plaintiffs at the time the court declared the settlement
final.

The asset impairment loss in 2002 represented the unamortised portion of
the costs incurred in the acquisition of an electronic payment gateway system
which we ceased using.

Research and development expenses increased by 6.5% to RMB14.2 million
(US$1.7 million) in

2002 from RMB13.3 million in 2001, primarily due to an increase in the number of
programmers and technicians recruited in 2002 to assist our online games
business.

Other Income (Expenses)

Other income and expenses in 2002 mainly consisted of interest income and
expenses. We repaid RMB84 million (US$10.1 million) in short-term bank
borrowings during 2002, and as a result, both our interest income and interest
expenses dropped significantly in 2002 as compared to 2001. The decrease in the
net interest income in 2002 as compared with 2001 was also due to the reduction
of interest rates during 2002. Other net income of RMB3.7 million (US$0.4
million) in 2002 represented the write-back of certain provisions for expenses
and claims payable for certain arbitration.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

In 2001, revenues from advertising services, e-commerce and other services
and software licensing and related integration projects constituted 50.0%, 49.9%
and 0.1%, respectively, of our total revenues. This compares with 91.2%, 7.4%
and 1.4%, respectively, of our total revenues in 2000. Our advertising services
revenues decreased significantly during 2001 primarily due to the softening of
the Internet advertising market in China which led to a decrease in the demand
for advertising on the NetEase Web sites, and the intense market competition
which affected the general pricing in the Internet advertising market in China.
Conversely, revenues from our e-commerce and other services increased
significantly during 2001 mainly as a result of the fixed upfront fees and
referral fees that we earned from EachNet in connection with the operation of
our co-branded trading and auction Web site (which has since been terminated)
and the other revenues generated from fee-based services including wireless
value-added services, e-mail services and other premium services. Finally, in
2001 our software licensing and related integration projects revenue further
decreased as we continued to earn fees for post-contract customer support.

Revenues

Total revenues decreased by 14.2% to RMB28.3 million (US$3.4 million) in
2001 from RMB33.0 million in 2000. Advertising services revenues decreased by
52.9% to RMB14.2 million (US$1.7 million) in 2001 from RMB30.1 million in 2000,
primarily as a result of the softening of the Internet advertising market in
China which led to a decrease in demand for advertising on the NetEase Web
sites, and the intense market competition which affected the general pricing in
the Internet advertising market in China. Average revenue per advertiser
decreased from approximately RMB96,000 (US$11,600) in the first quarter to
RMB46,000 (US$5,500) in the fourth quarter of 2001. The number of contracted
advertisers using the NetEase Web sites decreased from 231 in 2000 to 174 in
2001, with revenues from our top ten advertisers comprising 40.3% of our total
advertising services revenues in 2001 as compared to 34.4% in 2000.

Revenues from e-commerce and other services increased by 474.3% to RMB14.1
million (US$1.7 million) in 2001 from RMB2.5 million in 2000, mainly as a result
of the amortization of the upfront service fee recognized in 2001 of RMB1.0
million (US$0.1 million) and quarterly referral fees of approximately RMB3.3
million (US$0.4 million) that we earned from EachNet. As mentioned previously,
our relationship with EachNet has terminated. In addition, the increase in total
revenues from fee-based services in 2001, predominantly from wireless
value-added services and to a lesser extent from premium e-mail and other
services, totaled RMB6.7 million (US$0.8 million).

We ceased providing software licensing and integration services in 1999.
Our revenues in 2000 and 2001 in this revenue category consisted only of the
recognition of deferred revenue which was

brought forward for post-contract customer support and totaled RMB33,000
(US$4,000) in 2001, compared to RMB450,000 in 2000.

Cost of Revenues

Our cost of revenues increased by 50.5% to RMB60.1 million (US$7.3 million)
in 2001 from RMB39.9 million in 2000, primarily due to the overall expansion of
our business, including in particular the increase in Internet connection costs,
such as server related and bandwidth costs to support the large increase in
traffic on the NetEase Web sites, offset in part by a decrease in staff costs.
The average daily page views on the NetEase Web sites in December 2001 was
approximately 174 million as compared to approximately 70 million in December
2000. As a result, our loss on revenues increased to RMB34.0 million (US$4.1
million) in 2001 from RMB9.4 million in 2000.

Staff costs consisted primarily of compensation expenses for our e-commerce
and editorial professionals and comprised 15.2% of our total cost of revenues in
2001, compared with 20.8% in 2000. The decrease was mainly due to the reduction
in the number of employees during 2001.

Depreciation and amortization of computers and software comprised 22.6% of
our total cost of revenues in 2001, compared with 17.2% in 2000. The increase
was mainly due to the increase in the number of servers during 2001.

Operating Expenses

Total operating expenses increased by 6.9% to RMB197.9 million (US$23.9
million) in 2001 from RMB185.1 million in 2000. Operating expenses as a
percentage of total revenues increased from 561.4% in 2000 to 699.1% in 2001.
The increase in 2001 was mainly due to the substantial fees charged by third
parties as discussed in the next paragraph.

Selling, general and administrative expenses increased by 6.7% to RMB181.8
million (US$22.0 million) in 2001 from RMB170.4 million in 2000, primarily due
to certain expenses of more than RMB50 million (US$6.0 million) for legal and
professional fees and consultancy fees in 2001.

The asset impairment loss for 2001 represents a provision for impairment
loss on the software costs and other assets directly relating to the development
of an online game of RMB2.8 million (US$0.3 million). The impairment loss
relating to the online game assets was estimated on the basis of the difference
between the carrying value of the assets as of December 31, 2001 and the present
value of the future cash flows which are likely to be generated from the
operation of the online game.

Research and development expenses decreased by 9.7% to RMB13.3 million
(US$1.6 million) in 2001 from RMB14.8 million in 2000, primarily due to a
decrease in share compensation costs as a result of the resignation of certain
management staff in our technical department during 2001.

Other Income (Expenses)

Other income and expenses in 2001 mainly consisted of the one time
non-recurring provisions for the impairment of our investments in a convertible
note issued by Ladynow.com Corporation Limited, a corporation in which we
invested, and convertible preference shares issued by EachNet of RMB2.1 million
(US$0.3 million) and RMB6.9 million (US$0.8 million), respectively, and net
interest income of RMB7.7 million (US$0.9 million). The provision for the
Ladynow convertible note was necessitated by Ladynow's cessation of operations
in 2001. In turn, the EachNet shares were sold back to EachNet in 2002, and the
impairment charge for our investment in EachNet in 2001 represents the
difference between

our original cost of investment and the consideration received for the resale.
The decrease in the net interest income in 2001 as compared with 2000 was due to
the decrease in our cash balance and the reduction of interest rates during
2001.

Quarterly Results of Operations Data

The following table sets forth selected unaudited quarterly consolidated
statements of operations data for each of the four fiscal quarters for the year
ended December 31, 2002 in Renminbi. Our management believes this data has been
prepared substantially on the same basis as the consolidated audited financial
statements, including all necessary adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of such data. Operating
results for any quarter are not necessarily indicative of results for any future
quarter. You should read the quarterly data for the four quarters set forth
below for the year ended December 31, 2002 in conjunction with our consolidated
financial statements and the related notes included elsewhere in this annual
report.

Quarter Ended
---------------------------------------------------------------------
March 31, June 30, September 30, December 31,
2002 2002 2002 2002
---------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
RMB RMB RMB RMB

Revenues:
Advertising services 3,946,530 8,029,230 9,779,126 12,454,490
E-commerce and other services 19,968,083 30,337,297 63,999,662 83,052,025
Software licensing and related
integration projects 39,385 118,154 618,138 226,348
---------------------------------------------------------------------
Total revenues 23,953,998 38,484,681 74,396,926 95,732,863
Sales and value-added taxes (1,197,700) (1,924,880) (3,694,693) (4,809,943)
---------------------------------------------------------------------
Net revenues 22,756,298 36,559,801 70,702,233 90,922,920
Cost of revenues:
Advertising, e-commerce and other
services (14,894,747) (14,107,720) (19,940,627) (20,826,355)
Share compensation cost (477,032) (477,032) (477,032) (477,029)
---------------------------------------------------------------------
Total cost of revenues (15,371,779) (14,584,752) (20,417,659) (21,303,384)
---------------------------------------------------------------------
Gross profit 7,384,519 21,975,049 50,284,574 69,619,536
Operating expenses:
Selling, general and administrative
expenses (22,202,753) (21,962,075) (21,903,299) (26,717,117)
Asset impairment loss - (746,857) - -
Research and development expenses (3,565,372) (3,884,600) (2,714,442) (3,643,946)
Share compensation cost (645,657) (597,764) (358,700) (296,612)
Class action settlement - - (36,005,385) -
---------------------------------------------------------------------
Total operating expenses (26,413,782) (27,191,296) (60,981,826) (30,657,675)
---------------------------------------------------------------------
Operating profit (loss) (19,029,263) (5,216,247) (10,697,252) 38,961,861
Other income (expenses):
Interest income 1,949,086 2,281,729 1,719,807 1,611,700
Interest expense (996,735) (212,382) (191,924) -
Other, net 283,199 3,185,235 145,506 111,430
---------------------------------------------------------------------
Profit (loss) before tax (17,793,713) 38,335 (9,023,863) 40,684,991
Income tax benefit - - - 2,395,888
---------------------------------------------------------------------
Net profit (loss) (17,793,713) 38,335 (9,023,863) 43,080,879
=====================================================================

Our revenues and results of operations have varied significantly in the
past and may fluctuate in the future due to a combination of factors, including,
among others:

. the ability of the NetEase Web sites to attract and retain users;
. our ability to successfully implement our e-commerce strategies;
. our ability to develop new fee-based premium services;
. the receptiveness by users to such fee-based premium services;
. demand for advertising on the Internet in general and on the NetEase
Web sites in particular;
. our ability to update and develop our Internet portal systems and
infrastructure;
. technical difficulties that users may experience on the NetEase Web
sites;
. competition in Internet markets, including our competitors'
performance in each of the above aspects;
. growth and acceptance of the Internet in China;
. changes in Chinese governmental regulations; and
. general economic conditions in China.

Liquidity and Capital Resources

Our capital requirements relate primarily to financing:

. our working capital requirements, such as bandwidth and server custody
fees, staff costs, sales and marketing expenses and research and
development, and
. costs associated with the expansion of our business, such as the
purchase of servers.

Operating Activities

Cash provided by operating activities was RMB26.8 million (US$3.2 million)
in 2002 and cash used in operating activities was RMB185.7 million and RMB124.7
million in 2001 and 2000, respectively. In 2002, cash provided by operating
activities consisted primarily of our operating profit adjusted for an increase
in salary and welfare payable, taxes payable, and offset in part by an increase
in amount due from related parties, deferred tax assets and a decrease in
accounts payable. In 2001, cash used in operating activities consisted primarily
of our operating loss adjusted for a decrease in accrued liabilities and amount
due to related parties and an increase in due from related parties, offset in
part by an increase in accounts payable, salary and welfare payable and a
decrease in prepayments and other current assets. In 2000, cash used in
operating activities consisted primarily of our operating loss adjusted for an
increase in prepayments and other current assets and amount due from related
parties, offset in part by increases in accounts payable, salary and welfare
payable and other accrued liabilities.

Investing Activities

Cash provided by investing activities was RMB42.7 million (US$5.2 million)
in 2002, and cash used in investing activities was RMB67.3 million in 2001 and
RMB53.0 million in 2000. In 2002, cash provided by investing activities mainly
consisted of the decrease in temporary cash investments and the proceeds from
the disposal of our investment in convertible preference shares of EachNet, a
private Internet-based auction company, which was offset in part by the cash
used in the purchase of fixed assets. The decrease in temporary cash investments
resulted from our repayment of bank loans as discussed below under "Financing
Activities." In 2001, cash used in investing activities mainly consisted of the
placing of term deposits which had a maturity of more than three months and the
purchase of fixed assets, which accounted for 67.7% and 31.4%, respectively, of
total cash used in investing activities. In 2000, cash used in investing
activities consisted primarily of the purchase of fixed assets and investment in

convertible preference shares, which accounted for 64.1% and 31.2%,
respectively, of total cash used in investing activities. Our investment in
convertible preference shares coincided with our entering into an agreement to
operate our co-branded trading and auction Web site with EachNet which, as
previously noted, has been terminated. These shares were subsequently sold in
2002 back to EachNet for an aggregate net loss of approximately RMB6.9 million
(US$0.8 million).

Financing Activities

Cash used in financing activities was RMB78.1 million (US$9.4 million) in
2002. Cash used in financing activities was RMB22.3 million in 2001 and cash
provided by financing activities was RMB904.9 million in 2000. A substantial
portion of our cash is kept in US dollars. In 2002, the cash used in financing
activities mainly consisted of the repayment of bank loans of RMB84 million
(US$10.1 million), which was offset in part by the proceeds from the issuance of
ordinary shares upon the exercise of share options and the partial collection of
a subscription receivable for the Series B preference shares issued in 2000 of
RMB3.9 million (US$0.5 million) and RMB2.0 million (US$0.2 million),
respectively. In 2001, the cash used in financing activities mainly consisted of
the repayment of bank loans of RMB152.4 million (US$18.4 million) which was
offset in part by proceeds from other bank loans totaling RMB123.8 million
(US$15.0 million) and the receipt in 2001 of additional net proceeds from our
issuance of Series B preference shares in 2000 of RMB6.3 million (US$0.8
million). In 2000, the increase in cash provided by financing activities was
primarily due to the net proceeds from our issuance of Series B preference
shares in 2000 of RMB283.5 million and our initial public offering in July 2000
of RMB508.7 million and proceeds from bank loans totaling RMB112.6 million. We
borrow Renminbi for our working capital purposes.

We had no material commitments for capital expenditures as of December 31,
2002. Up to March 31, 2003, we spent approximately RMB4.1 million (US$0.5
million) for servers and computer equipment, and as our business grows, we plan
to spend an additional approximately RMB16.9 million (US$2.0 million) in 2003
towards purchases of additional servers and switches in order to accommodate the
expected increase in traffic on the NetEase Web sites.

Our net losses have been funded by our cash resources (in particular the
proceeds from our initial public offering in July 2000) and to a lesser extent
from cash generated from revenue growth. Although we have been striving to
enhance our revenues and stabilize or decrease our operating expenses, we cannot
be certain these efforts will be successful in future periods which could
accelerate the depletion of our cash resources. In particular, as noted
previously, our selling, general and administrative expenses have remained
relatively high due primarily to staff costs and, in certain prior periods, to
legal, professional and consultancy fees, while our revenues from advertising
services have been uneven in the last several years. Further, although our
revenues from e-commerce and other services have grown significantly recently,
we have only a limited track record offering these services and cannot be
certain that we will be able to maintain or grow such revenue. Nonetheless,
given our positive cash flows in recent quarters, we believe that such cash and
revenues will be sufficient for us to meet our obligations for the foreseeable
future.

Research and Development

We have utilized and will continue to utilize the products and services of
third parties to enhance

our platform of technologies and services to provide competitive and diverse
Internet services to our users. We also have utilized and will continue to
utilize third-party advertisement serving technologies. In addition, we plan to
continue to expand our technologies, products and services and registered user
base through diverse online community products and services developed
internally. We will seek to continually improve and enhance our existing
products and services to respond to rapidly evolving competitive and
technological conditions. For the years 2000, 2001 and 2002, we spent RMB14.8
million, RMB13.3 million and RMB14.2 million (US$1.7 million), respectively, on
research and development activities.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our exposure to market rate risk for changes in interest rates relates
primarily to the interest income generated by excess cash invested in short term
money market accounts and certificates of deposit. We have not used derivative
financial instruments in our investment portfolio. Interest earning instruments
carry a degree of interest rate risk. We have not been exposed nor do we
anticipate being exposed to material risks due to changes in interest rates.
However, our future interest income may fall short of expectations due to
changes in interest rates.

Foreign Currency Risk

Substantially all our revenues and expenses are denominated in Renminbi,
but as noted above, a substantial portion of our cash is kept in U.S. dollars.
Although we believe that, in general, our exposure to foreign exchange risks
should be limited, the value of our American Depositary Shares, or ADSs, will be
affected by the foreign exchange rate between U.S. dollars and Renminbi. For
example, to the extent that we need to convert U.S. dollars into Renminbi for
our operational needs and the Renminbi appreciates against the U.S. dollar at
that time, our financial position and the price of our ADSs may be adversely
affected. Conversely, if we decide to convert our Renminbi (which amount has
grown as a result of our improved cash flows in recent quarters) into U.S.
dollars for the purpose of declaring dividends on our ADSs or otherwise and the
U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of our
earnings from our subsidiaries and controlled entities in China would be
reduced.

We have not had any material foreign exchange gains or losses to date.
However, we have not engaged in any hedging activities, and we may experience
economic loss as a result of any foreign currency exchange rate fluctuations.

Recent Accounting Pronouncements

In November 2002, EITF reached a consensus on Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance
on how to account for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The provisions of EITF
Issue No. 00-21 will apply to revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. We believe that the adoption of this
standard will have no material impact on our financial statements.

In December 2002, the Financial Accounting Standards Board, or FASB, issued
Statements of Financial Accounting Standards, or SFAS No. 148, "Accounting for
Stock-Based Compensation, Transition and Disclosure." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS No. 148 also
requires that disclosures of the pro forma effect of using the fair value method
of accounting for

stock-based employee compensation be displayed more prominently and in a tabular
format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect
in interim financial statements. The transition and annual disclosure
requirements of SFAS No. 148 are effective for fiscal years ending after
December 15, 2002. The interim disclosure requirements are effective for interim
periods beginning after December 15, 2002. We have adopted the disclosure
provisions of SFAS No.148 as of December 31, 2002.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
disclosures to be made by a guarantor about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions under FIN 45 are applicable prospectively to
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for interim or annual periods ending after December
15, 2002 and have been included in the consolidated financial statements. We
believe that the adoption of the related accounting measurement and recognition
provisions will not have a material impact on our financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities, an Interpretation of APB No. 50" ("FIN 46"). FIN
46 provides guidance on the identification of and financial reporting for
entities over which control is achieved through means other than voting rights.
This Interpretation requires existing unconsolidated variable interest entities
to be consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among parties involved. The Interpretation applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003 to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. We have not yet completed our
assessment of the accounting effects from FIN 46 upon adoption. Based upon our
initial analysis, it is possible that Guangyitong Advertising and/or Guangzhou
NetEase may be subject to the requirements of FIN 46 and that we may be required
to consolidate or disclose information about these entities. Disclosures
regarding the nature, purpose, size, and activities of these identified
entities, along with the nature of our involvement and when that involvement
began, have already been included throughout the footnotes to our consolidated
financial statements, particularly in Notes 1 and 6. We do not believe that
consolidation of these entities will have a material impact on our net profit,
but we are not able to estimate the maximum exposure to loss as a result of our
involvement with these entities at the present time. Historically, we have not
incurred any net losses as a result of our involvement in these entities.

Trend Information

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

Item 6. Directors, Senior Management and Employees

A. Directors and Senior Management

The names of our current directors and executive officers, their ages
as of May 31, 2003 and the principal positions with NetEase held by them are as
follows:

Name Age Position
---- --- --------
William Ding 31 Director and Chief Architect
Ted Sun 35 Director and Acting Chief Executive Officer
Denny Lee 35 Director and Chief Financial Officer
Michael Tong 32 Executive Director
Donghua Ding (1) 65 Director
Ronald Lee 39 Director
Michael Leung (1) 49 Director
Joseph Tong (1) 40 Director

___________

(1) Member of the audit committee. Mary Nee was a member of our audit committee
until May 15, 2002 when she stepped down from that committee, and our board
appointed John Lau to fill the vacancy. Ms. Nee later resigned from our board in
July 2002. In addition, on June 5, 2002, Kathy Xu resigned from our board and
the audit committee, and Ronald Lee was appointed on that day to fill both
vacancies. Michael Leung replaced Mr. Lee on the audit committee on July 11,
2002 when he was appointed to our board. On March 14, 2003, Mr. Lau resigned
from our board and the audit committee, and on March 25, 2003, Joseph Tong was
appointed to fill both vacancies. Finally, on June 25, 2003, Michael Tong became
an executive director of our company at which time he stepped down from the
audit committee but remained a member of our board. On that same day, Donghua
Ding was appointed to our board and the audit committee. Our audit committee is
currently comprised of Joseph Tong, Michael Leung and Donghua Ding. In 2002, our
audit committee held six formal meetings.

The foregoing directors will hold office until the next annual general
meeting of shareholders and until such director's successor is elected and duly
qualified, or until such director's earlier death, bankruptcy, insanity,
resignation or removal. There are no family relationships among any of the
directors or executive officers of our company.

The News Corporation Limited had the right to nominate one director to
our board, and, upon nomination, certain of our shareholders holding a majority
of our outstanding shares were obligated to vote their shares in favor of such
nominated director. Two of our prior directors, Lawrence J. Smith and John Lau,
were nominated and elected to our board in this manner. However, this right
terminated in March 2003 when The News Corporation Limited sold a portion of its
shares in our company. See Item 7.B. "Related Party Transactions" in this annual
report.

Biographical Information

William Ding, our founder, has served as a director since July 1999 and
as our Chief Architect since March 2001. From June 2001 until September 2001,
Mr. Ding served as our acting Chief Executive Officer and acting Chief Operating
Officer. Mr. Ding also stepped down as Chairman of the Board of Directors in
September 2001 (the company currently has no permanently appointed Chairman).
From July 1999 until March 2001, Mr. Ding served as Co-Chief Technology Officer,
and from July 1999 until April 2000, he also served as our interim Chief
Executive Officer. Mr. Ding established Guangzhou Netease, our affiliate, in May
1997. Prior to establishing Guangzhou Netease, Mr. Ding spent one year at
Guangzhou Feijie Co. as a systems analyst, from June 1996 to April 1997, one
year at Sybase (China) as a project manager, from May 1995 to May 1996, and two
years at China Telecom Ningbo Branch as a technical engineer, from June 1993 to
May 1995. Mr. Ding holds a Bachelor of Science degree in Communication
Technology from the University of Electronic Science and Technology of China.

Ted Sun has served as a director since December 1999 and as our acting
Chief Executive Officer from September 2001 following William Ding's resignation
from that position. Mr. Sun also worked as our consultant from July 2001 until
September 2001. From July 2000 until September 2001, he served as Chief
Financial Officer of Infoserve Technology. Prior to that, Mr. Sun held various
positions with Bear Stearns Asia Limited from November 1996 to May 2000,
culminating in the position of Managing Director. Prior to November 1996, Mr.
Sun was an assistant director with Peregrine Capital Limited. Mr. Sun received a
Bachelor of Science degree in Economics from the Wharton School of Business,
University of Pennsylvania in 1988.

Denny Lee has served as a director and as our Chief Financial Officer
since April 2002. Previously, he was our Financial Controller from November 2001
until that time. Prior to joining our company, Mr. Lee worked in the Hong Kong
office of KPMG for more than ten years, culminating in the position of Senior
Manager in one of the audit departments where he specialized in auditing
international clients. During his employment with KPMG, he also worked with a
number of Chinese companies with respect to accounting and other aspects of
their initial public offerings on the Hong Kong Stock Exchange, due diligence
work in relation to potential investments in Chinese companies and financial and
operational reviews of Chinese companies in connection with proposed investments
in such companies by foreign investors. Mr. Lee graduated from the Hong Kong
Polytechnic University majoring in accounting and is a member of The Hong Kong
Society of Accountants and The Chartered Association of Certified Accountants.

Michael Tong became an executive director of our company on June 25,
2003 where he is involved with the overall management of our company with a
particular focus on our online games business. He has also served as one of our
directors since December 1999. Previously, he was an Executive Director with
techpacific.com Venture Capital Limited. In that capacity, he was primarily
responsible for portfolio management of the funds managed by techpacific.com and
its subsidiaries. Prior to joining techpacific.com in December 2000, Mr. Tong
worked at Softbank China Venture Investments Limited in Hong Kong, where he was
responsible for the evaluation, financial modeling, due diligence review and
structuring of Softbank's investments. He also worked at Nomura China Venture
Investments Limited, Jardine Fleming Securities Limited and Ernst & Young, all
in Hong Kong. Mr. Tong graduated with a Bachelor of Business Administration from
the University of Wisconsin, Madison with a major in Accounting and an extra
concentration in Computer Science in 1993. He is a member of the American
Institute of Certified Public Accountants and is a Chartered Financial Analyst.

Donghua Ding joined our board on June 25, 2003. He currently serves as
an advisor to China Mobile (Shenzhen) Limited, a subsidiary of China Mobile
(Hong Kong) Limited, the leading mobile operator in China and a listed company
on the Stock Exchange of Hong Kong and the New York Stock Exchange. From 1997
until 2002, he served as a director and chief financial officer of China Mobile
(Hong Kong) Limited where he was in charge of that company's financial
management. Mr.Ding was also a director of China Mobile Hong Kong (BVI) Limited.
Prior to joining China Mobile (Hong Kong) Limited, Mr. Ding was the Chief
Economist, Chief Accountant, Deputy Chief Economist and Department Director of
the Guangdong Posts and Telecommunications Administration. He graduated from the
Beijing University of Posts and Telecommunications in 1961 and has 40 years of
management experience in the telecommunications industry, as well as in
economics and finance.

Ronald Lee was appointed to our board on June 5, 2002. He is the
managing director and co-founder of BEENET, an Internet consulting and solutions
services provider established in November 1999. Prior to that, he was a
corporate finance senior manager at Cable & Wireless HKT, where he worked from
1995 to 1999. Mr. Lee also worked for Royal Trust in Toronto and Hong Kong and
Peregrine Capital Limited and Peregrine Direct Investment Limited in Hong Kong.
Mr. Lee received his Master of Business Administration degree with
specialization in accounting and finance from the University of Western Ontario
in 1992 and his Bachelor of Science degree in Accounting and Finance from
Georgetown University in 1987.

Michael Leung has been one of our directors since July 11, 2002. Since
April 2002, he has been a consultant with Koffman Securities, a brokerage firm
in Hong Kong. From February 1999 to September 2001, he was a director at
Emerging Markets Partnership (Hong Kong) Limited, which is the principal adviser
to the AIG Asian Infrastructure Fund L.P. Prior to that, from November 1997 to
October 1998, he was a Director of Warburg Dillon Read where he was involved in
corporate finance activities in China. From January 1994 to August 1997, he was
a Director of Crosby Securities heading the Corporate Finance Division covering
the Hong Kong and China markets. He was also a Director of Peregrine Capital
Limited from January 1992 to December 1993 where he was responsible for
marketing Peregrine's corporate finance services in Hong Kong and China. Mr.
Leung received a Bachelor's Degree in Social Sciences from the University of
Hong Kong with a major in accounting, management and statistics.

Joseph Tong is a director and co-founder of TLM Apparel Co., Ltd., a
garment trading company operating in Hong Kong and China which was established
in December 2002. At TLM Apparel, Mr. Tong is engaged in establishing offices
and operations in Hong Kong and China, setting up accounting and internal
control policies and overseeing the company's overall operations. Prior to that,
from September 2000 to September 2002, he was the e-Commerce Director of the
Asia Region for Universal Music Limited where he was responsible for forming
e-business development strategies and overseeing new promotional opportunities.
He was also an Associate Director of Softbank China Venture Investments Limited
from August 1999 to September 2000 and of Nomura China Investments Limited from
October 1996 to July 1999. In those positions, he was primarily involved in
identifying and

evaluating potential venture capital investments, negotiating investment terms
and structure and overseeing the businesses of portfolio companies. Mr. Tong has
also worked at Prosberg Limited, a management consulting company, Wharf Cable
Limited and Ernst & Young. Mr. Tong has a Bachelor of Science degree and Second
Honour Degree in Accounting and Statistics from the University of Southampton,
England. He is a member of the American Institute of Certified Public
Accountants and has served as a director since March 25, 2003.

B. Compensation

In 2002, we paid each of Michael Tong, Michael Leung and Ronald Lee
US$1,000 per month for their services as non-executive directors for a total of
US$12,000, US$5,652 and US$6,000, respectively. Other than Messrs. Tong, Leung
and Lee, we did not pay any other compensation in any form to our non-executive
directors in 2002. In 2002, we also granted stock options under our 2000 Stock
Incentive Plan to our two executive directors, Ted Sun and Denny Lee, as set
forth in the table entitled "Option Grants in Last Fiscal Year" below.

All of our current directors have entered into indemnification
agreements in which we agree to indemnify, to the fullest extent allowed by
Cayman law, our charter documents or other applicable law, those directors from
any liability or expenses, unless the liability or expense arises from the
director's own willful negligence or willful default. The indemnification
agreements also specify the procedures to be followed with respect to
indemnification.

Directors' and Officers' Liability Insurance

We maintained directors' and officers' liability insurance on behalf of
our directors and officers until June 15, 2003 when that policy expired. We do
not plan to purchase a new policy at this time.

Executive Officer Compensation

The following table sets forth certain information concerning
compensation paid during 2000, 2001 and 2002 to our executive officers:

Long-Term
Annual Compensation Compensation
------------------- ------------
Restricted
Stock Securities All Other
Name and Principal Fiscal Salary Bonus Awards Underlying Compensation
Position Year (US$) (US$)(1) (US$) Options (#) (US$)
-------- ---- ------ -------- ----- ----------- -----

Ted Sun (2) 2002 226,000 200,000 346,625 (3) 15,000,000 333,072 (4)
Acting Chief 2001 73,000 165,000 (5) 73,035 (3) ---- 12,400 (6)
Executive Officer and a 2000 ---- ---- ---- 1,200,000 ----
Director

Denny Lee (7) 2002 158,000 80,000 ---- 10,000,000 137,507 (8)
Chief Financial 2001 12,273 3,800 ---- ---- 3,138 (9)
Officer and a Director 2000 ---- ---- ---- ---- ----

Jack Xu (10) 2002 116,000 ---- ---- ---- 154,978 (11)
Chief Technology 2001 211,750 60,000 ---- 35,050,000 94,545 (12)
Officer 2000 119,736 30,000 ---- 33,605,500 12,300 (13)

__________

(1) Includes bonus amounts in the year earned, rather than in the year in which
such bonus amount was paid or is to be paid.
(2) Mr. Sun, one of our directors, became our acting Chief Executive Officer on
September 11, 2001 following Mr. Ding's resignation from that position.
(3) Pursuant to the terms of his employment agreement, Mr. Sun received cash
payments sufficient for him to purchase an aggregate of 25,000,000 of our
ordinary shares from us at a price of US$0.006492 per share (equivalent to
US$0.6492 per American Depositary Share) over an 18-month period. Our board
of directors set the per share purchase price at the fair market value of
the shares, which was deemed to be the last closing price on Nasdaq prior
to the grant of these subscription rights. In each of 2001 and 2002, we
paid Mr. Sun US$73,035 to purchase 11,250,000 of such shares in accordance
with his subscription schedule. The dollar amounts listed in this column
were calculated by multiplying the amount of shares purchased in each year
by the closing price of our American Depositary Shares (divided by 100 to
determine the per ordinary share price) on the date of each such purchase
or the last closing price in the case of shares purchased while trading in
our American Depositary Shares was suspended on Nasdaq in 2001.
(4) Represents a housing allowance of US$35,100 paid by our company on behalf
of Mr. Sun and US$297,972 for Chinese individual income taxes which accrued
in the year 2002 with respect to Mr. Sun's compensation in that year and
which our company will pay in 2003 on his behalf.
(5) This amount constituted a sign-on bonus which was paid in two installments:
one of US$75,000 upon Mr. Sun's commencement of employment and the second
of US$60,000 on January 2, 2002. It also included a year-end performance
bonus of US$30,000.
(6) Represents a housing allowance paid by our company on behalf of Mr. Sun.
(7) Mr. Lee joined our company as Financial Controller in November 2001 and
became our Chief Financial Officer in April 2002.
(8) Represents a housing allowance of US$23,349 paid by our company on behalf
of Mr. Lee and a cash living allowance of US$19,800 paid to Mr. Lee. This
amount also includes US$94,358 for

Chinese individual income taxes which accrued in the year 2002 with respect
to Mr. Lee's compensation in that year and which our company will pay in
2003 on his behalf.
(9) Represents a housing allowance of US$1,166 paid by our company on behalf of
Mr. Lee and a cash living allowance of US$1,972 paid to Mr. Lee.
(10) Mr. Xu joined our company as Co-Chief Technology Officer in May 2000 and
became our Chief Technology Officer in March 2001. Mr. Xu resigned from our
company in June 2002.
(11) Represents miscellaneous payments totaling US$141,778 to Mr. Xu upon his
resignation from our company in June 2002 and a housing allowance of
US$13,200 paid by our company on behalf of Mr. Xu prior to his resignation.
(12) Represents US$24,665 for a housing allowance paid by our company on behalf
of Mr. Xu and a US$69,880 payment towards Mr. Xu's taxes.
(13) Represents a housing allowance paid by our company on behalf of Mr. Xu.

Employment Agreements

We have entered into an employment agreement and a non-competition
agreement with Ted Sun, as described below. We have also entered into a new
employment agreement with Denny Lee who was named our Chief Financial Officer in
April 2002 after having served as our Financial Controller since November 2001
and an employment agreement with Michael Tong who became an executive director
on June 25, 2003.

Ted Sun. In September 2001, we entered into an employment agreement with
Ted Sun which originally provided for an annual salary of US$240,000. His annual
salary was subsequently lowered to US$216,000 in June 2002. In addition, Mr. Sun
received a sign-on bonus of US$135,000 which was paid in two installments in
September 2001 and January 2002 and year-end performance bonuses of US$30,000
and US$200,000 in 2001 and 2002, respectively. Further, he received cash
payments sufficient for him to purchase from us an aggregate of 25,000,000 of
our ordinary shares at a price of US$0.006492 per share over an 18-month period
ending in March 2003. Mr. Sun is also entitled to receive a housing allowance.

In addition, we also entered into a non-competition agreement with Mr. Sun
which obligates Mr. Sun to keep all proprietary information regarding our
company confidential, except in limited circumstances. This agreement also
prohibits Mr. Sun from obtaining an ownership interest in (unless the total
investment represents less than 5% of the total equity of the competitor and the
competitor is a listed company), or employment with, any of our competitors
during his employment with us and for one year thereafter. During that same
period, he may not solicit or encourage any of our officers or employees to
terminate their employment with us, except when done in the course of his job
with NetEase.

Denny Lee. In April 2002, we entered into a new employment agreement with
Denny Lee in connection with his promotion to the position of Chief Financial
Officer. This agreement provides for an annual salary of US$158,000, plus a
discretionary bonus to be determined by our company. Mr. Lee's discretionary
bonus in 2002 was US$80,000. He is also entitled to receive a housing allowance
and tax equalization benefits. If Mr. Lee's employment is terminated for any
reason other than his death, disability or pursuant to one of the statutory
bases for terminating employees without notice under Hong Kong law, he shall be
entitled to severance pay in the amount of six months of his then current base
salary.

This agreement also prohibits Mr. Lee, during his employment with us
and for six months thereafter, from obtaining an ownership interest in (unless
the total investment represents less than 5% of any single class of shares of
the competitor and the competitor is a listed company), or employment with, any
company which carries on a business in Hong Kong or China which competes with
our company and

in which Mr. Lee was involved at any time during the last two years of his
employment or in relation to which he acquired any confidential information
during the course of his employment. Also, he may not solicit, entice or hire
any of our employees or customers for a period of one year after his
termination. Mr. Lee has also entered into a proprietary information agreement
which obligates him to keep all proprietary information regarding our company
confidential, except in limited circumstances.

Michael Tong. Michael Tong's employment agreement provides for an annual
salary of US$168,000, plus a discretionary bonus to be determined by our
company. He is also entitled to receive a housing allowance, tax equalization
benefits and a stock option to purchase 10,000,000 of our ordinary shares. If
Mr. Tong's employment is terminated by us for any reason other than his death,
disability or pursuant to one of the statutory bases for terminating employees
without notice under Hong Kong law, he shall be entitled to severance pay in the
amount of three months of his then current base salary. Mr. Tong is also subject
to the same non-competition and confidentiality provisions as Mr. Lee which are
described above.

Option Grants in Last Fiscal Year

The following table sets forth information regarding stock options granted
to our current Acting Chief Executive Officer and Chief Financial
Officer and our former Chief Technology Officer during 2002.

Individual Grants
-----------------
% of Total
Number of Options Potential Realizable
Securities Granted to Value at Assumed Annual Rate
Underlying Employees in Exercise of Stock Price Appreciation for
Options Fiscal Price per Expiration Option Term (3)
---------------
Name Granted Year (1) Share (2) Date 5% 10%
---- -------- --------- ----------- ---------- ------------- --------

Ted Sun 15,000,000 14.31% US$0.007 July 6, 2005 US$16,551 US$34,755

Denny Lee 10,000,000 9.54% US$0.007 April 4, 2007 US$19,340 US$42,736

Jack Xu ---- ---- ---- ---- ---- ----

_____________
(1) Based on a total of 104,811,000 options granted to employees of NetEase
in 2002, including options granted to these officers but excluding all
options which were granted and terminated in that same year.

(2) The exercise price per share of options granted represented the fair
market value of the underlying shares of ordinary shares on the date
the options were granted.

(3) The potential realizable value is calculated based upon the term of the
option at its time of grant. It is calculated assuming that the stock
price on the date of grant appreciates at the indicated annual rate,
compounded annually for the entire term of the option, and that the
option is exercised and sold on the last day of its term for the
appreciated stock price.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values

The following table sets forth certain information with respect to
stock options exercised by our current Acting Chief Executive Officer and Chief
Financial Officer and our former Chief Technology Officer during 2002. In
addition, the table sets forth the number of shares covered by stock options as
of December 31, 2002, and the value of "in-the-money" stock options, which
represents the difference between the exercise price of a stock option and the
market price of the shares subject to such option on December 31, 2002.

Number of Securities
Underlying Unexercised Value of Unexercised
Shares Value Options at In-the-Money Options at
Acquired on Realized December 31, 2002 (#) December 31, 2002 (US$)
--------------------- -----------------------
Name Exercise (US$)(1) Exercisable Unexercisable Exercisable Unexercisable
---- -------- ------------ ----------- ------------- ----------- -------------

Ted Sun ---- ---- 10,200,000 6,000,000 984,900 645,000
Denny Lee ---- ---- ---- 10,000,000 ---- 1,075,000
Jack Xu 32,136,900 752,616 ---- ---- ---- ----

___________
(1) The value realized upon the exercise of stock options represents the
positive spread between the exercise price of stock options and the fair
market of the shares subject to such options on the exercise date.

Amended and Restated 2000 Stock Incentive Plan

General

Our shareholders approved the NetEase.com, Inc. Amended and Restated 2000
Stock Incentive Plan, or the Amended Plan, at our annual general meeting held on
May 25, 2001. The Amended Plan replaced the 2000 Stock Incentive Plan, or the
Prior Plan, in its entirety. Under the Prior Plan, a total of 223,715,000 of our
ordinary shares were reserved for issuance. The Amended Plan increased the
number of ordinary shares reserved for issuance to 323,715,000, which amount was
automatically further increased to 504,756,924 ordinary shares in accordance
with the provisions of that plan. On March 25, 2002, our board suspended any
further automatic increases in the number of authorized shares reserved for
issuance under the Amended Plan.

The purpose of the Amended Plan is to attract and retain the best available
personnel, to provide additional incentive to employees, directors and
consultants and to promote the success of our business. Our board of directors
believes that our company's long term success is dependent upon our ability to
attract and retain superior individuals who, by virtue of their ability and
qualifications, make important contributions to our business. The Amended Plan
provides for the granting of incentive awards of our ordinary shares, options to
purchase our ordinary shares and any other securities the value of which is
derived from the value of our ordinary shares.

Grantees under the Amended Plan will not receive any account status
reports. The Amended Plan is not subject to the U.S. Employee Retirement Income
Security Act of 1974, as amended, nor is the Amended Plan a "qualified plan"
within the meaning of Section 401(a) of the Code.

The Amended Plan continues to be administered by our board, and it has
delegated the power to award options under those plans for non-executive
officers to NetEase's acting chief executive officer.

The Amended Plan provides that in the event of certain corporate
transactions, including specified types of reorganizations and acquisition
transactions, each outstanding award granted under the Amended Plan shall
automatically become fully vested and exercisable and be released from any
restrictions in transfer (other than transfer restrictions applicable to the
award) and repurchase or forfeiture rights, immediately prior to the specified
effective date of such corporate transaction, unless the award is assumed by the
successor company or its parent company in connection with the corporate

transaction. Upon consummation of such corporate transactions, each outstanding
award shall be terminated unless the award is assumed by the successor company
or its parent company in connection with the applicable corporate transaction.
Our board of directors will determine whether an award was assumed in the manner
contemplated by the Amended Plan.

Under the Amended Plan, awards can be issued to employees, directors or
consultants of the company or our subsidiaries, although incentive stock
options, referred to as ISOs, may only be issued to our employees or the
employees of our subsidiaries.

Awards under the Amended Plan are evidenced by an award agreement which
contains, among other things, provisions concerning exercisability and
forfeiture upon termination of employment or consulting arrangement (by reason
of death, disability, retirement or otherwise) as have been determined by our
board. In addition, the award agreement also specifies whether the option
constitutes an ISO or a non-incentive stock option, referred to as NQSOs, and
may, but need not, include a provision whereby a grantee may at any time during
his or her employment with us exercise any part or all of the award prior to
full vesting of the award.

An option may be exercised by delivering written notice of such
exercise to us. The option price to exercise the option for our ordinary shares
must be paid at the time of exercise in full in cash or in check, by promissory
note with such terms as the board deems appropriate or in whole ordinary shares
with a fair market value at least equal to the option price (or in another
appropriate manner approved by us, such as in a combination of cash and whole
ordinary shares or by cashless exercise of options through a broker-dealer).

Under the Amended Plan, the exercise price for the options is specified
in the award agreement for those options. In any event, the exercise price of
ISOs cannot be less than the fair market value of our ordinary shares on the
date of grant. However, in the case of an ISO granted to a grantee, who, at the
time the ISO was granted, owned stock possessing more than 10% of the combined
voting power of all classes of our share capital, the option price may not be
less than 110% of the fair market value of our ordinary shares on the date of
grant of such ISO. To the extent that the aggregate fair market value of shares
subject to options granted as ISOs under the Amended Plan which become
exercisable for the first time by a recipient during any calendar year exceeds
US$100,000, then options represented by ordinary shares in excess of the
US$100,000 limitation shall be treated as NQSOs.

NQSOs granted pursuant to the Amended Plan can have an exercise price
of no less than 85% of the fair market value of our ordinary shares on the date
of grant.

In the event of any extraordinary dividend, share dividend,
recapitalization, share split, rights issuance, or combination or exchange of
such shares, or other similar transactions, our board may equitably adjust the
option price of our outstanding options so as to reflect such event.

The term of all ISOs and NQSOs will be stated in the applicable award
agreement. The term of an ISO granted to a person, who, at the time the ISO was
granted, owned stock possessing more than 10% of the combined voting power of
all classes of our share capital, may not be more than five (5) years from the
date of the grant of the award.

Under the Amended Plan, if the employment, director or consultant
relationship of a grantee with us terminates for cause, the grantee's right to
exercise the option will expire upon the termination of such relationship. If
the employment, director or consultant relationship of a grantee with us
terminates without cause, all options then exercisable may be exercised within
six months of the date of such termination or such shorter period as may be
specified in the award agreement. Any ISO granted under

the Amended Plan, if not exercised within the time period provided by law for
the exercise of ISOs following the termination of a grantee's employment with
us, shall automatically convert to a NQSO thereafter. If the termination of a
grantee's employment, director or consultant relationship with us is (i) by
reason of death or (ii) by reason of disability, all options then exercisable
may be exercised by such grantee, such grantee's estate or by a person who
acquired the right of exercise of such options by bequest or inheritance or
otherwise by reason of death or disability of such grantee, at any time within a
period not less than 12 months (but in no event later than the expiration date
of the options) after the date of such termination.

Under the Amended Plan, our board may at any time terminate, suspend,
or amend the Amended Plan in any respect, except that no termination, suspension
or amendment will be effective without shareholder approval if such approval is
required to comply with any law, regulation or stock exchange rule and no such
change may adversely affect any award previously granted without the written
consent of the recipient. The Amended Plan will expire in February 2010.

C. Board Practices

During the year 2002, our board met in person or passed resolutions by
unanimous written consent 17 times. No director attended fewer than 75% of all
the meetings of our board and its committees on which he or she served after
becoming a member of our board.

Our board has one active committee, the audit committee. Our board has
also maintained a compensation committee, but as discussed below, that committee
currently does not have the requisite number of members as required by its
charter and has, therefore, been inactive. Our board does not have a nominating
committee or a committee performing the functions of a nominating committee.

At the beginning of 2002, our audit committee consisted of Mary Nee,
Kathy Xu and Michael Tong. Ms. Nee and Ms. Xu stepped down from that committee
on May 15 and June 5, 2002, respectively (Ms. Nee later resigned from our board
in July 2002 and Ms. Xu resigned from our board at the same time she resigned
from the audit committee). John Lau filled the vacancy on the audit committee
created by Ms. Nee's resignation, and Ronald Lee initially replaced Ms. Xu on
the audit committee until Michael Leung was appointed to our board and audit
committee on July 11, 2002. Mr. Lau subsequently resigned from our board and
audit committee on March 14, 2003, and Joseph Tong was appointed to fill both
vacancies. Finally, on June 25, 2003, Michael Tong became an executive director
of our company at which time he stepped down from the audit committee but
remained a member of our board. On that same day, Donghua Ding was appointed to
our board and the audit committee. Our audit committee is currently comprised of
Joseph Tong, Michael Leung and Donghua Ding. In 2002, our audit committee held
six formal meetings.

Each member of our audit committee satisfies the "independence"
requirements of the National Association of Securities Dealers' listing
standards. The audit committee reports to our board regarding the appointment of
our independent public accountants, the scope and results of our annual audits,
compliance with our accounting and financial policies and management's
procedures and policies relative to the adequacy of our internal accounting
controls.

We have not entered into any service contracts or other arrangements
providing for benefits upon termination with our non-executive directors.

Compensation Committee Interlocks and Insider Participation

At the beginning of 2002, our compensation committee was comprised of
Michael Tong, Mary Nee and Kathy Xu. Ms. Nee and Ms. Xu resigned from this
committee on May 15, 2002 and June 5, 2002, respectively, and to date, the
vacancies have not been filled. The charter for the compensation

committee requires that it have at least two members, and accordingly, the
compensation committee has been inactive and held no meetings in 2002.

Prior to it becoming inactive, the compensation committee's functions were
to review and make recommendations to our board regarding our compensation
policies and all forms of compensation to be provided to our executive officers
and directors. In addition, the compensation committee reviewed bonus and stock
compensation arrangements for all of our other employees. These duties have been
performed by our full board of directors since the compensation committee became
inactive.

No interlocking relationships have existed between our board of
directors or compensation committee and the board of directors or compensation
committee of any other company.

D. Employees

At December 31, 2000, 2001 and 2002, we had 283, 327 and 398 employees,
respectively. As of May 31, 2003, we had 471 employees, including 95 in the
content department, 46 in technology, 49 in sales, 5 in marketing, 3 in business
development, 1 in e-commerce, 39 in customer service, 21 in accounting, 1 in
investor relations, 11 in administration, 4 in human resources, 20 in product
development, 1 in the corporate solution and service department, 74 in wireless
services and 101 in game development. None of our employees are represented by a
labor union.

E. Share Ownership

The following table sets forth certain information known to us with respect
to the beneficial ownership as of May 31, 2003 by:

. all persons who are beneficial owners of five percent or more of our
ordinary shares,
. each of our directors,
. our current Acting Chief Executive Officer, our Chief Financial
Officer, our Executive Director and our former Chief Technology
Officer (referred to below as the Named Executive Officers), and
. all current directors and executive officers as a group.

As of May 31, 2003, 3,139,337,789 shares of our ordinary shares were
outstanding. The amounts and percentages of ordinary shares beneficially owned
are reported on the basis of regulations of the Securities and Exchange
Commission (SEC) governing the determination of beneficial ownership of
securities. Under the rules of the SEC, a person is deemed to be a "beneficial
owner" of a security if that person has or shares "voting power," which includes
the power to vote or to direct the voting of such security, or "investment
power," which includes the power to dispose of or to direct the disposition of
such security. A person is also deemed to be a beneficial owner of any
securities of which that person has a right to acquire beneficial ownership
within 60 days. Under these rules, more than one person may be deemed a
beneficial owner of securities as to which such person has no economic interest.
The shareholders listed below do not have different voting rights.

As of May 31, 2003, none of our ordinary shares were held by U.S. holders
of record. On that date, a total of 14,186,267 ADSs were outstanding, of which
14,185,867 ADSs were held by 13 U.S. holders of record.

Number of Shares
Beneficially Owned
-------------------------------
Name Number Percentage
-------------------------------------------------------------------------------- -------------------------------

5% Shareholders
Shining Globe International Limited/William Ding (1) ........................... 1,683,611,900 53.6%
Suite 1901, Tower E3, The Towers, Oriental Plaza, Dong Cheng
District, Beijing, People's Republic of China

Yongping Duan and Xin Liu ...................................................... 205,000,000 6.5%
1706 Rada Road
City of Industry, CA 91745

Named Executive Officers and Directors (2)
Jack Xu (3) .................................................................... 32,136,900 1.0%
Denny Lee ...................................................................... ---- *
Ted Sun (4) .................................................................... 33,700,000 1.1%
Michael Tong ................................................................... ---- *
Donghua Ding ................................................................... ---- *
Ronald Lee ..................................................................... ---- *
Michael Leung .................................................................. ---- *
Joseph Tong .................................................................... ---- *

All current directors and executive officers
as a group (8 persons) (5) .................................................... 1,717,311,900 54.7%
============= ====

____________
* Less than 1%

(1) Shining Globe International Limited is 100% owned by William Ding, our
founder, Chief Architect and a director.
(2) The address of our current Named Executive Officers and directors is c/o
NetEase.com, Inc., Suite 1901, Tower E3, The Towers, Oriental Plaza, Dong
Cheng District, Beijing, People's Republic of China 100738.
(3) Mr. Xu resigned from our company in June 2002. The shares listed represent
all shares that were issued to Mr. Xu pursuant to his exercise of certain
stock options following his resignation. Based on a review of public
filings with the SEC, we cannot determine whether Mr. Xu still holds such
shares or has acquired any additional shares in our company.
(4) Includes 6,600,000 shares subject to stock options exercisable within 60
days of May 31, 2003. These options have the following features: (i)
6,000,000 of the options have an exercise price of US$0.007 per ordinary
share and an expiration date of July 6, 2005 and (ii) 600,000 of the
options have an exercise price of US$0.10 per ordinary share and an
expiration date of February 1, 2005.
(5) Shares owned by all of our current directors and executive officers as a
group includes shares beneficially owned by William Ding. This amount also
includes 6,600,000 shares subject to stock options currently exercisable or
exercisable within 60 days of May 31, 2003.

Item 7. Major Shareholders and Related Party Transactions

A. Major Shareholders

Please refer to Item 6. "Directors, Senior Management and
Employees--Share Ownership."

B. Related Party Transactions

Our business was founded in June 1997. In July 1999, we established a
new holding company, NetEase.com, Inc., in the Cayman Islands. In September
1999, we restructured our operations in order to comply with increasing
regulation of the Internet industry in China. As part of this restructuring,
substantially all of Guangzhou Netease Computer System Co., Ltd.'s, or Guangzhou
Netease, fixed and intangible assets and existing Internet applications,
services and technologies were acquired by Netease Information Technology
(Beijing) Co., Ltd., or Netease Beijing, a wholly owned subsidiary of NetEase
formed in August 1999. Guangzhou Netease, which is 80% owned by our founder,
Chief Architect, majority shareholder and a director, William Ding, has received
approval from the Guangzhou telecommunications administrative authorities to
provide Internet content services, and its 80% owned subsidiary, Beijing
Guangyitong Advertising Co., Ltd., or Guangyitong Advertising, holds a license
to operate an advertising business.

NetEase and Netease Beijing entered into a series of agreements with
Guangzhou Netease, Guangyitong Advertising and the shareholders of Guangzhou
Netease and Guangyitong Advertising under which we provide our Internet and
e-commerce applications, services and technologies and advertising services to
Guangzhou Netease and Guangyitong Advertising, and Guangzhou Netease and
Guangyitong Advertising operate the NetEase Web sites and our online advertising
business. We do not believe NetEase and Netease Beijing could have obtained
these agreements, taken as a whole, from unrelated third parties. We believe
that the terms of each agreement are no less favorable than the terms that we
could obtain from disinterested third parties. Guangzhou Netease is one of a
limited number of companies in China to have secured approval from the Guangzhou
telecommunications administrative authorities to engage in the Internet content
provider business. Through our agreements, we have the exclusive right to
benefit from this approval. In addition, we have secured significant rights over
Guangyitong Advertising and the ultimate shareholders of Guangyitong Advertising
and have obtained the commitment of the ultimate shareholders of Guangyitong
Advertising to allow it to direct the policies and management of the ongoing
activities of Guangyitong Advertising. We believe that the shareholders of
Guangzhou Netease and Guangyitong Advertising will not receive material benefits
from these agreements except as shareholders of NetEase. Because of the
uncertain and changing legal and regulatory environment in China, most of these
agreements have terms of one year, except for the Domain Names License Agreement
between NetEase and Guangzhou Netease which has a term of five years, and the
Operating Agreement among Netease Beijing, Guangyitong Advertising and the
ultimate shareholders of Guangyitong Advertising which has a term of twenty
years. In addition, the Voting Rights Trust Agreement among Netease Beijing and
William Ding and Bo Ding (William Ding's brother), as ultimate shareholders of
Guangyitong Advertising has a term of ten years. These agreements are described
below.

. Domain Name License Agreement between NetEase and Guangzhou
Netease. NetEase granted Guangzhou Netease the right to use the
domain names "netease.com," "163.com," "126.com," "yeah.net" and
"nease.net" on the NetEase Web sites in China for license fees of
RMB10,000 per year. NetEase may waive this fee in the future. By a
Supplemental Agreement entered into between the parties in May
2000, the term of this agreement has been extended from one year to
five years.

. Copyright License Agreement between Netease Beijing and Guangzhou
Netease. Netease Beijing granted Guangzhou Netease the right to use
Netease Beijing's Web page layout in China for a royalty of
RMB10,000 per year. Netease Beijing may waive this fee in the
future.

. Trademark License Agreement between Netease Beijing and Guangzhou
Netease. Netease Beijing granted Guangzhou Netease a license to use
Netease Beijing's registered trademarks on the NetEase Web sites in
China for license fees of RMB10,000 per year. Netease Beijing may
waive this fee in the future.

. Exclusive Technical Services Master Agreement between Netease
Beijing and Guangzhou Netease. Netease Beijing provides Guangzhou
Netease with technical services for the operation of the NetEase
Web sites, including:

- server maintenance;

- server application software development;

- Internet application software development;

- training; and

- e-commerce related services.

Guangzhou Netease pays monthly service fees to Netease Beijing
based on the actual operating circumstances of the parties. Netease
Beijing may unilaterally adjust such fees. Netease Beijing is
Guangzhou Netease's exclusive provider of these services.

Netease Beijing has the right to transfer and sell its interests in
this Exclusive Technical Services Master Agreement or any other
agreements between it and Guangzhou Netease.

. Exclusive Consulting and Services Agreement between Netease Beijing
and Guangyitong Advertising. Netease Beijing provides Guangyitong
Advertising with technical consulting and related services for all
advertisements published on the NetEase Web sites. Guangyitong
Advertising submits designs of advertisements to be published on
the NetEase Web sites, and Netease Beijing completes the related
technical work and delivers the completed advertisements to
Guangyitong Advertising. Guangyitong Advertising pays fees to
Netease Beijing based on the actual operating circumstances of the
parties, which consist of substantially all of Guangyitong
Advertising's advertising revenue, net of the related business tax
and cultural development fee. Netease Beijing may unilaterally
adjust such fees. Netease Beijing will be Guangyitong Advertising's
exclusive provider of these services. The initial term of this
agreement is 10 years from February 3, 2000.

. Exclusive Advertising Agency Agreement between NetEase and
Guangzhou Netease. Guangzhou Netease appointed NetEase as its
advertising agent to solicit advertising customers on behalf of
Guangzhou Netease in markets outside of China. NetEase pays
Guangzhou Netease 10% of the total advertising revenue under this
agreement per month.

. Online Advertising Agreement between Guangzhou Netease and
Guangyitong Advertising, as amended by a Supplemental Agreement
entered into in May 2000. Guangzhou Netease sells all of the banner
space on the NetEase Web sites to Guangyitong Advertising and
publishes the advertisements provided by Guangyitong Advertising on
the banner space purchased by

Guangyitong Advertising. Guangyitong Advertising pays Guangzhou
Netease RMB 10,000 per year. Guangzhou Netease may waive this fee
in the future. The initial term of this agreement is 10 years from
February 3, 2000.

. Trademark Transfer Agreement between Guangzhou Netease and Netease
Beijing. Guangzhou Netease has agreed to transfer its registered
trademarks to Netease Beijing.

. Supplemental Agreement between Netease Beijing and Guangzhou
Netease. Netease Beijing may not grant the license to use its
domain name, copyright and trademark to any third party without
Guangzhou Netease's consent and may not provide technical service
to any third party.

. Operating Agreement among Netease Beijing, Guangyitong and the
ultimate shareholders of Guangyitong Advertising. To ensure the
successful performance of the various agreements between the
parties, Guangyitong Advertising and its ultimate shareholders have
agreed that they will not enter into any transaction, or fail to
take any action, that would substantially affect the assets,
liabilities, equity or operations of Guangyitong Advertising
without the prior written consent of Netease Beijing.

The parties have agreed that upon Netease Beijing's determination
and at any time when Netease Beijing is able to obtain approval to
invest in and operate all or any part of Guangyitong Advertising,
Netease Beijing will acquire all of the assets or equity interests
of Guangyitong Advertising, to the extent permitted by Chinese law.
The consideration for such acquisitions will be based on the book
value of Guangyitong Advertising at the time of acquisition.

Netease Beijing has agreed that it will provide performance
guarantees and guarantee loans for working capital purposes to the
extent required by Guangyitong Advertising for its operations.

The ultimate shareholders of Guangyitong Advertising have agreed
that upon instruction from Netease Beijing, they will appoint or
terminate Guangyitong Advertising's board members, General Manager,
Chief Financial Officer and other senior officers.

Netease Beijing has the right to transfer and sell its interests in
the Operating Agreement or any other agreements between it and
Guangyitong Advertising. The term of this agreement is 20 years
from February 3, 2000.

. Shareholder Voting Rights Trust Agreement among William Ding, Bo
Ding and Netease Beijing. Bo Ding irrevocably appoints Netease
Beijing to represent him to exercise all the voting rights to which
he is entitled as a shareholder of Guangyitong Advertising and
William Ding and Bo Ding agree to cause Guangzhou Netease to
irrevocably appoint Netease Beijing to represent Guangzhou Netease
to exercise all the voting rights to which Guangzhou Netease is
entitled as a shareholder of Guangyitong Advertising. The term of
this agreement is ten years from May 12, 2000.

. Termination Agreements between Netease Beijing and Guangzhou
Netease. Netease Beijing and Guangzhou Netease terminated
previously existing contracts related to Netease Beijing's rights
with respect to the operation of Guangzhou Netease, the lease of
equipment from Netease Beijing to Guangzhou Netease and the
sublease of leased lines from Netease Beijing to Guangzhou Netease.
Under the Termination Agreements, Netease Beijing agrees to

provide without charge to Guangzhou Netease equipment related to
the operation of Internet information services.

. Agreement between Netease Beijing and Guangzhou Netease. Netease
Beijing agrees to pay the operating costs of Guangzhou Netease.

. Letter of Agreement. Each of William Ding and Bo Ding have agreed
that any amendments to be made to the Exclusive Consulting and
Services Agreement, the Shareholder Voting Rights Trust Agreement,
and the Operating Agreement described above, as well as all other
agreements to which Guangzhou Netease, Guangyitong Advertising
and/or William Ding and Bo Ding are parties, shall be subject to
the approval by the vote of a majority of our board, excluding the
vote of William Ding. Messrs. Ding have also agreed that, if any
amendments to the above mentioned agreements require a vote of the
shareholders of NetEase, Guangzhou Netease or Guangyitong
Advertising, as applicable, both of them will vote in their
capacity as direct or indirect shareholders of these companies to
act based upon the instructions of our board.

Voting Arrangement. The News Corporation Limited had the right to
nominate one director to our board of directors, and certain of our shareholders
holding a majority of our outstanding shares, including our largest shareholder,
Shining Globe, were obligated to vote their shares in favor of the appointment
of its nominated director. However, The News Corporation's right to nominate one
director and certain of our shareholders', including Shining Globe's, agreement
to vote their shares in favor of the director nominated by The News Corporation
irrevocably terminated in March 2003 when its share ownership fell below 4.25%
of our total issued and outstanding share capital.

Co-Sale Rights. Under the terms of the investors' rights agreement among
The News Corporation, Shining Globe and certain other shareholders, The News
Corporation had the right, at its option, to sell its shares if Shining Globe
proposed to sell any of its shares, on the same terms and conditions as Shining
Globe. This right also irrevocably terminated in March 2003 because its share
ownership fell below 4.25% of our total issued and outstanding share capital.

Strategic Alliance with The News Corporation. In March 2000, we issued
2,560,556 of our Series B preference shares to Best Alliance Profits Limited, a
company controlled by The News Corporation Limited, in exchange for US$35
million in cash together with on-air advertising and promotional services. In
connection with this issuance, we entered into an agreement with News Digital
Ventures, an affiliate of The News Corporation Limited, which provides for
cooperation between us and The News Corporation. As part of the consideration
for the issuance of our Series B preference shares, The News Corporation and its
affiliates agreed to provide us with on-air advertising and promotional
inventory with a value of US$5 million on The News Corporation's media
properties, including Channel [V], ESPN Star Sports, Phoenix TV and STAR TV. We
agreed to use at least US$1 million of the inventory within one year, and at
least US$2 million in each of the next two years. As of March 31, 2003, we had
used US$3 million of the inventory and, pursuant to a supplemental agreement
with The News Corporation, we are now entitled to use the remaining US$2 million
of the inventory by March 28, 2004. In addition, The News Corporation and its
affiliates agreed to spend US$5 million on on-line advertising on the NetEase
Web sites of which US$1 million had been spent as of March 31, 2003. In
accordance with our supplemental agreement, they are obligated to spend the
remaining amount by March 28, 2004.

All other aspects of our strategic cooperation agreement with The News
Corporation terminated in March 2003.

Share Transfers to Certain Senior Management Personnel and Key Employees.
In 1999, Shining Globe International Limited, which is 100% owned by William
Ding, our founder, Chief Architect, majority shareholder and a director, agreed
to transfer an aggregate of 109,694,200 ordinary shares to certain senior
management personnel and key employees. These share transfers were effected in
January 2000. The share transfer commitments were made to provide incentives to
senior management personnel and key employees to join our company. The fair
market value of these shares as of the date of such agreement (RMB45.4 million
or US$5.5 million) was charged to our earnings in 1999 as share compensation
costs in accordance with U.S. GAAP, with a corresponding increase in additional
paid-in capital. Furthermore, in March 2000, January 2001, January 2002 and
January 2003, William Ding transferred 1,945,200, 8,757,100, 4,609,000 and
4,609,000 shares, respectively, to certain employees. The total estimated fair
value of these shares, valued at US$0.05 per share at the date of grant, is
recognized as deferred compensation, which are amortized over the related
vesting periods.

Except for the voting arrangements described above, our major shareholders
do not have different voting rights than any of our other shareholders.

Loans and Advances. We have entered into loan agreements with four related
parties, the proceeds of which were used to purchase our ADSs, in the aggregate
principal amount of approximately US$777,000. The loans bear an interest rate of
five percent and became due one year from the date of disbursement of the loan
proceeds. As of March 31, 2003, US$667,000 of the outstanding principal amount
had been repaid. Although we have attempted to recover the remaining unpaid
balance of these loans, we can provide no assurance that we will be able to
recover such amount. In addition, we loaned US$250,000 to a former employee of
our company pursuant to an oral arrangement, which was repaid in full in January
2003. We previously made full provision for these loans in our audited financial
statements for the year 2001, which impacted our statement of operations in that
period. The amounts repaid in 2003 discussed above were reflected in our
statement of operations for the first quarter of 2003.

We also loaned US$235,000 to William Ding, our founder, Chief Architect,
majority shareholder and a director. This loan was repaid in full in March 2003.

Transactions with BEENET. Mr. Ronald Lee, who was appointed to our board of
directors on June 5, 2002, is the managing director and co-founder of BEENET, an
Internet consulting and solutions services provider. In 2000, 2001 and 2002,
BEENET entered into a series of transactions with our company whereby BEENET
provided Internet consulting services for our main Web site and our corporate
Web site and assisted in the design and production of a television commercial
for us, in exchange for an aggregate amount of approximately US$550,000. BEENET
also placed advertisements on the NetEase Web sites in 2001.

C. Interests of Experts and Counsel

Not applicable.

Item 8. Financial Information

A. Consolidated Statements and Other Financial Information

See Item 18. "Financial Statements" for our audited consolidated financial
statements filed as part of this annual report.

Legal Proceedings

Beginning in October 2001, four substantially identical purported class
action complaints alleging violations of the federal securities laws were filed
in the United States District Court for the Southern District of New York naming
the Company, certain of its current and former officers and directors, and the
underwriters of the Company's initial public offering (Merrill Lynch, Pierce,
Fenner & Smith, Inc., Deutsche Bank Securities, Inc., Chase Securities, Inc.,
Salomon Smith Barney, Inc. and UBS Warburg LLC) as defendants. These complaints
were subsequently consolidated into a single action. In general, the complaints
allege, among other things, that (i) the Company's initial public offering
violated the securities laws because the financial statements accompanying the
offering's registration statement misstated the Company's revenue; and (ii) the
Company committed securities fraud by materially misstating the Company's
revenue in its 2000 financial statements.

On August 29, 2002, the parties to the above-referenced litigation entered
into a Memorandum of Understanding for the settlement of this litigation.
Subsequently, the plaintiffs in this litigation conducted confirmatory discovery
to determine if the settlement is fair, reasonable and adequate. The discovery
has been completed, and on January 31, 2003, the parties entered into a
Stipulation and Agreement of Settlement. The court preliminarily approved this
settlement on February 25, 2003, and all persons who purchased the Company's
American Depositary Shares during the period from July 3, 2000 to August 31,
2001 were certified as a single class. Subsequently, notice was sent to the
class, and the court held a hearing where it gave its final approval to the
settlement. The aggregate settlement amount for all claims in this litigation is
US$4.35 million. Potential members of the class no longer have the right to opt
out of this settlement and pursue their own claims.

Dividend Policy

We have never declared or paid any cash dividends on our ordinary shares,
but it is possible that we may declare dividends in the future. We have
historically retained earnings to finance operations and the expansion of our
business. Any future determination to pay cash dividends will be at the
discretion of the board of directors and will be dependent upon our financial
condition, operating results, capital requirements and such other factors as the
board of directors deems relevant.

B. Significant Changes

We have not experienced any significant changes since the date of our
audited consolidated financial statements included in this annual report.

Item 9. The Offer and Listing

Not applicable except for Item 9.A.4. and Item 9.C.

American Depositary Shares, or ADSs, each representing 100 of our ordinary
shares, have been listed on the Nasdaq National Market since June 30, 2000. Our
ADSs trade under the symbol "NTES." Trading in our ADSs was suspended by the
Nasdaq National Market from September 4, 2001 until January 2, 2002 during
Nasdaq's investigation into the circumstances which necessitated the restatement
of our 2000 financial statements.

For the year ended December 31, 2000 (June 30, 2000 through December 31,
2000), the high and low price of our ADSs on Nasdaq has ranged from $17.25 to
$2.75. For the year ended December 31, 2001 (January 1, 2001 through September
4, 2001), the high and low price of our ADSs on Nasdaq has

ranged from $3.28125 to $0.51. For the year ended December 31, 2002, the high
and low price of our ADSs on Nasdaq has ranged from $13.74 to $0.65.

The following table provides the high and low prices for our ADSs on the
Nasdaq National Market for (1) each quarter in the two most recent financial
years and the most recent quarter and (2) each of the most recent six months.

Sales Price
High Low
---------------------------------------

Quarterly highs and lows
First Quarter 2001 $ 3.28125 $ 1.00
Second Quarter 2001 $ 2.45 $ 1.12
Third Quarter 2001 (until $ 1.55 $ 0.51
September 4, 2001)

Fourth Quarter 2001 Trading Suspended
First Quarter 2002 $ 1.47 $ 0.65
Second Quarter 2002 $ 1.57 $ 0.67
Third Quarter 2002 $ 3.65 $ 1.40
Fourth Quarter 2002 $13.74 $ 1.80
First Quarter 2003 $17.90 $10.11

Monthly highs and lows
December 2002 $13.74 $ 7.65
January 2003 $17.90 $11.40
February 2003 $15.83 $11.41
March 2003 $17.72 $10.11
April 2003 $23.40 $14.34
May 2003 $33.80 $21.00

Item 10. Additional Information

A. Share Capital

Not applicable.

B. Memorandum and Articles of Association

The following presents a description of the terms and provisions of our
restated memorandum and articles of association. Our articles of association
were amended pursuant to a special resolution passed by more than two-thirds of
our shareholders on June 5, 2003 to remove the provisions related to the
composition, duties and operations of the audit committee of our board of
directors (articles numbered 114 to 117 (inclusive)). Our audit committee is now
governed by a board-approved charter which is not part of our articles of
association. Our restated memorandum and articles of association are
incorporated by reference as noted in Item 19 and the above-referenced amendment
is attached to this annual report as Exhibit 1.3.

General

We were incorporated in the Cayman Islands on July 6, 1999 and operate
under the Cayman Islands Companies Law (2003 Revision), or the Companies Law.
Our corporate objectives and purpose are unrestricted.

Directors

A director may vote in respect of any contract or transaction in which he
is interested provided however that the nature of the interest of any director
in any such contract or transaction shall be disclosed by him at or prior to its
consideration and any vote on that matter. A general notice or disclosure to the
directors or otherwise contained in the minutes of a meeting or a written
resolution of the directors or any committee thereof that a director is a
shareholder of any specified firm or company and is to be regarded as interested
in any transaction with such firm or company shall be sufficient disclosure and
after such general notice it shall not be necessary to give special notice
relating to any particular transaction.

The directors may determine remuneration to be paid to the directors. The
directors may exercise all the powers of our company to borrow money and to
mortgage or charge its undertaking, property and uncalled capital or any part
thereof, to issue debentures, debenture stock and other securities whenever
money is borrowed or as security for any of our debts, liabilities, or
obligations or those of any third party.

There are no membership qualifications for directors. Further, there are no
share ownership qualifications for directors unless so fixed by us in a general
meeting.

Rights, Preferences and Restrictions of Ordinary Shares

General. All of our outstanding ordinary shares are fully paid and
nonassessable. Certificates representing the ordinary shares are issued in
registered form. Our shareholders who are nonresidents of the Cayman Islands may
freely hold and vote their shares.

Dividends. The holders of ordinary shares are entitled to such dividends as
may be declared by our board of directors.

Voting Rights. Each ordinary share is entitled to one vote on all matters
upon which the ordinary shares are entitled to vote, including the election of
directors. Voting at any meeting of shareholders is by show of hands unless a
poll is demanded. A poll may be demanded by the Chairman or any other
shareholder present in person or by proxy. A quorum required for a meeting of
shareholders consists of at least two shareholders present or by proxy.

Any ordinary resolution to be made by the shareholders requires the
affirmative vote of a simple majority of the votes attaching to the ordinary
shares cast in a general meeting, while a special resolution requires the
affirmative vote of no less than two-thirds of the votes cast attaching to the
ordinary shares. A special resolution is required for matters such as a change
of name. Holders of the ordinary shares may by ordinary resolution, among other
things, elect directors, appoint auditors, and make changes in the amount of our
authorized share capital.

Liquidation. On a return of capital on winding up or otherwise (other than
on conversion, redemption or purchase of shares) assets available for
distribution among the holders of ordinary shares shall be distributed among the
holders of the ordinary shares pro rata. If the assets available for

distribution are insufficient to repay all of the paid-up capital, the assets
will be distributed so that the losses are borne by our shareholders
proportionately.

Calls on Shares and Forfeiture of Shares. Our board of directors may from
time to time make calls upon shareholders for any amounts unpaid on their shares
in a notice served to such shareholders at least 14 days prior to the specified
time and place of payment. The shares that have been called upon and remain
unpaid are subject to forfeiture.

Redemption of Shares. We may issue shares on the terms that they are, or at
our option or at the option of the holders are, subject to redemption on such
terms and in such manner as we may determine by special resolution.

Variations of Rights of Shares

All or any of the special rights attached to any class of shares may,
subject to the provisions of the Companies Law, be varied either with the
consent in writing of the holders of three-fourths of the issued shares of that
class or with the sanction of a special resolution passed at a general meeting
of the holders of the shares of that class.

General Meetings of Shareholders

The directors may whenever they think fit, and they shall on the
requisition of our shareholders holding at the date of the deposit of the
requisition not less than one-tenth of our paid-up capital as at the date of the
deposit carries the right of voting at general meetings of the Company, proceed
to convene a general meeting of the Company. If the directors do not within 21
days from the date of the deposit of the requisition duly proceed to convene a
general meeting, the requisitionists, or any of them representing more than
one-half of the total voting rights of all of them, may themselves convene a
general meeting, but any meeting so convened shall not be held after the
expiration of three months after the expiration of such 21 days. Advanced notice
of at least five days is required for the convening of the annual general
meeting and other shareholders meetings.

Limitations on the Right to Own Shares

There are no limitations on the right to own our shares.

Limitations on Transfer of Shares

There are no provisions in our restated memorandum or articles of
association that would have an effect of delaying, deferring or preventing a
change in control and that would operate only with respect to a merger,
acquisition or corporate restructuring.

Disclosure of Shareholder Ownership

There are no provisions our restated memorandum or articles of association
governing the ownership threshold above which shareholder ownership must be
disclosed.

Changes in Capital

We may from time to time by ordinary resolution increase the share capital
by such sum, to be divided into shares of such amount, as the resolution shall
prescribe. The new shares shall be subject to

the same provisions with reference to the payment of calls, lien, transfer,
transmission, forfeiture and otherwise as the shares in the original share
capital. We may by ordinary resolution:

(a) consolidate and divide all or any of our share capital into shares of
larger amount than our existing shares;

(b) sub-divide our existing shares, or any of them into shares of smaller
amount than is fixed by our restated memorandum of association,
subject nevertheless to the provisions of Section 12 of the Companies
Law;

(c) cancel any shares which, at the date of the passing of the resolution,
have not been taken or agreed to be taken by any person.

We may by special resolution reduce our share capital and any capital
redemption reserve fund in any manner authorized by law.

Differences in Corporate Law

The Companies Law is modeled after that of the United Kingdom but does not
follow recent United Kingdom statutory enactments and differs from laws
applicable to United States corporations and their shareholders. Set forth below
is a summary of the significant differences between the provisions of the
Companies Law applicable to NetEase.com and the laws applicable to companies
incorporated in the United States and their shareholders.

Mergers and Similar Arrangements. Cayman Islands law does not provide for
mergers as that expression is understood under United States corporate law.
However, there are statutory provisions that facilitate the reconstruction and
amalgamation of companies, provided that the arrangement in question is approved
by a majority in number of each class of shareholders and creditors with whom
the arrangement is to be made, and who must in addition represent three-fourths
in value of each such class of shareholders or creditors, as the case may be,
that are present and voting either in person or by proxy at a meeting, or
meetings convened for that purpose. The convening of the meetings and
subsequently the arrangement must be sanctioned by the Grand Court of the Cayman
Islands. While a dissenting shareholder would have the right to express to the
court the view that the transaction ought not to be approved, the court can be
expected to approve the arrangement if it satisfies itself that:

. the statutory provisions as to majority vote have been complied with;

. the shareholders have been fairly represented at the meeting in
question;

. the arrangement is such as a businessman would reasonably approve; and

. the arrangement is not one that would more properly be sanctioned
under some other provision of the Companies Law.

When a take-over offer is made and accepted by holders of 90% of the shares
within four months, the offeror may, within a two month period, require the
holders of the remaining shares to transfer such shares on the terms of the
offer. An objection can be made to the Grand Court of the Cayman Islands but
this is unlikely to succeed unless there is evidence of fraud, bad faith or
collusion.

If the arrangement and reconstruction is thus approved, the dissenting
shareholder would have no rights comparable to appraisal rights, which would
otherwise ordinarily be available to dissenting shareholders of United States
corporations, providing rights to receive payment in cash for the judicially
determined value of the shares.

Shareholders' Suits. Our Cayman Islands counsel is not aware of any
reported class action or derivative action having been brought in a Cayman
Islands court. In principle, we will normally be the proper plaintiff and a
derivative action may not be brought by a minority shareholder. However, based
on English authorities, which would in all likelihood be of persuasive authority
in the Cayman Islands, exceptions to the foregoing principle apply in
circumstances in which:

. a company is acting or proposing to act illegally or ultra vires;

. the act complained of, although not ultra vires, could be effected
only if authorized by more than a simple majority vote;

. the individual rights of the plaintiff shareholder have been
infringed or are about to be infringed; or

. those who control the company are perpetrating a "fraud on the
minority."

Indemnification. Cayman Islands law does not (other than as set forth
hereafter) limit the extent to which a company's organizational documents may
provide for indemnification of officers and directors, except to the extent any
such provision may be held by the Cayman Islands courts to be contrary to public
policy, such as to provide indemnification against civil fraud or the
consequences of committing a crime. Our Articles of Association provide for
indemnification of officers and directors for losses, damages, costs and
expenses incurred in their capacities as such, except through their own willful
neglect or default.

Insofar as indemnification or liability arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, we have been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is
therefore unenforceable.

C. Material Contracts

We have not entered into any material contracts other than in the
ordinary course of business and other than those described in Item 4.
"Information on the Company" or elsewhere in this Form 20-F.

D. Exchange Controls

China's government imposes control over the convertibility of Renminbi
into foreign currencies. Under the current unified floating exchange rate
system, the People's Bank of China publishes a daily exchange rate for Renminbi,
or the PBOC Exchange Rate, based on the previous day's dealings in the
inter-bank foreign exchange market. Financial institutions authorized to deal in
foreign currency may enter into foreign exchange transactions at exchange rates
within an authorized range above or below the PBOC Exchange Rate according to
market conditions.

Pursuant to the Foreign Exchange Control Regulations issued by the
State Council on January 29, 1996 and effective as of April 1, 1996 (and amended
on January 14, 1997) and the Administration of Settlement, Sale and Payment of
Foreign Exchange Regulations which came into effect on July 1, 1996

regarding foreign exchange control, or the Regulations, conversion of Renminbi
into foreign exchange by foreign investment enterprises for current account
items, including the distribution of dividends and profits to foreign investors
of joint ventures, is permissible. Foreign investment enterprises are permitted
to remit foreign exchange from their foreign exchange bank account in China on
the basis of, inter alia, the terms of the relevant joint venture contracts and
the board resolutions declaring the distribution of the dividend and payment of
profits. Conversion of Renminbi into foreign currencies and remittance of
foreign currencies for capital account items, including direct investment,
loans, security investment, is still subject to the approval of the State
Administration of Foreign Exchange, or SAFE, in each such transaction. On
January 14, 1997, the State Council amended the Foreign Exchange Control
Regulations and added, among other things, an important provision, as Article 5
provides that the State shall not impose restrictions on recurring international
payments and transfers.

Under the Regulations, foreign investment enterprises are required to
open and maintain separate foreign exchange accounts for capital account items
(but not for other items). In addition, foreign investment enterprises may only
buy, sell and/or remit foreign currencies at those banks authorized to conduct
foreign exchange business upon the production of valid commercial documents and,
in the case of capital account item transactions, document approval from SAFE.

Currently, foreign investment enterprises are required to apply to SAFE
for "foreign exchange registration certificates for foreign investment
enterprises." With such foreign exchange registration certificates (which are
granted to foreign investment enterprises, upon fulfilling specified conditions
and which are subject to review and renewal by SAFE on an annual basis) or with
the foreign exchange sales notices from the SAFE (which are obtained on a
transaction-by-transaction basis), foreign-invested enterprises may enter into
foreign exchange transactions at banks authorized to conduct foreign exchange
business to obtain foreign exchange for their needs.

E. Taxation

The following summary of the material Cayman Islands and United States
federal income tax consequences relevant to the purchase, ownership or sale of
our ADSs is based upon laws and relevant interpretations thereof in effect as of
the date of this annual report, all of which are subject to change. This summary
does not deal with all possible tax consequences relating to the purchase,
ownership or sale of our ADSs, such as the tax consequences under state, local
and other tax laws. To the extent that the discussion relates to matters of
Cayman Islands tax law, it represents the opinion of Maples and Calder Asia,
special Cayman Islands counsel to us. To the extent the discussion relates to
matters of United States law or legal conclusions and subject to the
qualifications herein, it represents the opinion of Morrison & Foerster LLP, our
special U.S. counsel.

Cayman Islands Taxation

The Cayman Islands currently levies no taxes on individuals or
corporations based upon profits, income, gains or appreciation and there is no
taxation in the nature of inheritance tax or estate duty. There are no other
taxes likely to be material to us levied by the Government of the Cayman Islands
except for stamp duties which may be applicable on instruments executed in, or
after execution brought within the jurisdiction of the Cayman Islands. The
Cayman Islands is not party to any double tax treaties. There are no exchange
control regulations or currency restrictions in the Cayman Islands.

United States Federal Income Taxation

The following discussion is a summary of the material United States
federal income tax considerations that may be relevant to the purchase,
ownership or sale of our shares or ADSs (collectively

referred to in this section as the "shares"). This discussion is based on the
Internal Revenue Code of 1986, as amended, or the Code, U.S. Treasury
regulations promulgated under the Code and published administrative rulings and
pronouncements and judicial decisions, all as of the date hereof. We cannot
assure you that future legislation, administrative rulings or court decisions
will not modify the conclusions set forth in this summary, possibly with
retroactive effect. Except as specifically set forth herein, this discussion
deals only with investors that hold our shares as capital assets within the
meaning of Section 1221 of the Code and that have the U.S. dollar as their
functional currency, and does not address tax considerations applicable to
holders that may be subject to special tax rules, such as:

. banks and financial institutions;

. insurance companies;

. broker dealers;

. traders that elect to mark to market;

. tax-exempt entities;

. persons liable for alternative minimum tax;

. persons holding a share as part of a straddle, hedging,
conversion, constructive sale or integrated transaction; or

. holders that actually or constructively own 10% or more of our
voting stock.

This discussion is of a general nature only and beneficial owners of
the shares are urged to consult their tax advisors about the United States
federal, state, local and foreign tax consequences to them of the purchase,
ownership and sale of the shares.

The discussion below of the United States federal income tax
consequences to "U.S. Holders" will apply if you are the beneficial owner of the
shares and you are:

. a citizen or resident of the United States;

. a corporation or partnership organized under the laws of the
United States, any State or the District of Columbia;

. an estate whose income is subject to United States federal income
taxation regardless of its source;

. a trust that is subject to the supervision of a court within the
United States and the control of one or more United States
persons; or

. a trust that has a valid election in effect under applicable U.S.
Treasury regulations to be treated as a United States person.

If you are not described as a U.S. Holder, you will be considered a "Non-U.S.
Holder." Non-U.S. Holders should consult the discussion below regarding the
United States federal income tax consequences applicable to Non-U.S. Holders.

The Cayman Islands, where we are incorporated, is not a party to any
double tax treaty with the United States.

U.S. Holders

Taxation of Dividends and Other Distributions on the Shares

Subject to the passive foreign investment company rules discussed
below, which may apply to you, all our distributions to you with respect to the
shares, other than certain pro rata distributions of the shares, will be
includible in your gross income as ordinary dividend income when you receive the
distribution, but only to the extent that the distribution is paid out of our
current or accumulated earnings and profits. For this purpose, earnings and
profits will be computed under United States federal income tax principles. The
dividends will not be eligible for the dividends-received deduction allowed to
corporations. To the extent that the amount of the distribution exceeds our
current and accumulated earnings and profits, it will be treated first as a
tax-free return of your tax basis in the shares, and to the extent the amount of
the distribution exceeds your tax basis, the excess will be taxed as capital
gain.

Dividends paid in Renminbi will be included in your income as a U.S.
dollar amount based on the exchange rate in effect on the date that you receive
the dividend, regardless of whether the payment is in fact converted into U.S.
dollars. If you do not receive U.S. dollars on the date the dividend is
distributed, you will be required to include either gain or loss in income when
you later exchange the Renminbi for U.S. dollars. The gain or loss will be equal
to the difference between the U.S. dollar value of the amount that you include
in income when you receive the dividend and the amount that you receive when you
actually exchange the Renminbi for U.S. dollars. The gain or loss generally will
be ordinary income or loss from United States sources. If we distribute to you
non-cash property, you will include in income an amount equal to the U.S. dollar
equivalent of the fair market value of the property on the date that it is
distributed.

Dividends will constitute foreign source income for foreign tax credit
limitation purposes. The limitation on foreign taxes eligible for credit is
calculated separately with respect to specific classes of income. For this
purpose, dividends distributed by us with respect to the shares will be "passive
income" or, in the case of certain U.S. Holders, "financial services income."
Special rules apply to individuals whose foreign source income during the
taxable year consists entirely of "qualified passive income" and whose
creditable foreign taxes paid or accrued during the taxable year do not exceed
$300 ($600 in the case of a joint return). Further, in particular circumstances,
a U.S. Holder that (i) has held the shares for less than a specified minimum
period during which it is not protected from risk of loss, (ii) is obligated to
make payments related to the dividends, or (iii) holds the shares in
arrangements in which the U.S. Holder's expected economic profit, after non-U.S.
taxes, is insubstantial will not be allowed a foreign tax credit for foreign
taxes imposed on dividends paid on the shares.

You will not be eligible for a foreign tax credit against your U.S.
federal income tax liability for taxes paid by us that are deemed under Chinese
law to have been paid by our shareholders.

Distributions to you of shares or rights to subscribe for shares that
are received as part of a pro rata distribution to all our shareholders should
not be subject to United States federal income tax. The basis of your new shares
or rights so received will be determined by allocating your basis in the old
shares between the old shares and the new shares or rights received, based on
their relative fair market values on the date of distribution. However, the
basis of the new shares or rights will be zero if (i) the fair market value of
the new shares or rights is less than 15% of the fair market value of the old
shares at the time of distribution and (ii) the U.S. Holder does not make an
election to determine the basis of the new shares by allocation as described
above. Your holding period in the new shares or rights will generally include
the

holding period of the old shares on which the distribution was made.

For U.S. federal income tax purposes, the holders of our ADSs will be
treated as the beneficial owners of the ordinary shares represented by those
ADSs.

Taxation of Disposition of Shares

Subject to the passive foreign investment company rules discussed
below, which may apply to you, you will recognize taxable gain or loss on any
sale or exchange of a share equal to the difference between the amount realized
(in U.S. dollars) for the share and your tax basis (in U.S. dollars) in the
share. The gain or loss will be capital gain or loss. If you are an individual
who has held the share for more than one year, you will be eligible for reduced
rates of taxation (generally 15%). You may deduct any loss resulting from the
sale or exchange of a share only against other capital gains. If you are an
individual, up to US$3,000 of capital loss in excess of your capital gains may
be deducted against ordinary income. Excess losses may be carried forward. Any
gain or loss that you recognize will generally be treated as United States
source income or loss, except that losses will be treated as foreign source
losses to the extent you received dividends that were includible in the
financial services income basket during the 24-month period prior to the sale.

Passive Foreign Investment Company

We believe we were a passive foreign investment company for United
States federal income tax purposes for the taxable years ended on December 31st
of 2000, 2001 and 2002, and we cannot be certain whether we will be treated as a
passive foreign investment company for the taxable year ending on December 31st
of 2003. U.S. Holders who owned shares during any taxable years during which we
were a passive foreign investment company generally will be subject to increased
U.S. tax liabilities and reporting requirements for those taxable years and all
succeeding years, regardless of whether we continue to be a passive foreign
investment company for the 2003 taxable year and any subsequent years, although
a shareholder election, described below, to terminate such deemed passive
foreign investment company status may be made in certain circumstances. The same
adverse U.S. tax consequences will apply to U.S. Holders who acquire the shares
during the 2003 or any subsequent taxable year if we are treated as a passive
foreign investment company for that taxable year. U.S. Holders should consult
their own tax advisors regarding our status as a passive foreign investment
company, the consequences of an investment in a passive foreign investment
company, and the consequences of making a shareholder election to terminate
deemed passive foreign investment company status if we no longer meet the income
or asset test for passive foreign investment company status in the 2003 taxable
year.

A company is considered a passive foreign investment company for any
taxable year if either

. at least 75% of its gross income is passive income, or

. at least 50% of the value of its assets (based on an average of
the quarterly values of the assets during a taxable year) is
attributable to assets that produce or are held for the
production of passive income.

We will be treated as owning our proportionate share of the assets and earning
our proportionate share of the income of any other corporation in which we own,
directly or indirectly, more than 25% (by value) of the stock.

The determination that we were a passive foreign investment
company for the 2000, 2001 and 2002 taxable years is based on

our valuations of our assets, including goodwill. In calculating goodwill, we
have valued our total assets based on our total market value determined using
the average of the quarterly selling prices of the shares for the relevant year
and have made a number of assumptions regarding the amount of this value
allocable to goodwill. We believe our valuation approach is reasonable. However,
it is possible that the Internal Revenue Service, or IRS, will challenge the
valuation of our goodwill, which may result in it becoming even more likely that
we would be classified as a passive foreign investment company for the 2000,
2001, 2002 and 2003 taxable years as well as for subsequent years. In addition,
if our actual acquisitions and capital expenditures do not match our
projections, the likelihood that we are or will be classified as a passive
foreign investment company may also increase.

We must make a separate determination each year as to whether we are a
passive foreign investment company. As a result, our passive foreign investment
company status may change.

If we are a passive foreign investment company for any taxable year
during which you hold shares, you will be subject to special tax rules with
respect to any "excess distribution" that you receive and any gain you realize
from a sale or other disposition (including a pledge) of the shares, unless you
make a "mark-to-market" election as discussed below. Distributions you receive
in a taxable year that are greater than 125% of the average annual distributions
you received during the shorter of the three preceding taxable years or your
holding period for the shares will be treated as an excess distribution. Under
these special tax rules

. the excess distribution or gain will be allocated ratably over
your holding period for the shares,

. the amount allocated to the current taxable year, and any taxable
year prior to the first taxable year in which we were a passive
foreign investment company, will be treated as ordinary income,
and

. the amount allocated to each other year will be subject to tax at
the highest tax rate in effect for that year and the interest
charge generally applicable to underpayments of tax will be
imposed on the resulting tax attributable to each such year.

The tax liability for amounts allocated to years prior to the year of
disposition or "excess distribution" cannot be offset by any net operating
losses, and gains (but not losses) realized on the sale of the shares cannot be
treated as capital, even if you hold the shares as capital assets.

If you held shares during any of the 2000, 2001 and 2002 taxable years
when we were likely a passive foreign investment company, then we will continue
to be treated as a passive foreign investment company with respect to your
shares, even if we are no longer by definition a passive foreign investment
company. You may terminate this deemed passive foreign investment company status
by making a "deemed sale" election under Section 1298(b)(1) of the Code. If you
make a deemed sale election, you will recognize gain (if any) on the deemed sale
of the shares on the last day of the last taxable year in which we qualified as
a passive foreign investment company. The result of this election is: (1) your
tax basis in the shares will increase by the amount of gain recognized; (2) you
will start a new holding period with respect to the shares (for passive foreign
investment company purposes only); and (3) you will no longer be subject to the
excess distribution rules discussed immediately above with respect to the
shares. The deemed sale election is made on IRS Form 8621 part of an amended
income tax return for your taxable year that includes the date on which we cease
to qualify as a passive foreign investment company.

If we are a passive foreign investment company, you may avoid taxation
under the excess distribution rules discussed two paragraphs above by making a
"qualified electing fund" election to

include your share of our income on a current basis. However, you may make a
qualified electing fund election only if we agree to furnish you annually with
certain tax information, and we do not presently intend to prepare or provide
such information.

Alternatively, a U.S. Holder of "marketable stock" in a passive foreign
investment company may make a mark-to-market election for stock of a passive
foreign investment company to elect out of the excess distribution rules
discussed three paragraphs above. If you make a mark-to-market election for the
shares, you will include in income each year an amount equal to the excess, if
any, of the fair market value of the shares as of the close of your taxable year
over your adjusted basis in such shares. You are allowed a deduction for the
excess, if any, of the adjusted basis of the shares over their fair market value
as of the close of the taxable year. However, deductions are allowable only to
the extent of any net mark-to-market gains on the stock included in your income
for prior taxable years. Amounts included in your income under a mark-to-market
election, as well as gain on the actual sale or other disposition of the shares,
are treated as ordinary income. Ordinary loss treatment also applies to the
deductible portion of any mark-to-market loss on the shares, as well as to any
loss realized on the actual sale or disposition of the shares, to the extent
that the amount of such loss does not exceed the net mark-to-market gains
previously included for such shares. Your basis in the shares will be adjusted
to reflect any such income or loss amounts. The tax rules that apply to
distributions by corporations which are not passive foreign investment companies
would apply to distributions by us.

The mark-to-market election is available only for stock which is
regularly traded on a national securities exchange that is registered with the
Securities and Exchange Commission or on Nasdaq, or an exchange or market that
the U.S. Secretary of the Treasury determines has rules sufficient to ensure
that the market price represents a legitimate and sound fair market value. The
mark-to-market election would be available to you unless our ADSs are delisted
from the Nasdaq National Market and do not subsequently become regularly traded
on the Nasdaq SmallCap Market or other qualified exchange or market.

If you hold shares in any year in which we are a passive foreign
investment company, you would be required to file IRS Form 8621 regarding
distributions received on the shares and any gain realized on the disposition of
the shares.

Non-U.S. Holders

If you are a Non-U.S. Holder, you generally will not be subject to
United States federal income tax on dividends paid by us unless the income is
effectively connected with your conduct of a trade or business in the United
States.

You generally will not be subject to United States federal income tax
on any gain attributable to a sale or other disposition of the shares unless
such gain is effectively connected with your conduct of a trade or business
within the United States or you are a natural person who is present in the
United States for 183 days or more and certain other conditions exist.

Dividends and gains that are effectively connected with your conduct of
a trade or business in the United States generally will be subject to tax in the
same manner as they would be if you were a U.S. Holder except for the rules
regarding passive foreign investment companies. Effectively connected dividends
and gains received by a corporate Non-U.S. Holder may also be subject to an
additional branch profits tax at a 30% rate or a lower tax treaty rate.

Information Reporting and Backup Withholding

In general, information reporting requirements will apply to dividends
in respect of the shares or

the proceeds received on the sale, exchange or redemption of shares paid within
the U.S. (and, in certain cases, outside the United States) to U.S. Holders
other than certain exempt recipients, such as corporations, and a 28% backup
withholding tax may apply to such amounts if the U.S. Holder fails to provide an
accurate taxpayer identification number or to report interest and dividends
required to be shown on its U.S. federal income tax returns. The amount of any
backup withholding from a payment to a U.S. Holder will be allowed as credit
against the U.S. Holder's U.S. federal income tax liability provided that the
appropriate returns are filed.

A Non-U.S. Holder generally may eliminate the requirement for
information reporting and backup withholding by providing certification of its
foreign status to the payor, under penalties of perjury, on IRS Form W-8BEN.

Enforcement of Civil Liabilities

We are incorporated in the Cayman Islands because of the following
benefits found there:

. political and economic stability;

. an effective judicial system;

. a favorable tax system;

. the absence of exchange control or currency restrictions; and

. the availability of professional and support services.

However, certain disadvantages accompany incorporation in the Cayman
Islands. These disadvantages include:

(1) the Cayman Islands has a less developed body of securities
laws as compared to the United States and provides significantly less
protection to investors; and

(2) Cayman Islands companies may not have standing to sue
before the federal courts of the United States.

Our constituent documents do not contain provisions requiring that
disputes, including those arising under the securities laws of the United
States, between us, our officers, directors and shareholders be arbitrated.

A substantial portion of our current operations is conducted in China
through NetEase Beijing, our wholly-owned Chinese subsidiary. All or most of our
assets are located in China. We have appointed CT Corporation System, 111 Eighth
Avenue, New York, NY 10011, as our agent upon whom process may be served in any
action brought against us under the securities laws of the United States. A
majority of our directors and officers are nationals or residents of
jurisdictions other than the United States and a substantial portion of their
assets are located outside the United States. As a result, it may be difficult
for a shareholder to effect service of process within the United States upon
these persons, or to enforce against us or them judgments obtained in United
States courts, including judgments predicated upon the civil liability
provisions of the securities laws of the United States or any state in the
United States.

Maples and Calder Asia, our counsel as to Cayman Islands law, and
Commerce & Finance Law Office, our counsel as to Chinese law, have advised us
that there is uncertainty as to whether the courts of the Cayman Islands or
China would:

(1) recognize or enforce judgments of United States courts
obtained against us or our directors or officers predicated upon the
civil liability provisions of the securities laws of the United States
or any state in the United States; or

(2) entertain original actions brought in the Cayman Islands
or China against us or our directors or officers predicated upon the
securities laws of the United States or any state in the United States.

Maples and Calder Asia has further advised us that a final and
conclusive judgment in the federal or state courts of the United States under
which a sum of money is payable, other than a sum payable in respect of taxes,
fines, penalties or similar charges, may be subject to enforcement proceedings
as a debt in the courts of the Cayman Islands under the common law doctrine of
obligation.

Commerce & Finance Law Office has advised us further that the
recognition and enforcement of foreign judgments are provided for under Chinese
Civil Procedures Law. Chinese courts may recognize and enforce foreign judgments
in accordance with the requirements of Chinese Civil Procedures Law based either
on treaties between China and the country where the judgment is made or on
reciprocity between jurisdictions.

F. Dividends and Paying Agents

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

We have previously filed with the Commission our registration statement
on Form F-1 and prospectus under the Securities Act of 1933, as amended, with
respect to our ADSs.

We are subject to the periodic reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended, or the Exchange
Act. Under the Exchange Act, we are required to file reports and other
information with the Securities and Exchange Commission. Specifically, we are
required to file annually a Form 20-F no later than six months after the close
of each fiscal year, which is December 31. Copies of reports and other
information, when so filed, may be inspected without charge and may be obtained
at prescribed rates at the public reference facilities maintained by the
Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional office of the Securities and
Exchange Commission located at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. The public may obtain information regarding the
Washington, D.C. Public Reference Room by calling the Commission at
1-800-SEC-0330. The SEC also maintains a Web site at www.sec.gov that contains
reports, proxy and information statements, and other information regarding
registrants that make electronic filings with the SEC using its EDGAR system. As
a foreign private issuer, we are exempt from the rules under the Exchange Act
prescribing the furnishing and content of quarterly reports and proxy
statements, and officers, directors and principal shareholders

are exempt from the reporting and short-swing profit recovery provisions
contained in Section 16 of the Exchange Act.

Our financial statements have been prepared in accordance with U.S.
GAAP.

We will furnish our shareholders with annual reports, which will
include a review of operations and annual audited consolidated financial
statements prepared in conformity with U.S. GAAP.

I. Subsidiary Information

Not applicable.

Item 11. Quantitative and Qualitative Disclosures About Market Risk

Please refer to Item 5. "Operating and Financial Review and Prospects--
Quantitative and Qualitative Disclosures About Market Risk."

Item 12. Description of Securities Other than Equity Securities

Not Applicable.

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

Not Applicable.

Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds

Use of Proceeds

The following "Use of Proceeds" information relates to the registration
statement on Form F-1 (File No. 333-11724) (the "Registration Statement") for
our initial public offering of 4,500,000 American Depositary Shares, each
representing 100 of our ordinary shares, for an aggregate offering price of
US$69.75 million. Our Registration Statement was declared effective by the
Commission on June 29, 2000.

We received net proceeds of approximately US$64.9 million from our
initial public offering (taking into account underwriting discounts of US$4.88
million, but not taking into account transaction expenses of approximately
US$2.7 million). None of the transaction expenses included payments to directors
or officers of our company, persons owning 10% or more of our equity securities
or our affiliates.

From the effective date of the Registration Statement to July 6, 2000,
we did not use any of the proceeds from our initial public offering. Since July
6, 2000, we have used the net proceeds from our initial public offering to
satisfy past indebtedness and reduce our accounts payable and to fund expenses
primarily for marketing, employee compensation, and capital expenditures.

Merrill Lynch Far East Limited, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Deutsche Bank Securities Inc., Chase Securities Inc., Salomon
Smith Barney Inc., and UBS Warburg LLC were the underwriters for our initial
public offering.

Item 15. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Ted Sun, our Acting Chief Executive Officer, and Denny Lee, our Chief
Financial Officer, have performed an evaluation of our disclosure controls and
procedures, as that term is defined in Rules 13a-14(c) and 15d-14(c) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), within 90 days
of the date of this report and each has concluded that such disclosure controls
and procedures are effective to ensure that information required to be disclosed
in our periodic reports filed under the Exchange Act is recorded, processed,
summarized and reported, within the time period specified by the Securities and
Exchange Commission's rules and regulations.

Changes in Internal Controls

No significant changes in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of the
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses, were made as a result of the evaluation.

Item 16. [Reserved]

PART III

Item 17. Financial Statements

The Company has elected to provide financial statements pursuant to Item
18.

Item 18. Financial Statements

The consolidated financial statements for NetEase.com, Inc. and its
subsidiaries are included at the end of this annual report.

Item 19. Exhibits

Exhibit
Number Document
------ --------

1.1 Amended and Restated Memorandum of Association of NetEase.com, Inc.
(incorporated by reference to Exhibit 3.1 from Amendment No. 1 to the
company's Registration Statement on Form F-1 (file no. 333-11724) filed
with the Securities and Exchange Commission on May 15, 2000)

1.2 Amended and Restated Articles of Association of NetEase.com, Inc.
(incorporated by reference to Exhibit 3.2 from Amendment No. 1 to the
company's Registration Statement on Form F-1 (file no. 333-11724) filed
with the Securities and Exchange Commission on May 15, 2000)

1.3 Amendment to Amended and Restated Articles of Association of
NetEase.com, Inc. dated as of June 5, 2003

2.1 Specimen American Depositary Receipt of NetEase.com, Inc. (incorporated
by reference to Exhibit 4.1 from Amendment No. 1 to the company's
Registration Statement on Form F-1 (file no. 333-11724) filed with the
Securities and Exchange Commission on May 15, 2000)

2.2 Specimen Stock Certificate of NetEase.com, Inc. (incorporated by
reference to Exhibit 4.2 from Amendment No. 1 to the company's
Registration Statement on Form F-1 (file no. 333-11724) filed with the
Securities and Exchange Commission on May 15, 2000)

3.1 Shareholder Voting Rights Trust Agreement dated May 12, 2000 among
William Lei Ding, Bo Ding and NetEase Information Technology (Beijing)
Co., Ltd. (incorporated by reference to Exhibit 10.40 from Amendment
No. 1 to the company's Registration Statement on Form F-1 (file no.
333-11724) filed with the Securities and Exchange Commission on May 15,
2000)

4.1 1999 Stock Incentive Plan and Form of Stock Option Agreement
(incorporated by reference to Exhibit 10.1 from the company's
Registration Statement on Form F-1 (file no. 333-11724) filed with the
Securities and Exchange Commission on March 27, 2000)

4.2 Amended and Restated 2000 Stock Incentive Plan and Form of Stock Option
Agreement (including standard and non-standard form) (incorporated by
reference to Exhibit 4.2 from the company's Annual Report on Form 20-F
for the year ended December 31, 2000 filed with the Securities and
Exchange Commission on August 31, 2001)

4.3 Employment Agreement dated August 13, 1999 between NetEase.com, Inc.
and William Lei Ding (incorporated by reference to Exhibit 10.2 from
the company's Registration Statement on Form F-1 (file no. 333-11724)
filed with the Securities and Exchange Commission on March 27, 2000)

4.4 Addendum to Employment Agreement between NetEase.com, Inc. and William
Ding dated May 1, 2003

4.5 Employment Agreement dated April 1, 2002 between NetEase.com, Inc. and
Denny Lee

4.6 Employment Agreement dated September 11, 2001 between NetEase.com, Inc.
and Ted Sun (incorporated by reference to Exhibit 4.6 from the
company's Annual Report on Form 20-F for the year ended December 31,
2001 filed with the Securities and Exchange Commission on June 21,
2002)

4.7 Employment Agreement dated June 25, 2003 between NetEase.com, Inc. and
Michael Tong

4.8 Asset Purchase Agreement dated September 1, 1999 between Guangzhou
NetEase Computer System Co., Ltd. and NetEase Information Technology
(Beijing) Co., Ltd. (incorporated by reference to Exhibit 10.4 from the
company's Registration Statement on Form F-1 (file no. 333-11724) filed
with the Securities and Exchange Commission on March 27, 2000)

4.9 Supplemental Agreement to Asset Purchase Agreement dated as of
September 24, 1999 between Guangzhou NetEase Computer System Co., Ltd.
and NetEase Information Technology (Beijing) Co., Ltd. (incorporated by
reference to Exhibit 10.5 from the company's Registration Statement on
Form F-1 (file no. 333-11724) filed with the Securities and Exchange
Commission on March 27, 2000)

4.10 Domain Name License Agreement dated February 3, 2000 between
NetEase.com, Inc. and Guangzhou NetEase Computer System Co., Ltd.
(incorporated by reference to Exhibit 10.7 from the company's
Registration Statement on Form F-1 (file no. 333-11724) filed with the
Securities and Exchange Commission on March 27, 2000)

4.11 Copyright License Agreement dated February 3, 2000 between NetEase
Information Technology (Beijing) Co., Ltd. and Guangzhou NetEase
Computer System Co., Ltd. (incorporated by reference to Exhibit 10.8
from the company's Registration Statement on

Form F-1 (file no. 333-11724) filed with the Securities and Exchange
Commission on March 27, 2000)

4.12 Trademark License Agreement dated February 3, 2000 between NetEase
Information Technology (Beijing) Co., Ltd. and Guangzhou NetEase
Computer System Co., Ltd. (incorporated by reference to Exhibit 10.9
from the company's Registration Statement on Form F-1 (file no.
333-11724) filed with the Securities and Exchange Commission on March
27, 2000)

4.13 Supplemental Agreement (to Copyright License Agreement, Domain Name
License Agreement and Exclusive Technical Services Master Agreement)
dated April 27, 2000 between NetEase Information Technology (Beijing)
Co., Ltd. and Guangzhou NetEase Computer System Co., Ltd. (incorporated
by reference to Exhibit 10.10 from Amendment No. 1 to the company's
Registration Statement on Form F-1 (file no. 333-11724) filed with the
Securities and Exchange Commission on May 15, 2000)

4.14 Exclusive Technical Services Master Agreement dated February 3, 2000
between NetEase Information Technology (Beijing) Co., Ltd. and
Guangzhou NetEase Computer System Co., Ltd. (incorporated by reference
to Exhibit 10.11 from the company's Registration Statement on Form F-1
(file no. 333-11724) filed with the Securities and Exchange Commission
on March 27, 2000)

4.15 Notice of Renewal dated April 2, 2001 relating to the Copyright License
Agreement, the Trademark License Agreement and the Exclusive Technical
Services Master Agreement, each dated February 3, 2000 and made between
NetEase Information Technology (Beijing) Co., Ltd. and Guangzhou
NetEase Computer System Co., Ltd. (incorporated by reference to Exhibit
4.14 from the company's Annual Report on Form 20-F for the year ended
December 31, 2000 filed with the Securities and Exchange Commission on
August 31, 2001)

4.16 Exclusive Consulting and Services Agreement dated February 3, 2000
between NetEase Information Technology (Beijing) Co., Ltd. and Beijing
Guangyitong Advertising Co., Ltd. (incorporated by reference to Exhibit
10.12 from the company's Registration Statement on Form F-1 (file no.
333-11724) filed with the Securities and Exchange Commission on March
27, 2000)

4.17 Notice of Renewal dated April 2, 2001 relating to the Exclusive
Consulting and Services Agreement dated February 3, 2000 and made
between NetEase Information Technology (Beijing) Co., Ltd. and Beijing
Guangyitong Advertising Co., Ltd. (incorporated by reference to Exhibit
4.16 from the company's Annual Report on Form 20-F for the year ended
December 31, 2000 filed with the Securities and Exchange Commission on
August 31, 2001)

4.18 Exclusive Advertising Agency Agreement dated February 3, 2000 between
Guangzhou NetEase Computer System Co., Ltd. and NetEase.com, Inc.
(incorporated by reference to Exhibit 10.13 from the company's
Registration Statement on Form F-1 (file no. 333-11724) filed with the
Securities and Exchange Commission on March 27, 2000)

4.19 Notice of Renewal dated April 2, 2001 relating to the Exclusive
Advertising Agency Agreement dated February 3, 2000 between Guangzhou
NetEase Computer System Co., Ltd. and NetEase.com, Inc. (incorporated
by reference to Exhibit 4.18 from the company's Annual Report on Form
20-F for the year ended December 31, 2000 filed with the Securities and
Exchange Commission on August 31, 2001)

4.20 Trademark Transfer Agreement dated March 29, 2000 between Guangzhou
NetEase Computer System Co., Ltd. and NetEase Information Technology
(Beijing) Co., Ltd. (incorporated by reference to Exhibit 10.14 from
Amendment No. 1 to the company's Registration Statement on Form F-1
(file no. 333-11724) filed with the Securities and

Exchange Commission on May 15, 2000)

4.21 Online Advertising Agreement dated February 15, 2000 between Guangzhou
NetEase Computer System Co., Ltd. and Beijing Guangyitong Advertising
Co., Ltd. (incorporated by reference to Exhibit 10.15 from the
company's Registration Statement on Form F-1 (file no. 333-11724) filed
with the Securities and Exchange Commission on March 27, 2000)

4.22 Notice of Renewal dated April 2, 2001 relating to the Online
Advertising Agreement dated February 15, 2000 and made between
Guangzhou NetEase Computer System Co., Ltd. and Beijing Guangyitong
Advertising Co., Ltd. (incorporated by reference to Exhibit 4.21 from
the company's Annual Report on Form 20-F for the year ended December
31, 2000 filed with the Securities and Exchange Commission on August
31, 2001)

4.23 Amended and Restated Investors' Rights Agreement, dated March 28, 2000
among NetEase.com, Inc., Baring Asia Private Equity Investments XI
Limited, The Goldman Sachs Group, Inc., Softbank China Venture
Investments No. 1 Limited, Best Alliance Profits Limited and Shining
Globe International Limited (incorporated by reference to Exhibit 10.16
from the company's Registration Statement on Form F-1 (file no.
333-11724) filed with the Securities and Exchange Commission on March
27, 2000)

4.24 Tenancy Agreement dated October 31, 2002 between NetEase Information
Technology (Beijing) Co., Ltd. and Beijing Oriental Plaza Co., Ltd.

4.25 Strategic Cooperation Agreement dated March 23, 2000 between
NetEase.com, Inc. and News Digital Ventures (incorporated by reference
to Exhibit 10.23 from the company's Registration Statement on Form F-1
(file no. 333-11724) filed with the Securities and Exchange Commission
on March 27, 2000)

4.26 Amendment No. 1 dated June 22, 2000 to the Strategic Cooperation
Agreement between NetEase.com, Inc. and News Digital Ventures
(incorporated by reference to Exhibit 4.26 from the company's Annual
Report on Form 20-F for the year ended December 31, 2000 filed with the
Securities and Exchange Commission on August 31, 2001)

4.27 Amendment No. 2 dated September 1, 2000 to the Strategic Cooperation
Agreement between NetEase.com, Inc. and News Digital Ventures
(incorporated by reference to Exhibit 4.27 from the company's Annual
Report on Form 20-F for the year ended December 31, 2000 filed with the
Securities and Exchange Commission on August 31, 2001)

4.28 Letter Agreement dated as of February 24, 2003 regarding the Strategic
Cooperation Agreement between NetEase.com, Inc. and News Digital
Ventures

4.29 Supplemental Agreement dated May 10, 2000 (amending the Domain Name
License Agreement) between NetEase.com, Inc. and Guangzhou NetEase
Computer System Co., Ltd. (incorporated by reference to Exhibit 10.37
from Amendment No. 1 to the company's Registration Statement on Form
F-1 (file no. 333-11724) filed with the Securities and Exchange
Commission on May 15, 2000)

4.30 Agreement dated May 11, 2000 between NetEase Information Technology
(Beijing) Co., Ltd. and Guangzhou NetEase Computer System Co., Ltd.
(incorporated by reference to Exhibit 10.41 from Amendment No. 1 to the
company's Registration Statement on Form F-1 (file no. 333-11724) filed
with the Securities and Exchange Commission on May 15, 2000)

4.31 Operating Agreement dated May 10, 2000 among NetEase Information
Technology (Beijing) Co., Ltd., Beijing Guangyitong Advertising Co.,
Ltd., Bo Ding and William Lei Ding (incorporated by reference to
Exhibit 10.42 from Amendment No. 1 to the company's Registration
Statement on Form F-1 (file no. 333-11724) filed with the Securities
and

Exchange Commission on May 15, 2000)

4.32 Supplemental Agreement dated May 12, 2000 (supplementing the Online
Advertising Agreement dated February 15, 2000) between Guangzhou
NetEase Computer System Co., Ltd. and Beijing Guangyitong Advertising
Co., Ltd. (incorporated by reference to Exhibit 10.47 from Amendment
No. 1 to the company's Registration Statement on Form F-1 (file no.
333-11724) filed with the Securities and Exchange Commission on May 15,
2000)

4.33 Supplemental Agreement dated May 15, 2000 (supplementing the Domain
Name License Agreement dated February 3, 2000) between NetEase.com,
Inc. and Guangzhou NetEase Computer System Co., Ltd. (incorporated by
reference to Exhibit 10.48 from Amendment No. 1 to the company's
Registration Statement on Form F-1 (file no. 333-11724) filed with the
Securities and Exchange Commission on May 15, 2000)

4.34 Letter of Agreement, dated June 6, 2000, among William Lei Ding, Bo
Ding and NetEase.com, Inc. (incorporated by reference to Exhibit 10.49
from Amendment No. 2 to the company's Registration Statement on Form
F-1 (file no. 333-11724) filed with the Securities and Exchange
Commission on June 15, 2000)

4.35 Supplemental Agreement dated June 15, 2000 (supplementing the Online
Advertising Agreement dated February 15, 2000), between Beijing
Guangyitong Advertising Co., Ltd. and Guangzhou NetEase Computer System
Co., Ltd. (incorporated by reference to Exhibit 10.50 from Amendment
No. 2 to the company's Registration Statement on Form F-1 (file no.
333-11724) filed with the Securities and Exchange Commission on June
15, 2000)

4.36 Supplemental Agreement dated June 15, 2000 (supplementing the Exclusive
Consulting and Services Agreement dated February 3, 2000), between
NetEase Information Technology (Beijing) Co., Ltd. and Beijing
Guangyitong Advertising Co., Ltd. (incorporated by reference to Exhibit
10.51 from Amendment No. 2 to the company's Registration Statement on
Form F-1 (file no. 333-11724) filed with the Securities and Exchange
Commission on June 15, 2000)

4.37 Trademark Assignment Agreement dated August 17, 2001 between Guangzhou
NetEase Computer System Co., Ltd. and NetEase Information Technology
(Beijing) Co., Ltd and its Supplemental Agreement dated August 27, 2001
(incorporated by reference to Exhibit 4.53 from the company's Annual
Report on Form 20-F for the year ended December 31, 2000 filed with the
Securities and Exchange Commission on August 31, 2001)

8.1 Subsidiaries of NetEase.com, Inc.

10.1 Consent of PricewaterhouseCoopers, Independent Public Accountants

10.2 Consent of Maples and Calder Asia

10.3 Consent of Commerce & Finance Law Office

99.1 CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002

99.2 CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002

SIGNATURES

The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.

NETEASE.COM, INC.

By: /s/ Ted Sun
-------------------------------------
Ted Sun
Acting Chief Executive Officer

CERTIFICATION

I, Ted Sun, Acting Chief Executive Officer of NetEase.com, Inc., certify
that:

1. I have reviewed this annual report on Form 20-F of NetEase.com, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Dated: June 26, 2003

By: /s/ Ted Sun
---------------------------
Ted Sun
Acting Chief Executive Officer

100

CERTIFICATION

I, Denny Lee, Chief Financial Officer of NetEase.com, Inc., certify that:

1. I have reviewed this annual report on Form 20-F of NetEase.com, Inc.;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

Dated: June 26, 2003

By: /s/ Denny Lee
------------------------------
Denny Lee
Chief Financial Officer

101

NETEASE.COM, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of independent public accountants ................................................................. F-2 - F3

Consolidated balance sheets at December 31, 2001 and 2002 ................................................. F-4

Consolidated statements of operations and comprehensive income (loss) for the years
ended December 31, 2000, 2001 and 2002 ........................................................... F-5 - F-6

Consolidated statements of shareholders' equity for the years ended
December 31, 2000, 2001 and 2002 ................................................................. F-7 - F-8

Consolidated statements of cash flows for the years ended December 31, 2000, 2001 and 2002 ................ F-9 - F-10

Notes to the consolidated financial statements ............................................................ F-11 - F-36

F-1

Reports of Independent Public Accountants

To the Board of Directors and Shareholders of NetEase.com, Inc.:

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and comprehensive income, of shareholders'
equity and of cash flows expressed in Chinese Renminbi ("RMB") present fairly,
in all material respects, the financial position of NetEase.com, Inc. as of
December 31, 2002, and the results of its operations and its cash flows for the
year ended December 31, 2002, in conformity with generally accepted accounting
principles in the United States of America. These financial statements are the
responsibility of NetEase.com, Inc.'s management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with generally accepted
auditing standards in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion. The
financial statements of NetEase.com, Inc. as of December 31, 2001 and for each
of the two years ended December 31, 2000 and 2001 were audited by other
independent accountants who have ceased operations. Those independent
accountants expressed an unqualified opinion on those financial statements in
their report dated April 2, 2002.

/s/ PricewaterhouseCoopers

Beijing, People's Republic of China
April 7, 2003

F-2

The following report is a copy of a report previously issued by Arthur Andersen
.. Hua Qiang and has not been reissued by Arthur Andersen . Hua Qiang

To the Board of Directors and Shareholders of NetEase.com, Inc.:

We have audited the accompanying consolidated balance sheets of NetEase.com,
Inc. (a Cayman Islands corporation) as of December 31, 2000 and 2001 and the
related consolidated statements of operations and comprehensive loss,
shareholders' equity and cash flows for the years ended December 31, 1999, 2000
and 2001 expressed in Chinese Renminbi ("RMB"). These financial statements are
the responsibility of NetEase. com, Inc.'s management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NetEase.com, Inc. as
of December 31, 2000 and 2001 and the results of its operations and its cash
flows for the years ended December 31, 1999, 2000 and 2001 in conformity with
generally accepted accounting principles in the United States of America.

Without qualifying our opinion, we draw attention to Note 17 to the consolidated
financial statements which indicates that the Company and certain of its current
and former officers and directors are defendants of four substantially identical
purported class action complaints alleging violations of the federal securities
laws and committing securities fraud in the United States District Court for the
Southern District of New York. At the present time, the Company cannot estimate
what damages, if any, may be payable in connection with this litigation. The
ultimate resolution of this matter may have a material adverse impact on the
results of operations in the period in which it is resolved.

ARTHUR ANDERSEN . HUA QIANG
Beijing, People's Republic of China
April 2, 2002

F-3

Consolidated Balance Sheets

December 31, December 31, December 31,
Note 2001 2002 2002
----------------------------------------------------------
RMB RMB US$

Assets
Current assets:
Cash 479,608,534 560,069,711 67,641,269
Restricted cash 4 90,308,448 1,208,305 145,931
Temporary cash investments 45,521,300 - -
Prepayments and other current assets 5 9,136,362 6,110,689 738,006
Due from related parties, net of allowance for
doubtful accounts of RMB7,447,775 and RMB8,703,307
(US$1,051,124) at December 31, 2001 and 2002,
respectively 6 2,290,204 22,448,509 2,711,173
---------------------------------------------------
Total current assets 626,864,848 589,837,214 71,236,379
Non-current rental deposit 1,087,487 1,065,912 128,733
Investment in convertible preference shares 7 9,701,293 - -
Property, equipment and software, net 8 36,356,088 26,379,182 3,185,892
Deferred asset 783,352 - -
Deferred tax assets 11 - 2,395,888 289,358
---------------------------------------------------
Total assets 674,793,068 619,678,196 74,840,362
===================================================

Liabilities & Shareholders' Equity
Current liabilities:
Short-term bank loans 9 84,000,000 - -
Accounts payable 13,116,442 3,814,614 460,702
Salary and welfare payable 10 9,936,211 16,023,380 1,935,191
Taxes payable 11 1,772,931 8,252,950 996,733
Deferred revenue - 165,115 19,941
Accrued liabilities 12 10,937,950 10,398,385 1,255,844
---------------------------------------------------
Total current liabilities 119,763,534 38,654,444 4,668,411
---------------------------------------------------
Commitments and contingencies 18
Shareholders' equity:
Ordinary shares, US$0.0001 par value:
1,000,000,000,000 shares authorized,
3,024,175,192 shares issued and
outstanding as of December 31, 2001, and
3,100,162,537 shares issued and
outstanding as of December 31, 2002 14 2,503,626 2,566,543 309,969
Additional paid-in capital 14 1,044,889,829 1,049,651,354 126,769,488
Less: Subscriptions receivable 13 (35,100,568) (33,113,848) (3,999,257)
Deferred compensation 15 (3,344,574) (474,739) (57,336)
Translation adjustments 217,327 228,910 27,646
Accumulated deficit (454,136,106) (437,834,468) (52,878,559)
---------------------------------------------------
Total shareholders' equity 555,029,534 581,023,752 70,171,951
---------------------------------------------------
Total liabilities and shareholders' equity 674,793,068 619,678,196 74,840,362
===================================================

The accompanying notes are an integral part of these financial statements.

F-4

Consolidated Statements of Operations and Comprehensive Income (Loss)

For the year ended December 31,
---------------------------------------------------------------
Note 2000 2001 2002 2002
---- ---- ---- ---- ----
RMB RMB RMB US$

Revenues:
Advertising services from related parties 6 30,067,477 14,163,952 34,209,376 4,131,567
E-commerce and other services (including
revenues of RMB1,094,859, RMB14,103,151
and RMB 197,357,067 (US$23,835,395) from
a related party in 2000, 2001 and 2002,
respectively) 6, 16 2,455,834 14,103,151 197,357,067 23,835,395
Software licensing and related integration
projects 450,350 33,218 1,002,025 121,018
----------------------------------------------------------------
32,973,661 28,300,321 232,568,468 28,087,980
Sales and value-added taxes (2,476,444) (2,274,784) (11,627,216) (1,404,253)
----------------------------------------------------------------
Net revenues 30,497,217 26,025,537 220,941,252 26,683,727
----------------------------------------------------------------
Cost of revenues:
Advertising, e-commerce and other services
(including cost reimbursements to a
related party of RMB2,098,127, RMB796,454
and RMB 22,737,436 (US$2,746,067) in 2000,
2001 and 2002, respectively) 6 (38,738,335) (60,058,488) (69,769,449) (8,426,262)
Share compensation cost* (1,171,084) - (1,908,125) (230,450)
----------------------------------------------------------------
Total cost of revenues (39,909,419) (60,058,488) (71,677,574) (8,656,712)
----------------------------------------------------------------
Gross profit (Loss on revenues) (9,412,202) (34,032,951) 149,263,678 18,027,015
Operating expenses:
Selling, general and administrative expenses
(including cost reimbursements to a related
party of RMB3,124,247, RMB1,884,823 and
RMB5,542,383 (US$669,370) in 2000, 2001 and
2002, respectively) 6 (162,922,561) (181,560,624) (92,785,244) (11,205,948)
Asset impairment loss - (2,766,543) (746,857) (90,200)
Research and development expenses
(including cost reimbursements to a
related party of RMBnil, RMBnil and
RMB1,346,824 (US$162,660) in 2000, 2001
and 2002 respectively) 6 (9,525,436) (11,169,454) (13,808,360) (1,667,676)
Share compensation cost* (12,668,476) (2,357,758) (1,898,733) (229,316)
Class action settlement - - (36,005,385) (4,348,476)
----------------------------------------------------------------
Total operating expenses (185,116,473) (197,854,379) (145,244,579) (17,541,616)
----------------------------------------------------------------
Operating profit (loss) (194,528,675) (231,887,330) 4,019,099 485,399
Other income (expenses):
Investments impairment loss - (8,924,381) - -
Interest income 27,858,710 17,571,187 7,562,322 913,324
Interest expense (2,589,735) (9,882,874) (1,401,041) (169,208)
Other, net (9,099) (40,516) 3,725,370 449,924
----------------------------------------------------------------
Profit (Loss) before tax (169,268,799) (233,163,914) 13,905,750 1,679,439
Income tax benefit 11 - - 2,395,888 289,358
----------------------------------------------------------------
Net profit (loss) (169,268,799) (233,163,914) 16,301,638 1,968,797
================================================================
Other comprehensive income (loss)
Currency translation adjustments (348,586) 565,913 11,583 1,399
----------------------------------------------------------------
Comprehensive income (loss) (169,617,385) (232,598,001) 16,313,221 1,970,196
================================================================

F-5

For the year ended December 31,
Note 2000 2001 2002 2002
---- ---- ---- ---- ----
RMB RMB RMB US$

Net earnings (loss) per share, basic 17 (0.07) (0.08) 0.01 0.01
=============================================================
Net earnings (loss) per ADS, basic (6.78) (7.74) 0.53 0.06
=============================================================
Net earnings (loss) per share, diluted 17 (0.07) (0.08) 0.01 0.01
=============================================================
Net earnings (loss) per ADS, diluted (6.78) (7.74) 0.52 0.06
=============================================================
Weighted average number of ordinary shares 17
outstanding, basic 2,497,467,200 3,013,419,400 3,051,395,100 3,051,395,100
=============================================================
Weighted average number of ADS outstanding,
basic 24,974,672 30,134,194 30,513,951 30,513,951
=============================================================
Weighted average number of ordinary shares 17
outstanding, diluted 2,497,467,200 3,013,419,400 3,127,837,900 3,127,837,900
=============================================================
Weighted average number of ADS outstanding,
diluted 24,974,672 30,134,194 31,278,379 31,278,379
=============================================================
* Share compensation cost
Cost of revenues - advertising, e-commerce 15
and other services (1,171,084) - (1,908,125) (230,450)
Selling, general and administrative expenses (7,437,230) (204,423) (1,522,369) (183,861)
Research and development expenses (5,231,246) (2,153,335) (376,364) (45,455)
-------------------------------------------------------------
(13,839,560) (2,357,758) (3,806,858) (459,766)
=============================================================

The accompanying notes are an integral part of these financial statements.

F-6

Consolidated Statements of Shareholders' Equity

Convertible preference shares Ordinary shares Additional Subscriptions
----------------------------- ---------------
Share Amount Share Amount paid-up capital receivable
----- ------ ----- ------ --------------- ----------
RMB RMB RMB RMB

Balance as of December 31,
1999 3,000,000 248,367 2,004,500,000 1,659,447 197,604,001 -

Series B preference shares
issued for cash at US$15.62
per share 2,560,556 211,976 - - 330,940,024 (41,390,508)

Cost of issuance of Series B
preference shares - - - - (6,246,516) -

Ordinary shares issued for cash
at US$0.155 per share in
initial public offering - - 450,000,000 372,560 557,094,666 (6,439,401)

Cost of initial public offering - - - - (62,289,780) -

Automatic conversion of Series
A preference shares to
ordinary shares (3,000,000) (248,367) 300,000,000 248,367 - -

Automatic conversion of Series
B preference shares to
ordinary shares (2,560,556) (211,976) 256,055,600 211,976 - -

Share compensation cost - - - - 39,402,963 -

Net loss - - - - - -

Translation adjustments - - - - - -
---------- ----------- ------------- --------- ------------- -----------
Balance as of December 31,
2000 - - 3,010,555,600 2,492,350 1,076,505,358 (47,829,909)

Collection of subscriptions
receivable for Series B
preference shares issued in
2000 - - - - - 6,289,940

Ordinary shares issued to a
senior officer of the Company
as compensation (see Note 14) - - 11,250,000 9,315 1,334,529 -

Ordinary shares issued for
services to be provided by
certain employees (see Note 14) - - 2,369,592 1,961 799,160 -

Retained
earnings Total
Deferred (Accumulated Translation shareholders'
compensation deficit) adjustments equity
------------ -------- ----------- ------
RMB RMB RMB RMB

Balance as of December 31,
1999 (11,743,182) (51,703,393) - 136,065,240

Series B preference shares
issued for cash at US$15.62
per share - - - 289,761,492

Cost of issuance of Series B
preference shares - - - (6,246,516)

Ordinary shares issued for cash
at US$0.155 per share in
initial public offering - - - 571,027,825

Cost of initial public offering - - - (62,289,780)

Automatic conversion of Series
A preference shares to
ordinary shares - - - -

Automatic conversion of Series
B preference shares to
ordinary shares - - - -

Share compensation cost (25,563,403) - - 13,839,560

Net loss - (169,268,799) - (169,268,799)

Translation adjustments - - (348,586) (348,586)
----------- ------------ ---------- ------------
Balance as of December 31,
2000 (37,306,585) (220,972,192) (348,586) 772,540,436

Collection of subscriptions
receivable for Series B
preference shares issued in
2000 - - - 6,289,940

Ordinary shares issued to a
senior officer of the Company
as compensation (see Note 14) (739,265) - - 604,579

Ordinary shares issued for
services to be provided by
certain employees (see Note 14) (555,914) - - 245,207

F-7

Consolidated Statements of Shareholders' Equity (cont'd.)

Share compensation cost - - - - (33,749,218) -

Provision for
uncollectible
subscriptions
receivable - - - - - 6,439,401

Net loss - - - - - -

Translation adjustments - - - - - -
------------ ------------ ------------- ------------ ------------- ------------
Balance as of December
31, 2001 - - 3,024,175,192 2,503,626 1,044,889,829 (35,100,568)

Collection of
subscriptions
receivable for Series
B preference shares
issued in 2000 - - - - - 1,986,720

Ordinary shares issued
to a senior officer of
the Company as
compensation (see Note
14) - - 11,250,000 9,315 (9,315) -

Ordinary shares issued
for services to be
provided by certain
employees (see Note 14) - - 15,959,245 13,214 625,056 -

Ordinary shares issued
upon exercise of
employee options - - 48,778,100 40,388 3,847,031 -

Share compensation cost - - - - 298,753 -

Net profit - - - - - -

Translation adjustments - - - - - -
------------ ------------ ------------- ------------ ------------- ------------
Balance as of December
31, 2002 - - 3,100,162,537 2,566,543 1,049,651,354 (33,113,848)
============ ============ ============= ============ ============= ============

Retained
earnings Total
Deferred (Accumulated Translation shareholders'
compensation deficit) adjustments equity
------------ -------- ----------- ------
RMB RMB RMB RMB

Share compensation cost 35,257,190 - - 1,507,972

Provision for
uncollectible
subscriptions - - - 6,439,401
receivable

Net loss - (233,163,914) - (233,163,914)

Translation adjustments - - 565,913 565,913
------------ ------------ ------------- ------------
Balance as of December
31, 2001 (3,344,574) (454,136,106) 217,327 555,029,534

Collection of
subscriptions
receivable for Series
B preference shares
issued in 2000 - - - 1,986,720

Ordinary shares issued
to a senior officer of
the Company as
compensation (see Note
14) 604,729 - - 604,729

Ordinary shares issued
for services to be
provided by certain
employees (see Note 14) 467,631 - - 1,105,901

Ordinary shares issued
upon exercise of
employee options - - - 3,887,419

Share compensation cost 1,797,475 - - 2,096,228

Net profit - 16,301,638 - 16,301,638

Translation adjustments - - 11,583 11,583
------------ ------------ ------------- ------------
Balance as of December
31, 2002 (474,739) (437,834,468) 228,910 581,023,752
============ ============ ============= ============

The accompanying notes are an integral part of these financial statements.

F-8

Consolidated Statements of Cash Flows

For the year ended December 31,
---------------------------------------------------------------------
2000 2001 2002 2002
---------------------------------------------------------------------
RMB RMB RMB US$

Cash flows from operating activities:
Net profit (loss) (169,268,799) (233,163,914) 16,301,638 1,968,797
Adjustments for:
Depreciation 8,117,140 17,334,794 21,797,267 2,632,520
Share compensation cost 13,839,560 2,357,758 3,806,858 459,766
Provision for doubtful debts 1,584,452 7,105,038 3,254,783 393,090
Write down of investment in convertible note - 2,069,475 - -
Write down of investment in convertible
preference shares - 6,854,906 - -
Write down of property, equipment and
software - 2,766,543 746,857 90,200
Provision for uncollectible subscriptions
receivable - 6,439,401 - -
Decrease in accounts receivable 4,706,696 684,888 - -
(Increase) decrease in prepayments and other
current assets (6,056,428) 5,689,171 3,025,673 365,420
Increase in due from related parties (5,194,687) (3,526,047) (23,413,088) (2,827,668)
(Increase) decrease in deferred assets (673,407) (109,945) 783,352 94,608
Increase in deferred tax assets - - (2,395,888) (289,358)
Increase (decrease) in accounts payable 6,420,224 5,553,994 (9,301,828) (1,123,409)
(Decrease) increase in deferred revenue (1,035,112) (558,739) 165,115 19,941
Increase in salary and welfare payable 4,862,634 3,204,174 6,087,169 735,165
(Decrease) increase in taxes payable (410,760) 765,827 6,480,019 782,610
Increase (decrease) in accrued liabilities 18,083,907 (7,843,607) (539,565) (65,165)
Increase (decrease) in due to related parties 371,279 (1,313,229) - -
---------------------------------------------------------------------
Net cash provided by (used in) operating
activities (124,653,301) (185,689,512) 26,798,362 3,236,517
---------------------------------------------------------------------
Cash flows from investing activities:
(Increase) decrease in temporary cash
investments - (45,521,300) 45,521,300 5,497,742
Purchase of property, equipment and software (33,970,794) (21,095,334) (12,567,218) (1,517,781)
Increase in investment in convertible note (827,810) (1,241,665) - -
Investment in convertible preference shares (16,556,199) - - -
Proceeds from disposal of convertible
preference shares - - 9,701,293 1,171,654
(Increase) decrease in non-current deposit (1,682,710) 595,223 21,575 2,606
---------------------------------------------------------------------
Net cash provided by (used in) investing
activities (53,037,513) (67,263,076) 42,676,950 5,154,221
---------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from short-term bank loans 112,600,000 123,800,000 - -
Repayment of short-term bank loans - (152,400,000) (84,000,000) (10,144,928)
Proceeds from issuance of ordinary shares,
net of RMB62,289,780 issuance costs and
RMB6,439,401 subscriptions receivable in
2000 508,738,045 - - -

F-9

Consolidated Statements of Cash Flows (cont'd.)

Proceeds from issuance of Series A and Series B
preference shares, net of issuance costs of
RMB6,246,516 and RMB41,390,508
subscriptions receivable in 2000 283,514,976 - - -
Proceeds from issuance of ordinary shares
upon exercise of employee options - - 3,887,419 469,495
Collection of subscriptions receivable for
Series B preference shares issued in 2000 - 6,289,940 1,986,720 239,942
---------------------------------------------------------------------
Net cash provided by (used in) financing
activities 904,853,021 (22,310,060) (78,125,861) (9,435,491)
---------------------------------------------------------------------
Effect of exchange rate changes on cash (348,586) 565,913 11,583 1,399
---------------------------------------------------------------------
Net increase (decrease) in cash 726,813,621 (274,696,735) (8,638,966) (1,043,354)
(Increase) decrease in restricted cash (136,052,705) 45,744,257 89,100,143 10,760,887
Cash, beginning of year 117,800,096 708,561,012 479,608,534 57,923,736
---------------------------------------------------------------------
Cash, end of year 708,561,012 479,608,534 560,069,711 67,641,269
=====================================================================
Supplemental disclosures of cash flow
information:
Cash paid during the year for income taxes - - - -
=====================================================================
Cash paid during the year for interest 1,159,275 8,726,640 1,057,225 127,684
=====================================================================
Supplemental schedule of non-cash
investing and financing activities:
Compensation costs, arising from transfer
of ordinary shares and issuance of stock
options in the Company to employees
and some non-employees of the
Company (see Notes 14 and 15) 13,839,560 2,357,758 3,806,858 459,766
=====================================================================

The accompanying notes are an integral part of these financial statements.

F-10

Notes to The Consolidated Financial Statements
(Amounts expressed in renminbi ("RMB"), unless otherwise stated)

1. Organization and Nature of Operations

The Group

The accompanying consolidated financial statements include the financial
statements of NetEase.com, Inc. (the "Company") and its controlled entities
which consist of NetEase Information Technology (Beijing) Co., Ltd. ("NetEase
Beijing"), NetEase Information Technology (Shanghai) Co., Ltd. ("NetEase
Shanghai"), NetEase (U.S.) Inc. ("NetEase US"), NetEase Interactive
Entertainment Limited ("NetEase Interactive") and Guangzhou NetEase Interactive
Entertainment Limited ("Guangzhou Interactive"). The Company and these
controlled entities are hereinafter collectively referred to as the "Group".

The Company was incorporated in the Cayman Islands on July 6, 1999. As of
December 31, 2002, the Company had four directly wholly owned subsidiaries,
NetEase Beijing, NetEase Shanghai, NetEase US and NetEase Interactive. NetEase
Beijing and Netease Shanghai were established in the People's Republic of China
("China") by the Company on August 30, 1999 and May 14, 2000, respectively.
Netease US was established in the United States of America on September 10,
1999. NetEase Interactive was established in the British Virgin Islands (the
"BVI") by the Company on April 12, 2002. Guangzhou Interactive was established
in China on October 15, 2002 by NetEase Interactive.

The Group is principally engaged in developing and providing Internet-related
advertising, e-commerce and other services, and software licensing services. The
Group's businesses were previously conducted by Guangzhou NetEase Computer
System Co., Ltd. ("Guangzhou NetEase"), a limited liability company established
in China controlled by the principal shareholder of the Company. Pursuant to a
reorganization under common control transaction which took place in September
1999 and related agreements, NetEase Beijing took over the business previously
owned by Guangzhou NetEase.

The Group conducts its business within one industry segment - the business of
developing and providing Internet-related advertising, e-commerce and other
services, and software licensing services in China. The industry in which the
Group operates is subject to a number of industry-specific risk factors,
including, but not limited to, rapidly changing technologies; significant
numbers of new entrants; dependence on key individuals; competition from similar
products from larger companies; customer preferences; the need for the continued
successful development, marketing, and selling of its products and services; the
need for financing; and the need for positive cash flows from operations.

The Group is currently targeting the Chinese market. The Chinese government
regulates Internet access, the distribution of news and other information and
the provision of commerce through strict business licensing requirements and
other governmental regulations, which include, among others, those restricting
foreign ownership in Chinese companies providing Internet access, information
and other online Internet services. Management is of the opinion that the
Group's businesses comply with existing Chinese laws and regulations. However,
the interpretation and application of current or proposed requirements and
regulations may have an adverse effect on the Group's businesses, financial
condition and results of operations.

The Group has a limited operating history and as a result, the Group is subject
to risks associated with early stage companies in new and rapidly evolving
markets. As of December 31, 2002, the Group had an accumulated deficit of
approximately RMB437.8 million.

F-11

Agreements with Guangzhou NetEase

The Group entered into a series of agreements with Guangzhou NetEase effective
from year 2000. Under these agreements, the Group provides its Internet portal
and e-commerce technologies and advertising services to Guangzhou NetEase, and
Guangzhou NetEase operates the NetEase Web sites. These services include:

.. use of domain names;
.. use of copyrighted Web page layout;
.. use of registered trademarks;
.. use of equipment; and
.. provision of technical and consulting services.

Under these agreements, substantially all of the income received by Guangzhou
NetEase will be paid to NetEase Beijing. In addition, NetEase Beijing agreed to
bear the operating costs of Guangzhou NetEase. Guangzhou NetEase is a related
party because it is also controlled by the principal shareholder of the Company.
The Group's businesses are dependent upon Guangzhou NetEase which operates the
NetEase Web sites. Under the agreements with Guangzhou NetEase, the Group is to
receive payments from Guangzhou NetEase for the technologies and services it
provides. The effect of the accounting is that revenues that the Group records
related to transactions with Guangzhou NetEase will not exceed the revenues that
Guangzhou NetEase derives from unrelated parties. Transactions with Guangzhou
NetEase are disclosed as related party transactions.

Agreements with Guangyitong Advertising Co., Ltd. ("Guangyitong Advertising")

NetEase Beijing also entered into a series of agreements with Guangyitong
Advertising and the ultimate owners of Guangyitong Advertising effective from
year 2000. These agreements include:

.. a ten-year irrevocable proxy given by the ultimate owners of Guangyitong
Advertising which allows NetEase Beijing to exercise all of the shareholder
voting rights of Guangyitong Advertising;

.. an operating agreement providing for the following:

- Guangyitong Advertising will appoint only those individuals nominated
by NetEase Beijing as its senior management personnel;

- the major decisions of Guangyitong Advertising have to be approved by
NetEase Beijing, including those relating to financing; transfer of
ownership interests, significant acquisitions, disposals or pledges of
assets; and amendment and assignment of contracts;

- NetEase Beijing has a commitment to purchase the assets and business
of Guangyitong Advertising at their net book value once it obtains the
approval from the Chinese Government to do so under Chinese law; and

- NetEase Beijing will issue guarantees for the benefit of Guangyitong
Advertising when considered necessary for Guangyitong Advertising's
operations;

.. a ten-year exclusive consulting and technical services agreement providing
for the following:

F-12

- NetEase Beijing is the exclusive provider of technical consulting and
related services to Guangyitong Advertising for all the advertisements
which Guangyitong Advertising will receive and publish on the NetEase
Web sites; and

- NetEase Beijing will charge Guangyitong Advertising a monthly fee for
the above services. The service fee may be unilaterally adjusted by
NetEase Beijing such that NetEase Beijing may receive all of the
profits and cash flows of Guangyitong Advertising;

.. an undertaking by the principal shareholder of the Company and the ultimate
owners of Guangyitong Advertising that they will not vote in any
shareholders' or directors' meetings of the Company on any amendments or
supplements to the agreements with Guangyitong Advertising except as
directed by the Company's board of directors.

Under these agreements, Guangyitong Advertising is fully dependent on the
technical consulting and other services provided by NetEase Beijing to operate
its online advertising business. Substantially all of the net profit earned by
Guangyitong Advertising will be paid to NetEase Beijing. Guangyitong Advertising
is a related party because it is also 80% owned by the principal shareholder of
the Company. The financial statements of Guangyitong Advertising are not
consolidated with those of the Group because of the majority equity interest
that the principal shareholder of the Company has both in the Company and
Guangyitong Advertising. Transactions with Guangyitong Advertising are disclosed
as related party transactions.

2. Principal Accounting Policies

Basis of consolidation

The consolidated financial statements include the financial statements of the
Company and its controlled entities. All significant transactions and balances
between the Company and its controlled entities have been eliminated upon
consolidation.

Basis of presentation

The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America ("US GAAP"). This basis of accounting differs from that used in the
statutory accounts of those companies within the Group established in China
("PRC Statutory Accounts"), which are prepared in accordance with accounting
principles and the relevant financial regulations applicable to enterprises
established in China ("PRC GAAP").

The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the balance sheet dates and the reported amounts of revenues and expenses during
the reporting periods. Actual results might differ from those estimates.

The principal differences between US GAAP and PRC GAAP applicable to the Group
include the following:

.. recognition of compensation costs arising from transfer of ordinary shares
in the Company by the principal shareholder to certain members of senior
management;
.. recognition of compensation cost arising from grants of stock options and
shares to the Company's employees, directors, consultants and advisory
board members;
.. basis for revenue recognition; and

F-13

.. tax effects related to the above adjustments and recognition of deferred
tax assets.

Revenue recognition

The Group has adopted the provisions of the Staff Accounting Bulletin 101,
"Revenue Recognition", in its accounting policy on revenue recognition.

Advertising services

The Group derives its advertising services revenues principally from the fees
earned from services provided to Guangyitong Advertising, a related party (see
Note 6).

The agreements entered into between NetEase Beijing and Guangyitong Advertising
(see Note 1) allow NetEase Beijing to unilaterally adjust the amount of fees
NetEase Beijing is entitled to from the technical consulting and related
services provided to Guangyitong Advertising such that all of the advertising
revenues recognized by Guangyitong Advertising based on the recognition policy
described below, less all of the accrued expenses incurred by Guangyitong
Advertising, will fully accrue to NetEase Beijing. Therefore, the Group
recognizes advertising services revenues from Guangyitong Advertising as the
service revenues are earned based on the related service agreement (see Note 1)
at the same time as Guangyitong Advertising recognizes its advertising revenues.

Guangyitong Advertising derives its advertising fees principally from short-term
advertising contracts. Revenues from advertising contracts are generally
recognized ratably over the period in which the advertisement is displayed and
only if collection of the resulting receivables is probable. Guangyitong
Advertising's obligations may also include guarantees of a minimum number of
impressions or times that an advertisement appears in pages viewed by users. To
the extent that minimum guaranteed impressions are not met within the
contractual time period, Guangyitong Advertising defers recognition of the
corresponding revenues until the remaining guaranteed impression levels are
achieved.

Revenues from barter transactions primarily relate to advertising services
provided in the years ended 2000 and 2001. Effective from January 20, 2000,
Guangyitong Advertising has adopted the consensus reached in Emerging Issue Task
Force ("EITF") 99-17 to account for barter transactions. According to EITF
99-17, revenue and expense should be recognized at fair value from a barter
transaction involving advertising services provided by Guangyitong Advertising
only if the fair value of the advertising services surrendered in the
transaction is determinable based on the entity's own historical practice of
receiving cash, marketable securities, or other consideration that is readily
convertible to a known amount of cash for similar advertising from buyers
unrelated to the counterparty in the barter transaction. During the years ended
December 31, 2000, 2001 and 2002, the recognized revenues and expenses derived
from barter transactions were approximately RMB0.7 million, RMB0.7 million and
RMBnil, respectively. During the years ended December 31, 2000, 2001 and 2002,
Guangyitong Advertising also engaged in certain advertising barter transactions
for which the fair value is not determinable within the limits of EITF 99-17 and
therefore no revenues or expenses derived from these barter transactions were
recognized. These transactions primarily involved exchanges of advertising
services rendered by Guangyitong Advertising for advertising, promotional
benefits, information content, consulting services, and software provided by the
counterparties.

E-commerce and other services

The Group currently derives all its e-commerce and other services revenues from
fees earned from services provided to Guangzhou NetEase, a related party (see
Note 6). The Company derives e-commerce and other services revenues from
technical services provided to Guangzhou NetEase which operates the

F-14

NetEase Web sites for transactions conducted through the Internet. The
agreements entered into between NetEase Beijing and Guangzhou NetEase (see Note
1) allow NetEase Beijing to unilaterally adjust the amount of fees NetEase
Beijing is entitled to from the technical services provided to Guangzhou NetEase
such that all of the e-commerce and other services revenues recognized by
Guangzhou NetEase based on the recognition policy described below will fully
accrue to NetEase Beijing.

A substantial portion of the transactions conducted by Guangzhou NetEase for
which the Group provides technical services to Guangzhou NetEase represents
wireless value-added services which are currently predominantly derived from
activities related to short messaging services ("SMS"). Guangzhou Netease
derives SMS revenues principally from providing value-added services such as
friends matching, news and information services, ring-tone and logo downloads
and various other related products to mobile phone users under co-operative
arrangements with mobile phone operators. SMS revenues recognized by Guangzhou
Netease represent its share of the revenues under these co-operative
arrangements net of the amounts retained by the mobile phone operators for their
services performed.

Other transactions conducted by Guangzhou NetEase for which the Group provides
technical services to Guangzhou NetEase include online games, dating and friends
matching, mail box, online shopping mall, auctions and revenue sharing from
co-branded Web sites, etc.

Guangzhou NetEase recognizes its revenues from e-commerce and other services
when the services are provided.

The Group recognizes services revenues from Guangzhou NetEase at the same time
as Guangzhou NetEase recognizes its e-commerce and other services revenues.

Services provided to third parties during 2000 also included various short-term
service contracts for construction of Web sites and market surveys, etc. Revenue
was recognized upon completion of the respective total contract and acceptance
by the customer.

Software and related integration projects

Software and related integration projects include the elements of licensing,
services, and postcontract customer support ("PCS"). PCS, generally for one year
or less and occasionally beyond one year, are generally in the form of hotline
support and may involve unspecified upgrades or enhancements. These unspecified
upgrades or enhancements offered during PCS arrangements historically have been
and are expected to continue to be minimal and infrequent. The estimated costs
of providing PCS are insignificant. Sufficient vendor-specific objective
evidence does not exist to allocate the revenues from software and related
integration projects to the separate elements of such projects.

In accordance with American Institute of Certified Public Accountants ("AICPA")
Statement of Position ("SOP") 97-2, revenues from software licensing and related
integration projects under which the Group provides PCS for one year or less are
recognized when the following criteria are met:

.. persuasive evidence of an arrangement;
.. delivery has occurred and services have been performed;
.. the sales amount is fixed or determinable; and
.. collectibility is probable.

Revenues from those projects under which the Group provides PCS that extend
beyond one year are recognized ratably over the respective terms of the
contracts. Warranty on the hardware in the related

F-15

integration projects is substantially assumed by the original equipment vendors.

Deferred revenue

Deferred revenue represents prepayments by customers for services yet to be
completed as of the balance sheet dates.

Cost of revenues

Costs of advertising, e-commerce and other services, including cost
reimbursements to Guangzhou NetEase under the agreements with Guangzhou NetEase
described in Note 1, consist primarily of staff costs of those departments
directly involved in providing advertising and e-commerce and other services,
depreciation and amortization of computers and software, server custody fees,
bandwidth and other direct costs of providing these services. These costs are
charged to the statement of operations as incurred.

Material direct costs incurred in the development of platforms for providing
these services consist primarily of computer software developed or acquired.
They are capitalized and amortized in accordance with AICPA SOP 98-1 and costs
incurred prior to the application development stage are expensed as incurred.

Cash

Cash represents cash on hand and demand deposits placed with banks or other
financial institutions. Included in the cash balance as of December 31, 2001 and
2002 are amounts denominated in United States dollars totaling US$56.3 million
and US$50.7 million respectively (equivalent to approximately RMB466.0 million
and RMB419.9 million respectively).

Temporary cash investments

As of December 31, 2002, there were no temporary cash investments. As of
December 31, 2001, temporary cash investments represented time deposits placed
with banks or other financial institutions with original maturities over three
months.

Financial instruments

Financial instruments of the Group primarily consist of temporary cash
investments, due from related parties, investment in convertible preference
shares, short-term bank loans and accounts payable. As of the balance sheet
dates, their estimated fair value approximated their carrying value.

Property, equipment and software

Property, equipment and software are stated at cost less accumulated
depreciation. Depreciation is calculated on the straight-line basis over the
following estimated useful lives, taking into account any estimated residual
value:

Computers 3 years
Furniture and office equipment 5 years
Software 2-3 years
Vehicles 5 years
Leasehold improvements lesser of the term of the lease or
the estimated useful lives of the
assets

F-16

Costs of computer software developed or obtained for internal use are accounted
for in accordance with AICPA SOP 98-1, under which direct costs incurred to
develop the software during the application development stage and to obtain
computer software from third parties that can provide future benefits are
capitalized.

Impairment of long-lived assets

Prior to January 1, 2002, the Group evaluated the recoverability of long-lived
assets in accordance with Statement of Financial Accounting Standards ("SFAS")
No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of". As of January 1, 2002, the Group has adopted SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which
addresses the financial accounting and reporting for the recognition and
measurement of impairment losses for long-lived assets. In accordance with these
standards, the Group recognizes impairment of long-lived assets in the event the
net book value of such assets exceeds the future undiscounted cash flows
attributable to such assets.

Advertising expenses

The Group recognizes advertising expenses in accordance with AICPA SOP 93-7
"Reporting on Advertising Costs". As such, the Group expenses the costs of
producing advertisements at the time production occurs, and expenses the cost of
communicating advertising in the period in which the advertising space or
airtime is used. Advertising expenses totaled approximately, RMB61.6 million,
RMB14.7 million and RMB2.4 million during the years ended December 31, 2000,
2001 and 2002, respectively.

Foreign currency translation

The functional currency of the Group is RMB. Transactions denominated in
currencies other than RMB are translated into RMB at the exchange rates quoted
by the People's Bank of China (the "PBOC") prevailing at the dates of the
transactions. Monetary assets and liabilities denominated in foreign currencies
are translated into RMB using the applicable exchange rates quoted by the PBOC
at the balance sheet dates. The resulting exchange differences are included in
the determination of income.

Translations of amounts from RMB into United States dollars ("USD") for the
convenience of the reader were calculated at the noon buying rate of US$1.00 =
RMB8.2800 on December 31, 2002 in The City of New York for cable transfers of
RMB as certified for customs purposes by the Federal Reserve Bank of New York.
No representation is made that the RMB amounts could have been, or could be,
converted into United States dollars at that rate on December 31, 2002, or at
any other certain rate.

Stock-based compensation

In accordance with the provisions of SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", the Group has selected the disclosure
only provisions related to employee stock options and share purchases and
follows the provisions of Accounting Principles Board Opinion No. 25 ("APB 25")
in accounting for stock options and shares issued to employees. Under APB 25,
compensation expense, if any, is recognized as the difference between the
exercise price and the estimated fair value of the ordinary shares on the
measurement date, which is typically the date of grant, and is expensed ratably
over the service period, which is typically the vesting period.

Stock-based employee compensation cost of RMB13.8 million, RMB2.4 million and
RMB3.8 million in

F-17

2000, 2001 and 2002, respectively, is expensed. The following table illustrates
the effect on net income and earnings per share if the Group had applied the
fair value recognition provisions of the Financial Accounting Standards Board
("FASB") No. 123, "Accounting for Stock-Based Compensation", to stock-based
employee compensation.

For the year ended December 31,
----------------------------------------------------------
2000 2001 2002
----------------------------------------------------------

Net income (loss):
As reported (169,268,799) (233,163,914) 16,301,638
Less: Additional Stock-based employee
compensation expense determined
under fair value based
method for all awards,
net of related tax effects (622,882) (8,057,740) (223,046)
--------------------------------------------------------
Pro forma (169,891,681) (241,221,654) 16,078,592
========================================================
Basic net earnings (loss) per ordinary share:
As reported (0.07) (0.08) 0.01
Pro forma (0.07) (0.08) 0.01
Diluted net earnings (loss) per ordinary share:
As reported (0.07) (0.08) 0.01
Pro forma (0.07) (0.08) 0.01

Income taxes

Deferred income taxes are provided using the balance sheet liability method.
Under this method, deferred income taxes are recognized for the tax consequences
of significant temporary differences by applying enacted statutory rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. The tax
base of an asset or liability is the amount attributed to that asset or
liability for tax purposes. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment date. A
valuation allowance is provided to reduce the amount of deferred tax assets if
it is considered more likely than not that some portion of, or all of, the
deferred tax assets will not be realized.

Net earnings (loss) per share ("EPS") and per American Depositary Share ("ADS")

In accordance with SFAS No. 128, "Computation of Earnings Per Share," basic EPS
is computed by dividing net profit (loss) attributable to ordinary shareholders
by the weighted average number of ordinary shares outstanding during the period.
Diluted EPS is calculated by dividing net profit (loss) by the weighted average
number of ordinary and dilutive ordinary equivalent shares outstanding during
the period. Ordinary equivalent shares consist of the ordinary shares issuable
upon the conversion of the convertible preference shares (using the if-converted
method) and ordinary shares issuable upon the exercise of outstanding stock
options (using the treasury stock method). Ordinary equivalent shares in the
diluted EPS computation are excluded in net loss periods as their effect would
be anti-dilutive. A total of 50,164,600, 66,845,749 and 24,972,000 stock options
in 2000, 2001 and 2002, respectively were excluded from the computation of
diluted earnings (loss) per share because either (i) the option's exercise price
was greater than the average market price of the ordinary shares, or (ii) the
inclusion of the options

F-18

would have been anti-dilutive because the Company experienced a net loss during
the year.

Net earnings (loss) per ADS has been computed by multiplying the net earnings
(loss) per share by 100, which is the number of shares represented by each ADS.

Statutory reserves

In accordance with the Regulations on Enterprises with Foreign Investment of
China and their articles of association, NetEase Beijing, NetEase Shanghai and
Guangzhou Interactive, being foreign invested enterprises established in China,
are required to provide for certain statutory reserves namely general reserve,
enterprise expansion fund and staff welfare and bonus fund which are
appropriated from net profit as reported in their PRC Statutory Accounts.
NetEase Beijing, NetEase Shanghai and Guangzhou Interactive, being wholly
foreign owned enterprises, are required to allocate at least 10% of their
after-tax profit to the general reserve. NetEase Beijing, NetEase Shanghai and
Guangzhou Interactive may stop allocations to the general reserve if such
reserve has reached 50% of their respective registered capital. Appropriations
to the enterprise expansion fund and staff welfare and bonus fund are at the
discretion of the board of directors of NetEase Beijing, NetEase Shanghai and
Guangzhou Interactive, respectively. These reserves can only be used for
specific purposes and are not distributable as cash dividends. Appropriations to
the staff welfare and bonus fund will be charged to selling, general and
administrative expenses.

NetEase Beijing, NetEase Shanghai and Guangzhou Interactive have been in an
accumulated loss position according to their PRC Statutory Accounts and no
appropriations to statutory reserves have been made.

Related parties

Parties are considered to be related if one party has the ability, directly or
indirectly, to control the other party or exercise significant influence over
the other party in making financial and operating decisions. Parties are also
considered to be related if they are subject to common control or common
significant influence.

Recent accounting pronouncements

In November 2002, EITF reached a consensus on Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance
on how to account for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The provisions of EITF
Issue No. 00-21 will apply to revenue arrangements entered into in fiscal
periods beginning after June 15, 2003. The Group believes that the adoption of
this standard will have no material impact on its financial statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also requires
that disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the
pro forma effect in interim financial statements. The transition and annual
disclosure requirements of SFAS No. 148 are effective for fiscal years ending
after December 15, 2002. The interim disclosure requirements are effective for
interim periods beginning after December 15, 2002. The Group has adopted the
disclosure provisions of SFAS No.148 as of December 31, 2002.

F-19

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
disclosures to be made by a guarantor about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions under FIN 45 are applicable prospectively to
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for interim or annual periods ending after December
15, 2002 and have been included in the consolidated financial statements. The
Group believes that the adoption of the related accounting measurement and
recognition provisions will not have a material impact on its financial
statements.

In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of APB No. 50", ("FIN 46"). FIN 46
provides guidance on the identification of and financial reporting for entities
over which control is achieved through means other than voting rights. This
Interpretation requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. The Interpretation applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Group has not yet
completed its assessment of the accounting effects from FIN 46 upon adoption.
Based upon the Group's initial analysis, it is possible that Guangyitong
Advertising and/or Guangzhou Netease may be subject to the requirements of FIN
46, and that the Group may be required to consolidate or disclose information
about these entities. Disclosures regarding the nature, purpose, size, and
activities of these identified entities, along with the nature of the Group's
involvement and when that involvement began, have already been included
throughout the footnotes to the consolidated financial statements, particularly
in Notes 1 and 6. The Group does not believe that consolidation of these
entities will have a material impact on its net income but it is not able to
estimate the maximum exposure to loss as a result of its involvement with these
entities at present time. Historically, the Group has not incurred any net
losses as a result of its involvement in these entities.

3. Concentrations

Dependence on mobile phone operators

SMS revenues, which represent a substantial portion of the e-commerce and other
services revenue of Guangzhou NetEase, are derived from co-operative
arrangements with the two mobile phone operators in China. If the strategic
relationship with either mobile phone operator is terminated or scaled-back, or
if the mobile phone operators alter the fee sharing percentages, it will be
difficult, if not impossible, to find appropriate replacement partners with the
requisite licenses and permits, infrastructure and customer base to offer the
service, which would adversely affect the Group's businesses.

Bandwidth and server custody service provider

The Group relies on two telecommunications service providers and their
affiliates for bandwidth and server custody service.

Dependence on Guangzhou NetEase

The Group relies exclusively on Guangzhou NetEase, which has the approval to
operate as an Internet content provider, for the operation of the NetEase Web
sites.

F-20

Dependence on Guangyitong Advertising

All of the Group's advertising services revenues are derived from Guangyitong
Advertising which has the approval to operate online advertising.

Credit risk

The Group is principally engaged in developing and providing Internet-related
advertising, e-commerce and other services to businesses primarily in China. The
Group generally does not require collateral for its accounts receivable.

4. Restricted Cash

As of December 31, 2002, restricted cash represents USD denominated deposits in
the amounts of US$0.1 million pledged as security money for renting office
space. As of December 31, 2001, restricted cash represented USD denominated
deposits pledged for renting office space and the Group's RMB denominated
short-term bank loans of US$0.1 million and US$10.8 million respectively.

5. Prepayments and Other Current Assets

December 31, December 31,
2001 2002
------------- --------------
Prepayments 2,692,651 2,608,169
Interest receivable 2,854,722 352,826
Employee advances 100,535 375,069
Low-value consumables 1,712,813 884,400
Rental deposits 636,222 1,657,212
Other 1,139,419 233,013
------------- --------------
Total 9,136,362 6,110,689
============= ==============

6. Related Party Transactions

During the years ended December 31, 2000, 2001 and 2002 the Group derived
approximately RMBnil, RMB0.3 million and RMBnil, respectively, of advertising
fees from shareholders of the Company.

During the years ended December 31, 2000, 2001 and 2002, the Group derived
approximately RMB30.1 million, RMB14.2 million and RMB34.2 million,
respectively, of advertising services revenues from Guangyitong Advertising, a
related company which is controlled by the principal shareholder of the Company,
for advertising-related technical consulting services performed.

During the years ended December 31, 2000, 2001 and 2002, the Group derived
approximately RMB1.1 million, RMB14.1 million and RMB197.4 million,
respectively, of e-commerce and other services revenues from Guangzhou NetEase,
a related company which is controlled by the principal shareholder of the
Company.

During the years ended December 31, 2000 and 2001 and 2002, the Group reimbursed
Guangzhou NetEase a total of approximately RMB5.2 million, RMB2.7 million and
RMB29.6 million, respectively,

F-21

for the costs of revenue and operating expenses associated with the NetEase Web
sites.

Due from related parties represents amounts receivable from Guangyitong
Advertising and Guangzhou NetEase for services performed and temporary advances
to officers of the Group. The balances with related parties were unsecured,
interest-free and repayable on demand. As of December 31, 2001 and 2002, the
amounts due from related parties included amounts denominated in USD of US$0.5
million and US$0.2 million respectively (equivalent to approximately RMB3.9
million and RMB1.3 million respectively). All other related party balances are
denominated in RMB.

7. Investment in Convertible Preference Shares

December 31, December 31,
2001 2002
-------------- --------------
Investment, at cost 16,556,199 -
Less: Investment impairment loss (6,854,906) -
-------------- --------------
Net book value 9,701,293 -
============== ==============

As of December 31, 2001, investment in convertible preference shares represented
an investment in 705,816 preference shares in a private Internet-based auction
company at US$2.8336 per share.

According to a board resolution dated March 14, 2002 and an agreement entered
into between the Company and the private auction company dated March 18, 2002,
the private auction company repurchased from the Company all of the 705,816
convertible preference shares the Company acquired at a consideration of
approximately US$1.2 million which is equivalent to approximately RMB9.7
million. Since the carrying value of the investment had already been written
down to its net realizable value as of December 31, 2001, no gain or loss
resulted from the disposal.

The Group had entered into a strategic co-operation agreement with the private
auction company pursuant to which the Group and the private auction company
established a co-branded auction Web site on the NetEase Web sites. According to
the agreement, the Group was entitled to (i) a non-refundable upfront fee and
(ii) quarterly referral fees which are based on the number of click-throughs to
the co-branded site with a minimum fee level on a quarterly basis. The agreement
was for a term of two years commencing from the date of launch of the co-branded
Web site on September 10, 2000. On June 25, 2002, both parties signed an
agreement to terminate this strategic co-operation agreement whereby both
parties agreed that apart from the non-refundable upfront fee and the four
quarterly referral fees that had already been received by the Group, an
additional US$38,000 would be paid by the private auction company to the Group.

F-22

8. Property, Equipment and Software

December 31, December 31,
2001 2002
------------- --------------
Computers 43,937,710 50,163,071

Furniture and office equipment 2,262,944 2,167,062

Software 12,899,639 16,200,568

Vehicles - 358,705

Leasehold improvements 3,782,693 5,813,941
------------- --------------
62,882,986 74,703,347

Less: Accumulated depreciation (26,526,898) (48,324,165)
------------- --------------
Net book value 36,356,088 26,379,182
============= ==============

9. Short-term Bank Loans

As of December 31, 2002, there were no short-term bank loans. As of December 31,
2001, short-term bank loans consisted of:

Annual Outstanding principal as of
Lender Period interest rate December 31, 2001
------------------------------------------------------------------------------------------------------

China Merchants Bank-loan A March 2001 to March 2002 5.85% 24,000,000

China Merchants Bank-loan B April 2001 to April 2002 5.85% 32,000,000

China Merchants Bank-loan C May 2001 to May 2002 5.85% 28,000,000
----------------------------

84,000,000
============================

The above loans A and C totaling RMB52.0 million were secured by bank deposits
of US$6.5 million, and the loan B of RMB32.0 million was secured by a bank
deposit of US$4.3 million.

These short-term bank loans were drawn for working capital purposes.

10. Employee Benefits

The full-time employees of those companies within the Group which are
established in China are entitled to staff welfare benefits including medical
care, welfare subsidies, unemployment insurance and pension benefits, etc. These
companies are required to accrue for these benefits based on certain percentages
of the employees' salaries in accordance with the relevant regulations. The
total provision for such employee benefits amounted to RMB6.2 million, RMB9.6
million and RMB9.8 million for the years ended December 31, 2000, 2001 and 2002,
respectively. These companies are also required to make contributions to the
state-sponsored pension and medical plans out of the amounts accrued for medical
and pension benefits. These contributions for the years ended December 31, 2000,
2001 and 2002 amounted to approximately RMB3.6 million, RMB6.3 million and
RMB8.4 million, respectively. The

F-23

Chinese government is responsible for the medical benefits and ultimate pension
liability to these employees.

11. Taxation

Income taxes

Cayman Islands

Under the current laws of the Cayman Islands, the Company is not subject to tax
on income or capital gain. Additionally, upon payments of dividends by the
Company to its shareholders, no Cayman Islands withholding tax will be imposed.

British Virgin Islands

NetEase Interactive is exempted from income tax on its foreign-derived income in
the BVI. There are no withholding taxes in the BVI.

China

In accordance with "Income Tax Law of China for Enterprises with Foreign
Investment and Foreign Enterprises", foreign invested enterprises are generally
subject to enterprise income tax ("EIT") at the rate of 30% plus a local income
tax of 3%. NetEase Beijing, being a foreign invested enterprise and located in
the New Technology Industrial Development Experimental Zone in Beijing, has been
recognized as a "New and High Technology Enterprise". According to an approval
granted by the Haidian State Tax Bureau in November 2000, NetEase Beijing is
entitled to a reduced EIT rate of 15% commencing from the year 2000. In
addition, the approval also granted NetEase Beijing with a full exemption from
EIT from 2001 to 2002, a 50% reduction in EIT from 2003 to 2005, and a full
exemption from the local income tax from 2000 onwards. Consequently, NetEase
Beijing is exempted from EIT and local income tax for each of the years ended
December 31, 2000, 2001 and 2002.

NetEase Shanghai and Guangzhou Interactive are both subject to EIT at the rate
of 30% plus a local tax of 3%.

A reconciliation of the differences between the statutory tax rate and the
effective tax rate for EIT is as follows:

F-24

For the year ended December 31,
------------------------------------
2000 2001 2002
------------------------------------

EIT statutory rate (33.0%) (33.0%) 33.0%
Permanent differences (primarily the expenses
incurred by the Company which are not
deductible for EIT purposes)
- Professional fees 1.9% 8.5% 42.0%
- Salaries of the Company's senior officers 1.9% 3.1% 40.8%
- Class action settlement - - 87.7%
- Depreciation - - 32.7%
- Advertising - - 9.8%
- Technical services - - 13.0%
- Other 7.2% 6.7% 14.7%
Non-deductible share compensation costs 2.7% 0.3% 9.0%
Effect of lower tax rate applicable to hi-tech enterprises 6.7% 6.2% (168.9%)
Effect of tax holidays applicable to hi-tech enterprises - - (140.8%)
Additional valuation allowance on tax loss carry-forwards 12.6% 8.2% 9.8%
-----------------------------------
Effective EIT rate - - (17.2%)
===================================

As of December 31, 2001, and 2002, the tax impact of significant temporary
differences between the tax and financial statement bases of assets and
liabilities that gave rise to deferred tax assets were principally related to
the following:

December 31, December 31,
2001 2002
-------------- ---------------

Loss carryforwards 39,147,456 19,132,653
Valuation allowance (39,147,456) (16,736,765)
------------- -------------

Net deferred tax assets - 2,395,888
============= =============

Subject to the approval of the relevant tax authorities, the Group had loss
carryforwards of approximately RMB64.8 million as of December 31, 2002 for EIT
purposes. Approximately RMB23.2 million, RMB29.5 million and RMB12.1 million of
these loss carryforwards will expire in 2005, 2006 and 2007, respectively. A
valuation allowance has been provided on the loss carryforwards of the Group due
to the uncertainty surrounding the realizability of such assets. There is no
assurance that the Group will be able to utilize the loss carryforwards before
their expiration.

Income tax benefit shown in the consolidated statement of operations for the
year ended December 31, 2002 resulted from the recognition of deferred tax
assets arising from tax loss carryforwards for which less than full valuation
allowance was made because certain of these tax carryforwards are expected to be
utilized in the foreseeable future.

F-25

In addition, the preferential EIT treatments that NetEase Beijing obtained may
be subject to review by higher authorities. If these preferential tax treatments
were not available to NetEase Beijing, NetEase Beijing would be subject to EIT
at 30% plus a local tax of 3% and the exemption and reduction described above
would not apply.

Business tax ("BT")

The Group is subject to BT on the provision of taxable services in China,
transfer of intangible assets and the sale of immovable properties in China. The
tax rates range from 3% to 20% of the gross receipts, depending on the nature of
the revenues. The applicable BT rate for the Group's revenues is generally 5%.
In addition, Guangyitong Advertising is subject to a cultural development fee at
3% on its Internet advertising fees, which effectively reduces the revenues the
Group derives from Guangyitong Advertising.

Taxes payable

December 31, December 31,
2001 2002
------------- -------------

BT 1,313,896 4,337,428
Individual income taxes for employees 459,035 3,848,253
Other - 67,269
------------- -------------
Total 1,772,931 8,252,950
============= =============

12. Accrued Liabilities

December 31, December 31,
2001 2002
-------------- -------------

Accrued advertising expenses 978,027 808,420
Accrued information fees 1,787,468 1,276,551
Accrued professional fees 3,854,513 3,428,678
Other 4,317,942 4,884,736
------------- -------------
Total 10,937,950 10,398,385
============= =============

13. Subscriptions Receivable

Subscriptions receivable represents the amount receivable from a shareholder for
subscription for the Company's series B preference shares (see Note 14). During
the year ended December 31, 2001, the Company also made an allowance for
doubtful subscriptions receivable amounting to approximately RMB6.4 million.
Such subscriptions receivable arose from advances to certain shareholders for
subscription for the Company's shares in 2000.

F-26

14. Capital Structure

Ordinary shares

The holders of ordinary shares in the Company are entitled to one vote per share
and to receive ratably such dividends, if any, as may be declared by the board
of directors of the Company. In the event of liquidation, the holders of
ordinary shares are entitled to share ratably in all assets remaining after
payment of liabilities. The ordinary shares have no preemptive, conversion, or
other subscription rights.

In November 1999, in consideration for certain members of the senior management
joining the Group, the principal shareholder of the Company agreed to transfer a
total of 26,271,300 of his ordinary shares in the Company for services to be
rendered by certain of those individuals over three years starting from January
1, 2000. The total estimated fair value of these shares, valued at US$0.05 per
share at the date of grant, is recognized as deferred compensation which is to
be amortized over the related vesting periods.

In addition, in March 2000 the principal shareholder of the Company transferred
an additional approximately 1,900,000 ordinary shares to certain employees, for
which the Company recorded compensation costs of approximately RMB2.5 million in
2000.

On March 31, 2000, the ordinary shares in the Company were split on a
one-hundred-for-one basis. The effects of the share split have been reflected in
the financial statements on a retroactive basis for all the periods presented.

In June 2000, the Company sold 4,500,000 ADS, representing 450,000,000 ordinary
shares, in an underwritten initial public offering for net proceeds of
approximately US$64.9 million, before offering expenses. Simultaneously with the
closing of the public offering, all 3,000,000 shares of Series A preference
shares and 2,560,556 shares of Series B preference shares were converted to
ordinary shares on a basis of 100 ordinary shares for one preference share (see
below).

On March 23, 2001, the Company entered into an agreement whereby the Company
acquired certain software for online games, computers and the related
intellectual property rights for cash consideration of US$0.2 million from a
private technology company. In addition, the Company agreed to issue 7,742,168
ordinary shares in the Company to the founders of the private technology company
by installments on a quarterly basis starting from June 23, 2001 through March
23, 2003 for the service to be provided by such individuals as employees of the
Company over such period. The total estimated fair value of these shares of
approximately RMB0.8 million valued at US$0.0125 per share at the date of
agreement is recognized as deferred compensation, which is to be amortized over
the related vesting period.

According to an agreement dated September 11, 2001 between the Company and a
senior officer of the Company, the Company provided the officer with 25,000,000
ordinary shares by quarterly installments over a period of 18 months. As a
result, deferred compensation cost of approximately RMB1.3 million was recorded
in 2001, which amount is being amortized over the related vesting period of 18
months.

According to a board resolution dated January 23, 2002, the Company agreed to
provide two newly hired members of senior management of the Company with
12,322,868 ordinary shares in the Company over a period of 7 months. The total
estimated fair value of those shares of RMB0.7 million (valued at US$0.006492
per share) at the date of the agreement is recognized as deferred compensation
which is being amortized over the related vesting periods.

F-27

Convertible preference shares

Series A preference shares

The Series A preference shares were convertible on a basis of 100 ordinary
shares for one preference share. These preference shares were automatically
converted upon closing of the public offering of the ordinary shares in the
Company in 2000.

The Series A preference shares carried certain preferences on dividend payment
and return of capital in case of a winding up of the Company. Written consent of
the holders of more than 50% of these preference shares had to be obtained for
any acquisition, merger, reorganization, substantial disposal of assets,
alteration of capital amounts, disposal of interest in any subsidiary or
associate company, and liquidation or winding-up of the Company.

Series B preference shares

On March 23, 2000, the Company entered into a Series B Preference Shares
Purchase Agreement pursuant to which the Company issued 2,560,556 Series B
preference shares of US$0.01 each at an issuance price of US$15.60 per share for
a total consideration of approximately US$40.0 million, of which US$35.0 million
was paid up in cash and US$5.0 million was paid up by advertising to be provided
by the shareholder of the Series B preference shares and its affiliated
companies on their television channels over a period of three years.

The Series B preference shares had the same conversion features as the Series A
preference shares. The Series B preference shares had an aggregate liquidation
preference equal to the total consideration for which they were issued. They
carried the same preferences as those of Series A preference shares on dividend
payment but had certain preferences over Series A preference shares on return of
capital in case of a winding up of the Company. These preference shares were
automatically converted upon closing of the public offering of the ordinary
shares in the Company in 2000.

The Company also entered into a strategic co-operation agreement with the
shareholder of its Series B preference shares which provided for, among other
things, advertising spending of US$5.0 million from the shareholder over the
next three years, cross licensing of Internet tools and technologies, licensing
of content information, and other co-operative marketing and promotional events
on commercial terms to be agreed between the two parties (see Note 19).

The effect of the issuance of Series B preference shares together with the
strategic co-operation agreement with the same shareholder is similar to an
issuance of shares to the shareholder for cash consideration of US$40.0 million
(with US$35.0 million receivable immediately and US$5.0 million receivable over
a period of three years from March 2000) and having a barter transaction for
advertising between the Company and the shareholder. The accounting for these
two transactions in the financial statements reflects this effect.

15. Stock Option Plans

1999 Stock Option Plan

In December 1999, the Company adopted an incentive and non-statutory stock
option plan for the Company's senior management and employees (the "1999 Stock
Option Plan"). The Company has reserved 345,675,000 ordinary shares for issuance
under the plan.

F-28

Employees

Options for the employees vest upon completion of the first full year of service
by the respective employees from the date they first joined the Group and expire
at the end of the fifth year of their respective service periods.

Of the 3,735,000 ordinary shares granted to employees in 1999 at an exercise
price of US$0.070 per share, options to acquire 740,000, 1,560,000 and 140,000
ordinary shares were cancelled in 2000, 2001 and 2002, respectively, as a result
of the resignation of certain employees. Accordingly, options to acquire
1,295,000 ordinary shares remained outstanding as of December 31, 2002.

Senior management

Options for the members of the Company's senior management become exercisable at
the rate of 20% on the vesting commencement date which was September 1, 1999,
20% upon completion of one full year and 30% upon completion of each of the next
two full years thereafter. These options will also vest upon the founder of the
Group ceasing to be the principal shareholder of the Group.

Of the 115,225,000 ordinary shares granted to senior management in 1999 at an
exercise price of US$0.065 per share, options to acquire 46,858,200, 52,235,300
and 16,131,500 ordinary shares were cancelled in 2000, 2001 and 2002
respectively, as a result of the resignation of certain members of the Company's
senior management. Accordingly, no options remained outstanding as of December
31, 2002.

Advisory board

The Company also granted options to its advisory board members. Twenty percent
of these options vested on the date of appointment, which was the end of 1999,
and 10% would vest each quarter over the next two years.

Of the 3,000,000 ordinary shares granted to the advisory board members in 1999
at an exercise price of US$0.065 per share, options to acquire 400,000,
1,600,000 and 1,000,000 ordinary shares were cancelled in 2000, 2001 and 2002,
respectively, as a result of the resignation of the advisory board members.
Accordingly, no options remained outstanding as of December 31, 2002.

2000 Stock Option Plan

According to a resolution of the board of directors of the Company in 2000, the
1999 Stock Option Plan was replaced by the 2000 Stock Option Plan.

According to a resolution of the board of directors and the shareholders of the
Company in 2001, the 2000 stock option plan was amended and restated. Under the
amended plan, the number of ordinary shares available for issuance was increased
from 223,715,000 under the prior plan to 323,715,000. The amended plan also
included a mechanism for the automatic increase in the number of ordinary shares
available for future issuance. This mechanism, which is known as "Evergreen
Provision", provided for a periodic increase so that the number of ordinary
shares available under the plan would automatically increase by 3% each year up
to a maximum at any given time of 17.5% of the Company's total outstanding
ordinary shares, on a fully-diluted basis. These increases would occur on June 1
of 2001 and January 1 of each year thereafter. The "Evergreen Provision" has
been suspended pursuant to a resolution of the board of directors dated March
25, 2002.

F-29

Employees

During the year ended December 31, 2000, the Company granted options to acquire
a total of 64,720,000 ordinary shares to the Company's employees at an exercise
price ranging from US$0.063 to US$0.156 per share. Options for those employees
who joined the Group in 1999 vest over a period of three years beginning with
the completion of the second full year of service by the respective employees.
Options for other employees vest over a period of four years beginning with the
completion of one full year from the date of grant.

Out of the options granted to employees in 2000, options to acquire 21,755,000,
17,350,000 and 3,838,000 ordinary shares were cancelled in 2000, 2001 and 2002,
respectively, as a result of the resignation of certain employees. Options to
acquire 21,777,000 ordinary shares remained outstanding as at December 31, 2002.

During the year ended December 31, 2001, the Company granted options to acquire
a total of 24,059,000 ordinary shares to the Company's employees at an exercise
price of approximately US$0.022 per share. These options vest over a period of
four years beginning with the completion of one full year from the date of
grant.

Out of the options granted to employees in 2001, options to acquire 9,366,000
and 1,958,000 ordinary shares were cancelled in 2001 and 2002, respectively, as
a result of the resignation of certain employees, and options to acquire 834,200
ordinary shares were exercised in 2002. Options to acquire 11,900,800 ordinary
shares remained outstanding as at December 31, 2002.

During the year ended December 31, 2002, the Company granted options to acquire
a total of 51,510,000 ordinary shares to the Company's employees at exercise
prices ranging from US$0.007 to US$0.021 per share. Options for those employees
who joined the Company before April 4, 2001 vest over a period of three years
beginning with the completion of one full year of service by the respective
employees. Options for other employees vest over a period of three years
beginning from the date of grant.

Out of the options granted to employees in 2002, options to acquire 5,699,000
ordinary shares were cancelled in 2002 as a result of the resignation of certain
employees, and options to acquire 5,407,000 ordinary shares were exercised in
2002. Options to acquire 40,404,000 ordinary shares remained outstanding as at
December 31, 2002.

Senior management

During the year ended December 31, 2000, the Company granted options to acquire
a total of 163,424,300 ordinary shares to certain new members of the Company's
senior management at exercise prices ranging from US$0.043 to US$0.156 per
share. These options generally vest over a period of three to four years
beginning with the completion of one full year from (i) February 1, 2000, (ii)
the date of employment or (iii) the date of offer of employment. The
compensation costs were calculated based upon the estimated fair value of the
Company's ordinary shares ranging from US$0.03 per share to US$0.156 per share
during the period from February to December 2000.

Out of the options granted to senior management in 2000, options to acquire
33,600,000, 92,218,800 and 37,605,500 ordinary shares were cancelled in 2000,
2001 and 2002, respectively, as a result of the resignation of certain members
of the Company's senior management. No options remained outstanding as at
December 31, 2002.

During the year ended December 31, 2001, the Company also granted options to
acquire a total of

F-30

92,225,000 ordinary shares to certain members of the Company's senior management
at exercise prices ranging from US$0.006 to US$0.155 per share.

Out of the options granted to senior management in 2001, options to acquire
54,175,000 and 5,513,100 ordinary shares were cancelled in 2001 and 2002,
respectively, as a result of the resignation of certain members of the Company's
senior management, and options to acquire 32,536,900 ordinary shares were
exercised in 2002. No options remained outstanding as at December 31, 2002.

During the year ended December 31, 2002, the Company also granted options to
acquire a total of 59,000,000 ordinary shares to certain members of the
Company's senior management at exercise prices ranging from US$0.007 to US$0.015
per share. Options for those senior management who joined the Company before
April 4, 2001 vest over a period of three years beginning with the completion of
one full year of service by the respective members. Options for other management
members vest over a period of three years beginning from the date of grant.

Out of the options granted to senior management in 2002, options to acquire
10,000,000 ordinary shares were exercised in 2002. Options to acquire 49,000,000
ordinary shares remained outstanding as at December 31, 2002.

Director and consultants

During the year ended December 31, 2000, the Company granted options to acquire
a total of 1,200,000 ordinary shares to a director and options to acquire a
total of 850,000 ordinary shares to two consultants. These options generally
vested over a period of two years beginning on February 1, 2000. The exercise
price of these options is US$0.100 per share. Deferred compensation costs
related to these option grants to the director and two consultants in 2000 were
approximately RMB1.5 million. The estimated fair value of the options granted to
the director and the consultants was estimated on the date of grant using the
Black-Scholes option pricing model. The following assumptions were used for the
grants: risk-free interest rate of 2.97%; estimated fair value of US$0.10 per
ordinary share; expected dividend yield of 0% for all periods; expected life of
five years; and expected volatility of 155% for all periods.

Of these grants to the directors and the consultants, options to acquire
1,200,000 and 700,000 ordinary shares, respectively, remained outstanding as at
December 31, 2002. Options to acquire 150,000 ordinary shares granted to one
consultant were cancelled in 2000 as a result of the resignation of that
consultant.

Advisory board

In June 2000, the Company granted options to acquire a total of 1,500,000
ordinary shares to a member of the Company's advisory board at an exercise price
of US$0.155 per share. These options vested over a two-year period commencing
from the date of grant. Deferred compensation costs related to these option
grants was approximately RMB1.8 million, estimated on the date of grant using
the Black-Scholes option pricing model. The following assumptions were used for
the grants: risk-free interest rate of 2.97%; estimated fair value of US$0.155
per ordinary share; expected dividend yield of 0% for all periods; expected life
of five years; and expected volatility of 155%. In addition, in August 2000, the
Company granted options to acquire a total of 2,000,000 ordinary shares to the
same advisory board member at an exercise price of US$0.05 per share to replace
the 1,500,000 shares of option granted in June 2000. The terms of the new grants
were the same as those of the grants made in June 2000. In this connection, the
options to acquire 1,500,000 ordinary shares granted in June 2000 were modified
and therefore the modification was subject to an additional compensation cost of
approximately RMB0.04 million. Deferred compensation cost related to the
remaining newly issued 500,000 share options was approximately RMB0.2 million,
estimated on the date of grant using the Black-Scholes option pricing

F-31

model. The following assumptions were used for the grants: risk-free interest
rate of 2.97%; estimated fair value of US$0.05 per ordinary share; expected
dividend yield of 0% for all periods; expected life of five years; and expected
volatility of 155%.

All the above options were cancelled in 2000 and 2001 (3,250,000 in 2000 and
250,000 in 2001, respectively) as a result of the resignation of the advisory
board member.

Deferred Compensation Costs

In connection with all the above option grants to the employees, senior
management, directors, consultants, and advisory board members in 2000, the
Company recorded deferred share compensation costs of approximately RMB48.5
million in 2000 and RMBnil in 2001 and RMBnil in 2002, which were to be
amortized and charged to expense starting from the grant date and through the
end of the vesting periods of the underlying options.

In 2002, approximately RMB2.1 million (2000: RMB13.8 million; 2001: RMB1.5
million) of the deferred compensation costs were amortized and charged to
expense and approximately RMB0.1 million (2000: RMB9.8 million; 2001: RMB33.6
million) of the deferred compensation costs were reversed against the additional
paid in capital as a result of the resignation of employees, senior management,
consultants and advisory board members.

Summary Information

Information relating to stock options outstanding is as follows:

For the year ended December 31,
------------------------------------------------------------------------------------------------
2000 2001 2002
------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
exercise Exercise Exercise
Option shares price Option shares price Option shares price
------------------------------------------------------------------------------------------------
US$ US$ US$

Outstanding at
beginning of
year 121,960,000 0.065 248,901,100 0.091 136,430,000 0.074
Granted 233,694,300 0.105 116,284,000 0.017 110,510,000 0.008
Cancelled (106,753,200) 0.091 (228,755,100) 0.064 (71,885,100) 0.096
Exercised - - - - (48,778,100) 0.010
------------------------------------------------------------------------------------------------
Outstanding at
year end 248,901,100 0.091 136,430,000 0.074 126,276,800 0.028
================================================================================================

As of December 31, 2002, options to purchase 32,010,775 ordinary shares were
exercisable. Under the stock option plans, options to purchase 451,662,024
ordinary shares were available for future grant. The fair value of ordinary
shares on the dates of stock option grants was determined by management based on
the recent issuance of preference shares, consideration of significant
milestones achieved by the Group and other market considerations. Options
outstanding and exercisable by price range as of December 31, 2002 were as
follows:

F-32

Options Exercisable at
Options Outstanding at December 31, 2002 December 31, 2002
----------------------------------------------------------------------------
Weighted
Average Weighted
Remaining Weighted Average
Number Contractual Average Number Exercise
Exercise Price Outstanding Life Exercise Price Exercisable Price
----------------------------------------------------------------------------------------------------------
Years US$ US$

US$0.007 - US$0.009 82,684,000 3.16 0.007 16,908,000 0.007
US$0.012 - US$0.015 4,220,000 4.49 0.015 - -
US$0.021 2,500,000 4.39 0.021 - -
US$0.022 11,900,800 4.08 0.022 1,738,400 0.022
US$0.070 - US$0.075 3,295,000 2.82 0.073 2,295,000 0.072
US$0.100 17,767,000 3.21 0.100 9,505,375 0.100
US$0.155 - US$0.156 3,910,000 3.32 0.156 1,564,000 0.156
----------------------------------------------------------------------------
126,276,800 3.32 0.028 32,010,775 0.047
============================================================================

For the purposes of SFAS No.123 pro forma disclosures, the estimated fair value
of each senior management or employee option grant is estimated on the date of
grant using the Black-Scholes option pricing method with the following
assumptions:

For the year ended December 31,
--------------------------------------------------------
2000 2001 2002
--------------------------------------------------------

Risk free interest rate 2.50% - 3.30% 2.97% - 3.30% 2.91%
Expected life (in years) 5 - 10 5 - 10 5
Expected dividend yield 0% 0% 0%
Volatility 142% - 155% 122% - 155% 104% - 108%
Weighted average estimated fair value of
the underlying shares on the date of
option grants (US$) 0.128 0.085 0.008

F-33

16. Revenues From E-commerce and Other Services

The following is the summarized information of revenues from e-commerce and
other services:

2000 2001 2002
-----------------------------------------------------

Wireless value-added services and other
fee-based services 2,455,834 14,103,151 160,303,651
Online games - - 37,053,416
-----------------------------------------------------

Total 2,455,834 14,103,151 197,357,067
=====================================================

Revenue from wireless value-added services represents revenue earned by the
Group for providing technical services to Guangzhou NetEase in relation to its
wireless business. Guangzhou NetEase derives SMS revenues from providing
value-added services such as friends matching, news and information services,
ring-tone and logo downloads and various other related products to mobile phone
users in China.

Revenue from other fee-based services represents revenue earned by the Group for
providing technical services to Guangzhou NetEase in relation to various
value-added services provided by the NetEase Web sites, including dating and
friends matching, mail box, personal homepage hosting and online shopping mall,
etc.

Revenue from online games represents revenue earned by the Group for providing
technical services to Guangzhou NetEase in relation to its online game business.
Guangzhou NetEase operates various online games platforms and derives revenue
from providing service to its registered game players.

17. Net Earnings (Loss) Per Share

The following table sets forth the computation of basic and diluted net earnings
(loss) per share for the years ended December 31, 2000, 2001 and 2002:

2000 2001 2002
---------------------------------------------------------

Numerator:
Net profit (loss) attributable to
ordinary stockholders (169,268,799) (233,163,914) 16,301,638
---------------------------------------------------------
Denominator:
Weighted average number of ordinary
shares outstanding, basic 2,497,467,200 3,013,419,400 3,051,395,100
Dilutive effect of employee stock
options - - 76,442,800
---------------------------------------------------------
Weighted average number of ordinary
shares outstanding, diluted 2,497,467,200 3,013,419,400 3,127,837,900
=========================================================
Anti-dilutive effect of stock options 50,164,600 66,845,749 24,972,000
=========================================================
Net earnings (loss) per share, basic (0.07) (0.08) 0.01
=========================================================
Net earnings (loss) per share, diluted (0.07) (0.08) 0.01
=========================================================

F-34

18. Commitments and Contingencies

Commitments

As of December 31, 2002, future minimum lease and capital commitments were as
follows:

Office rental Server custody Capital Total
commitments fee commitments commitments
-------------------------------------------------------------------------

2003 4,719,333 10,309,500 450,000 15,478,833
2004 3,697,039 - - 3,697,039
2005 2,365,763 - - 2,365,763
--------------------------------------------------------------------------
Total 10,782,135 10,309,500 450,000 21,541,635
==========================================================================

In the years ended December 31, 2000, 2001 and 2002, the Company incurred rental
expenses in the amounts of approximately RMB6.9 million, RMB8.8 million, and
RMB7.4 million, respectively.

Insurance coverage

As of December 31, 2002, the Group had insurance coverage of approximately
RMB39.2 million on its property, equipment and software.

As of December 31, 2002, the Company also maintained insurance coverage, which
is subject to various restrictions and limitations, for certain claims which are
brought against the Company, certain subsidiaries, the attorneys and
underwriters for the Company's initial public offering and directors, officers
and employees of the Company. The aggregate coverage for all the above mentioned
parties under this policy is US$10.0 million, and the policy expires on June 15,
2003.

Litigation

Class Actions

These complaints were subsequently consolidated into a single action. In
general, the complaints allege, among other things, that (i) the Company's
initial public offering violated the securities laws because the financial
statements accompanying the offering's registration statement misstated the
Company's revenue; and (ii) the Company committed securities fraud by materially
misstating the Company's revenue in its 2000 financial statements.

On August 29, 2002, the parties to the above-referenced litigation entered into
a memorandum of understanding for the settlement of this litigation.
Subsequently, the plaintiffs in this litigation conducted confirmatory discovery
to determine if the settlement is fair, reasonable and adequate. The discovery
has been completed, and on January 31, 2003, the parties entered into a
stipulation and agreement of settlement.

The court preliminarily approved this settlement on February 25, 2003, and all
persons who purchased the

F-35

Company's ADSs during the period from July 3, 2000 to August 31, 2001 were
certified as a single class. Subsequently, notice was sent to the class, and the
court will hold a hearing before it gives final approval to the settlement. The
aggregate settlement amount for all claims in this litigation is US$4.35
million, which amount has been paid by the Company into an escrow account
pending such final court approval and charged to the statement of operations for
the year ended December 31, 2002.

If the settlement is not approved by the court or is otherwise terminated by its
terms, then, among other consequences, the parties shall revert to their
litigation positions as of August 29, 2002. Potential members of the class no
longer have the right to opt out of this settlement and pursue their own claims.
The Company cannot predict if this settlement will be given final approval.

In January 2003, Guangzhou NetEase was named in a copyright infringement lawsuit
in China and the plaintiffs claimed damages of US$1.0 million. The Group intends
to vigorously defend its position. Based on the legal advice it has obtained,
the Group believes the ultimate resolution of this matter will not have a
material financial impact on the Group.

19. Subsequent Events

In March 2003, the Company entered into a supplemental agreement to the
strategic co-operation agreement with the purchaser of its Series B preference
shares described in Note 14. Pursuant to the supplemental agreement, the
purchaser of Series B preference shares and its affiliates is obligated to spend
the US$4.0 million on online advertising on the NetEase Web sites by March 28,
2004. All other aspects of the strategic co-operation agreement terminated in
March 2003.

(Unaudited)

On May 16, 2003, the court gave its final approval to the definitive settlement
agreement entered into between the parties to the litigation referred to in Note
18 - Litigation, Class Actions above which provides for a final settlement
amount of US$4.35 million.

F-36