
Title of each class		Name of each exchange on which registered
American Depositary Shares, each representing five Class B ordinary shares, par value US$0.0001 per share		The NASDAQ Stock Market LLC (The NASDAQ Global Select Market)
Class B ordinary shares, par value US$0.0001 per share		The NASDAQ Stock Market LLC (The NASDAQ Global Select Market)*

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

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.

29,671,195 Class A ordinary shares, par value US$0.0001 per share, and 219,078,955 Class B ordinary shares, par value US$0.0001 per share, as of December 31, 2014.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

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.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark which basis of accounting the registrant has been to prepare the financial statements included in this filing:

If "other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

In this annual report, except where the context otherwise requires and for purposes of this annual report only:

This annual report on Form 20-F contains statements of a forward-looking nature. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. 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 "may," "will," "expects," "anticipates," "future," "intend," "plan," "believe," "estimate," "is/are likely to" or other similar expressions. The accuracy of these statements may be impacted by a number of risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include, but are not limited to, the following:

These risks are not exhaustive. We operate in an emerging and evolving environment. New risk factors emerge from time to time and it is impossible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results of this annual report to differ materially from those contained in any forward-looking statement.

We would like to caution you not to place undue reliance on forward-looking statements and you should read these statements in conjunction with the risk factors disclosed in "Item 3. Key Information—D. Risk Factors" of this annual report. We do not undertake any obligation to update or revise the forward-looking statements except as required under applicable law.

The following table presents our selected consolidated financial information. The selected consolidated statements of income and comprehensive income data for the three years ended December 31, 2012, 2013 and 2014 and the consolidated balance sheet data as of December 31, 2013 and 2014 have been derived from our audited consolidated financial statements, which are included in this annual report beginning on page F-1. Our selected consolidated statements of income and comprehensive income data for the years ended December 31, 2010 and 2011 and our consolidated balance sheet data as of December 31, 2010, 2011 and 2012 have been derived from our audited consolidated financial statements not included in this annual report. Our historical results do not necessarily indicate results expected for any future periods. The selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements and related notes and "Item 5. Operating and Financial Review and

Prospects" below. Our audited consolidated financial statements are prepared and presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.

	For the Year Ended December 31,

	2010			2011			2012			2013			2014
	RMB			RMB			RMB			RMB			RMB			US$
	(in thousands, except for share, per share and per ADS data)
Consolidated Statements of Income and Comprehensive Income Data:
Revenues:
Online game operation revenues		2,156,258			2,708,507			2,499,419			2,800,321			3,597,595			579,827
Licensing revenues		214,981			246,823			171,564			149,318			168,956			27,231
Other revenues		12,402			28,107			99,604			103,024			76,673			12,357
Total revenues		2,383,641			2,983,437			2,770,587			3,052,663			3,843,224			619,415
Cost of revenues		(379,417	)		(479,878	)		(539,936	)		(711,648	)		(1,115,831	)		(179,839	)
Gross profit		2,004,224			2,503,559			2,230,651			2,341,015			2,727,393			439,576
Operating expenses		(1,109,197	)		(1,449,290	)		(1,664,713	)		(2,003,075	)		(2,386,461	)		(384,628	)
Operating profit		895,027			1,054,269			565,938			337,940			340,932			54,948
Total other income		35,529			109,840			127,641			154,021			236,288			38,083
Income before tax		930,556			1,164,109			693,579			491,961			577,220			93,031
Income from continuing operations, net of tax		841,560			1,002,405			577,460			421,963			455,726			73,450
Discontinued operations:(1)
Loss from discontinued operations, net of tax		(14,997	)		(22,343	)		(30,215	)		(44,322	)		—			—
Gain from disposal of discontinued operations, net of tax		—			—			—			166,288			—			—
(Loss)/income from discontinued operations, net of tax		(14,997	)		(22,343	)		(30,215	)		121,966			—			—
Net Income		826,563			980,062			547,245			543,929			455,726			73,450
Net loss/(income) attributable to non-controlling interests		14,138			3,924			(6,594	)		(1,515	)		15,664			2,524
Net income attributable to the Company's shareholders		840,701			983,986			540,651			542,414			471,390			75,974
Net Income		826,563			980,062			547,245			543,929			455,726			73,450
Other comprehensive income:
Foreign currency translation adjustment		(503	)		5,526			(20,112	)		(45,994	)		(30,513	)		(4,918	)
Comprehensive income		826,060			985,588			527,133			497,935			425,213			68,532
Comprehensive loss/(income) attributable to non-controlling interests		14,138			3,924			(6,594	)		(1,515	)		15,664			2,524
Comprehensive income attributable to the Company's shareholders		840,198			989,512			520,539			496,420			440,877			71,056
Cash dividend per ordinary share		—			—			2.49			0.54			0.60			0.096
Net earnings per ordinary share, basic
Continuing operations		3.37			4.13			2.39			1.72			1.90			0.31
Discontinued operations		(0.01	)		(0.09	)		(0.13	)		0.50			—			—
Total earnings per share, basic		3.36			4.04			2.26			2.22			1.90			0.31
Net earnings per ordinary share, diluted
Continuing operations		3.18			3.94			2.35			1.70			1.86			0.30
Discontinued operations		(0.01	)		(0.09	)		(0.12	)		0.49			—			—
Total earnings per share, diluted		3.17			3.85			2.23			2.19			1.86			0.30
Net earnings per ADS, basic
Continuing operations		16.87			20.63			11.94			8.62			9.51			1.53
Discontinued operations		(0.07	)		(0.45	)		(0.63	)		2.50			—			—
Total earnings per ADS, basic		16.80			20.18			11.31			11.12			9.51			1.53
Net earnings per ADS, diluted
Continuing operations		15.94			19.70			11.77			8.49			9.32			1.50
Discontinued operations		(0.07	)		(0.43	)		(0.62	)		2.46			—			—
Total earnings per ADS, diluted		15.87			19.27			11.15			10.95			9.32			1.50
Weighted average number of ordinary shares used in per share calculations:
Basic		250,232,543			243,765,093			239,119,233			243,958,465			247,943,431			247,943,431
Diluted		264,818,376			255,380,327			242,495,660			247,712,898			252,939,407			252,939,407
Amount attributable to the Company's shareholders:
Income from continuing operations, net of tax		844,291			1,005,977			570,866			420,448			471,390			75,974
(Loss)/income from discontinued operations, net of tax		(3,590	)		(21,991	)		(30,215	)		121,966			—			—
Net income		840,701			983,986			540,651			542,414			471,390			75,974
Share-based compensation cost included in:
Cost of revenues		(6,938	)		(6,362	)		(4,570	)		(3,671	)		(1,456	)		(235	)
Research and development expenses		(37,481	)		(47,533	)		(34,819	)		(34,243	)		(17,389	)		(2,803	)
Sales and marketing expenses		(13,079	)		(15,228	)		(10,112	)		(12,351	)		(8,211	)		(1,323	)
General and administrative expenses		(39,287	)		(35,613	)		(21,644	)		(25,627	)		(24,439	)		(3,939	)
Loss from discontinued operations, net of tax		—			—			—			(21,450	)		—			—

We have adopted an item-based revenue model for all but one of our self-developed online games and intend to apply this revenue model to most of our new online games. This revenue model may have a negative impact on our financial condition and results of operations.

We have adopted an item-based revenue model for all of our self-developed online games except for our first MMORPG, Perfect World, for which we use a time-based model whereby players are charged for their playing time. Going forward, we intend to continue applying the item-based model to most of the new online games that we operate.

Under the item-based revenue model, players are able to play the online game free of charge for an unlimited amount of time, but are charged for purchases of in-game items, such as performance-enhancing items, clothing, accessories and pets. The item-based model requires us to design games that not only attract players to spend more time playing, but also encourage them to purchase in-game items. The sale of in-game items requires us to track closely consumer tastes and preferences, especially in-game spending trends. In addition, the item-based model may cause additional concerns with the PRC regulators, who have been trying to implement ways to reduce the amount of time that Chinese youths spend on online games. A model that does not charge for time may be viewed by the PRC regulators as inconsistent with this goal. We cannot assure you that the item-based revenue model will continue to be successful, or that it will not have a negative impact on our future financial condition and results of operations.

Our revenue recognition policy for the item-based online games entails our best estimates of the lives of various items associated with each of our item-based games. We adopted the item-based revenue model beginning in September 2006. With respect to permanent ownership items that we sell to players, we recognize revenues over the estimated lives of such items. We consider the average period that paying players typically play our games and other player behavior patterns to arrive at our best estimates for the lives of these permanent ownership items, which, in some cases, may be as long as the estimated life of the related game. However, given the fast-evolving nature of the game industry and various types of online games we offer to players with different tastes and preferences, our estimate of the period that players typically play our games may not accurately reflect the actual lives of the items. We have been revising our estimates as we continue to gain operating data and refine our estimation process and results accordingly. Any future revisions to these estimates could adversely affect the time period during which we recognize revenues from these items. For example, an increase in the estimated lives of these items would increase the period over which revenues from these items are recognized. See "Item 5. Operating and Financial Review and Prospects—A. Operating Results—Critical Accounting Policies—Revenue Recognition."

If we are unable to successfully develop, launch and/or operate additional online games that grow our player base and increase our revenues, our future results of operations will be adversely affected.

In order for our business strategy to succeed over time, we will need to continually develop, launch and operate new online games or license or acquire new games that are commercially successful. We

will need to do this to both replace our existing online games as they reach the end of their useful economic lives and to meet our growth strategy of operating a larger number of online games that grow our overall player base and increase our revenues.

We plan to invest a significant amount of financial and personnel resources in developing, launching and operating new online games. The success of our new online games will largely depend on our ability to anticipate and effectively respond to changing consumer tastes and preferences and technological advances in a timely manner. We cannot assure you that the games we develop will be launched as scheduled, viewed by the regulatory authorities as complying with content restrictions, attractive to players, able to compete with games operated by our competitors or commercially successful. In addition, as we introduce new games, some of our existing customers may switch to the new games. If this transfer of players from our existing games does not grow our overall player base and revenues, our growth and profitability may be materially and adversely affected.

We may license or acquire new games from other game developers from time to time. However, we have limited track record in operating games licensed or acquired from other developers, and we may not be able to identify appropriate games or enter into arrangements with those developers to offer these games in China or elsewhere, on terms acceptable to us. If we are not able to develop, license or acquire additional online games that are commercially successful and have continuing appeal to players, our future profitability and growth prospects will decline.

We face risks and uncertainties regarding the growth of the online game industry and market acceptance of our online games and in-game items.

The online game industry, from which we derive all of our revenues, is an evolving industry and concept. The growth of the online game industry and the level of demand and market acceptance of our online games are subject to a high degree of uncertainty. Our future operating results will depend on numerous factors, many of which are beyond our control. These factors include:

Our ability to plan for product development and distribution and promotional activities will be significantly affected by our ability to anticipate and adapt to relatively rapid changes in consumer tastes and preferences. However, there is no assurance that online games will continue to be popular in China or elsewhere. A decline in the popularity of online games in general, or the online games that we operate, will likely adversely affect our business and prospects. We must be able to track and respond to changes in consumer preferences in a timely and effective manner, especially changes in game preferences and consumer spending trends relating to in-game item purchases.

A severe and prolonged global economic recession and the related slowdown in the Chinese economy may adversely affect our business, results of operations and financial condition.

The global financial markets experienced significant disruptions in 2008 and the United States, Europe and other economies went into recession. The recovery from the lows of 2008 and 2009 was uneven and it is facing new challenges, including the escalation of the European sovereign debt crisis since 2011 and the slowdown of the Chinese economy since 2012. It is unclear whether the European sovereign debt crisis will be continued and whether the Chinese economy will resume its high growth rate. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies that have been adopted by the central banks and financial authorities of some of the world's leading economies, including China's. There have been concerns over unrest in the Middle East and Africa, which have resulted in volatility in oil and other markets. There have also been concerns about the economic effect of the earthquake, tsunami and nuclear crisis in Japan and tensions in the relationship between China and Japan. Economic conditions in China are sensitive to global economic conditions. Since we derive a majority of our revenues from China, any slowdown in the Chinese economy may have a negative impact on our business, operating results and financial condition in a number of ways. For example, our game players may decrease or delay spending with us, while we may have difficulty expanding our customer base fast enough, or at all, to offset the impact of decreased spending by our existing game players. Furthermore, the economic recession in other countries where our games are operated may reduce game players' level of disposable income, perceived future earnings capacities and willingness to spend, and may thus result in a decline in their spending on our games and a corresponding decrease in our revenues and profit.

Our business could suffer if we do not successfully manage our business expansion.

We have experienced a period of significant business expansion that has placed, and continues to place, strain on our management personnel, systems and resources. To accommodate our business expansion pursuant to our strategies, we anticipate that we may need to implement and maintain a variety of new and upgraded operational and financial systems, including online payment systems and related security systems, procedures and controls, and improve our accounting and other internal management systems, all of which require substantial management efforts. We also will need to continue to expand, train, manage and motivate our workforce, and manage our relationships with our distributors, customers, overseas licensees and third-party service providers. All of these endeavors will require substantial management effort and skill and the incurrence of additional expenditures. We cannot assure you that we will be able to efficiently or effectively implement our business expansion strategies and manage the growth of our operations, and any failure to do so may limit our future growth and hamper our business strategy.

Our recent acquisitions and strategic investments and any future acquisitions, investments or alliances may have an adverse effect on our ability to manage our business and may subject us to unforeseen liabilities.

Selective acquisitions of and investments in online game development and operating companies and alliances with key players in the online game industry and other related industry sectors form part of our strategy to further expand our business. However, our ability to grow through future acquisitions, investments or alliances, such as joint ventures, will depend on the availability of suitable acquisition or investment targets or joint venture partners at reasonable terms, our ability to compete effectively to attract these targets or partners, the availability of financing to complete large acquisitions, investments or joint ventures, and our ability to obtain any required governmental approvals.

We only have limited experience in identifying, financing and completing large acquisitions, investments or joint venture transactions. These acquisitions and investments and our future similar

transactions could expose us to potential risks, including risks associated with the assimilation of new operations, technologies and personnel, unforeseen or hidden liabilities, the inability to generate sufficient revenue to offset the costs and expenses of acquisitions, significant loss of investments, and potential loss of, or harm to, our relationships with employees, customers, licensors and other suppliers as a result of integration of new businesses. Furthermore, we may not be able to maintain a satisfactory relationship with our joint venture or other partners or handle other risks associated with our future alliances, which could adversely affect our business and results of operations. Such transactions and the subsequent integration processes would require significant attention from our management. The diversion of our management's attention and any difficulties encountered with respect to the acquisitions or alliances or in the process of integration could have an adverse effect on our ability to manage our business.

We may suffer material loss on our venture capital investments if the fund we invested does not achieve the performance we expected.

In 2011, we entered into a limited partnership agreement to invest up to RMB643.5 million as a limited partner in a venture capital fund over a nine-year period. This venture capital fund is expected to invest in high growth companies in the technology, media and telecommunication, or TMT, industries. In early 2013, we increased our committed capital for an additional RMB396.0 million and the investment term has been changed to 12 years. The venture capital fund intends to invest the additional capital received as a limited partner into another private equity fund, which focuses on investment into mature companies in the consumer and retail, financial services, health care, TMT, energy and natural resources, and high value-added manufacturing industries in China. The venture capital fund is managed by a general partner unrelated to us. Because various regulations in China currently restrict or prevent foreign-invested entities from engaging in certain TMT industries which are the targeted industries of the venture capital fund, we use Tianjin Trendsters Investment Co., Ltd., or Trendsters Investment, a variable interest entity we established in November 2011, as an investment vehicle to hold our investment in the fund. Trendsters Investment does not itself make investment decisions for the fund and is not involved in the management of the fund. These investments have inherent risks. We may suffer material loss in our venture capital investments if the fund we invested does not achieve the performance we expected.

We operate in a highly competitive industry and compete against many companies.

We believe that there are over 100 online game operators in China. Given the relatively low entry barriers to operating online games, we expect more companies to enter the online game industry in China and a wider range of online games to be introduced to the China market. Our principal competitors in China include Tencent Holdings Limited, or Tencent, NetEase.com, Inc., or NetEase, Shanda Games Limited, or Shanda Games, Changyou.com Limited, or Changyou, Giant Interactive Group Inc., or Giant Interactive, Kingsoft Corporation Limited, or Kingsoft, Shanghai Posts & Telecommunications Technology Co., Ltd., or Tiancity, Beijing Guangyu Huaxia Sci-Tech Co., Ltd., or Guangyu Huaxia, KongZhong Corporation, or KongZhong, and NetDragon Websoft Inc., or NetDragon. Our potential competitors also include major internet portal operators, other domestic and foreign game developers and publishers, and alliances between our existing and new competitors. Some of our competitors have significantly greater financial and marketing resources, name recognition and game development resources than we have. In addition, many of our competitors have developed and operated games that have proven commercially successful for a longer period of time than our games and have a larger portfolio of online game offerings than we do. As a result, they may be able to take greater risks and endure lower than expected performances from some of their games than we are able to do.

Our competitors may introduce new business models, and if these new business models are more attractive to customers than the business models we currently use, our customers may switch to our competitors' games. We believe that competition in the online game market in China may become more intense as increasing numbers of online games are introduced in the market. We cannot assure you that we will be able to compete successfully against any new or existing competitors, or against any new business models implemented by them. In addition, mobile games have gained increasing popularity and user base along with the online games and other online platforms. The increased competition we have experienced and anticipate in the online game industry may reduce the number of our players or growth rate of our player base, or cause us to reduce usage fees or the prices of certain in-game items. All of these competitive factors could have a material adverse effect on our revenue growth and profitability.

As we currently depend on a limited number of online games for substantially all of our revenues, any adverse developments relating to these games may adversely affect our future results of operations.

We anticipate that our existing client-based online PC games and mobile games in operation will continue to account for a substantial majority of our revenues in 2015. In 2014, our top three online games operated in China, namely Zhu Xian, Return of the Condor Heroes Mobile and Perfect World II, in aggregate contributed 34% of our total revenues. Although we currently have a number of new games in pipeline, and will target to develop and launch more games in the future, we cannot guarantee you that we will be able to successfully develop, launch and operate any of these new games. Neither can we guarantee you that we will be able to maintain the popularity of our top games or that our new games would generate sufficient revenues to replace these top games should they approach the end of their respective life cycles.

Accordingly, any of the following could materially and adversely affect our business, financial condition and results of operations:

We distribute our mobile games through a number of app stores and web platforms, including Apple's App Store, 91.com, Baidu, Qihoo 360 and UCWEB. These app stores and web platforms also serve as payment collection channels. App stores and web platforms have strong bargaining power in dealing with mobile game developers and operators like us. We are subject to the standard service terms and conditions of these app stores and web platforms with regard to the promotion, distribution, operation and payment methods for our mobile games. If any of these app stores and web platforms (i) goes out of business, (ii) discontinues its relationship with us due to any reason, such as our failure to comply with any laws or regulations in any jurisdiction where our games are offered, (iii) limits our access to its platforms, (iv) modifies its terms of services or other policies, (v) changes its fee structure, (vi) provides more favorable terms to our competitors or develops its own games, or (vii) is forced to cease the business relationship with us due to its lack of required licenses or permits or other regulatory compliance issues, our business could be adversely affected.

In addition, we have benefited from these platforms' widely recognized brand names and large player bases. If any of these app stores and web platforms loses its market position or otherwise falls out of favor among players or other factors cause its player base to stop growing or shrink, or if any of them fails to perform its contractual obligations to us, we would need to identify alternative platforms for marketing, promoting and distributing our mobile games, which would consume substantial resources and may not be effective or available.

Our failure to anticipate or successfully implement new technologies could render our game engines, game development platforms or games uncompetitive or obsolete, and reduce our revenues and market share.

Our proprietary game engines, game development platforms and anti-cheating expertise are critical to our success. The online game industry is subject to rapid technological change. We need to anticipate the emergence of new technologies and assess their market acceptance. We also need to invest significant resources in research and development to keep pace with technological advances in order to make our development capabilities and our games competitive in the market. However, development activities are inherently uncertain, and we might encounter practical difficulties in commercializing our development results. Our significant expenditures on research and development may not generate corresponding benefits. Given the fast pace with which online game technology has been and will continue to be developed, we may not be able to timely upgrade our game engines or our game development platforms in an efficient and cost-effective manner, or at all. New technologies in online game programming or operations could render our technologies, our existing online games or the games that we are developing or expect to develop in the future obsolete or uncompetitive, thereby potentially resulting in a decline in our revenues and market share.

We face risks associated with the licensing and operation of our games overseas, and if we are unable to effectively manage these risks, they could impair our ability to expand our business internationally.

As of the date of this annual report, we have licensed a number of our games to game operators overseas and have been operating a number of games in overseas markets by ourselves. We plan to further license and operate our existing and new games in more countries and regions. The offering of our games in the international markets through self-operation exposes us to a number of risks, including:

The offering of our games in the international markets through licensing exposes us to a number of additional risks, including:

The countries and regions where we license our games impose various restrictions on online games. For example, Korea requires online game companies to obtain a rating classification for online games and implement procedures to restrict the distribution of online games to minors. In particular,

online game operators in Korea are required to screen minors from accessing the online games between midnight and 6 a.m. In Vietnam, all internet cafés must be shut down between 10 p.m. and 8 a.m., no online game advertisement is permitted and no internet café can be operated within 200 meters of a school. If we are unable to effectively manage these and other risks associated with the licensing of our games overseas, our ability to expand our business internationally and our growth prospect could be impaired.

Unauthorized character enhancements and other hacking or cheating activities could harm our business and reputation and materially and adversely affect our results of operations.

With the increase in the number of online game players in China, online game operators have increasingly encountered problems arising from the use of unauthorized character enhancements and other hacking or cheating activities. We have from time to time detected a number of players who have gained an unfair in-game advantage by installing hacking or cheating tools to facilitate character progression. In response to these activities, we have installed built-in detection mechanisms in our games to identify various hacking and cheating activities, and have expanded our technical team dedicated to detecting unauthorized character enhancements and resolving other hacking issues. Continued occurrences of unauthorized character enhancements and other manipulations may negatively impact the image of our online games and players' perception of their reliability, decrease the number of players, reduce the players' interest in purchasing in-game items, shorten the life span of the games and adversely affect our results of operations. Furthermore, once we detect the players who have engaged in hacking or cheating activities, we generally suspend their access to their respective accounts, which may result in significant user dissatisfaction and cause some of these players to cease to play the game altogether.

In addition, our games may be affected by other hacking or cheating activities in China and other countries and regions. We cannot assure you that we or our overseas licensees will be able to defend against these attacks promptly and effectively in the future. Furthermore, we cannot assure you that we will be able to identify and eliminate new unauthorized character enhancements or other hacking or cheating activities in a timely manner, or at all. Unauthorized character enhancements and other hacking or cheating activities could harm our business and reputation and adversely affect our results of operations. Furthermore, a constant recurrence of these activities may require us to shift our management's and personnel's attention from research and development and other operations to focus instead primarily on anti-hacking programs and activities, which could hurt our ability to develop and launch new games and grow our business.

We may not be able to prevent others from infringing upon our intellectual property rights, which may harm our business and expose us to litigation.

We regard our proprietary software, domain names, trade names, copyrights, trademarks, trade secrets and similar intellectual properties as critical to our success. In particular, we have spent significant amount of time and resources in developing our game engines and must continue to protect the technology. We do not hold any patents in China or elsewhere and intellectual property rights and confidentiality protection in China may not be as effective as in the United States or other countries. Policing unauthorized use of proprietary technology is difficult and expensive. We have taken steps to prevent the misappropriation of our proprietary technology, including registration of our online games that are currently in operation and a number of our game engines for copyright protection, registration of our domain names and entering into non-competition and confidentiality agreements with our key employees. However, these steps may be inadequate. Any misappropriation by our employees, licensees or other third parties of intellectual property used in our business, whether licensed to us or owned by us, could have an adverse effect on our business and operating results. The validity, enforceability and scope of protection of intellectual property in internet-related industries are uncertain and still evolving. In particular, the laws and enforcement procedures of the PRC and certain other countries are

uncertain or do not protect intellectual property rights in this area to the same extent as do the laws and enforcement procedures of the United States. We mainly rely on our licensees for copyright, domain names and trademark protection outside China, although very limited protection has been secured to date. We may need to resort to court proceedings to enforce our intellectual property rights in the future. Litigation relating to our intellectual property might result in substantial costs and diversion of resources and management attention away from our business. See "—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us."

We may be subject to intellectual property infringement claims which could be time-consuming and costly to defend and may result in diversion of our financial and management resources and our inability to continue providing certain of our existing games.

We cannot assure you that our online games or other content posted on our websites, such as the information posted on our in-game bulletin boards, do not or will not infringe upon patents, valid 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 in the ordinary course of our business. For example, on February 1, 2013, a Delaware company sued Perfect World Entertainment Inc., or PW USA (Parallel Networks, LLC v. Perfect World Entertainment, Inc., Case No. 13-cv-00182) and ten other companies in related actions for patent infringement in the United States District Court for the District of Delaware. The plaintiff alleged that PW USA's installers, downloaders and/or launchers, which are downloaded by users from our websites in connection with the distribution of our games, infringed two of its patents. Although we settled this case in June 2013 without having any material adverse effect on our business, we cannot assure you that we will not face similar claims in the future. If we are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property, be forced to pay fines and damages, and we may incur licensing fees or be forced to develop alternatives. In addition, we may incur substantial expenses and diversion of our financial and management resources in defending against these third party infringement claims, regardless of their merit. Successful infringement or other intellectual property rights claims against us may result in substantial monetary liabilities, which may disrupt our operations and materially adversely affect our business, results of operations and prospects.

Some of our employees were previously employed at other companies, including our current and potential competitors. We also intend to hire additional personnel to expand our product development and technical support teams. To the extent these employees are involved in research at our company similar to research in which they have been involved at their former employers, we may become subject to claims that such employees or we may have used or disclosed trade secrets or other proprietary information of the former employers of our employees.

Moreover, we currently derive, and expect to continue to derive, substantial revenues and profits from online games based on intellectual property licensed to us by third parties. Any of our licensors may be subject to intellectual property rights claims with respect to those aspects of the online game licensed to us. If any of our licensors cannot prevail on the intellectual property rights claims brought against it, we might lose our license from such licensor and may not be able to obtain the license from the legitimate owner of the intellectual property, and our results of operations could be materially and adversely affected.

We may be the target of harassing or other detrimental conducts by third parties including defamatory and malicious internet postings and allegations reported to government authorities that could harm our reputation and adversely affect the price of our ADSs.

We have been, and in the future may be, the target of harassing or other detrimental conducts by third parties. For example, in January 2012, there were anonymous allegations posted on certain Chinese language websites regarding the corporate governance and business ethics of our company and

our management. To our knowledge, some of these defamatory and malicious allegations were also reported to certain government authorities. We have been, and in the future may continue to be, subject to government or regulatory inquiries or investigation as a result of such third-party conducts. We may need to spend significant time and incur substantial costs to respond to such third-party conducts, and there is no assurance that we will be able to conclusively refute each of the allegations within a reasonable period of time, or at all. Our reputation and the price of our ADSs may also be negatively affected as a result of such detrimental third-party conducts.

Undetected programming errors or flaws in our games or failure to maintain effective customer service could harm our reputation or decrease market acceptance of our games, which would materially and adversely affect our results of operations.

Our games may contain errors or flaws, which may only become apparent after their release, particularly as we launch new games or introduce new features to existing games under tight time constraints. From time to time, our players informed us of programming flaws affecting their game play experience, which we were generally able to resolve promptly. Furthermore, customer service, including in-game masters, is critical for retaining customers, and we may not be able to maintain and continuously improve the quality of our services to meet customers' expectations. If our games contain programming errors or other flaws, or if we inadvertently delete our customers' records or otherwise fail to provide effective customer service, our customers may be less inclined to continue or resume playing our games or recommend our games to other potential customers, and may switch to our competitors' games. Undetected programming errors, game defects and unsatisfactory customer service can disrupt our operations, adversely affect the game experience of our customers, harm our reputation, cause our customers to stop playing our games, and delay market acceptance of our games, any of which could materially and adversely affect our results of operations.

Network interruptions or loss of critical customer data caused by system failures or other internal or external factors may lead to player attrition and revenue reduction and harm our business and reputation.

Any failure to maintain the satisfactory performance, reliability, security and availability of our network and computer infrastructure may cause significant harm to our reputation and our ability to attract and maintain players. From time to time, our customers in certain locations could not gain access to our online game services for a period of time lasting from several minutes to several hours due to server interruptions, power shutdowns, internet connection problems or other reasons. Any server interruptions, break-downs, design deficiencies, or system failures, including failures which may be attributable to events within or outside our control that could result in a sustained shutdown of all or a material portion of our services or loss of critical customer data, could adversely impact our ability to service our players and lead to player attrition and revenue reduction.

Our network systems are also vulnerable to damage from computer viruses, fire, flood, earthquake, power loss, telecommunications failures, computer hacking and similar events. We do not maintain insurance policies covering losses relating to our systems and do not have business interruption insurance.

If our system and network infrastructure fails to operate effectively, our business may be harmed.

We use internally developed software systems that support nearly all aspects of our billing transactions. Our business may be harmed if we are unable to upgrade our systems fast enough to accommodate future traffic levels, avoid obsolescence or successfully integrate any newly developed or acquired technology with our existing systems. Furthermore, our network capacity depends on our owned and leased network servers and the communication bandwidth that we lease. Constraints in network capacity could cause unanticipated system disruptions and slower response time, affecting data transmission and game play. These factors could, among other things, cause us to lose existing or

potential customers, which could, in turn, materially and adversely affect our business and results of operations.

We rely on services from third parties to carry out our businesses, and if there is any interruption or deterioration in the quality of these services, our customers may cease playing our games.

We rely on a distribution network composed of non-exclusive third-party distributors throughout China to carry out a portion of sales of our online game services to our customers. Our distributors also distribute games for our competitors. We do not have long-term agreements with any of our distributors, and cannot assure you that we will continue to maintain favorable relationships with them. In addition, we rely on various internet data centers to host our servers. Any interruption in our ability to obtain the services of these or other third parties or deterioration in their performance could impair the timeliness and quality of our service. Furthermore, if our arrangements with any of these third parties are terminated or modified against our interest, we may not be able to find alternative channels of distribution or services on a timely basis or on terms favorable to us or at all.

The financial soundness of our licensees, distributors and vendors could affect our business and results of operations.

If our licensees, distributors, service or product suppliers and other vendors experience cash flow concerns, licensees and distributors may delay their payment to us and vendors may increase their prices, reduce their output or change terms of sales. Additionally, if the operating and financial performance of our licensees, distributors and/or vendors deteriorates, or if they are unable to make scheduled payments or obtain credit, licensees or distributors may not be able to pay, or may delay payment of, accounts receivable owed to us and vendors may restrict credit or impose different payment terms. Any inability of current or potential licensees or distributors to pay us or any demands by vendors for different payment terms may adversely affect our earnings and cash flow.

We need a substantial amount of cash to fund our operations; if we fail to obtain additional capital when we require it, our growth prospects and future profitability may be materially and adversely affected.

We require a significant amount of cash to fund our operations. In particular, we will need capital to fund the expansion of our business and our research and development activities in order to remain competitive in this market. Future expansions, changes in market conditions or other developments may also cause us to require additional funds. Our ability to obtain external financing in the future is subject to a number of uncertainties, including:

If we are unable to obtain necessary capital in a timely manner or on commercially acceptable terms, our operation, results of operations and growth prospects may be materially and adversely affected.

We could be liable for breaches of security of our website and third party online payment channels, which may have a material adverse effect on our reputation and business.

Currently, a portion of our online game operation revenues are generated from sales through third-party online payment platforms. In such transactions, secured transmission of confidential information, such as customers' credit card numbers and expiration dates, personal information and billing addresses, over public networks, in some cases including our website as well, is essential to maintain consumer confidence. While we have not experienced any material breach of our security measures to date, we cannot assure you that our current security measures are adequate. In addition, we expect that an increasing amount of our sales will be conducted over the internet as a result of the

growing use of online payment systems over time. In the meantime, the associated online crime will likely increase as well and we must be prepared to increase our security measures and efforts so that our customers have confidence in the reliability of the online payment systems that we use. We do not have control over the security measures of our third party online payment vendors and we cannot assure you that these vendors' security measures are adequate or will be adequate with the expected increased usage of online payment systems. Security breaches of the online payment systems that we use could expose us to litigation and possible liability for failing to secure confidential customer information and could harm our reputation, ability to attract customers and ability to encourage customers to purchase in-game items.

We have experienced and may continue to experience fluctuations in quarterly operating results.

Although our entire game portfolio does not exhibit clear cyclic characteristics, our quarterly operating results have experienced fluctuations and may continue to fluctuate in the future. Such fluctuations are due to a variety of factors, including the demand for our products and services and our competitors' products and services, the launch of our new games, changes in estimation of the average period that players typically play our games, the quality of the expansion packs for our existing games, the level of usage of illegal game servers, the level of usage of the internet, the size and rate of growth of the online game market, development and promotional expenses related to the introduction of new products, network interruptions and other system problems. As an online game operator, our revenues in any quarter depend on various factors that can cause significant fluctuations, including timing and strength of the expansion packs release and in-game promotions, the amount and mixture of in-game items purchased by players, the game playing time spent by our players and evolving market conditions. To a significant degree, our operating expenses are based on planned expenditures and our expectations regarding prospective customer usage and purchases. Failure to meet our expectations or our inability to accurately estimate customer usage and purchases, could disproportionately and adversely affect our operating results in any given quarter. Given the adoption of the item-based revenue model, it may be difficult to estimate customer usage and purchases. As a result, we believe that period-to-period comparisons of operating results are not necessarily indicative of our future results.

Our business and growth are substantially dependent on the continuing efforts of our senior executive officers, and our business may be severely disrupted if we lose their services.

Our future success depends substantially on the continued services of our senior executive officers and key employees. If one or more of our senior executive officers were unable or unwilling to continue in their present positions, we might not be able to replace them easily, timely, or at all, our business may be severely disrupted, and our financial conditions and results of operations may be materially and adversely affected. If any of our senior executive officers joins a competitor or forms a competing company, we may lose distributors, customers, service providers, know-how and key professionals and staff members. Each of our senior executive officers has entered into an employment agreement with us, which contains non-competition provisions. However, if any dispute arises between our senior executive officers and us, these agreements may not be enforceable in China, where these executive officers reside, in light of the uncertainties relating to China's legal system. See "—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us."

If we are unable to attract, train and retain key employees, our business may be adversely affected.

We will need to hire and retain additional qualified employees, particularly experienced game development personnel with expertise in the online game industry. Since our industry is characterized by high demand and intense competition for talent, we may need to offer higher compensation and other benefits in order to retain key personnel in the future. We formed five new controlled companies, in which we hold majority stakes, in line with the restructuring plan of our research and development

teams, to help retain, attract and incentivize top talents. However, we cannot assure you that, by implementing this plan or any other measures we may take in the future, we will be able to attract or retain the qualified key personnel that we will need to achieve our business objectives. In addition, as we are still a relatively young company and our business has grown rapidly since our establishment, our ability to train and integrate new employees into our operations may not meet the increasing demands of our business.

If we fail to maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results, and investor confidence and the market price of our ADSs may be adversely affected.

We are subject to the reporting obligations under the U.S. securities laws. Under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we are required to include a report of management on the effectiveness of our internal control over financial reporting in our annual report. In addition, our independent registered public accounting firm must issue an attestation report on the effectiveness of our internal control over financial reporting. If we fail to maintain effective internal control over financial reporting in the future, a material misstatement of our financial statements may not be prevented or detected on a timely basis. In addition, we and our independent registered public accounting firm may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting at a reasonable assurance level in accordance with Section 404. This could in turn result in the loss of investor confidence in the reliability of our financial statements and negatively impact the trading price of our ADSs. Furthermore, we have incurred and anticipate that we will continue to incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act. If we are not able to continue to meet the requirements of Section 404 in a timely manner or with adequate compliance, we may be subject to sanctions or investigation by the SEC or other regulatory authorities. Any such action could adversely affect our financial results and the market price of our ADSs.

Our business could be adversely affected by the effects of Ebola virus disease, influenza, avian flu, severe acute respiratory syndrome, or SARS, or any other epidemic or outbreak. Any prolonged recurrence of Ebola virus disease, influenza, avian flu, SARS or other adverse public health developments in China may have a material adverse effect on our business operations. Our operations may be impacted by a number of health-related factors, including, among other things, quarantines or closures of our offices which could severely disrupt our operations, the sickness or death of our key officers and employees, closure of internet cafés 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 have not adopted any written preventive measures or contingency plans to combat any future outbreak of Ebola virus disease, influenza, avian flu, SARS or any other epidemic. In addition, other major natural disasters may also adversely affect our business by, for example, causing disruptions of the internet network or otherwise affecting access to our games, or resulting in damages to our facilities. For example, the earthquake, tsunami and nuclear crisis hitting Japan in March 2011 caused a temporary decline in the number of game players logged on to our games in Japan and a delay of the commercial launch of our new games in Japan.

If PRC tax benefits currently available to our PRC subsidiaries and our PRC affiliated entities are reduced or repealed, our business and results of operations could suffer.

Under the corporate income tax law that took effect on January 1, 2008, foreign-invested enterprises, such as our subsidiary, Beijing Perfect World Software Co., Ltd., or PW Software, and domestic companies are subject to corporate income tax at a uniform rate of 25%. Preferential tax

treatments will continue to be granted to entities which conduct businesses in certain encouraged sectors and to entities classified as "software enterprises" and/or "high and new technology enterprises." See "Item 5. Operating and Financial Review and Prospects—A. Operating Results—Taxation—PRC—PRC Corporate Income Tax." In addition, according to tax rules and regulations that are favorable to technology development businesses, revenues generated from software development and relevant technology consulting services may enjoy business tax exemption. Any expiration of, or changes to, these tax benefits or treatments will have a material adverse effect on our operating results.

Our global income may be subject to PRC tax under the corporate income tax law, which would have a material adverse effect on our results of operations.

Under the corporate income tax law and the Implementing Rules, an enterprise established outside of the PRC with "de facto management bodies" within the PRC is considered a resident enterprise and will be subject to the corporate income tax on its global income. According to the Implementing Rules, "de facto management bodies" refer to "establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise." Accordingly, Perfect World Co., Ltd. and its subsidiaries outside the PRC may be considered a resident enterprise and may therefore be subject to PRC corporate income tax on our global income. If Perfect World Co., Ltd. and its subsidiaries outside the PRC are considered a resident enterprise and earn income other than the dividends from our PRC subsidiaries, such PRC income tax on our global income could significantly increase our tax burden and materially and adversely affect our cash flow and profitability.

In addition, with the uncertainty regarding the interpretation and implementation of the corporate income tax law and its implementation rules, if we are regarded as a PRC resident enterprise, then any dividends to be distributed by us to our non-PRC shareholders or ADS holders or any gains realized by non-PRC shareholders or ADS holders from transfer of our shares or ADSs may be subject to PRC withholding tax. If we are required under the corporate income tax law to withhold PRC income tax on the above dividends or gains, the investment in our shares or ADSs may be materially and adversely affected.

The PRC withholding tax rate on dividends that PW Hong Kong receives from our PRC subsidiaries may rise under the corporate income tax law, which would have a material adverse effect on our results of operations.

Pursuant to the corporate income tax law and the Implementing Rules, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise to its foreign investors are subject to a 10% withholding tax if the foreign investors are considered non-resident enterprises without any establishment or place within China or if the dividends payable have no connection with the establishment or place of the foreign investors within China, unless any such foreign investor's jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. Perfect Online Holding Limited, or PW Hong Kong, our wholly owned subsidiary and the direct holder of 100% equity interest in PW Software, Shanghai Perfect World Software Co., Ltd., or Shanghai PW Software and Beijing Perfect World Game Software Co., Ltd., or PW Game Software, is incorporated in Hong Kong. According to a tax arrangement between Mainland China and Hong Kong, dividends paid by a foreign-invested enterprise in China to its direct holding company in Hong Kong are subject to withholding tax at a rate of no more than 5% if the foreign investor directly owns at least 25% of the shares of the foreign-invested enterprise. However, if PW Hong Kong is not considered to be the beneficial owner of dividends paid to it by its PRC subsidiaries under a tax notice promulgated on October 27, 2009, such dividends should be subject to withholding tax at a rate of 10%.

The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products. As a result, we do not have any business liability, loss of data or disruption insurance coverage for our operations in China. Any business disruption, litigation or natural disaster might result in our incurring substantial costs and the diversion of our resources.

If the PRC government finds that the arrangements that establish the structure for operating our business and investing in a venture capital fund do not comply with PRC government restrictions on foreign investment, we could be subject to severe penalties.

We are a Cayman Islands company and, as such, we are classified as a foreign enterprise under Chinese laws, and our wholly owned PRC subsidiaries are foreign-invested enterprises. Various regulations in China currently restrict or prevent foreign ownership of companies that operate online game, online reading and other TMT businesses. In light of these restrictions, we operate our businesses and make investments through our variable interest entities in China. Specifically, we rely (i) on Beijing Perfect World Network Technology Co., Ltd., or PW Network, and Beijing Perfect World Digital Technology Co., Ltd., or PW Digital Technology, to conduct our online game businesses in China; and (ii) on Trendsters Investment to hold our investment in a venture capital fund that may invest in various TMT businesses. We previously operated our film and television business through Beijing Perfect Moment Network Technology Co., Ltd. (previously known as Beijing Perfect Moment Pictures Co., Ltd.), or Perfect Moment, in China, which no longer has material business operations after we sold the film and television business in August 2011. We had operated our online reading business through Beijing Huanxiang Zongheng Chinese Literature Website Co., Ltd. (previously known as Beijing Huanxiang Zongheng Network Technologies Co., Ltd.), or PW Literature, before we sold PW Literature to an unrelated party in December 2013. We treat PW Network, PW Digital Technology, Trendsters Investment, Perfect Moment, and PW Literature, for the period before we sold it in December 2013, as our variable interest entities. Our variable interest entities hold the licenses and own intellectual property, facilities and other assets that are essential for our business operations.

Each of our variable interest entities and their respective equity owners have entered into a series of contractual arrangements with PW Software, or in the case of PW Digital Technology, with PW Game Software, through which we have effective control over each of our variable interest entities. The agreements between PW Literature, its equity owners and PW Software were terminated when we sold PW Literature to an unrelated party in December 2013. For a description of these contractual arrangements with PW Network, PW Digital Technology, Trendsters Investment, Perfect Moment and PW Literature, see "Item 4. Information on the Company—A. History and Development of the Company," "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with PW Network and its Equity Owners," "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with PW Digital Technology and its Equity Owners," "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with Trendsters Investment and its Equity Owners," "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with Perfect Moment and its Equity Owners" and "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with PW Literature and its Equity Owners."

Under the equity pledge agreements, the equity holders of our variable interest entities pledged their respective equity interests in our variable interest entities to PW Software or to PW Game Software in the case of PW Digital Technology. According to the PRC Property Rights Law which took

effect on October 1, 2007, such equity pledge has to be registered with the relevant administration for industry and commerce. We completed the registration of the pledge of PW Literature's equity interests in early 2011 and again in 2012 after the change of PW Literature's equity owners in July 2011. We completed the registration of the pledge of the equity interests of PW Network, Perfect Moment and Trendsters Investment in 2012 and the registration of the pledge of the equity interest of PW Digital Technology in 2014.

The Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business issued by the Ministry of Industry and Information Technology (previously known as the Ministry of Information Industry), or the MIIT, in July 2006, reiterated the regulations on foreign investment in telecommunications businesses, which require foreign investors to set up foreign-invested enterprises and obtain a business operating license for internet content provision, or ICP license, to conduct any value-added telecommunications business in China. Under this circular, an ICP license holder must own relevant trademarks and domain names that are used in the value-added telecommunications business, have necessary facilities for its approved business operations, and maintain network and information security in accordance with the standards set forth under relevant PRC regulations. Furthermore, an ICP license holder is prohibited from leasing, transferring or selling the license to foreign investors in any form, and from providing any assistance, including providing resources, sites or facilities, to foreign investors that conduct value-added telecommunications business illegally in China. Due to a lack of interpretative materials from the regulator, it is unclear what impact this circular will have on us or the other Chinese internet companies that have adopted the same or similar corporate and contractual structures as ours. We have made verbal inquiries with the officials at the MIIT, but have not been able to get a definitive answer as to the applicability of this circular to our corporate structure and to the enforcement and performance of the contractual arrangements between our wholly owned PRC subsidiaries on the one hand, and our variable interest entities and their respective equity holders on the other.

On September 28, 2009, the General Administration of Press and Publication of China, or GAPP, which was reorganized as the State Administration of Press, Publication, Radio, Film, and Television, or SAPPRFT, in 2013, the National Copyright Administration, and National Office of Combating Pornography and Illegal Publications jointly issued a Notice on Further Strengthening on the Administration of Pre-examination and Approval of Online Games and the Examination and Approval of Imported Online Game, or the GAPP Notice. The GAPP Notice restates that foreign investors are not permitted to invest in online game-operating businesses in China via wholly owned, equity joint venture or cooperative joint venture investments and expressly prohibits foreign investors from gaining control over or participating in domestic online game operators through indirect ways such as establishing other joint venture companies, or contractual or technical arrangements. However, the GAPP Notice does not provide any interpretation of the term "foreign investors" or make a distinction between foreign online game companies and China based companies under a similar corporate structure like ours. Thus, it is unclear whether such regulations will be applicable to us or many other China based companies that rely on similar contractual arrangements with variable interest entities to operate online games in China.

In the opinion of King & Wood Mallesons, our PRC counsel, each of the above agreements constitutes valid and legally binding obligations of each party to such contractual agreements under PRC Laws. However, King & Wood Mallesons is of the view that the interpretation and implementation of the laws and regulations in the PRC and their application to and effect on the legality, binding effect and enforceability of contracts are subject to the discretion of competent PRC authorities, and therefore there is no assurance that relevant PRC authorities will take the same position as the opinion of King & Wood Mallesons herein in respect of the legality, binding effect and enforceability of each of the contractual agreements.

It is uncertain whether any new PRC laws, rules or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. In particular, in January 2015, the Ministry of Commerce published a discussion draft of the proposed Foreign Investment Law for public review and comments. Among other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of "actual control" in determining whether a company is considered a foreign-invested enterprise. Under the draft Foreign Investment Law, variable interest entities would also be deemed as foreign-invested enterprises if they are ultimately "controlled" by foreign investors, and be subject to restrictions on foreign investments. However, the draft law has not taken a position on what actions will be taken with respect to the existing companies with the "variable interest entity" structure, whether or not these companies are controlled by Chinese parties. It is uncertain when the draft would be signed into law and whether the final version would have any substantial changes from the draft. See "—Risks Related to Doing Business in China—Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations."

If we are found to be in violation of any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violation, including levying fines, confiscating our income, revoking business licenses of PW Software and PW Game Software or the business or operating licenses of our variable interest entities, requiring us to restructure the relevant ownership structure or operations, and requiring us to discontinue all or any portion of our online game operations. Any of these actions could cause significant disruption to our business operations and may materially and adversely affect our business, financial condition and results of operations.

Our contractual arrangements with our variable interest entities may result in adverse PRC tax consequences to us.

We could face material and adverse PRC tax consequences if the PRC tax authorities determine that PW Software's and PW Game Software's contractual arrangements with our variable interest entities were not made on an arm's length basis and adjust our income and expenses for PRC tax purposes in the form of a transfer pricing adjustment. A transfer pricing adjustment could adversely affect us by (i) increasing the PRC tax liabilities of these variable interest entities without reducing the PRC tax liabilities of PW Software and PW Game Software, which could further result in late payment fees and other penalties to these variable interest entities for underpaid taxes; or (ii) limiting the ability of PW Software, PW Game Software and these variable interest entities to maintain preferential PRC tax treatments and other financial incentives.

Our contractual arrangements with our PRC variable interest entities and their respective equity owners may not be as effective in providing control over these entities as direct ownership of these entities.

We conduct substantially all of our operations, and generate substantially all of our revenues, in China through contractual arrangements with our PRC variable interest entities and their respective equity owners that provide us with effective control over these variable interest entities. We have no direct ownership interest in our PRC variable interest entities. The contractual arrangements among our wholly owned subsidiaries, PW Software and PW Game Software, and our PRC variable interest entities and their respective equity owners may not be as effective in providing us with control over these variable interest entities as direct ownership subject to the discretion of competent PRC authorities. Our PRC variable interest entities or their respective equity owners may breach their contractual arrangements. The equity owners of these variable interest entities may bring claims against us to demand their economic and other rights in these entities by virtue of the fact that they are

registered equity holders of these entities. They may also refuse to transfer their equity interests in our PRC variable interest entities to us or our designee when and if we request so. There is no assurance that the equity owners of our variable interest entities will act in our interests in the event of conflicts of interest between their own interests and those of our company.

In any such event, we would have to rely on legal remedies under PRC law. These remedies may not always be effective, particularly in light of uncertainties in the PRC legal system. See "—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us." In addition, PRC laws and regulations governing the validity of our contractual arrangements are uncertain and the government authorities, including courts, have broad discretion in interpreting these laws and regulations. See "—If the PRC government finds that the arrangements that establish the structure for operating our business and investing in a venture capital fund do not comply with PRC government restrictions on foreign investment, we could be subject to severe penalties."

On February 2, 2012, a Chinese company unrelated to our company sought a court order of attachment against the assets of Beijing Jiuzhou Tianyuan Investment Management Co., Ltd., or Jiuzhou Tianyuan, an equity owner of PW Network. The law suit was later withdrawn in July 2012 according to a court record.

On March 20, 2012, Jiuzhou Tianyuan filed a case against PW Network seeking access to financial and other information of PW Network as an equity holder of PW Network, notwithstanding that it has entered into an equity pledge agreement to pledge all its equity interests in PW Network to PW Software. Jiuzhou Tianyuan withdrew its case in June 2012 and the registration of the equity pledge of Jiuzhou Tianyuan with the relevant administration for industry and commerce was completed in July 2012.

While our effective control over our variable interest entities has not been materially adversely affected, we may consider taking additional actions to maximize the protection of our interests in these entities, including restructuring our operations. Any of these actions may be time consuming, divert our management's attention, result in substantial costs on our part and cause unintended adverse consequences that may materially and adversely affect our business, financial condition and reputation.

Our business may be adversely affected by public opinions and government policies and regulations in China.

Due to the high degree of user loyalty to client-based online PC games and other online games, easy access to personal computers and internet cafés, and lack of more appealing forms of entertainment in China, many teenagers frequently play online games. This may result in these teenagers spending less time on or refraining from other activities, including academics and sports. Furthermore, excessive game play may adversely affect the health of players, especially teenage players. Internet cafés, which are currently the most important outlets for online games, have been criticized by the general public in China for having exerted a negative influence on the youth of China. Due primarily to such adverse public reaction, local and central governments in China have tightened their regulation of internet café operations. A notice jointly issued by several central governmental agencies in February 2007 suspended nationwide approval for the establishment of new internet cafés for the year of 2007 and increased the punishment for internet cafés admitting minors. This notice also tightened the administration of in-game currency, and its impact on us and other operators of item-based online games is uncertain. Also, local and higher-level governmental authorities may from time to time decide to more strictly enforce the customers' age limit and other requirements relating to internet cafés as a result of the occurrence of, and the media attention on, gang fights, arson or other incidents in or related to internet cafés. As many of our customers access our games website from

internet cafés, any restrictions on internet café operations could result in a reduction of the amount of time our customers spend on our online games or a reduction in or slowdown in the growth of our customer base or customer purchases of in-game items, thus adversely affecting our business and results of operations.

The PRC government may decide to adopt more stringent policies to monitor the online game industry as a result of adverse public reaction to perceived addiction to online games, particularly among minors. In April 2007, eight PRC government authorities, including GAPP and several other governmental authorities issued a notice requiring all Chinese online game operators to adopt an "anti-fatigue system" in an effort to curb addiction to online games by minors. Under the anti-fatigue system, three hours or less of continuous play is defined as "healthy," three to five hours is defined as "fatiguing," and five hours or more is defined as "unhealthy." Game operators are required to reduce the value of game benefits for minor game players by half when those game players reach the "fatigue" level, and to zero when they reach the "unhealthy" level. In addition, online game players in China are now required to register their identity card numbers before they can play an online game. This system allows game operators to identify which game players are minors.

The implementation of the aforementioned systems and regulations may discourage or otherwise prevent or restrict our young and other customers from playing our online games, which could limit the growth of or reduce our revenues, thus adversely affecting our business and results of operations. If we fail to implement these systems timely and successfully, the relevant government authorities may have broad discretion in dealing with our noncompliance, including rejecting our application for the operation of new games, suspending our online game operations and revoking our relevant licenses. In addition, it is also possible that the PRC government authorities may decide to adopt more stringent policies to monitor the online game industry as a result of adverse public reaction or otherwise. Any such restrictions on online game playing would adversely affect our business and results of operations.

The continued growth of China's internet market as well as our growth may be adversely affected by an inadequate telecommunications infrastructure.

Although private sector internet service providers currently exist in China, almost all access to the internet is maintained through state-owned telecommunications operators under the administrative control and regulatory supervision of the MIIT. We rely on this infrastructure 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 as planned or at all. 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 necessary for the continued growth in internet usage and in our business.

Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our services and adversely affect our competitive position.

Most of our operations are conducted in China and most of our revenues are sourced from China. Accordingly, our results of operations, financial condition and prospects are subject to a significant degree to the economic, political and legal developments of China. Since the late 1970s, the PRC government has been reforming the economic system in China. These reforms have resulted in significant economic growth. However, we cannot predict the future direction of economic reforms or the effects such measures may have on our business, financial position or results of operations. Furthermore, while the economy of China has experienced significant growth in the past 30 years, growth has been uneven, both geographically and among various sectors of the economy. The PRC

government also exercises significant control over China's economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Future actions and policies of the PRC government could materially affect our liquidity and access to capital and our ability to operate our business.

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

The online game industry in China is highly regulated by the PRC government. Various regulatory authorities of the PRC central government, such as the State Council, the MIIT, the GAPP that was reorganized as the SAPPRFT in 2013, the Ministry of Culture and the Ministry of Public Security are empowered to issue and implement regulations governing various aspects of these industries. We are required to obtain applicable permits or approvals from different regulatory authorities in order to provide online game services. For example, an internet content provider, or ICP, such as PW Network, must obtain an ICP license in order to engage in any commercial ICP operations within China. Online game operators must also obtain a license from the Ministry of Culture and an internet publishing license from the GAPP that was reorganized as the SAPPRFT in 2013 in order to distribute games through the internet.

Before May 2008, we did not hold an internet publishing license as the issuance of such licenses had been suspended by the GAPP that was reorganized as the SAPPRFT in 2013. PW Network obtained an internet publishing license for online game publishing in May 2008, which allows PW Network to distribute and publish online games on the internet. Hefei Perfect World Network Technology Co., Ltd, or Hefei PW Network, a wholly owned subsidiary of PW Digital Technology, obtained an internet publishing license for online game and mobile game publishing in June 2012, which allows Hefei PW Network to distribute and publish online games and mobile games on the internet. Currently, our self-operated online games are published in China by PW Network or Hefei PW Network. We have filed internet publications of our client-based online PC games and certain of our self-developed web games and mobile games with SAPPRFT, and we are in the process of filing internet publications of our other self-developed web games and mobile games.

As the online game industry is at a relatively early stage of development in China, new laws and regulations may be adopted from time to time to require additional licenses and permits other than those we currently have, and address new issues that arise. As a result, substantial uncertainties exist regarding the interpretation and implementation of current and any future PRC laws and regulations applicable to these industries. We cannot assure you that we will be able to timely obtain required licenses or any other new license required in the future, or at all. We cannot assure you that we will not be found in violation of any current or future PRC laws and regulations.

Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.

The Ministry of Commerce published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment, replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-owned Enterprise Law, together with their implementation rules and ancillary regulations. The draft Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for

both foreign and domestic investments. The Ministry of Commerce solicited comments on this draft and substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation. The draft Foreign Investment Law, if enacted as proposed, may materially impact the viability of our current corporate structure, corporate governance and business operations in many aspects.

Among other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of "actual control" in determining whether a company is considered a foreign-invested enterprise. The draft Foreign Investment Law specifically provides that entities established in China but "controlled" by foreign investors will be treated as foreign-invested enterprises, whereas an entity set up in a foreign jurisdiction would nonetheless be, upon market entry clearance by the Ministry of Commerce, treated as a PRC domestic investor provided that the entity is "controlled" by PRC entities and/or citizens. In this connection, "control" is broadly defined in the draft law to cover the following summarized categories: (i) holding 50% or more of the voting rights of the subject entity; (ii) holding less than 50% of the voting rights of the subject entity but having the power to secure at least 50% of the seats on the board or other equivalent decision making bodies, or having the voting power to material influence on the board, the shareholders' meeting or other equivalent decision making bodies; or (iii) having the power to exert decisive influence, via contractual or trust arrangements, over the subject entity's operations, financial matters or other key aspects of business operations. Once an entity is determined to be a foreign-invested enterprise, it will be subject to the foreign investment restrictions or prohibitions set forth in a "negative list," to be separately issued by the State Council later, if the foreign-invested enterprise is engaged in the industry listed in the negative list. Unless the underlying business of the foreign-invested enterprise falls within the negative list, which calls for market entry clearance by the Ministry of Commerce, prior approval from the government authorities as mandated by the existing foreign investment legal regime would no longer be required for establishment of the foreign-invested enterprise.

The "variable interest entity" structure, or Contractual Arrangement, has been adopted by many PRC-based companies, including us, to obtain necessary licenses and permits in the industries that are currently subject to foreign investment restrictions in China. See "—Risks Related to Our Corporate Structure" and "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions." Under the draft Foreign Investment Law, variable interest entities that are controlled via contractual arrangement would also be deemed as foreign-invested enterprises, if they are ultimately "controlled" by foreign investors. Therefore, for any companies with a Contractual Arrangement in an industry category that is on the "negative list," the Contractual Arrangement may be deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either PRC companies or PRC citizens). Conversely, if the actual controlling person(s) is/are of foreign nationalities, then the variable interest entities will be treated as foreign-invested enterprises and any operation in the industry category on the "negative list" without market entry clearance may be considered as illegal.

Through our dual-class share structure, our founder and chairman of board of directors Mr. Michael Yufeng Chi, a PRC citizen, controlled 56.0% of the voting power of our company as of April 26, 2015. However, the draft Foreign Investment Law has not taken a position on what actions shall be taken with respect to the existing companies with a Contractual Arrangement, whether or not these companies are controlled by Chinese parties, while it solicited comments from the public on this point. Moreover, it is uncertain whether the online game industry, in which our variable interest entities operate, will be subject to the foreign investment restrictions or prohibitions set forth in the "negative list" to be issued. If the enacted version of the Foreign Investment Law and the final "negative list" mandate further actions, such as Ministry of Commerce market entry clearance, to be completed by companies with existing Contractual Arrangement like us, we face uncertainties as to whether such clearance can be timely obtained, or at all.

The draft Foreign Investment Law, if enacted as proposed, may also materially impact our corporate governance practice and increase our compliance costs. For instance, the draft Foreign Investment Law imposes stringent ad hoc and periodic information reporting requirements on foreign investors and the applicable foreign-invested enterprises. Aside from investment implementation report and investment amendment report that are required at each investment and alteration of investment specifics, an annual report is mandatory, and large foreign investors meeting certain criteria are required to report on a quarterly basis. Any company found to be non-compliant with this information reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible may be subject to criminal liabilities.

Regulation and censorship of information disseminated over the internet in China may adversely affect our business, and we may be liable for information displayed on, retrieved from, or linked to our internet websites.

The PRC government has adopted certain regulations governing internet access and the distribution of news and other information over the internet. Under these regulations, internet content providers and internet publishers are prohibited from posting or displaying over the internet content that, among other things, violates PRC laws and regulations, impairs the national dignity of China, or is obscene, superstitious, fraudulent or defamatory. Meanwhile, when internet content providers and internet publishers find that information falling within the above scope is transmitted on their websites or is stored in their electronic bulletin service systems, they should terminate the transmission of such information or delete such information immediately and keep records and report to relevant authorities. Failure to comply with these requirements could result in the revocation of the ICP license and other required licenses and the closure of the concerned websites. The website operator may also be held liable for such prohibited information displayed on, retrieved from or linked to such website.

In addition, the MIIT has published regulations that subject website operators to potential liability for content included on their websites and the actions of users and others using their websites, including liability for violations of PRC laws prohibiting the dissemination of content deemed to be socially destabilizing. The Ministry of Public Security has the authority to order any local internet service provider to block any internet website maintained outside China at its sole discretion. Periodically, the Ministry of Public Security has stopped the dissemination over the internet of information which it believes to be socially destabilizing. The State Secrecy Bureau, which is directly responsible for the protection of State secrets of the PRC government, is authorized to block any website it deems to be leaking State secrets or failing to meet the relevant regulations relating to the protection of State secrets in the dissemination of online information.

As these regulations are relatively new and subject to interpretation by the relevant authorities, it may not be possible for us to determine in all cases the type of content that could result in liability for us as a website operator. In addition, we may not be able to control or restrict the content of other internet content providers linked to or accessible through our websites, or content generated or placed on our websites by our users, despite our attempt to monitor such content. To the extent that regulatory authorities find any portion of our content objectionable, they may require us to limit or eliminate the dissemination of such information or otherwise curtail the nature of such content in our online games and on our websites, and keep records and report to relevant authorities, which may reduce our player base, the amount of time our games are played or the purchases of in-game items. This would have a material adverse effect on our financial condition and results of operations. In addition, we may be subject to significant penalties for violations of those regulations arising from information displayed on, retrieved from or linked to our online games and websites, including a suspension or shutdown of our operations.

There are currently no laws or regulations in the PRC governing property rights of virtual assets and therefore it is not clear what liabilities, if any, we may have relating to the loss of virtual assets by our game players.

In the course of playing our games, players acquire and accumulate some virtual assets, such as performance-enhancing items, clothing, accessories, pets and other in-game items. Such virtual assets can be highly valued by game players. In practice, virtual assets can be lost for various reasons, such as data loss caused by delay of network service, by a network crash, or by hacking activities. There are currently no PRC laws and regulations governing property rights of virtual assets. As a result, it is unclear who is the legal owner of virtual assets and whether the ownership of virtual assets is protected by law. In addition, it is unclear under PRC law whether an operator of online games such as us would have any liability (whether in contract, tort or otherwise) for loss of such virtual assets by game players. Based on several judgments regarding the liabilities of online game operators for loss of virtual assets by game players, the courts have generally required the online game operators to provide well-developed security systems to protect such virtual assets owned by game players. In the event of a loss of virtual assets, we may be sued by game players and may be held liable for damages.

Restrictions on virtual currency may adversely affect our revenues from game operations in China.

Our revenues from game operations in China are collected through the sale of our prepaid cards or sale of our online points. The Notice on the Reinforcement of the Administration of Internet Cafés and Online Games issued by the Ministry of Culture on February 15, 2007 directs the People's Bank of China to strengthen the administration of virtual currency in online games to avoid any adverse impact on the PRC economy and financial system. This notice provides that the total amount of virtual currency issued by online game operators and the amount purchased by individual game players should be strictly limited, with a strict and clear division between virtual transactions and real transactions carried out by way of ecommerce. This notice also provides that virtual currency should only be used to purchase in-game items. On June 4, 2009, the Ministry of Commerce and the Ministry of Culture jointly issued Notice on the Reinforcement of the Administration of Virtual Currency in Online Games, which defines what is virtual currency and requires that entities should obtain the approval from the Ministry of Commerce before issuing virtual currency and engaging in transactions using virtual currency in connection with online games. Entities are prohibited from using virtual currency to carry out gambling business.

These restrictions may result in lower sales of our prepaid cards or online points, and could have an adverse effect on our game operations revenues.

PRC regulations relating to internet video/audio program services may adversely affect the operation of our online games.

On December 12, 2007, the Ministry of Public Security, and the State Administration of Radio, Film and Television, or the SARFT, and MIIT promulgated the Administrative Measures on internet Video/Audio Program Services, which requires that, among others, a service provider of internet video/audio program should obtain a license from the SARFT, failure of which may result in the suspension or close of the website providing the internet video/audio program services. On April 1, 2010, the SARFT issued the Tentative Catalogue of internet Video/Audio Program Services, which classifies the internet video and audio services into three categories and provides detailed description on each category. We obtained the SARFT license to provide internet video and audio services through our website wanmei.com in 2010. If any PRC regulatory agency determines that our operation of internet video/audio program is not in compliance with the requirements of this regulation, the regulatory agency may impose fines and penalties or take actions to prevent us from providing internet video and audio services through our online games websites, which may adversely affect the operation of our online games.

PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries' ability to increase their registered capital or distribute profit to us or otherwise expose us to liabilities and penalties under PRC law.

On July 14, 2014, the PRC State Administration of Foreign Exchange, or SAFE, issued the Circular on Relevant Issues Concerning Domestic Residents' Investment and Offshore Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, which requires PRC residents (including PRC entities and PRC resident individuals) to register with SAFE or its local branches in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing, with such PRC residents' legally owned assets or equity interests in domestic enterprises or offshore assets or interests. In addition, such PRC residents shall update their SAFE registrations when the offshore special purpose vehicle undergoes any change of basic information (including change of such PRC individual shareholder, name and operation term), or material events relating to increases or decreases in investment amount contributed by PRC resident individual, transfers or exchanges of shares, or mergers or divisions.

SAFE Circular 37 is issued to replace the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Circular 75.

SAFE Circular 37, and any subsequent implementation rules as may be issued by SAFE, may apply to our shareholders who are PRC residents ultimately owned by PRC residents and may apply to any of our potential offshore acquisitions in the future.

If our shareholders who are PRC residents do not complete their registration with the local SAFE branches, our PRC subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiaries. Moreover, failure to comply with the SAFE registration described above could result in liability under PRC laws for violation of applicable foreign exchange restrictions.

We have requested our shareholders who are PRC residents to make the necessary applications, filings and amendments as required under SAFE Circular 37 and the relevant SAFE regulations and guidance. We attempt to comply, and attempt to ensure that our shareholders who are subject to these rules comply with the relevant requirements. However, we cannot provide any assurance that all of our shareholders who are PRC residents will comply with our request to make or obtain any applicable registrations or comply with other requirements required by SAFE Circular 37 and the relevant SAFE regulations and rules. The failure or inability of our PRC resident shareholders to make any required registrations or comply with other requirements may subject such shareholders or our PRC subsidiaries to fines and legal sanctions and may also limit our ability to contribute additional capital into or provide loans to our PRC subsidiaries or variable interest entities, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries' ability to pay dividends or otherwise distribute profits to us, or otherwise adversely affect us.

We may be subject to fines and legal sanctions if we or our Chinese employees fail to comply with PRC regulations relating to employee stock options granted by overseas listed companies to PRC citizens.

In February 2012, SAFE promulgated the Notice relating to Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas-Listed Company, or SAFE Notice 7, which replaced an earlier SAFE notice promulgated in 2007. Under SAFE Notice 7, PRC individuals and foreign citizens having resided in the PRC for one year or more who participate in a stock incentive plan of an overseas listed company are required, through a PRC domestic agent or PRC subsidiary of the overseas listed company, to register with SAFE and complete certain other procedures. We and our Chinese employees who have been granted restricted shares or stock options

pursuant to our share incentive plan are subject to this notice because we are an overseas listed company. If we or our Chinese employees fail to comply with the provisions of this notice, we and/or our Chinese employees may be subject to fines and legal sanctions imposed by SAFE or other PRC government authorities.

A PRC regulation promulgated in August 2006 and certain other PRC regulations set forth complex procedures for acquisitions conducted by foreign investors which could make it more difficult to pursue growth through acquisitions.

On August 8, 2006, six PRC government and regulatory authorities, including the Ministry of Commerce, and the Chinese Securities Regulatory Commission, or the CSRC, promulgated a rule entitled "Provisions regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors," which became effective on September 8, 2006, and were amended on June 22, 2009. This regulation, among other things, sets forth complex procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. We made some acquisitions and investments in the past and we may grow our business in part by acquiring complementary businesses in the future. Complying with the requirements of this regulation to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit the completion of such transactions, which could affect our ability to expand our business or maintain our market share. In addition, if any PRC regulatory agency determines that any of our past acquisitions was not in compliance with the requirements of this regulation, the regulatory agency may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects.

Also, other recently adopted regulations and rules concerning mergers and acquisitions set forth additional procedures and requirements that could make merger and acquisition activities of foreign investors more time consuming and complex. For example, on February 3, 2011, the General Office of the State Council promulgated a Notice on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the Circular No. 6, which officially establishes a security review system for mergers and acquisitions of domestic enterprises by foreign investors. Under Circular No. 6, a security review is required for mergers and acquisitions by foreign investors having "national defense and security" concerns and mergers and acquisitions by which foreign investors may acquire the "de facto control" of domestic enterprises with "national security" concerns.

In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce or its local counterparts may delay or inhibit our ability to complete such transactions. It is unclear whether our business would be deemed to be in an industry that raises "national defense and security" or "national security" concerns. If the Ministry of Commerce or other government agencies determines in the future that our business is in an industry subject to the security review, our future acquisitions in the PRC, including those by way of entering into contractual control arrangements with target entities, may be closely scrutinized or prohibited. Our ability to expand our business or maintain or expand our market share through future acquisitions would as such be materially and adversely affected.

Uncertainties with respect to the PRC legal system could adversely affect us.

We are a holding company, and we conduct our business primarily through our subsidiaries and variable interest entities incorporated in China. These entities are subject to PRC laws and regulations including, in the case of our wholly owned subsidiaries, laws applicable to wholly-foreign owned enterprises. In addition, we depend on our variable interest entities and their equity holders to honor their agreements with us. Almost all of these agreements are governed by PRC law and disputes arising out of these agreements are expected to be decided by arbitration in China. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

We may partly rely on dividends paid by our operating subsidiaries in China for our cash needs.

We may partly rely on dividends paid by our PRC subsidiaries for our cash needs, including the funds necessary to pay dividends and other cash distributions, if any, to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities organized in China is subject to limitations. Regulations in the PRC currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Our PRC subsidiaries are also required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year to their general reserves until the accumulative amount of such reserves reach 50% of their registered capital. These reserves are not distributable as cash dividends. In addition, if our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us.

The audit report included in this annual report is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection.

Auditors of companies that are registered with the U.S. Securities and Exchange Commission and traded publicly in the United States, including our independent registered public accounting firm, must be registered with the Public Company Accounting Oversight Board, or the PCAOB, in the United States and are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards in connection with their audits of financial statements filed with the SEC. Because our auditors are located in the People's Republic of China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating audits and quality control procedures of any auditors operating in China, including our auditors. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor's audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. As a result, investors may be deprived of the benefits of PCAOB inspections.

If additional remedial measures are imposed on the certain PRC-based accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC, we could be unable to file timely future financial statements in compliance with the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

In December 2012, the SEC brought administrative proceedings against five accounting firms in China, including our independent registered public accounting firm, alleging that they violated U.S. securities laws and the SEC's rules and regulations thereunder by refusing to produce audit work papers and other documents related to certain other PRC-based companies under investigation by the SEC. On January 22, 2014, an initial administrative law decision was issued, censuring these five PRC-based accounting firms and suspending four of them, which are members of large international networks associated with the "Big Four" accounting firms, from practicing before the SEC for a period of six months. The decision is neither final nor legally effective unless and until reviewed and approved by the SEC. On February 12, 2014, these four PRC-based accounting firms appealed to the SEC against this decision. In February 2015, each of these four PRC-based accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The settlement requires the firms to follow detailed procedures to seek to provide the SEC with access to Chinese firms' audit documents via the CSRC. If the firms do not follow these procedures, or if there is a failure of the process between the SEC and the CSRC, the SEC could impose penalties such as suspensions, or it could restart the administrative proceedings.

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, as amended, including possible delisting. Moreover, any negative news about the proceedings against these audit firms may cause investor uncertainty regarding PRC-based, United States-listed companies and the market price of our ADSs may be adversely affected.

If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act, as amended. Such a determination could ultimately lead to delisting of our ordinary shares from the NASDAQ Global Select Market or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

Fluctuation in the value of the Renminbi may have a material adverse effect on our business and result of operations.

The value of the Renminbi against the U.S. dollar and other currencies is affected by changes in China's political and economic conditions and by China's foreign exchange policies, among other things. In July 2005, the PRC government changed its decades-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. After June 2010, the Renminbi began to appreciate against the U.S. dollar again, although there have been some periods when it has lost value against the U.S. dollar, as it did for example during 2014. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future. As most of our costs and expenses are denominated in Renminbi, any appreciation in the Renminbi against the U.S. dollar could further increase our costs in U.S. dollar terms. For example, to the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on

the Renminbi amount we receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.

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

Most of our revenues and expenses are denominated in Renminbi. We may need to convert a portion of our revenues into other currencies to meet our foreign currency obligations, including, among others, payment of dividends declared, if any, in respect of our ordinary shares or ADSs. Under China's existing foreign exchange regulations, our PRC subsidiaries are able to pay dividends in foreign currencies, without prior approval from SAFE, by complying with certain procedural requirements. However, we cannot assure you that the PRC government will not take further measures in the future to restrict access to foreign currencies for current account transactions.

Foreign exchange transactions by our subsidiaries and affiliated entities in China under capital accounts continue to be subject to significant foreign exchange controls and require the approval of, or registration with, PRC governmental authorities. In particular, if our subsidiaries or affiliated entities in China borrow foreign currency loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance them by means of additional capital contributions, these capital contributions must be approved or registered by certain government authorities including SAFE, the Ministry of Commerce or their local counterparts. These limitations could affect the ability of these entities to obtain foreign exchange through debt or equity financing, and could affect our business and financial condition.

Our non-PRC resident enterprise investors face PRC tax uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises.

Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698, which is issued by the PRC State Administration of Taxation and became effective retroactively from January 1, 2008, where a non-resident enterprise investor transfers equity interests in a PRC resident enterprise indirectly by way of disposing equity interests in an overseas holding company, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate less than 12.5% or (ii) does not tax foreign income of its residents, the non-resident enterprise investor should report such indirect transfer to the relevant tax authority of the PRC resident enterprise. The PRC tax authorities will then adopt the "substance over form" principle to review the transaction and may disregard the existence of the overseas holding company if they consider the establishment of the holding company to be lack of a reasonable commercial purpose and is mainly for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC withholding tax at the rate of up to 10%. In addition, the PRC resident enterprise may be required to provide necessary assistance to support the enforcement of Circular 698.

However, there are uncertainties related to the application of Circular 698. For example, while the term "Indirect Transfer" is not clearly defined, it appears that the PRC tax authorities are authorized to request information from a wide range of foreign entities that have no direct link to China. Moreover, there are uncertainties regarding the interpretation and implementation of the related regulations. In addition, there is lack of regulations regarding how to determine whether an indirect share transfer is arranged mainly for the purpose of reducing, avoiding or deferring PRC tax. In our case, although it appears that Circular 698 is not intended to apply to transfers of publicly traded shares, it remains unclear whether such exemption will be applicable to the ordinary shares or ADSs transfer of our company. If Circular 698 is determined by the tax authorities to be applicable to the

disposal of our ordinary shares or ADSs, our investors who are non-PRC resident enterprises may be subject to additional PRC reporting obligations or tax burdens. Further, in the case that our non-PRC resident enterprise investors are required but fail to comply with Circular 698 requirements, the PRC tax authorities may take actions including requesting us to provide assistance for their investigation, which could lead to additional obligations to be fulfilled by the company.

In addition, the PRC State Administration of Taxation, or SAT, promulgated Administrative Measures on the General Anti-Avoidance Rule (Trial), or GAAR Measures, on December 12, 2014, which shows the authority's intention to fight against tax avoidance scheme that is adopted to obtain unwarranted tax benefit without reasonable commercial purpose. A press release, made by the State Administration of Taxation to clarify certain issues relating to the application of the GAAR Measures, stated that the GAAR Measures may be applicable if any general tax-avoidance scheme exists in the offshore indirect transfer of equity interests. Since GAAR Measures was recently promulgated and it is unclear how this set of measures, and any future implementation rules thereof, will be interpreted, amended and implemented by the relevant governmental authorities, we cannot predict how these regulations will affect our business operation, future acquisitions or strategy.

The SAT released the Bulletin on Certain Issues relating to Indirect Transfer of Assets by Non-resident Enterprises, or SAT Bulletin 7, on February 3, 2015, which clarifies several provisions in Circular 698, expands the applicable scope thereof and provides a comprehensive guidance on non-residents' indirect assets transfer. SAT Bulletin 7 took effect on the issuance date, but it also applies to transactions concluded before the issuance date but the tax treatment therefore has yet to be decided upon by the Chinese tax authorities. SAT Bulletin 7 expanded the scope of the subject assets of the indirect transfer to cover not only equity investment in Chinese resident enterprises, but also assets attributable to an establishment in China and immovables situated in China, collectively defined as "Chinese Taxable Assets." It also provides a list of factors to assess whether a transfer arrangement may be deemed as having reasonable commercial purpose, as well as a set of threshold tests for determining the arrangement that shall be directly regarded as without reasonable commercial purpose. In addition, SAT Bulletin 7 has lifted the burden of mandatory reporting requirement and shifted the regime to a more relaxed voluntary reporting system, but it still grants the Chinese tax authority the right to require relevant parties to fill necessary documents if it so determines. Furthermore, a safe harbor for qualifying group reorganization has been carved out by SAT Bulletin 7, falling under which no Chinese tax exposure will arise.

Since GAAR Measures and SAT Bulletin 7 were recently promulgated and it is unclear how this set of measures and regulations, and any future implementation rules thereof, will be interpreted, amended and implemented by the relevant governmental authorities, we cannot predict how these regulations will affect our business operation, future acquisitions or strategy.

There can be no assurance that the Agreement and Plan of Merger dated April 26, 2015 and the going private transaction contemplated thereby will be approved by our shareholders or successfully consummated. Potential uncertainty involving the going private transaction may adversely affect our business and the market price of our ADSs.

Our board of directors received a preliminary non-binding proposal letter dated December 31, 2014 from our founder and chairman of the board of directors, Mr. Michael Yufeng Chi, to acquire all of our outstanding ordinary shares not already directly or indirectly owned by him in a going private transaction for US$20.0 per ADS in cash, or US$4.0 per ordinary share in cash. Our board of directors formed a special committee of independent directors, or the Special Committee, on January 2, 2015 to consider and evaluate the proposal and any other alternative proposals or other strategic alternatives that may be available to our company, and to negotiate the terms of any potential definitive agreement.

On April 26, 2015, we entered into an Agreement and Plan of Merger, or the Merger Agreement, with Perfect Peony Holding Company Limited, or Parent, a Cayman Islands company beneficially owned by Mr. Michael Yufeng Chi, and Perfect World Merger Company Limited, or Merger Sub, a wholly owned subsidiary of Parent. Subject to satisfaction of the Merger Agreement's terms and conditions, Merger Sub will merge with and into our company, with our company continuing as the surviving corporation and a wholly owned subsidiary of Parent. Each of our ordinary shares or ADSs will be cancelled in exchange for the right to receive US$4.04 per ordinary share or US$20.20 per ADS in cash without interest, except for shares, including such shares represented by ADSs, already directly or indirectly owned by Mr. Michael Yufeng Chi, and shares held by shareholders who have validly exercised and not effectively withdrawn or lost their rights to dissent from the merger. The merger is subject to customary closing conditions including the approval of the Merger Agreement by an affirmative vote of holders of shares representing at least two-thirds of the voting power of the shares present and voting in person or by proxy at a meeting of our shareholders which will be convened to consider the approval of the Merger Agreement and the merger. As of April 26, 2015, Mr. Michael Yufeng Chi controlled 56.0% of the voting power of our company. However, there can be no assurance that the merger will be approved by sufficient affirmative vote or consummated.

The merger, whether or not consummated, presents a risk of diverting management focus, employee attention and resources from other strategic opportunities and from operational matters. In addition, we are subject to various restrictions under the Merger Agreement on the conduct of our business prior to the completion of the merger, which may delay or prevent us from undertaking business opportunities that may arise pending completion of the merger. Also, the development of the merger, such as completion of the merger or termination of the Merger Agreement, may increase volatility of the trading price of our ADSs.

The trading price of our ADSs has been and may continue to be subject to wide fluctuations. During the period from January 1, 2010 until April 24, 2015, the trading price of our ADSs has ranged from US$8.44 to US$44.63 per ADS and the closing sale price on April 29, 2015 was US$19.54 per ADS. The market price for our ADSs may continue to be volatile and subject to wide fluctuations in response to factors including the following:

Volatility in global capital markets could also have an effect on the market price of our ADSs. In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our ADSs.

Substantial future sales of our ADSs or ordinary shares, or the perception that these sales could occur, could cause the price of our ADSs to decline.

Additional sales of our ADSs or ordinary shares in the public market, or the perception that these sales could occur, could cause the market price of our ADSs to decline. If our shareholders sell substantial amounts of our ADSs, including those issued upon the exercise of outstanding options, in the public market, the market price of our ADSs could fall. Such sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. If any existing shareholder or shareholders sell a substantial amount of ordinary shares, the prevailing market price for our ADSs could be adversely affected. In addition, if we pay for our future acquisitions in whole or in part with additionally issued ordinary shares or ADSs, your ownership interests in our company would be diluted and this, in turn, could have a material adverse effect on the price of our ADSs.

Our dual-class ordinary share structure with different voting rights could discourage others from pursuing any change of control transactions that holders of our Class B ordinary shares and ADSs may view as beneficial.

Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to 10 votes per share, while holders of Class B ordinary shares are entitled to one vote per share. Due to the disparate voting powers attached to these two classes, certain shareholders have significant voting power over matters requiring shareholder approval, including election of directors and significant corporate transactions, such as a merger or sale of our company or our assets. This concentrated control could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class B ordinary shares and ADSs may view as beneficial and therefore might have a negative impact on the price of our ADSs.

Our board of directors received a preliminary non-binding proposal letter dated December 31, 2014 from our founder and chairman of the board of directors, Mr. Michael Yufeng Chi, to acquire all of our outstanding ordinary shares not already directly or indirectly beneficially owned by him. On April 26, 2015, we entered into a Merger Agreement with entities controlled by Mr. Chi. As of April 26, 2015, Mr. Chi controlled 56.0% of the voting power of our company. The voting power held by Mr. Chi in our company may effectively prevent a competing bid for our company.

You may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise your right to vote.

Except as described in this annual report, holders of our ADSs will not be able to exercise voting rights attaching to the shares evidenced by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.

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

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement for the ADSs, the depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act of 1933, as amended, or exempt from registration under the Securities Act with respect to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take advantage of any exemptions from registration under the Securities Act. The depositary may, but is not required to, sell such undistributed rights to third parties in this situation. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited, because we are incorporated under Cayman Islands law, conduct a majority of our operations in China and most of our officers and directors reside outside the United States.

We are incorporated in the Cayman Islands, and conduct a majority of our operations in China through our wholly owned subsidiaries in China. Most of our officers and directors reside outside the United States and some or all of the assets of those persons are located outside of the United States. It may be difficult or impossible for you to bring an original action against us or against these individuals in a Cayman Islands or Chinese court in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. You would also find it difficult to enforce a U.S. court judgment based on the civil liability provisions of the U.S. federal securities laws, in the United States, the Cayman Islands or China, against us or our officers and directors.

Our corporate affairs are governed by our memorandum and articles of association and by the Companies Law (2013 Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action against our directors and us, actions by non-controlling shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws as compared to the United States, and provides significantly less protection to investors. In addition, shareholders of Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States.

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

We may be treated as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. Holders of our ADSs or ordinary shares.

A non-U.S. corporation, such as our company, will be a "passive foreign investment company," or PFIC, for any taxable year if either (1) at least 75% of its gross income for such year is passive income or (2) at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income. We disclosed in our annual reports for 2012 and 2013 that we may have been a PFIC in prior taxable years. Similarly, we believe we may have been a PFIC for our taxable year ended December 31, 2014, as well. This determination is made based on our significant cash balances, the market price of the ADSs and ordinary shares, and the composition of our income and assets. However, because the application of the PFIC rules to our facts and circumstances is unclear in many important legal and factual respects, and the required calculations for 2014 yielded results that were close to the line, no assurances may be given in this regard. A U.S. Holder (as defined in "Item 10. Additional Information—E. Taxation—United States Federal Income Taxation") who owned (or owns) our ADSs or ordinary shares at any time when we were (or are) a PFIC will generally be subject to reporting requirements and may incur significantly increased United States income tax on gain recognized on the sale or certain other dispositions of our ADSs or ordinary shares and on the receipt of distributions on the ADSs or ordinary shares to the extent such distributions are treated as "excess distributions" under U.S. federal income tax rules. Such a U.S. Holder also generally will not be able to benefit from any preferential tax rate with respect to any dividend distribution that such U.S. Holder receives from us in a year in which we are a PFIC (or are treated as such with respect to such holder) or the following year. Certain elections may be available, however, that may mitigate certain of these adverse tax consequences to varying degrees. U.S. Holders are urged to consult their tax advisors regarding the passive foreign investment company rules.

We must make a separate determination after the close of each taxable year as to whether we were a PFIC for that year. Accordingly, we may continue to be, or become, a PFIC in 2015 or future taxable years. Further, although the law in this regard is unclear, we treat our variable interest entities as being owned by us for U.S. federal income tax purposes, not only because we control their management decisions but also because we are entitled to substantially all of the economic benefits associated with these entities, and, as a result, we consolidate these entities' operating results in our consolidated U.S. GAAP financial statements. If it were determined, however, that we were not the owner of our variable interest entities for U.S. federal income tax purposes, then we would likely be treated as a PFIC even if we would not otherwise have been treated as a PFIC for that particular year. We have not sought a ruling from the Internal Revenue Service, or IRS, with respect to our PFIC status. In the event that we determine that we are not a PFIC in 2015 or in a future taxable year, there can be no assurance that the IRS or a court will agree with our determination.

Provided we are a PFIC for any year during which a U.S. Holder holds our ADSs or ordinary shares, we generally will continue to be treated as a PFIC as to such U.S. Holder for all succeeding years during which such U.S. Holder holds our ADSs or ordinary shares, unless we cease to be a PFIC and the U.S. Holder makes a deemed sale election with respect to our ADSs or ordinary shares.

For more information, see "Item 10. Additional Information—E. Taxation—United States Federal Income Taxation—Passive Foreign Investment Company." We urge investors in our ADSs and ordinary shares to consult their tax advisors concerning the U.S. federal income tax consequences of acquiring, holding and disposing of our ADSs or ordinary shares.

We commenced operations through PW Network, a limited liability company established in China in 2004. To enable us to raise equity capital from international investors, our holding company, Perfect World Co., Ltd. was incorporated under the laws of the Cayman Islands in June 2006. In August 2006, we formed PW Software, our wholly owned subsidiary in China. In September 2006, PW Software entered into contractual agreements with PW Network and its equity owners, pursuant to which PW Network transferred certain fixed assets and certain personnel to PW Software and PW Software provides technical support and research and development services to PW Network. Through these contractual arrangements, as amended and restated in April 2007, we have the ability to effectively control PW Network's daily operations and financial affairs, appoint senior executives and decide on all matters subject to shareholders' approval. As a result of these contractual arrangements, we are considered to be the primary beneficiary of PW Network and PW Network is a variable interest entity of our company under U.S. GAAP. Accordingly, we consolidate PW Network's results of operations, assets and liabilities in our financial statements. See "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions" for a description of the contractual arrangements among PW Software, PW Network and its equity owners.

In July 2007, we completed our initial public offering, in which we issued and sold 9,000,000 ADSs, representing 45,000,000 of our Class B ordinary shares, and certain of our then shareholders sold 4,570,000 ADSs, representing 22,850,000 of our Class B ordinary shares, in each case at a public offering price of US$16.00 per ADS.

In December 2007, we established PW Hong Kong, our wholly owned subsidiary, to capture potential business opportunities in Southeast Asian region.

In March 2008, we opened a research and development center in Shanghai to take advantage of the skilled workforce in the game development industry in Shanghai.

In April 2008, we entered into a capital increase and share transfer agreement with Chengdu Seasky Digital Entertainment Co., Ltd., a limited liability company in China, or Chengdu Seasky, and its equity holders, to acquire a 20% equity interest in Chengdu Seasky. We increased our equity interest in Chengdu Seasky to 40% in the first quarter of 2010. Chengdu Seasky is principally engaged in the design and development of online games in China. In January 2011, we entered into an agreement to transfer the 40% equity interest to an officer of Seasky.

In April 2008, we established PW USA, a Delaware corporation and our wholly owned subsidiary, to capture potential business opportunities in North America.

From June 2008 to July 2011, PW Software entered into a series of contractual arrangements with PW Literature, an online reading service provider in China and its equity owners. These contractual arrangements enabled us to effectively control PW Literature's daily operations and financial affairs, appoint senior executives and decide on all matters subject to shareholders' approval. As a result, we were considered to be the primary beneficiary of PW Literature and we had consolidated PW Literature's results of operations, assets and liabilities in our financial statements before we sold PW Literature to Beijing Baidu Netcom Science Technology Co., Ltd., an unrelated party in December 2013.

In August 2008, PW Network invested in a minority stake in Perfect Pictures and Media Group Co., Ltd. (previously known as Perfect World (Beijing) Pictures Co., Ltd.), or PW Pictures, and then acquired all the remaining equity interest through a series of transactions. PW Pictures is a PRC media and entertainment company principally engaged in film and television program production and distribution and advertising services in China. In February 2011, PW Network transferred its equity

interest in PW Pictures through a series of contractual arrangements to Perfect Moment, which then was a newly established variable interest entity controlled by PW Software and known as Beijing Perfect Moment Pictures Co., Ltd. In order to sharpen our focus on our core online game development and operation business, in August 2011, we sold PW Pictures for a total consideration of RMB360.0 million to Beijing Ever Joy Pictures Co., Ltd., which is majority-owned by Mr. Michael Yufeng Chi, our founder and chairman of the board of directors. The transaction was approved by the board of directors and a special committee consisting of all independent members of our board of directors. Perfect Moment no longer had material business operations after the transaction and changed its name to Beijing Perfect Moment Network Technology Co., Ltd. See "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions" for a description of the contractual arrangements among PW Software, Perfect Moment and its equity owners.

In November 2008, PW Network established Shanghai Perfect World Network Technology Co., Ltd., or Shanghai PW Network, to expand our game operation and development.

In February 2009, we acquired a 100% equity interest in Global InterServ (Caymans) Inc., or InterServ Caymans, from Global InterServ (B.V.I.) Inc., or InterServ. Upon consummation of the transaction, InterServ Caymans and its two PRC subsidiaries, InterServ Information and Technology (Shanghai) Co., Ltd., or InterServ Shanghai and Chengdu Perfect World Software Co., Ltd. (previously known as Chengdu InterServ Information and Technology Co., Ltd.), became our wholly owned subsidiaries.

In February 2009, PW Network established Chengdu Perfect World Network Technology Co., Ltd., or Chengdu PW Network, to expand our game operation and development. In April 2009, Chengdu PW Network invested in a 30% equity interest in Chengdu Ye Net Science and Technology Development Co., Ltd., or Ye Net. Ye Net is a Chinese company principally engaged in web game development and operation. Through a series of transactions, in January 2011, we increased our equity interest in Ye Net to 80%, and in July 2012, we acquired the remaining 20% of equity interest in Ye Net.

In December 2009 and January 2010, we established Perfect World Universal Coöperatieve U.A., or PW Universal, and Perfect World Europe B.V., or PW Europe, respectively, both in Netherlands, to capture potential business opportunities in Europe.

In April 2010, we acquired a 100% equity interest in C&C Media Co., Ltd., or C&C Media, from Atlus Co., Ltd., a Japanese computer and video game developer, publisher, and distributor and other shareholders of C&C Media. Upon consummation of the transaction, C&C Media became our wholly owned subsidiary.

In April 2010, PW Network invested a 20% equity interest in Beijing Zhizhu Network Technology Co., Ltd., or Zhizhu Network. This strategic investment is expected to allow us to leverage Zhizhu Network's large user base to further grow our online game community. There were certain transactions between us and Zhizhu Network. For a description of these transactions, see "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions" in this report.

In May 2010, we acquired a majority stake in Runic Games, Inc., or Runic Games, a specialized developer of PC-based entertainment software in the United States. In addition, we acquired 40% equity interest in Unknown Worlds Entertainment, Inc., or Unknown Worlds and 100% equity interest in Cryptic Studios, Inc., or Cryptic Studios, both online game developers in the United States, in August 2011. In February 2013, we increased our equity interest in Unknown Worlds to a majority stake.

In November 2011, we established Perfect World Korea Co., Ltd. (previously known as NGL Co., Ltd.), or PW Korea, jointly with Nexon Korea Corporation, to manage and operate online

games in Korea. In October 2012, we acquired the entire equity interest in PW Korea held by Nexon Korea Corporation, as a result, PW Korea became our wholly owned subsidiary.

The venture capital fund is managed by a general partner unrelated to us. Because various regulations in China currently restrict or prevent foreign-invested entities from engaging in certain technology, media and telecommunications industries which are the targeted industries of the venture capital fund, we use Trendsters Investment, a variable interest entity we established in November 2011, as an investment vehicle to hold our investment in the fund. Trendsters Investment does not itself make investment decisions for the fund or involve in the management of the fund. PW Software has entered into a series of contractual agreements with Trendsters Investment and its equity owners, namely Mr. Qing Li and Mr. Qi Zhu, pursuant to which PW Software provides technical support and consulting services to Trendsters Investment. Through these contractual arrangements, we have the ability to effectively control Trendsters Investment's daily operations and financial affairs, appoint senior executives and decide on all matters subject to shareholders' approval. Thus, Trendsters Investment is a variable interest entity of our company under U.S. GAAP. Accordingly, we consolidate Trendsters Investment's results of operations, assets and liabilities in our financial statements. See "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions" for a description of the contractual arrangements among PW Software, Trendsters Investment and its equity owners.

In November 2013, we entered into definitive agreements to acquire 100% equity interest in Wuhu Huitian Shengshi Network Technology Co., Ltd., or Wuhu Huitian, and 30% equity interest in Beijing Shouyou Daqu Technology Co., Ltd., or Daqu. Wuhu Huitian and Daqu run TGBus.com and PTBus.com, two leading Chinese game portals, respectively. In June 2014, we increased our equity interest in Daqu to 40%.

In May 2014, we acquired a total of 30,326,005 Class A ordinary shares of Shanda Games Limited (NASDAQ: GAME), or Shanda Games, a leading online game developer, operator and publisher in China, from Shanda SDG Investment Limited, for a total consideration of US$100 million in cash. In September 2014, we entered into an agreement to sell such 30,326,005 Class A ordinary shares of Shanda Games at a premium for a total consideration of US$104,624,717 in cash to Shanghai Buyout Fund L.P., an unrelated third party. Concurrently, we withdrew from a consortium to which we had joined early in 2014 in the proposed "going private" transaction with respect to Shanda Games.

In June 2014, we entered into a definitive agreement to acquire 100% equity interest of Fuzhou Online Game Information Technology Co., Ltd., which runs 766.com, a leading Chinese game portal.

In November 2014, we formed five controlled companies, in which we hold majority stakes, in line with the restructuring plan of our research and development teams, to help retain, attract and

incentivize top talents, allow faster reaction to changing market trends and boost game development productivity.

Our board of directors received a preliminary non-binding proposal letter dated December 31, 2014 from our founder and chairman of the board of director, Mr. Michael Yufeng Chi, to acquire all of our outstanding ordinary shares not already directly or indirectly owned by him in a going private transaction for US$20.0 per ADS in cash, or US$4.0 per ordinary share in cash. Our board of directors formed a special committee of independent directors on January 2, 2015 to consider the proposal. On April 26, 2015, we entered into a Merger Agreement with Perfect Peony Holding Company Limited, or Parent, a Cayman Islands company beneficially owned by Mr. Michael Yufeng Chi, and Perfect World Merger Company Limited, or Merger Sub, a wholly owned subsidiary of Parent. Subject to satisfaction of the Merger Agreement's terms and conditions, Merger Sub will merge with and into our company, with our company continuing as the surviving corporation and a wholly owned subsidiary of Parent. Each of our ordinary shares or ADSs will be cancelled in exchange for the right to receive US$4.04 per ordinary share or US$20.20 per ADS in cash without interest, except for shares, including such shares represented by ADSs, already directly or indirectly owned by Mr. Michael Yufeng Chi, and shares held by shareholders who have validly exercised and not effectively withdrawn or lost their rights to dissent from the merger. The merger is subject to customary closing conditions including the approval of the Merger Agreement by an affirmative vote of holders of shares representing at least two-thirds of the voting power of the shares present and voting in person or by proxy at a meeting of our shareholders which will be convened to consider the approval of the Merger Agreement and the merger.

Our principal executive offices are located at Perfect World Plaza, Tower 306, 86 Beiyuan Road, Chaoyang District, Beijing 100101, People's Republic of China. Our telephone number at this address is (8610) 5780-5700. Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.

We are a leading online game developer and operator in China. We primarily develop online games based on our proprietary game engines and game development platforms. Our strong technology and creative game design capabilities, combined with our extensive knowledge and experience in the online game market, enable us to frequently and promptly introduce popular games designed to cater to changing customer preferences and market trends. Since 2006, we have launched in China a number of self-developed client-based online PC games. Currently, we operate Perfect World, Legend of Martial Arts, Perfect World II, Zhu Xian, Chi Bi, Hot Dance Party, Pocketpet Journey West, Battle of the Immortals, Fantasy Zhu Xian, Forsaken World, Empire of the Immortals, Return of the Condor Heroes, Saint Seiya Online, Swordsman Online, Holy King and Legend of the Condor Heroes, as well as several web games, such as Touch. Since our expansion into mobile games in 2013, we have launched in China several mobile games. Currently we operate Legend of Chu and Han, Rise of the King, Return of the Condor Heroes Mobile, Fantasy of the Immortals, Forsaken World Mobile, CrossGate Mobile, Touch Mobile, Forever Mars, Dawn after Dark, Swordsman Mobile and Saint Seiya Mobile. To expand our reach in the U.S. and European market to capture potential business opportunities, we established our wholly owned U.S. and European subsidiaries, PW USA and PW Europe, in April 2008 and January 2010, respectively. Currently, PW USA and PW Europe operate a number of our own online games including some games developed by our wholly owned U.S. based subsidiary, Cryptic Studios, as well as several games licensed from other developers. To further expand our overseas operating capabilities in Asia, we acquired C&C Media in Japan, established PW Korea in Korea, and extended our coverage to Southeast Asia through PW Hong Kong. Currently, we operate, in Japan, a number of our own games and certain games licensed from other developers through C&C Media; and also in Southeast Asia and Korea, several of our own games through PW Hong Kong and PW Korea,

respectively. We plan to develop more online games with a variety of themes, cultural characteristics and features that appeal to different segments of the online game player community.

Our core technology capabilities consist of our proprietary game engines, game development platforms and real-time anti-cheating expertise, all developed and built by our experienced development team. In particular, our proprietary game engines enable us to create superior graphics with impressive visual effects and provide the technical foundation for realizing innovative features in the game environment. Our game development platforms are built on modularized functions which allow us to have the ability to develop our online games with relatively short development cycle and to update our games frequently through expansion packs.

We have achieved an impressive game development track record. In September 2014, we won the "Top 10 Influential Brands in Asia" and "Top 500 Asia Brands Award" at the 9th Asia Brand Ceremony. In October 2014, we won the "China Online Culture Achievement Award" at the China International Digital Content Expo 2014. In November 2014, our PC online game Legend of the Condor Heroes won the award for the "Top 10 Most Anticipated Online Games by Game Players"; our PC and console versions of Neverwinter won awards for the "Best Overseas Online Games" and the "Top 10 Most Anticipated Console Games by Game Players," respectively; and our mobile game CrossGate Mobile won an award for the "Top 10 Most Favorite Mobile Games among Game Players," in the "2014 Golden Plume Awards Annual Best Games Election" held by ChinaJoy Expo, also known as the China Digital Entertainment Exposition and Conference. In December 2014, we won the "2014 Outstanding Enterprise in Chinese e-Game Industry Award" and "2014 Outstanding Enterprise in research and development in Chinese e-Game Industry Award" in the 2014 Annual Conference of Chinese e-Game Industry. Our client-based online PC games DOTA2 and Neverwinter won the Gold Finger Awards of "2014 Outstanding Online Game" and "2014 Most Anticipated Online Game," respectively. And our mobile games CrossGate Mobile and Perfect World Begins won the Gold Finger Awards of "2014 Outstanding Mobile Game" and "2014 Most Anticipated Mobile Game," respectively in the 2014 Annual Conference of Chinese e-Game Industry. Legend of the Condor Heroes was ranked among the "Top 10 Popular Domestic Online Games" and the top ten "China Domestic 3D MMORPGs" in 2014 according to International Data Corporation, or IDC, a premier global provider of market intelligence, advisory services, and events for the information technology, telecommunications and consumer technology markets. In addition, DOTA2 was ranked among the "Top 10 Popular Online Games," and Neverwinter was ranked among the "2015 Top 10 Anticipated Client-based Online Games" in China in 2014. Dragon Ascension and Swordsman Mobile were also ranked among the "2015 Top 10 Anticipated Web Games" and the "2015 Top 10 Anticipated Mobile Games," respectively, according to IDC.

We use a time-based revenue model for our first game, Perfect World, under which we charge players based on the time they spend playing the game. We use an item-based revenue model for our other self-developed online games under which players can play the games for free, but they are charged for purchases of in-game items, such as performance-enhancing items, clothing, accessories and pets. In 2012, 2013 and 2014, a substantial majority of our online game operation revenues were generated through this item-based revenue model. Although a majority of our revenues are generated in China, as of the date of this annual report, we have exported a number of our games to various countries and regions, and we plan to export more of our games and continue to develop our business overseas.

Since our inception in March 2004, we have developed, operated and distributed a number of our self-developed client-based online PC games. Currently, we operate eleven 3D MMORPGs, namely, Perfect World, Legend of Martial Arts, Perfect World II, Zhu Xian, Chi Bi, Pocketpet Journey West, Forsaken World, Saint Seiya Online, Swordsman Online, Holy King and Legend of the Condor Heroes, a 3D online casual game, Hot Dance Party, two 2.5D MMORPGs, Battle of the Immortals and Empire of the Immortals, and two 2D turn-based MMORPGs, Fantasy Zhu Xian and Return of the Condor Heroes. Our games offer "anytime play," meaning users can play the games 24 hours a day, seven days a week.

Our games offer significant opportunities for social interaction in cyberspace. Life-like features in some of our games include marriages among online characters and martial arts apprenticeships, which are historical associations formed by martial arts masters according to Chinese legends. In addition, characters in our games may visually express feelings by their actions or by using emoticons that appear within a character's dialogue box. We believe that these features significantly expand the interface for player interaction, allow players to express their own personalities or virtual personalities through their virtual characters and create a certain level of social reality in the game. Although each game character may be unique, groups of players may, and often must, form teams or alliances to achieve certain collective game objectives, such as battles and missions. Our games also incorporate instant messaging systems and chat rooms, which allow players to communicate and interact with each other in real-time groups or in one-on-one discussions. The bulletin boards in our games allow players to post notes or inquiries and respond to other players' notes or inquiries. Our games are designed to be flexible to present an effective game experience even for players who may not have state-of-the-art hardware.

In addition to our self-developed games, we have obtained exclusive license to operate a world-famous online game, DOTA2, in China. Developed by a leading entertainment software and technology company based in the United States, this game features a unique mix of action, RTS and RPG gameplay and has become one of the most popular games at professional e-sport competitions. We started to commercialize this game in December 2013 in China.

The following table summarizes the launch date of the games and the number of expansion pack releases since the respective launch for each of our self-developed client-based online PC games that we are currently operating in China.

Perfect World. We launched Perfect World in January 2006. We adopted a time-based revenue model for this game, i.e., charging players based on the time they spend playing the game. Perfect World is an adventure and fantasy game with traditional Chinese settings. Players can take on various roles, including swordsmen, magicians, archers, priests and magical creatures. Players can also design and customize the appearance and characteristics of their characters and roles. Perfect World offers a variety of features that were once innovative in China, such as day-and-night shifting and weather effects and changes. The game allows characters to fly freely and move in a continuous and changing terrain and environment seamlessly without having to wait for scenery changes as is often the case in many other online games. Perfect World offers sophisticated 3D graphics that realistically represent

real-life characters and items moving in captivating scenes. The game can be displayed on a 16:9 widescreen to provide a movie-like visual effect.

Legend of Martial Arts. We launched Legend of Martial Arts in September 2006, when we sold in-game items during the open beta testing. We developed Legend of Martial Arts based on a popular TV drama series with the same Chinese name, . Legend of Martial Arts is an adventure story of Chinese swordsmen set in an ancient kingdom. It is designed to provide a more light-hearted and less intense game environment than Perfect World. The game attempts to capture the look and the feel that have made the TV series a hit with the Chinese audience. We have enriched the game content by creating stories developed specifically for the game. We engage a team of writers, including the playwright of the TV series. In addition to employing many of the customization features found in Perfect World, Legend of Martial Arts contains several features designed to provide players a flavor of traditional oriental culture. Legend of Martial Arts is the first game for which we adopted an item-based revenue model. Unlike the time-based revenue model, users can play the basic functions of Legend of Martial Arts free of charge for as long as they want. Players are charged when they purchase in-game items, such as performance-enhancing items, clothing, accessories and pets. This allows players to further express their own or virtual personalities and enhance the game experience. In-game items can be "purchased" at virtual stores within the game using one of two kinds of currencies: either with an in-game virtual currency known as "yuanbao," which game players obtain by purchasing prepaid cards or online points with real money, or with another in-game virtual currency known as "gold coins," which game players can obtain for free by completing certain missions and activities within the game.

Perfect World II. We launched 3D MMORPG Perfect World II in November 2006. The storyline of Perfect World II is set in a similar content and graphic background as Perfect World. Compared to Perfect World, we adopted an item-based revenue model for Perfect World II, and further improved the playing methods and game environment. We provide more user-friendly guidance on the classification and ranking of in-game weapons, and players can purchase virtual raw materials to manufacture their weapons. We have also optimized the visual effects of our in-game items to enhance the attraction to players and transaction volumes. As Perfect World II offers more appealing play experience and operates under a different model compared to Perfect World, we have noted that some users play these two games concurrently, particularly those players who have already achieved advanced game attributes in Perfect World and are trying to enjoy a more personalized experience.

Zhu Xian. We launched 3D MMORPG Zhu Xian in May 2007 and adopted an item-based revenue model for this game. Zhu Xian was developed based on a popular internet novel with the same name. The internet novel was ranked the No. 1 most read internet novel in 2005 and was among the top five most read internet novels in 2006 according to the click statistics of Baidu, Inc. The basic story concept of Zhu Xian is a martial arts focused adventure set in a fantasy world. The game players are able to experience the various fantastic scenes and plots that have made the internet novel popular, such as martial arts training, use of magical weapons, upgrading of special capabilities and contests to obtain magical treasure, from the perspectives of the novel characters that they choose to play. We also add a time dimension, so that the player can enter into any game scenario based on the time parameter that they select without having to wait for the plot development like a novel reader. We believe that this feature diversifies the game content and increases players' interests in the game environment.

Chi Bi. We launched 3D MMORPG Chi Bi in January 2008 and adopted an item-based revenue model for this game. Chi Bi is a war story developed based on the well-known period in ancient Chinese history known as the Three Kingdoms. This game is designed to include various in-game weapons and large-scale map of the game environment in a historical cultural setting. Game players can freely choose to join any of the Three Kingdoms, i.e., Wei, Shu, or Wu, and are provided with full experience of the historical battles of the Three Kingdoms period. In addition, Chi Bi also features

motion fighting system, allowing players to attack their opponents as they move, which we believe enhances appeal to game players. We co-promoted "Chi Bi" alongside the movie "Red Cliff," which has the same Chinese name as "Chi Bi," in China, according to an agreement signed with China Film Group Corporation, which owns the copyright to the movie in China.

Hot Dance Party. We launched Hot Dance Party, our first 3D online casual game, in March 2008 and adopted an item-based revenue model for this game. Hot Dance Party allows players to enjoy dancing game play in a captivating 3D game environment with a variety of background music choices. Furthermore, we have incorporated certain community features such as establishing a virtual family, into this game. Game players can also raise virtual pets in the game environment and improve game characters' appearance by using cosmetics.

Pocketpet Journey West. We launched Pocketpet Journey West, in October 2008 and adopted an item-based revenue model for this game. Pocketpet Journey West ( ) is a pet-themed 3D MMORPG and is developed based on "Journey to the West ( )," one of the four classical novels of Chinese literature. The game is designed to include distinctive adventurers adapted from the novel. The game features innovative diversified pet systems, which not only allow users to catch monsters as their pets, raise pets, and enhance attributes of pets, but also have many creative features which enable online game players to exchange pets, obtain particular skills and attributes by collecting special items, and combine two separate pets to create customized or enhanced attributes. The diversified pet systems are designed to bring an entirely new interactive pet raising experience to online game players.

Battle of the Immortals. We launched Battle of the Immortals, in April 2009 and adopted an item-based revenue model for this game. Battle of the Immortals, our first mysterious adventure 2.5D MMORPG, is developed based on our proprietary Cube engine. Battle of the Immortals enables game players to travel between Eastern and Western cultures, featuring themes ranging from Norse mythology to the history of China's Qin Dynasty, catering to game players with different interests. This game also includes adventures in historic sites and turf wars.

Fantasy Zhu Xian. We launched Fantasy Zhu Xian in October 2009 and adopted an item-based revenue model for this game. Fantasy Zhu Xian is our first 2D turn-based MMORPG, which is based on the same popular internet fantasy novel Zhu Xian as our 3D MMORPG Zhu Xian. The game represents the world of Zhu Xian in a refreshing cartoon style. The game is developed based on our proprietary EPARCH 2D engine and can exhibit special visual effects such as reflections, particle effects and translucency effects. In addition, it introduces the concept of altitude into a 2D game and creates a realistic flying visual effect within a 2D game environment.

Forsaken World. We launched Forsaken World in October 2010 and adopted an item-based revenue model for this game. Forsaken World is a 3D MMORPG set against the backdrop of a fantasy world called Grand Mundo, where players themselves alter the fate of Grand Mundo through their individual actions in the game. The game features exciting elements such as rule of time, rule of space, magic and divinity. Forsaken World adopts a system of annalistic history, and allows players to impact core contents such as the epoch, the orbiting of constellations and the birth of deities.

Empire of the Immortals. We launched Empire of the Immortals in March 2011. Following Battle of the Immortals, Empire of the Immortals is the second 2.5D MMORPG in our Immortals franchise. Featuring the international style of the Immortals series and running on an upgraded Cube engine, Empire of the Immortals introduces novel game experiences and exciting visual effects to satisfy various tastes of different players.

Return of the Condor Heroes. We launched Return of the Condor Heroes in September 2012 and adopted an item-based revenue model for this game. The game is adapted from Louis Cha's acclaimed martial arts novel of the same name. In a traditional 2D turn-based online game environment, the game adopts some advanced 3D technologies to render delicate visual effects and various fun options

to players, providing a refreshing game experience for fans of traditional 2D games. It also introduces a series of new exciting features, including "Qinggong," a gameplay that adopts a style of martial arts with gravity-defying moves, and a powerful pet system.

Saint Seiya Online. We launched Saint Seiya Online in May 2013 and adopted an item-based revenue model for this game. This is a 3D comic-based MMORPG adapted from the globally famous comic series "Saint Seiya." The game presents a variety of classic elements from the original comic. Running on our proprietary game engine, Saint Seiya Online renders exquisite graphics, elaborate game design and a smooth and enjoyable game experience to players.

Swordsman Online. We launched Swordsman Online in June 2013 and adopted an item-based revenue model for this game. Swordsman Online is a 3D martial arts MMORPG adapted from Louis Cha's acclaimed classic martial arts novel of the same Chinese name. Running on our proprietary "Angelica 3D" game engine, the game presents exquisite visual effects and recreates the grand and free martial arts world depicted in the original novel. The game also features a refreshing design of martial arts actions and combat, dazzling character skills, and various interesting instances full of fun and challenges. Additionally, the game involves gamers in active interaction with others and embeds captivating story plots.

Holy King. We launched Holy King in September 2013 and adopted an item-based revenue model for this game. Holy King is a 3D fantasy MMORPG adapted from the popular online novel of the same Chinese name. Running on our proprietary "Echoles" game engine, the game presents an immersive fantasy world with vivid graphics and grand scenery.

Legend of the Condor Heroes. We launched Legend of the Condor Heroes in September 2014 and adopted an item-based revenue model for this game. Legend of the Condor Heroes is a 3D MMORPG adapted from Louis Cha's acclaimed martial arts novel of the same name. Powered by our proprietary "ARK" game engine, Legend of the Condor Heroes provides players with a brand new online game experience that can incorporate data from offline sports and other activities through certain wearable devices.

In North America, Europe, Japan, Southeast Asia and Korea, besides localizing and operating some of the above games through our wholly owned subsidiaries, we also operate certain games developed by our U.S. based subsidiary, Cryptic Studios, as well as games licensed from other developers.

Since 2013, we began tapping into the mobile game segment to capitalize on the growing popularity of the mobile internet and devices in China, leveraging our existing knowledge in client-based online PC games. We have developed, operated and distributed several mobile games covering a wide range of game genres, namely, Legend of Chu and Han, Rise of the King, Return of the Condor Heroes Mobile, Fantasy of the Immortals, Forsaken World Mobile, CrossGate Mobile, Touch Mobile, Forever Mars, Dawn after Dark, Swordsman Mobile and Saint Seiya Mobile.

In addition to the above client-based online PC games and mobile games, we also developed and operate several web games such as Touch.

Online Games under Development. We currently have a number of new games in pipeline, ranging from client-based online PC games to mobile games.

In addition to operating online games, we also generated advertising revenue from our game portals and revenue from selling our pay-per-install games, such as Torchlight and Torchlight 2, developed by our majority-owned subsidiary Runic Games based in the U.S.

Anticipating the potential growth of online games in China and recognizing the importance of possessing our own game engine, we have developed several proprietary game engines for our various types of games. For example, our Angelica 3D game engine enables us to create superior 3D graphics with impressive visual effects, realistically representing real-life characters moving in captivating scenes. Our Angelica 3D game engine employs the latest technology to realize 3D features, including shadow mapping, light reflection and refraction on water surfaces. It also enables characters to fly freely in the game environment, to embrace and thus enhance interaction between players, and enables our game players to create, customize and personalize virtual content and characters.

The Angelica 3D game engine is designed to be flexible to allow for effective game play on both high-end and lower-end computers. Many of the international game operators that license games to China use game engines that require players to have the newest and most advanced computers to play the game or enjoy the game experience. We believe these engines may not be suitable to the hardware environment in China, because a large number of game players in China play online games using hardware that may be generations behind the most advanced computers. In comparison, the games developed on our Angelica 3D game engine are compatible with a variety of hardware platforms by simplifying certain computation requirements for low-end hardware. This allows us to access a broad range of players in China.

The logic part of the Angelica 3D game engine provides the framework for the continuous evolution of the game story and game episodes. Under the logic engine, all game elements including characters, weapons, skills, game plots and scenes, are defined as abstract parameters and assigned with relative probabilities. Based on the complicated algorithms, formulas and computation processes supported by the logic engine, our program developers optimize and maintain the systematic balance and evolution of the various game elements to create a consistently challenging and exciting game experience and a game environment that is perceived as fair by the players.

The network part of the Angelica 3D game engine provides a platform to streamline online data transmission, game operation and user control.

Our Angelica 3D game engine can support the development of a range of styles of games under various game environments. We have employed this engine and its upgraded versions to develop a number of our existing 3D MMORPGs and our 3D online casual game.

We have also developed several game engines for our 2.5D and 2D games. For example, our Cube 2.5D game engine, which was used to develop Battle of the Immortals and Empire of the Immortals, balances graphics quality and hardware requirements: it can generate high-quality graphics with 3D depiction of the background, in-game items and characters, while the games developed by Cube engine have relatively low hardware requirements compared to 3D games. Our Cube 2.5D engine adopts angle locking technique and manages to reduce the technical difficulty of graphics display by shielding sky and distant objects in the game scenes.

Our EPARCH 2D engine, which was used to develop Fantasy Zhu Xian, has the advantages of typical 2D game engines such as highly-refined image quality, compatibility with both high and low end computers and user friendly interface for new game development. In addition, it adopts technologies used in 3D game engines to enable our games to fully utilize hardware potentials. For example, it introduces the concept of altitude into 2D games and creates a realistic flying visual effect within 2D game environment. It can also create various light effects that alter in real time following the change of game environment.

Our Echoles 3D engine, which was used to develop Holy King, provides solution to achieve full dynamic visual effects in games, such as whole scene lights and shadows, without sacrificing details and

fidelity of images. Featuring multithreaded resource management, Echoles enables games to run with enhanced smoothness and stability. Echoles is integrated with a pack of powerful special effect system and character control system, which improve the game image quality and ensure the efficient game running.

Our ARK 3D engine, which was used to develop Legend of the Condor Heroes, creates impressive visual effects by leveraging state-of-the-art technologies, including static mixed lights and shadows, high-dynamic-range lighting rendering, realistic screen-space ambient occlusion, efficient anti-aliasing, dynamic weather, etc. It also provides full support to large-scale outdoor scene, ecological environment simulation, lights and shadows rendering, interactive processing and other stunning processing effects.

Our game development platforms have been designed with modularized functions to allow our game designers and graphic artists to quickly enhance and expand on the game play, design and settings without getting bogged down by technical computer programming language. Designers and graphic artists can program by going through a series of user-friendly menus. This significantly shortens our game development process and allows us to quickly add content and features to our games even after their launch. Furthermore, as the same program development team supports the programming of multiple games via the same development platform, any programming improvement originated from one game can be readily introduced to other games. We believe that our various game development platforms provide us with a solid foundation to rapidly and frequently develop and introduce new games and to update our existing games.

Our game engine also provides the technological foundation for the real-time detection and resolution of unauthorized character enhancements and other attacks from hacking and cheating activities. Our games have built-in detection mechanisms, which include a verification process between the user end hardware and our operation servers and the rapid detection of cheating activities. We believe this is important to ensure players' confidence in the fairness and reliability of our games, in particular given the propensity of hacking and cheating activities in online games in China and in other parts of the Asia Pacific region.

We believe that rapid and high-quality game development is critical to our success. Our game development team mainly consists of our programming personnel, design personnel and graphics personnel. Several core members of our development team have worked together for more than a decade. In March 2008 we opened a research and development center in Shanghai to take advantage of the skilled workforce in the game development industry there. In February 2009 we acquired InterServ Caymans and its two PRC subsidiaries in Shanghai and Chengdu, both of which have further strengthened our research and development capability. We acquired a majority stake in Runic Games in May 2010 and 100% equity interests in Cryptic Studios in August 2011, respectively, which allowed us to further enhance our strong research and development capabilities and to leverage their creative and professional development teams to create global titles. In November 2014, we restructured our research and development teams to form five new controlled companies, in which we hold majority stakes. In order to help retain, attract and incentivize top talents, non-controlling interest of each of these five controlled companies was granted to be beneficially held by our key research and development employees. We believe this new arrangement will help invigorate the game development process, support game design flexibility, allow faster reaction to changing market trends, and boost game development productivity.

Unlike many of our competitors in China that operate client-based online PC games licensed from foreign game developers, we have in-house capabilities that allow us to develop games rapidly and in response to constantly changing market demands and trends.

Our games are realized through coordination among teams of program developers, game designers and graphic artists. Our in-house development team also supports our frequent game upgrades and updates to accommodate the latest user tastes and preferences and evolving market trends. We also try to design each of our games to cater to distinct market segments to grow our overall player base rather than merely shifting players from one game to another. Furthermore, our games are developed with built-in multiple-language capability to support our timely expansion into international markets through a convenient localization process.

We offer Perfect Pass, our integrated membership management system, to our customers in China. It is designed to provide our customers with an integrated user-friendly platform to log in, play and purchase any products and services that we offer. To play our online games, a customer must register an account with our Perfect Pass system. Once registered, the customer may log into our network, select and activate the desired games that the customer wishes to play, and then charge his account with prepaid cards or online points that enable the customer to play for a specified period of time or purchase in-game items. Each customer needs to maintain only one Perfect Pass account, which provides information regarding the customer's available prepaid online points, profile and payment history of the last three months.

A customer can purchase the prepaid cards through our various distribution channels both online and offline. Each prepaid card contains a unique access code and password that enables a player to add online points to his account. Our prepaid cards are offered in a variety of denominations to provide players with flexibility, and each prepaid card may be used to play any of our online games. To avoid third parties' misuse of our customers' accounts, we offer a series of security measures by linking the account with our customer's mobile phones, such as the lock-up of account and lock-up of IP addresses via short message instructions.

Customers in North American and Europe can set up their billing profile and carry ZEN, a virtual currency, after creating their Perfect World accounts. Customers can purchase ZEN, to make payments for all games operated by PW USA and PW Europe, through various payment methods including but not limited to credit cards, prepaid cards and mobile phone payments.

Customers in Japan can create their MK accounts through MK-STYLE, our self-developed and operated online game portal site. Customers in Japan can use their MK Points, to make payments for all games operated by C&C Media. MK Points can be purchased through major payment gateways widely available in Japan.

In various markets, we cooperate with local payment gateways to provide more payment method options to and facilitate convenient paying process for our customers.

Pricing. We mainly have two different pricing models: (1) time-based, which we have adopted for Perfect World; and (2) item-based, which we have adopted for our other online games. Under the time-based model, players pay for game playing time. The pricing was determined near the end of the open beta testing period based on several factors, including the prices of other comparable games, the technological and other features of the game, and the targeted marketing position of the game. Under the item-based model, players can play the basic functions of the game free of charge for as long as they want. We generate revenues when players purchase and consume the in-game items such as performance-enhancing items, clothing, accessories and pets that enhance the game play experience. We determine the price of each in-game item before its introduction, generally based on an analysis of a series of benchmarks, such as the price of similar items offered in other online games, the market price of the real-life item represented by the in-game item, and pricing of other popular forms of entertainment.

Distribution. We established our distribution network by leveraging our management team's extensive connections accumulated from their previous game and software distribution experience. We distribute our physical and virtual prepaid cards and online points through various channels.

Physical cards: We generally sell physical cards through a network of third-party distributors. We sell the cards directly to a number of qualified distributors, who resell the cards to numerous internet cafés, newsstands, convenience stores and other retail outlets throughout China.

Electronic distribution system: Each of our regional distributors in our electronic distribution network has a sales account in our E-sales system. Upon receipt of their payment, we allocate to the distributor a number of online points or virtual cards on the central E-sales computer system operated and monitored by us. The distributors can electronically transfer the online points or virtual cards in their sales accounts to the accounts of their sub-distributors, retailers or players on our central E-sales computer system. Through this system, we also cooperate with telecommunication operators and bundle the collection of fees for our games with their user services, such as their prepaid phone cards and SMS services. As a result, gamers can conveniently make payments through their mobile phones. This system of electronic sales simplifies logistics by eliminating the need for, and the cost of, physical game cards, and allows us to centrally monitor the transfers of the online points or virtual cards by the distributors.

Online payment platforms: We sell our online points directly to players for charging their accounts via our own website. Payments for purchases are processed by banks and other third-party online payment platform service providers. These online payment platform service providers receive transaction fees, which reduce the net payment we receive from them.

Digital Storefronts and Game Platforms: We distribute mobile games to end-users through digital storefronts and game platforms, such as Apple's App Store and Qihoo 360's game platform. These storefronts and platforms sell in-game virtual currencies, which are used by game players to redeem virtual items in our mobile games. After retaining their revenue sharing amounts at a pre-agreed percentage, the storefronts and platforms remit us the proceeds that they have received from game players.

In order to extend our reach in the overseas markets, we license our games to overseas operators. Under our license agreements, we allow our overseas licensees to exclusively operate, promote, service and distribute our games in specified territories. In return, we are generally entitled to an initial fee and ongoing royalties, the latter of which is generally determined based on the amount of money charged to players' accounts or the services fees payable by the players to the licensee in a specific country or region. The licensees are responsible for the sales and marketing of our games in the specified territories, including setting the price of our games and virtual items, and usually there are minimum requirements on promotion expenditures. The licensees are also generally in charge of maintenance of the network infrastructure and customer service. We are responsible for the technical support for the operation of our games, including providing technical tools for the localization of our games. We generally agree to provide our licensees with updates or upgrades to the licensed games, usually every three to six months or on a when-and-if-available basis. We also usually assist the licensees in preventing, detecting, and resolving hacking and cheating activities.

We plan to license more of our games to leading online game operators in various countries and regions overseas to further strengthen our global presence. All of the games we license to overseas operators use an item-based revenue model. We work with the licensees to determine the pricing of in-game items based on the local market conditions as well as our input.

The following table lists the countries or regions where we have licensed our client-based online PC games.


Game		Country/Region
Perfect World II		Taiwan, Hong Kong, Macau, Vietnam, The Philippines, Brazil, Thailand, Indonesia, and The Russian Federation and other Russian-speaking territories
Zhu Xian		Thailand, Taiwan, The Russian Federation and other Russian-speaking territories and Indonesia
Chi Bi		The Philippines
Hot Dance Party		Vietnam
Battle of the Immortals		Taiwan
Forsaken World		Taiwan, The Russian Federation and other Russian-speaking territories, Brazil and the Spanish-speaking countries in Latin America
Empire of the Immortals		Taiwan and Indonesia
Saint Seiya Online		Taiwan
Swordsman Online		Taiwan, Vietnam and Indonesia
Legend of the Condor Heroes		Taiwan

We employ a variety of innovative and traditional marketing and promotional activities to attract new game players and increase revenues from existing players. These activities include tailor-made marketing programs, live promotions, in-game marketing and advertising and online promotions.

Tailor-made Marketing Programs. Based on our extensive local knowledge and experience, we have designed, for each of our games, innovative promotional activities with entertainment and fashion elements. For some of our games, we have appointed celebrities, ranging from pop stars to famous actors and actresses, to be our spokespersons, and have worked with popular bands and singers to record theme songs. For the games that are developed from well-known novels, such as Chi Bi, we cooperated with the film maker to co-promote our game and the movie that are developed from the same novel.

Live Promotions. We regularly organize a variety of off-line promotion activities to develop and support the community of game players, such as internet café gatherings, player clubs, product press conferences, college marketing, distribution of free game-related posters, distribution of promotional online points and cross-marketing with telecommunication operators. For example, we organized Perfect World International Championship for our flagship games. We have promotion personnel to organize cooperative promotion campaigns with local distributors and internet cafés throughout China. We also promote Perfect World's brand and our games by attending various industrial exhibitions, including China Joy Expo game exhibition in China and E3 industrial exhibition in the U.S.

In-game Marketing. We conduct in-game marketing programs for our players from time to time, including player unions and game tournaments. We also frequently post announcements in the game environment to promote new items and features, usually linking with in-game events. Leveraging our in-house development capability, we offer new in-game items periodically, especially around the holidays and certain special events, such as the offering of in-game moon cakes and in-game pets "Jade Rabbit" during the Chinese Moon Festival.

Advertising and Online Promotions. We advertise in many online game sites and game magazines that are updated regularly. To enhance our market penetration, especially among working professionals, we also advertise through flat-panel television displays placed in high-traffic areas of commercial office buildings, such as in lobbies and near elevators.

For each of our games, we have a dedicated product management team responsible for marketing activities, managing player community and developing operational plans. We believe that our multi-channel marketing activities help build up a players' community and satisfy our players' need for social outlets and social interaction. We believe this in turn helps to generate and improve players' loyalty to our games.

We have focused on providing excellent customer service in order to retain our existing customers and to attract new game players.

Our players can access our customer service center via phone, online in-game chats or e-mail at any time 24 hours a day, seven days a week. Many of our dedicated customer service representatives are online game fans with deep understanding of game play and players. All of our customer service representatives are required to participate in a formal training program before commencing work. We have implemented detailed performance measures to monitor our calls to ensure that our customers will receive quality service. In addition, we also operate online bulletin boards that enable players to post questions to, and receive responses from, other players. In addition to providing customer service to our players, our customer service representatives also collect player comments and complaints about

our games and generate periodic reports for our management and operations personnel that summarize important issues raised by players and our responses to those issues.

We have in-game masters that are responsible for organizing in-game events, troubleshooting and responding to players' inquiries. Our in-game masters work together with our dedicated engineering team to detect and remove bugs and viruses. They are also actively involved in identifying and resolving any issues arising from unauthorized character enhancements and other hacking or cheating activities.

We have service centers which are open to walk-in customers during normal business hours in China. Our customers in North America, Europe and Japan can reach our customer service support via phone or online service channels. All of our representatives at our service centers are trained to address our customers' questions and concerns and resolve any problems they may have with our products and services. Our customer service in China has maintained the ISO 9001:2000 certification since August 2007.

We aim to build a reliable and secure network infrastructure to fully support our operations. We maintain an efficient hardware and software infrastructure with a large network capacity consisting of self-owned and leased servers.

We have a network operation team responsible for stability and security of our network. The team follows a workflow plan of problem detection, recording, analyzing and solving. The primary responsibilities of the team members consist of monitoring system performance, troubleshooting, detecting system error, random sample testing on servers, maintaining equipment, and testing, evaluating and installing hardware and software. In addition, we frequently upgrade our game server software to ensure the stability of our operation and reduce risks of hacking. Our streamlined server groups support a large number of concurrent users.

Competition in the online game market in China and the overseas markets where we offer our games is intense. We believe that the key competitive factors include the design, quality, popularity and price of online games and in-game items, the ability to rapidly update and upgrade games, marketing activities, sales and distribution network and customer service. We compete principally with the following groups of competitors:

Some of our existing and potential competitors have significantly greater financial and marketing resources and a larger portfolio of game offerings than we do. For a discussion of risks relating to competition, see "Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We may not be able to maintain our revenues and profitability as we operate in a highly competitive industry and compete against many companies."

Our quarterly operating results may fluctuate due to various factors and reasons. For example, as part of our normal product cycle, our revenues may be relatively low when we decelerate promotional activities for some time in order to lengthen the life cycle of existing games and maintain long-term sustainable growth. Based on our experience, our user traffic may also be relatively low as result of the

"golden" holidays in China, such as the Chinese New Year holiday in January or February when many of our game players may go back to home town and have less access to the internet, and national college admission exams in the second quarter when our game players spent less time playing online game. Other factors that may cause our operating results to fluctuate include a deterioration of economic conditions in China and potential changes to the regulation of the online game industry in China, which are discussed elsewhere in this annual report.

Our intellectual property rights include trademarks, trade secrets and domain names in China and copyright and other rights associated with our websites, game engines, technology platforms, self-developed software and other aspects of our business. We regard our intellectual property rights as critical to our business. We rely on trade secret protection, trademark and copyright law, non-competition and confidentiality agreements with our employees, and license agreements with our partners, to protect our intellectual property rights. We require our key employees to enter into agreements requiring them to keep confidential all information relating to our software, technology, business and trade secrets during and after their employment with us. These agreements also require our employees to assign to us all of their inventions and other intellectual property rights developed by them primarily in connection with our business.

We have registered our domain names www.pwrd.com, www.wanmei.com and www.perfectworld.com, and have registered a series of domain names in connection with each of games, including without limitation, www.world2.com.cn, www.wulin2.com.cn, www.w2i.com.cn, www.zhuxian.com, www.chibi.com, www.rwpd.com, www.kdxy.com, www.sgcq.com.cn, www.mhzx.com.cn, www.smdl.com, www.sgsj.com, sdxl.wanmei.com, http://seiya.wanmei.com, http://xa.wanmei.com, http://sw.wanmei.com and http://sd.wanmei.com with China Internet Network Information Center, and have legal rights over these domain names. We have filed trademark applications for the Chinese names of a number of our existing online games with the Trademark Office of the State Administration for Industry and Commerce in China. For example, the trademark has been registered in classes 9, 16 and 35 in China, the and the trademarks have been registered in classes 9, 16 and 41 in China, respectively, the and the trademarks have been registered in class 41 in China, the trademark has been registered in class 9 and 41 in China and the trademark has been registered in class 9 in China. We have registered all of our self-developed client-based online PC games, web games and mobile games that are currently in operation, and a number of our game engines with the National Copyright Administration for copyright protection. We have taken steps to legally protect our intellectual property, acknowledging, however, that historically China has not been able to successfully protect a company's intellectual property to the same extent as the United States. We mainly rely on our licensees for copyright, domain names and trademark protection outside China, although very limited protection has been secured to date.

We have licensed from third parties certain intellectual property, based on which we are entitled to develop online games. For examples, PW Network obtained exclusive licenses to use certain intellectual property of the TV drama series and the internet novel Zhu Xian for the production and commercial operation of Legend of Martial Arts, Zhu Xian and Fantasy Zhu Xian, respectively. We have fully paid the license fees under these license agreements.

Our provision of online games and related content on our websites is subject to various PRC laws and regulations relating to the telecommunications industry, internet and online games, and regulated by various government authorities, including:

The principal PRC regulations governing the internet content provision industry as well as the online game services in China include:

As the online game industry is at an early stage of development in China, new laws and regulations may be adopted from time to time to require additional licenses and permits other than those we currently have, and address new issues that arise from time to time. As a result, substantial uncertainties exist regarding the interpretation and implementation of current and any future Chinese laws and regulations applicable to the online game industry. See "Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The laws and regulations governing the online game industry in China are developing and subject to future changes. If we fail to obtain or maintain all applicable permits and approvals, our business and operations would be materially and adversely affected."

Under the above regulations, a foreign investor is currently prohibited from owning more than 50% of the equity interest in a Chinese entity that provides value-added telecommunications services, including online game, online reading and other internet content provision services. In addition, foreign and foreign-invested enterprises are currently not able to apply for certain required licenses to provide these services.

The Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business issued by the MIIT in July 2006, reiterated the regulations on foreign investment in telecommunications business, which require foreign investors to set up foreign-invested enterprises and obtain an ICP license in order to conduct any value-added telecommunications business in China. Under this circular, a domestic company that holds an ICP license is prohibited from leasing, transferring or selling the license to foreign investors in any form, and from providing any assistance in forms of resources, sites or facilities to foreign investors that conduct value-added telecommunications business illegally in China. Furthermore, the relevant trademarks and domain names that are used in the value-added telecommunications business shall be owned by the local ICP license holder or its shareholders. This circular further requires each ICP license holder to have the necessary facilities for its approved business operations and to maintain such facilities in the regions covered by its license. In addition, all value-added telecommunications service providers are required to maintain network and information security in accordance with the standards set forth under relevant PRC regulations. Due to the lack of further necessary interpretation from the regulator, it remains

unclear what impact this circular will have on us or the other Chinese internet companies that have adopted the same or similar corporate and contractual structures as ours.

On September 28, 2009, GAPP, the National Copyright Administration, and National Office of Combating Pornography and Illegal Publications jointly issued the GAPP Notice, which restates that foreign investors are not permitted to invest in online game-operating businesses in China via wholly owned, equity joint venture or cooperative joint venture investments. The GAPP Notice expressly prohibits foreign investors from gaining control over or participating in domestic online game operators through indirect ways such as establishing other joint venture companies, or contractual or technical arrangements. However, the GAPP Notice does not provide any interpretation of the term "foreign investors" or make a distinction between foreign online game companies and China based companies under a similar corporate structure like ours. Thus, it is unclear whether such regulations will be applicable to us or many other China based companies that rely on similar contractual arrangements with variable interest entities to operate online games in China. Since the promulgation of the GAPP Notice, we have applied for and obtained ISBNs from the then GAPP for internet publications of several new games without encountering any problem. We are not aware that either the GAPP or the SAPPRFT has taken any enforcement action under the GAPP Notice against any online game operators under a similar corporate structure like ours.

We conduct our online game and related internet content provision businesses in China through contractual arrangements with PW Network and PW Digital Technology. We used to conduct the online reading business through contractual arrangements with PW Literature before we sold PW Literature to an unrelated party in December 31, 2013. In addition, we use Trendsters Investment as an investment vehicle to hold our investment in a venture capital fund. The venture capital fund will be managed by one or several general partners unrelated to us and will be focusing on companies with high-growth potentials in certain technology, media and telecommunications sectors. Trendsters Investment does not itself make investment decisions for the fund or involve in the management of the fund. In the opinion of our PRC legal counsel, King & Wood Mallesons, each of the agreements constitutes valid and legally binding obligations of each party to such contractual agreements under PRC Laws. However, King & Wood Mallesons is of the view that the interpretation and implementation of the laws and regulations in the PRC and their application to and effect on the legality, binding effect and enforceability of contracts are subject to the discretion of competent PRC authorities, and therefore there is no assurance that relevant PRC authorities will take the same position as the opinion of King & Wood Mallesons herein in respect of the legality, binding effect and enforceability of each of the contractual agreements. Meanwhile, since the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to us to enforce the contractual arrangements should our variable interest entities or their equity holders fail to perform their obligation under those arrangements.

Online game operators are required to hold a variety of permits and licenses, which, among others, include:

ICP License. Under current Chinese laws and regulations, a commercial operator of internet content provision services must obtain a value-added telecommunications business operating license for internet content provision from the appropriate telecommunications authorities in order to carry on any commercial internet content provision operations in China. PW Network, Hefei PW Network and PW Digital Technology, among our other consolidated entities, each has obtained the ICP license.

Internet Culture Operation License. Each ICP license holder that engages in the supply of internet culture products and related services, including provision of online games, must obtain an additional internet culture operation license from the appropriate culture administrative authorities pursuant to

the newly issued Tentative Measures for Administration of Internet Culture (2011), which superseded the Tentative Measures for Administration of Internet Culture (2003, and as amended in 2004). PW Network obtained an internet culture operation license for the operation of online games in May 2008, which was renewed in February 2015. Hefei PW Network and PW Digital Technology among our other consolidated entities, each has obtained the internet culture operation license for the operation of online games.

Internet Publishing License. The GAPP that was reorganized as the SAPPRFT in 2013 and the MIIT jointly impose a license requirement for any company that intends to engage in internet publishing, defined as any act by an internet information service provider to select, edit and process content or programs and to make such content or programs publicly available on the internet. According to the Tentative Measures for Administration of Internet Publication (2002), the provision of online games is deemed an internet publication activity. Therefore, online game operators need to obtain an internet publishing license in order to directly make their online games publicly available in China. Historically, we did not hold such a license as issuances of such licenses were temporarily suspended by the then GAPP. PW Network obtained an internet publishing license for online game publishing in May 2008, which allows PW Network to distribute and publish online games on the internet. Hefei PW Network, a subsidiary of PW Digital Technology, obtained an internet publishing license for online game and mobile game publishing in June 2012, which allows Hefei PW Network to distribute and publish online games and mobile games on the internet. Currently, our self-operated online games are published in China by PW Network or Hefei PW Network. We have filed internet publication of our client-based online PC games and certain of our self-developed web games and mobile games with the GAPP, and we are in the process of filing internet publications of our other self-developed web games and mobile games.

Online Bulletin Board Service Approval. The MIIT has promulgated rules requiring ICP license holders that provide online bulletin board services to register with, and obtain approval from, the relevant telecommunication authorities. Although such rules were abandoned in July 2010 by the State Council, certain telecommunication authorities still require online bulletin board services be itemized in ICP license if an ICP license holder intends to provide such services.

In addition to the aforementioned permits and licenses that are required for online game operators, for each online game that an operator operates, additional permits or licenses are required, which include, among others, those set forth below in "—Regulation of Internet Content" and "—Regulation of Information Security."

In the opinion of our PRC legal counsel, King & Wood Mallesons, except as described above, no consent, approval or license other than those already obtained by PW Network and PW Digital Technology is required under any of the existing laws and regulations of China for our businesses and operations.

The Chinese government has promulgated measures relating to internet content through a number of ministries and agencies, including the MIIT, the Ministry of Culture and the GAPP that was reorganized as the SAPPRFT in 2013. These measures specifically prohibit internet activities, which includes the operation of online games, among other businesses, that result in the publication of any content which is found to, among other things, propagate obscenity, gambling or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC, or compromise State security or secrets. When an internet content provider or an internet publisher finds that information falling within the above scope is transmitted on its website or is stored in its electronic bulletin service system, it shall terminate the transmission of such information or delete such information immediately and keep records and report to relevant authorities. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its websites. In addition, in accordance

with the Provisional Measures for the Regulation of Online Games promulgated by the Ministry of Culture in June 2010, imported online games should be filed with the Ministry of Culture before the operation of the games and domestic online games should be filed with the Ministry of Culture within one month of their operations. We have successfully completed the filings with the Ministry of Culture for our client-based online PC games Perfect World, Legend of Martial Arts, Perfect World II, Zhu Xian, Chi Bi, Hot Dance Party, Pocketpet Journey West, Battle of the Immortals, Forsaken World, Empire of the Immortals, Saint Seiya Online, Swordsman Online, Holy King and DOTA2. We have submitted to the Ministry of Culture the relevant filing documents for our other self-operated online games. We believe that our submissions met all filing requirements. However, we cannot assure you that these submissions will be deemed successfully filed by the Ministry of Culture. Except as described above with respect to the filing of certain online games with the Ministry of Culture, we have complied with all the requirements described in this paragraph.

Internet content in China is also regulated and restricted from a State security standpoint. The National People's Congress, China's national legislative body, has enacted a law that may subject to criminal punishment in China any effort to: (1) gain improper entry into a computer or system of strategic importance; (2) disseminate politically disruptive information; (3) leak State secrets; (4) spread false commercial information; or (5) infringe intellectual property rights.

The Ministry of Public Security has promulgated measures that prohibit use of the internet in ways which, among other things, result in a leak of State secrets or a spread of socially destabilizing content. The Ministry of Public Security has supervision and inspection rights in this regard, and we may be subject to the jurisdiction of the local public security bureaus. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its websites.

The State Council and the National Copyright Administration have promulgated various regulations and rules relating to protection of software in China. Under these regulations and rules, software owners, licensees and transferees may register their rights in software with the National Copyright Administration or its local branches and obtain software copyright registration certificates. We have registered all of our self-developed client-based online PC games, web games and mobile games that are currently in operation, and a number of our game engines with the National Copyright Administration. Although such registration is not mandatory under PRC law, software owners, licensees and transferees are encouraged to go through the registration process and registered software rights may receive better protections.

The PRC Trademark Law together with its implementation rules protects registered trademarks. The Trademark Office of the State Administration for Industry and Commerce, or SAIC, handles trademark registrations and grants a protection term of ten years to registered trademarks.

Internet cafés are required to obtain a license from the Ministry of Culture and the SAIC, and are subject to requirements and regulations with respect to location, size, number of computers, age limit of customers and business hours. In 2004, the Ministry of Culture, the SAIC and some other governmental authorities jointly issued a notice to suspend issuance of new internet café licenses. Though this nationwide suspension has been generally lifted in 2005, the local authorities have the authority of controlling the volume and recipients of new licenses at their discretion. In addition, local and higher-level governmental authorities may from time to time strictly enforce customer age limits and other requirements relating to internet cafés, as a result of the occurrence of, and media attention on, gang fights, arsons or other incidents in or related to internet cafés. As many of our customers

access our games website from internet cafés, any reduction in the number, or any slowdown in the growth, of internet cafés in China as a result of any intensified internet café regulation will limit our ability to maintain or increase our revenues and expand our customer base, which will in turn materially and adversely affect our business and results of operations. A notice jointly issued by several central governmental agencies in February 2007 suspended nationwide the approval for the establishment of new internet cafés for the year of 2007 and enhanced the punishment for internet cafés admitting minors.

Chinese law does not prohibit internet content providers from collecting and analyzing personal information from their users. We require our users to accept a user agreement whereby they agree to provide certain personal information to us. Chinese law prohibits internet content providers from disclosing to any third parties any information transmitted by users through their networks unless otherwise permitted by law. If an internet content provider violates these regulations, the MIIT or its local bureaus may impose penalties and the internet content provider may be liable for damages caused to its users.

In April 2007, the GAPP and several other governmental authorities issued a circular requiring the implementation of an "anti-fatigue system" and a real-name registration system by all PRC online game operators, in an effort to curb addictive online game play behaviors of minors. Under the anti-fatigue system, three hours or less of continuous play by minors is considered to be "healthy," three to five hours to be "fatiguing," and five hours or more to be "unhealthy." Game operators are required to reduce the value of in-game benefits to a player by half if the player has reached "fatiguing" level, and to zero in the case of "unhealthy" level.

To identify whether a player is a minor and thus subject to the anti-fatigue system, a real-name registration system is also adopted, which requires online game players to register their real identity information before they play online games. We have developed our own anti-fatigue system and real identification number registration system, and have implemented them since July 2007.

On July 1, 2011, the GAPP and several other government authorities jointly promulgated a notice to strengthen the implementation of the anti-fatigue system and real-name registration, entitled Notice on Initializing the verification of Real-name Registration for Anti-Fatigue System on Internet Games, or the Real-name Registration Notice, which took effect on October 1, 2011. Pursuant to the Real-name Registration Notice, the authority may terminate the operation of an online game if its operator violates the anti-fatigue and real-name registration requirements.

On February 15, 2007, the Ministry of Commerce, the People's Bank of China and other relevant government authorities jointly issued the Notice on the Reinforcement of the Administration of Internet Cafés and Online Games, or the Internet Cafés Notice. Under this notice, the People's Bank of China is directed to strengthen the administration of virtual currency in online games to avoid any adverse impact on the economy and financial system. This notice provides that the total amount of virtual currency issued by online game operators and the amount purchased by individual game players should be strictly limited, with a strict and clear division between virtual transactions and real transactions carried out by way of electronic commerce. This notice also provides that virtual currency should only be used to purchase in-game items.

On June 4, 2009, the Ministry of Commerce and the Ministry of Culture jointly issued Notice on the Reinforcement of the Administration of Virtual Currency in Online Games, which defines what is virtual currency and requires that entities shall obtain the approval from the Ministry of Commerce

before issuing virtual currency and engaging in transactions using virtual currency in connection with online games. Entities are prohibited from using virtual currency to carry out gambling business.

On December 12, 2007, the SARFT and MIIT promulgated the Administrative Measures on Internet Video/Audio Program Services, which requires that, among others, a service provider of internet video/audio program shall obtain a license from the SARFT, failure of which may result in the suspension or close of the website providing the internet video/audio program services. See "Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—PRC regulations relating to internet video/audio program services may adversely affect the operation of our online games."

For a discussion of applicable PRC tax regulations, see "Item 5. Operating and Financial Review and Prospects—A. Operating Results—Taxation."

Foreign Currency Exchange. The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations (1996), as amended in August 2008. Under these regulations, the RMB is freely convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions, but not for capital account items, such as direct investment, loan, repatriation of investment and investment in securities outside China, unless previously approved by and/or registered with SAFE or its authorized local branches.

Pursuant to the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), foreign-invested enterprises in China may purchase or remit foreign exchange, subject to a cap approved by SAFE, for settlement of current account transactions without the approval of SAFE. Foreign exchange transactions under the capital account are still subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities.

Dividend Distribution. The principal regulations governing distribution of dividends of foreign holding companies include the Foreign Investment Enterprise Law (1986), as amended, and the Administrative Rules under the Foreign Investment Enterprise Law (2001).

Under these regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, foreign-invested enterprises in China are required to allocate at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds unless these reserves have reached 50% of the registered capital of the enterprises. These reserves are not distributable as cash dividends.

SAFE Circular 37. On July 14, 2014, SAFE issued SAFE Circular 37, which replaced the SAFE Circular 75. According to SAFE Circular 37, PRC residents (including PRC entities and PRC resident individuals) shall register with SAFE or its local branches in connection with their establishment or control of an offshore entity established for the purposes of overseas investment or financing, with such PRC residents' legally owned assets or equity interests in domestic enterprises or offshore assets or interests. In addition, such PRC residents shall update their SAFE registrations when the offshore special purpose vehicles undergo any change of basic information (including change of such PRC resident individual shareholder, name and operation term), or material events relating to increase or decrease in investment amount contributed by PRC resident individual shareholder, transfers or exchanges of shares, or mergers or divisions. SAFE may subsequently issue implementation guidance.

Under the relevant rules, failure to comply with the registration procedures set forth in SAFE Circular 37 and any subsequent implementation guidance as may be issued by SAFE, may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including the increase of its registered capital, the payment of dividends and other distributions to its offshore parent or affiliate and the capital inflow from the offshore entity, and may also subject relevant PRC residents to penalties under PRC foreign exchange administration regulations. PRC residents who control our company from time to time are required to register with SAFE in connection with their investments in us.

SAFE Notice 7. In December 2006, the People's Bank of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, or PBOC Notice 78, setting forth the respective requirements for foreign exchange transactions by PRC individuals under either the current account or the capital account. In February 2012, SAFE promulgated the Notice relating to Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas-Listed Company, or SAFE Notice 7, which replaced an earlier SAFE notice issued in 2007. SAFE Notice 7 is applicable to domestic directors, supervisors, senior management and other employees of an overseas-listed domestic company, PRC subsidiaries or branches of an overseas-listed company and any PRC entities which are directly or indirectly controlled by an overseas-listed company ("Domestic Company"), including PRC citizens and foreign citizens who have resided in the PRC for one year or more ("Domestic Individuals"). Under SAFE Notice 7, Domestic Individuals who are granted stock options or any other stock-related rights and benefits under a stock incentive plan by an overseas publicly listed company are required, through the Domestic Company or a PRC agent ("Domestic Agent"), to complete certain procedures and transactional foreign exchange matters under the stock incentive plan upon the examination by, and the approval of, SAFE or its authorized local counterparts; and the Domestic Agent is required to register relevant information of the stock incentive plan with the authorized local counterparts of SAFE. If we or our PRC optionees fail to comply with the SAFE Notice 7, we or our PRC optionees and their local employer may be subject to fines and legal sanctions.

The National Development and Reform Commission, or the NDRC, issued the Circular on Promoting and Standardize the Development of Equity Investment Enterprises on November 23, 2011, which regulates (1) the establishment, fundraising and investment of equity investment enterprises, (2) risk-control mechanisms of equity investment enterprises, (3) responsibilities of equity investment management entities as entrusted management entities of the equity investment enterprises, (4) information disclosure systems of the equity investment enterprises, and (5) the record filings and industry self-regulation of the equity investment enterprises. The NDRC also issued a series of implementation guidance for the operation and management of capital equity investment enterprises. This circular and the corresponding guidance set out the requirements for an investor in an equity investment enterprise, including the investor's risk profile and fund contribution requirements, including that subscription in an equity investment enterprise by each investor shall not be less than RMB10 million. In addition, an investor shall invest with one's lawful equity funds and hold the investment in an equity investment enterprise directly instead of by way of trust or any other similar measures.

Trendsters Investment, our variable interest entity, is an investor and a limited partner in a venture capital fund, which falls in the category of equity investment enterprises under this circular. We believe that we are in compliance with all the requirements for an investor set forth in this circular and the series of guidance.

The following diagram illustrates our corporate structure as of the date of this annual report:


(4)				Contractual arrangements including an Exclusive Technology Support and Service Agreement, a Development Cooperation Agreement, a Business Operation Agreement, a Call Option Agreement and an Equity Pledge Agreement. For a description of these agreements, see "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with Perfect Moment and its Equity Owners."
(5)				Contractual arrangements including an Exclusive Technology Support and Service Agreement, a Development Cooperation Agreement, a Business Operation Agreement, a Call Option Agreement and an Equity Pledge Agreement. For a description of these agreements, see "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with Trendsters Investment and its Equity Owners."
(6)				Contractual arrangements including two Loan Agreements, a Business Operation Agreement, a Call Option Agreement, an Equity Pledge Agreement and a Power of Attorney. For a description of these agreements, see "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with Trendsters Investment and its Equity Owners."
(7)				Contractual arrangements including two Loan Agreements, a Business Operation Agreement, a Call Option Agreement, an Equity Pledge Agreement and a Power of Attorney. For a description of these agreements, see "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with PW Digital Technology and its Equity Owners."
(8)				Contractual arrangements including an Exclusive Technology Support and Service Agreement, a Development Cooperation Agreement, a Business Operation Agreement, a Call Option Agreement and an Equity Pledge Agreement. For a description of these agreements, see "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with PW Digital Technology and its Equity Owners."

In the first quarter of 2011, we moved our principal executive offices into an office building of approximately 55,000 square meters that we purchased in Beijing when it became available for occupancy. We also have two office premises of approximately 4,500 square meters and approximately 2,700 square meters located in Beijing, which we purchased in November 2007 and January 2008, respectively. In June 2013, we purchased office premises with an area of approximately 14,140 square meters in Chengdu. In June 2014, we entered into an agreement to purchase office premises with an area of approximately 12,800 square meters in Chongqing at a total price of approximately RMB104.9 million (US$16.9 million), and the purchase was completed in April 2015.

Our major leased properties in China include approximately 11,040 square meters of office space in Beijing, approximate 6,200 square meters of office space in Shanghai, approximate 1,320 square meters of office space in Hefei and approximate 710 square meters of office space in Fuzhou. Our U.S. subsidiaries' office lease is for an aggregate of approximately 15,310 square meters. Our Japan office lease is approximately 860 square meters. Our Netherlands office lease is approximately 990 square meters. Our Korea office lease is approximately 1,120 square meters. We maintain an efficient hardware and software infrastructure with a large network capacity consisting of self-owned and leased servers.

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. See "Forward-Looking Information." In evaluating our business, you should carefully consider the information provided under the caption "Item 3. Key Information—D. 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.

We are a leading online game developer and operator in China as measured by the popularity of our games in China in 2014, according to a report published by the International Data Corporation. We primarily develop online games based on our proprietary game engines and game development platforms. Our strong technology and creative game design capabilities, combined with our extensive knowledge and experience in the online game market, enable us to frequently and promptly introduce popular games designed to cater to changing customer preferences and market trends.

We currently operate in China a number of our self-developed client-based online PC games, including eleven 3D MMORPGs, namely, Perfect World, Legend of Martial Arts, Perfect World II, Zhu Xian, Chi Bi, Pocketpet Journey West, Forsaken World, Saint Seiya Online, Swordsman Online, Holy King and Legend of the Condor Heroes, two 2.5D MMORPGs, Battle of the Immortals and Empire of the Immortals, two 2D turn-based MMORPGs, Fantasy Zhu Xian and Return of the Condor Heroes, and an online casual game, Hot Dance Party.

In North America, Europe, Japan, Southeast Asia and Korea, we localize and operate some of the above games through our wholly owned subsidiaries. In some of these markets, we also operate certain games developed by our U.S. based subsidiary Cryptic Studios such as Neverwinter, as well as games licensed from other developers.

In addition to the above client-based online PC games, we also developed and operate several web games such as Touch, and mobile games, such as Return of the Condor Heroes Mobile, Forsaken World Mobile, CrossGate Mobile, Forever Mars, Dawn after Dark, Swordsman Mobile and Saint Seiya Mobile.

We use a time-based revenue model for our first game, Perfect World, under which we charge players based on the time they spend playing the game. We use an item-based revenue model for our other self-developed online games, under which players can play the games for free, but they are charged for purchases of in-game items, such as performance-enhancing items, clothing, accessories and pets. In 2012, 2013 and 2014, a substantial majority of our online game operation revenues were generated through this item-based revenue model. Although a majority of our revenues are generated in China, as of the date of this annual report, we have exported a number of our games to various countries and regions, and we plan to export these games and our new games to more countries and regions. We generated revenues of RMB2.8 billion, RMB3.1 billion and RMB3.8 billion (US$619.4 million) in 2012, 2013 and 2014, respectively. We achieved net income of RMB540.7 million, RMB542.4 million and RMB471.4 million (US$76.0 million) in the years ended December 31, 2012, 2013 and 2014, respectively.

To sharpen our focus on our core online game development and operation business, we sold the online reading business to an unrelated party in December 2013. As a result, the online reading business is accounted for as discontinued operations and our consolidated statements of income and comprehensive income in this annual report separates the discontinued operations from our remaining business operations for all years presented.

We are affected by general conditions typically affecting the online game industry in China. For example, we benefited from the overall economic growth in China in the past several years, which resulted in increases in disposable income and discretionary consumer spending. We have also benefited from other general conditions in China, including the increasing use of the internet with the growth of PC and broadband penetration; the growing popularity of online games in comparison with other forms of entertainment; and favorable demographic trends, particularly the growth of the population in the age groups more inclined to play online games. Our results of operations may be adversely affected by economic slowdown in China and other countries and regions where our games are operated and the arrival of additional competitions into the markets of each of our businesses. The government regulation imposed on online game industry may also have significant impact on our results of operations.

Our operating results are more directly affected by company-specific factors including the following:

Our future growth will depend significantly upon our ability to continually and successfully develop, market and operate additional online games that are attractive to players, to increase monetization of our existing and future games and to expand internationally by licensing our games to various countries and regions and by operating our own games through our overseas subsidiaries. Our acquisitions and expansion in foreign markets may increase our capital expenditure, create downward pressure on our liquidity and depress margins in the short term. However, we believe that our acquisitions and expansion in foreign markets will in the long run increase revenues, diversify our user base and enhance our research and development and operating capability, which in turn will help improve our liquidity, capital resources, results of operation and key performance measures such as average concurrent users and maintain and improve our profit margin as well.

For the years ended December 31, 2012, 2013 and 2014, we generated revenues of RMB2.8 billion, RMB3.1 billion and RMB3.8 billion (US$619.4 million), respectively. We expect that our future revenue growth will be primarily driven by our launch of additional games, increasing monetization of our existing games, and expansion of our overseas business. For the years ended December 31, 2012, 2013 and 2014, our online game operation revenues are net of sales discounts and rebates to our

distributors, which averaged approximately 10.3%, 9.4% and 7.8%, respectively, of the face value of our prepaid cards sold to our distributors. The following table sets forth the revenues generated from our online game operations and licensing, and from other sources, both in absolute amount and as a percentage of total revenues for the periods indicated.

In 2012, 2013 and 2014, the majority of our revenues were generated from our online game operations. We launched our first game, Perfect World, in China in January 2006, using the time-based revenue model. In 2012, 2013 and 2014, 1.1%, or RMB27.4 million, 0.9%, or RMB24.1 million and 0.3%, or RMB12.3 million (US$2.0 million), of our online game operation revenues were derived from this game, respectively. With respect to games operated under the time-based revenue model, the revenue growth will depend primarily on the increase in the number of players and their playtime. We expect that our revenues generated from games operated under the time-based revenue model will remain a small portion of our online game operation revenues as we have continued to use the item-based revenue model for our new online games since we began to use that model in September 2006.

We launched additional self-developed online games using the item-based model in China: Legend of Martial Arts in September 2006, Perfect World II in November 2006, Zhu Xian in May 2007, Chi Bi in January 2008, Hot Dance Party in March 2008, Pocketpet Journey West in October 2008, Battle of the Immortals in April 2009, Fantasy Zhu Xian in October 2009, Forsaken World in October 2010, Empire of the Immortals in March 2011, Return of the Condor Heroes in September 2012, Saint Seiya Online in May 2013, Swordsman Online in June 2013, Holy King in September 2013 and Legend of the Condor Heroes in September 2014, as well as a number of web games and mobile games, such as Touch in September 2013, Return of the Condor Heroes Mobile in August 2013, Forsaken World Mobile in June 2014, CrossGate Mobile in July 2014, Forever Mars in November 2014, Dawn after Dark, Swordsman Mobile and Saint Seiya Mobile in December 2014. In North America and Europe, through PW USA and PW Europe, we operate a number of our own games including some games developed by our wholly owned U.S. based subsidiary Cryptic Studios, as well as several games that we licensed from other developers. In Japan, through C&C Media, we operate a number of our own games and certain games licensed from other developers. In Southeast Asia and Korea, we operate several of our own games through PW Hong Kong and PW Korea, respectively.

In 2012, 2013 and 2014, a substantial amount of our online game operation revenues were derived from our games using the item-based revenue model. With respect to games using the item-based revenue model, the revenue growth will depend primarily on the increase in the number of players and the monetization level of our games. We expect that revenues derived from our games operated under the item-based revenue model will remain a dominant source of our online game operation revenues in the foreseeable future.

We believe that our proprietary game engines, powerful game development platforms and creative game design will facilitate our successful development of games that cater to changing customer preferences and market trends. Furthermore, our creative utilization of extensive knowledge and experience in the online game market and strong and consistent operations will help increase the monetization of our existing and future games. We currently have a number of new games under development. We intend to continue to develop new games to expand our game portfolio and replace our existing games as they reach the end of their useful economic lives. We expect the percentage of our online game operation revenues derived from particular games to change from period to period over the life span of each individual game.

The following table sets forth, for the periods indicated, certain operating statistics for online PC games under operation in Mainland China.

Average concurrent users, or ACU, for any of our online PC games operated in China is the number of users logged on to that game at particular points of time with 5-minute intervals. The daily average concurrent users for that game is determined by averaging the 5-minute interval data over the course of a day. The daily average data are then averaged over the course of a month to derive the monthly average concurrent users of the game. Quarterly average concurrent users for a game is the average of monthly average concurrent users of such game during the relevant quarter. The fluctuation of ACU during the fiscal year 2014 was mainly due to our anti-cheating efforts with regard to our core games for the purpose of maintaining a healthy and fun gaming environment for our players. Although ACU does not always correlate with changes in our domestic online game revenues, we believe that ACU reflects the popularity and health of our games in the long run.

The following table sets forth, for the periods indicated, certain operating statistics for our client-based online PC games under the item-based revenue model.

The active charging accounts and the average revenue per active charging account may fluctuate significantly from period to period due to a number of factors, including our promotional activities and unpredictable player deposit and spending patterns.

In 2012, 2013 and 2014, we recorded revenues of RMB171.6 million, RMB149.3 million and RMB169.0 million (US$27.2 million), respectively, for the initial fees and usage-based royalties we

earned from licensees of our online games. Licensing revenues represented 6.2%, 4.9% and 4.4% of our total revenues in 2012, 2013 and 2014, respectively. Majority of our licensing revenues were generated from overseas. As of the date of this annual report, we have licensed a number of our games to leading game operators overseas. All of these licensed games are operated under the item-based revenue model by the respective operators. Under our license agreements with licensees, we are generally entitled to receive from the licensees an initial fee and ongoing usage-based royalties. The usage-based royalties are generally determined based on the amount of money charged to players' accounts or service fees payable by players in a given country or region. We plan to further strengthen our global presence by licensing more of our existing games and new games we develop in the future to leading online game operators in various countries and regions overseas.

In 2012, 2013 and 2014, we recorded other revenues in the amount of RMB99.6 million, RMB103.0 million and RMB76.7 million (US$12.4 million), which represented 3.6%, 3.4% and 2.0% of our total revenues, respectively. Other revenues included, among other things, advertising revenue from our game portals and revenues generated from Torchlight series, our pay-per-install games developed by our majority owned subsidiary Runic Games.

Client-based Online PC Games. For our client-based online PC games, we collect our online game operation revenues through sales of (i) physical and virtual prepaid cards, which record entitlements to certain numbers of our online points, and (ii) online points, which entitle players to play our games for a specified period of time or to purchase our in-game items. We generally sell physical prepaid cards through an offline network of third-party distributors, which in turn distribute our cards to retailers, including internet cafés, newsstands and convenience stores. Our virtual prepaid cards and online points are sold via third-party online distributors and telecommunication operators who bundle the collection of fees for our games with the fees for their services to users. Through our electronic distribution system, we electronically sell virtual prepaid cards or online points to distributors and our distributors electronically sell the online points in their accounts to the accounts of their sub-distributors, retailers or players. We also sell online points directly to players via online payment platform service providers.

In most cases, we receive cash payments from distributors upon or before delivering our prepaid cards or online points to them. In other cases, the online payment platform service providers or other third parties generally pay us within several days after they collect the payments or after our monthly or weekly settlement with them.

We offer a discount to the face value of our game cards to our customers. We also offer certain volume rebate as a percentage of the face value of our game cards to our major distributors in China if they have achieved a pre-set sales target. The rebate is provided to these major distributors in the form of free game cards. To date, all of these major distributors have been able to achieve the pre-set sales target. The average total discount rate we have offered to all of our distributors in China was approximately 10.3%, 9.4% and 7.8% for the years ended December 31, 2012, 2013 and 2014, respectively, of the face value of our game cards.

Mobile Games. We distribute mobile games to end-users through digital storefronts and game platforms, such as Apple's App Store and Qihoo 360's game platform. These storefronts and platforms sell in-game virtual currencies, which are used by game players to redeem virtual items in our mobile games. After retaining their revenue sharing amounts at a pre-agreed percentage, the storefronts and platforms remit us the proceeds that they have received from game players.

Licensing. Under our license agreements with licensees, we are generally entitled to receive, from the licensees, an initial fee and ongoing usage-based royalties. The ongoing usage-based royalties are generally determined based on the amount of money charged to players' accounts or service fees payable by players in a given country or region. We generally receive ongoing usage-based royalties on a monthly basis. We generally receive our initial fees in installments, usually within several days after the signing of the license agreements or the commencement of the closed beta testing, the open beta testing and/or the commercial launch of our games, respectively. In some cases, in consideration of the initial fees, we are required to provide a combination of licenses to use the software, training and post contract services, such as provision of when-and-if-available or periodic upgrades to the games, during the license period. In other cases, we are required to provide free post-contract customer support, or PCS, in the first year of the licensing period to the licensees who have the option to acquire the PCS at certain percentage of the initial fees after the first year of the licensing period.

Client-based Online PC Games. For our client-based online PC games, to use the online points on a prepaid card, a player must activate the card by using an access code and password to transfer the online points on the card to such player's personal game account. Players can directly charge the online points they purchased into their accounts. Under both the time-based and the item-based revenue models, the net proceeds we receive from sales of online points to players are recorded as deferred revenues, while the net proceeds we receive from sales of online points to distributors and sales of prepaid cards are initially recorded as advances from customers. As we do not have the control and generally do not know the ultimate selling price of the prepaid cards or online points sold by third-party distributors, we record the net proceeds collected from distributors as advances from customers. Upon activation of the game cards or charge of the online points, these advances from customers are immediately transferred to deferred revenues. As of December 31, 2012, 2013 and 2014, our advances from customers amounted to RMB133.9 million, RMB102.5 million and RMB65.9 million (US$10.6 million), respectively, and our deferred revenues related to online game operations amounted to RMB411.0 million, RMB774.6 million and RMB886.0 million (US$142.8 million), respectively.

The timing of recognizing deferred revenues as revenues depends on whether the game is using the time-based revenue model or the item-based revenue model. For our game that uses the time-based revenue model, we recognize revenues when the activated prepaid cards or the charged online points representing the playing time are actually used by the players to play our games. For our games that use the item-based revenue model, we recognize revenues over the expected lives of the purchased in-game items or as these items are consumed.

Mobile Games. We record revenues generated from mobile games on a gross basis, which is based on the total amount billed to game players, including the commissions retained by digital storefronts and game platforms, as we are acting as the principal and the primary obligor toward game players for the games distributed through digital storefronts and game platforms.

The revenues with regard to a mobile game are then ratably recognized over paying players' estimated average player life, which is the average period between the first date the game players charge online points to their accounts and the expected last date these paying players would play the game.

Licensing. We enter into licensing arrangements with licensees to operate our games in other countries and regions. These licensing agreements provide for two revenue streams: the initial fees and the usage-based royalty fees.

In certain licensing arrangements, we provide PCS for the first year, which includes free upgrades, maintenance support and training. The licensee has the option to purchase PCS in subsequent years at a specified renewal rate. In these arrangements, we allocate the initial fee into two parts. The first part represents the license of the game and is recognized as revenue upon commercial launch. The second part represents PCS and is recognized ratably over the one-year PCS period.

In other licensing arrangements, we provide PCS over the full licensing period without additional charge. In those cases, the total amount of the initial fee is recognized ratably over the full contractual licensing period.

According to the license agreements, we are also entitled to ongoing usage-based royalties determined based on the amount of money charged to the players' accounts or services payable by players in a given country or region. The usage-based royalties are recognized when they are earned, provided that the collection is probable.

For more details of our revenue recognition policies for our revenues from online game operations and licensing, see "—Critical Accounting Policies—Revenue Recognition."

Our cost of revenues consists primarily of server and bandwidth leasing fees, salary and benefits expenses related to the operation of our online games, depreciation and amortization expenses, revenue sharing cost or royalties paid to third parties, value added tax ("VAT") and business tax and other direct costs of providing online game services. Other direct costs of providing online game services primarily comprise rental cost for the premises used in relation to the operation of our online games and manufacturing costs of physical game cards. We expect that our online game related cost will increase as our revenues increase.

Server and bandwidth leasing fees were equal to 2.8%, 3.5% and 2.7% of our revenues in 2012, 2013 and 2014, respectively. We rent communication bandwidth to connect our game operating networks to the internet and interchange data traffic to and from our networks and our users. Our bandwidth needs are considerable given the large number of concurrent users of our games and because our games are highly interactive between online users, requiring considerable amounts of data to be exchanged at high frequencies. We expect our payments for bandwidth leasing fees will increase in the future as we launch new games, broaden our geographic reach, add features to advance our network security and data traffic management systems and address additional growth in our player base. We purchase majority of the servers for the operation. To ensure that we have sufficient network capacity to meet the needs of our players at all times, we generally increase our server capacity in line with the rate of increase in our peak concurrent users.

Salary and benefits expenses were equal to 5.2%, 5.1% and 4.6% of our revenues in 2012, 2013 and 2014, respectively. Salary and benefits expenses included in our cost of revenues primarily relate to employees involved in the operation of our online games, including network operation and customer service. Salary and benefits expenses primarily include employee wages and social welfare benefits, such as medical insurance, housing subsidies, unemployment insurance and pension benefits.

The amount of net VAT and business tax with related surcharge included in cost of revenues for the years ended December 31, 2012, 2013 and 2014 was RMB117.6 million, RMB157.8 million and RMB195.1 million (US$31.4 million), respectively, equal to 4.2%, 5.1% and 5.1% of our revenues in 2012, 2013 and 2014, respectively. Our subsidiaries and variable interest entities incorporated in China are subject to either a 5% business tax or a VAT at an effective rate of 3% or 6% on revenues generated from our online game businesses in China. Starting from September 1, 2012, our subsidiaries and variable interest entities incorporated in China are subject to VAT at an effective rate of 6% for revenues derived from overseas licensing. In addition, according to the applicable tax rules and

regulations, being a technology development business and technology export enterprise, an entity may enjoy VAT exemption for revenues generated from software development and relevant technology consulting services, and overseas licensing, respectively. The sales proceeds generated from our overseas businesses are subject to VAT or consumption tax applicable in the respective jurisdictions. See "—Taxation."

The amount of depreciation and amortization expenses included in cost of revenues for the years ended December 31, 2012, 2013 and 2014 was RMB88.7 million, RMB108.8 million and RMB132.7 million (US$21.4 million), respectively, equal to 3.2%, 3.6% and 3.5% of our revenues in 2012, 2013 and 2014, respectively. Depreciation and amortization expenses comprise primarily of depreciation and amortization expenses of servers, computer equipment and copyrights that are directly related to our business operation. We expect our depreciation and amortization expenses to increase as we purchase additional servers, computer equipment and office premises to meet the needs of our business expansion.

The amount of revenue sharing cost or royalties paid to third parties for the years ended December 31, 2012, 2013 and 2014 was RMB41.0 million, RMB103.8 million and RMB442.7 million (US$71.4 million), respectively, equal to 1.5%, 3.4% and 11.5% of our revenues in 2012, 2013 and 2014, respectively. Revenue sharing cost consists primarily of revenue sharing with mobile game distribution platforms, as well as license fees and royalty fees paid to third parties related to our client-based online PC games.

Our operating expenses consist of research and development expenses, sales and marketing expenses, and general and administrative expenses, each of which includes share-based compensation.

We expect that our operating expenses will increase in the future as we further expand our game portfolio, enhance our research and development and sales and marketing activities.

Research and development expenses were equal to 28.8%, 29.0% and 27.9% of our revenues in 2012, 2013 and 2014, respectively. From April of 2010, due to the extended game development cycle and the incurrence of material online game development costs, we started to capitalize the qualified online game development costs as intangible assets. For the years ended December 31, 2012, 2013 and 2014, the amount of online game development costs capitalized as intangible assets was approximately RMB5.9 million, RMB47.9 million and RMB19.2 million (US$3.1 million), respectively. The decrease from 2013 to 2014 is primarily due to the decrease in online game development activities and expenditure associated with new games during 2014 that met the conditions of capitalization in accordance with our accounting policy, see "—Critical Accounting Policies—Software Development Costs." Our research and development expenses consist primarily of salary and benefits expenses of personnel engaged in the research and development of our game engines, game development platforms and online games, share-based compensation expenses, and rental cost for the premises used in our development of online game products. We expect that our research and development expenses will increase in the near future as we plan to increase research and development expenditures to develop more client-based online PC games, mobile games and other online games, and upgrade our proprietary game engines and game development platforms.

Sales and marketing expenses were equal to 18.8%, 23.9% and 22.4% of our revenues in 2012, 2013 and 2014, respectively. Our sales and marketing expenses consist primarily of expenses for advertisement and promotion, and salary and benefits of our sales and marketing personnel. Our

advertisement and promotion expenses include advertising payments to various online game sites and game magazines and other advertising service providers as well as expenses for sponsoring media events. We plan to intensify our marketing and promotional efforts when we launch new games in the future, which will result in the increase in our sales and marketing expenses.

General and administrative expenses were equal to 11.1%, 10.2% and 10.3% of our revenues in 2012, 2013 and 2014, respectively. Our general and administrative expenses consist primarily of salary and benefits and share-based compensation expenses for general management, finance and administrative personnel and professional service fees for services rendered in connection with our acquisition, audit and tax consultation. We expect that our general and administrative expenses will increase due to, among other things, our overall operational expansion.

Goodwill impairment was RMB58.2 million (US$9.4 million) for the year ended December 31, 2014, which primarily comprised impairment associated with our U.S. subsidiaries, compared to RMB40.8 million and RMB77.3 million for the years ended December 31, 2012 and 2013, respectively, which primarily comprised impairment associated with our Japanese subsidiary. For goodwill impairment, see "—Critical Accounting Policies—Goodwill."

We have adopted share incentive plans to motivate, attract and retain employees, directors and consultants, and promote the success of our business. See "Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers—Share Incentive Plan." As of December 31, 2014, there were outstanding options to purchase a total of 25,042,720 Class B ordinary shares. The amounts of these share-based compensation charges were RMB71.1 million, RMB75.9 million and RMB47.7 million (US$7.7 million) for the years ended December 31, 2012, 2013 and 2014, respectively. As of December 31, 2014, the unamortized compensation expenses in connection with our outstanding options were RMB57.8 million (US$9.3 million). In 2014, our board of directors approved a restructuring plan of our research and development teams, under which five new controlled companies have been formed. Non-controlling interest of each of these five controlled companies was granted to be beneficially held by our key research and development employees. The shares beneficially held by our key employees were recognized as share-based compensation expenses in our consolidated financial statements, and the total compensation cost of RMB119.9 million (US$19.3 million) would be amortized over the requisite service periods of these key research and development employees on a straight-line basis, among which approximately RMB3.8 million (US$0.6 million) expenses were recorded for the year ended December 31, 2014.

Under the current laws of the Cayman Islands, we are not subject to tax on income or capital gain in the Cayman Islands. In addition, payments of dividends by us to our shareholders are not subject to withholding tax in the Cayman Islands.

Under the current laws of the British Virgin Islands, we are not subject to tax on income or capital gain in the British Virgin Islands. In addition, dividend payments by our subsidiaries in the British Virgin Islands are not subject to withholding tax in the British Virgin Islands.

PW USA, Runic Games, Cryptic Studios and Unknown Worlds are generally subject to corporate income tax rates ranging from 15% to 35% at the federal level and, in some instances, are also subject to tax at the state level. State tax rates vary by jurisdiction. Our sales proceeds from online game operation in the states of Massachusetts and Washington of the U.S. are subject to sales tax at rates of 6.25% and 6.5%, respectively. For other states where we operate online games, sales tax is not levied according to local tax regulation.

Under the current Hong Kong Inland Revenue Ordinance, our subsidiaries established in Hong Kong are subject to 16.5% income tax on their taxable income generated from operations in Hong Kong. In addition, payments of dividends from PW Hong Kong to us are not subject to any Hong Kong withholding tax. Hong Kong does not levy turnover tax.

Perfect Star Co., Ltd. engages in offshore licensing activity. It is subject to a fix amount corporate income tax of MYR20,000 a year. Perfect Play SDN. BHD. engages in onshore business activities, and is subject to a 25% corporate income tax rate. Our sales proceeds from online game operation supporting service conducted in Malaysia are subject to service tax at a rate of 6%.

Our subsidiary established in Taiwan is subject to a 17% corporate income tax rate (taxable income up to TWD120,000 is exempt). Our sales proceeds from online game operation supporting service conducted in Taiwan are subject to VAT at a rate of 5%.

The fiscal unity PW Universal in Netherlands engages in intra-group licensing and local sales and marketing. The standard corporate income tax rate is 25%. A lower rate of 20% applies to the first EUR200,000 of taxable income. Our sales proceeds from online game operation conducted in the Netherlands are subject to VAT at a rate of 21%.

The corporate income tax rate applicable to C&C Media and CCO Co., Ltd is 40.7% in 2012, 38.0% from 2013 to March 31, 2014 and 35.6% from April 1 to December 31, 2014. Our sales proceeds from online game operation conducted in Japan are subject to consumption tax at a rate of 5% from 2012 to March 31, 2014 and 8% from April 1 to December 31, 2014.

PW Korea is generally subject to corporate income tax rates ranging from 11.0% to 24.2%. Our sales proceeds from online game operation conducted in Korea are subject to VAT at a rate of 10%.

Perfect World (Thailand) Co., Ltd., our subsidiary established in Thailand in 2013, is subject to a corporate income tax rate of 20%. Our sales proceeds from online game operation conducted in Thailand are subject to VAT at a rate of 7%.

For Perfect World Games (Singapore) Pte. Ltd., our subsidiary established in Singapore in June 2014, 75% of the first SGD10,000 of normal chargeable income is exempt from tax, and 50% of the next SGD290,000 is exempt from tax. The balance of chargeable income is fully taxable at the standard rate of 17%. Our sales proceeds from online game operation conducted in Singapore are subject to goods and services tax at a rate of 7%.

On March 16, 2007, the National People's Congress of PRC enacted a corporate income tax law, which became effective on January 1, 2008. Under the corporate income tax law, foreign-invested enterprises and domestic companies are subject to corporate income tax at a uniform rate of 25%. There is a five-year transition period for foreign-invested enterprises, during which foreign-invested enterprises are allowed to continue to enjoy their existing preferential tax treatments. Preferential tax treatments will continue to be granted to entities which conduct businesses in certain encouraged sectors and to entities otherwise classified as "software enterprises" and/or "high and new technology enterprises," whether foreign-invested enterprises or domestic companies.

Under the corporate income tax law, enterprises that were established before March 16, 2007 and already enjoyed preferential tax treatments will continue to enjoy them (i) in the case of preferential tax rates, for a period of five years from January 1, 2008 to December 31, 2012, or (ii) in the case of preferential tax exemption or reduction for a specified term, until the expiration of such term.

PW Network has been qualified as a "high and new technology enterprise" under the corporate income tax law from 2008 to 2017. Therefore, PW Network enjoyed a preferential tax rate of 15% from 2012 to 2014 as a "high and new technology enterprise."

PW Software has been qualified as a "high and new technology enterprise" from 2008 to 2017. Therefore, PW Software was entitled to the tax exemption in 2008 and 2009 and a 50% reduction of its applicable corporate income tax rate of 15% from 2010 to 2012, and enjoyed a preferential tax rate of 15% in 2013 and 2014 as a "high and new technology enterprise."

Shanghai PW Network has been qualified as having "software enterprise" status from 2009 to 2013 and "high and new technology enterprise" status from 2014 to 2016. Therefore, Shanghai PW Network was entitled to the tax exemption in 2009 and 2010 and was subject to a 50% income tax reduction to a rate of 12.5% from 2011 to 2013 as a "software enterprise," and enjoyed a preferential tax rate of 15% in 2014.

Beijing Perfect World Digital Entertainment Software Co., Ltd., or PW Digital Software and Beijing Perfect World Digital Entertainment Co., Ltd., or PW Digital, have been qualified as having "software enterprise" status from 2010 to 2014. PW Digital Software and PW Digital were entitled to the tax exemption in 2010 and 2011 and were subject to a 50% income tax reduction to a rate of 12.5% in 2012, 2013 and 2014.

tax reduction to a rate of 12.5% from 2015 to 2017, provided that it continues to be qualified as a "software enterprise" during such period.

Hefei PW Network has been qualified as a "high and new technology enterprise" and a "software enterprise" since 2013. Hefei PW Network achieved cumulative taxable income for the year ended December 31, 2013, and therefore was entitled to the tax exemption in 2013 and 2014 as a "software enterprise." Hefei PW Network will be subject to a 50% income tax reduction to a rate of 12.5% from 2015 to 2017, provided that it continues to be qualified as a "software enterprise" during such period.

Chengdu PW Network has been qualified as a "software enterprise" since 2010. Chengdu PW Network achieved cumulative taxable income for the year ended December 31, 2014, and therefore was entitled to the tax exemption in 2014. Chengdu PW Network will continue to enjoy the tax exemption in 2015 and be subject to a 50% income tax reduction to a rate of 12.5% from 2016 to 2018, provided that it continues to be qualified as a "software enterprise" during such period.

Except for PW Network, PW Software, Shanghai PW Network, PW Digital Software, PW Digital, PW Game Software, Hefei PW Network and Chengdu PW Network, our other major China-based subsidiaries and variable interest entities are subject to a 25% corporate income tax rate.

Furthermore, under the corporate income tax law, a "PRC resident enterprise," which includes an enterprise established outside of China with its "de facto management body" located in China, is subject to PRC corporate income tax. If the PRC tax authorities subsequently determine that Perfect World Co., Ltd. and our subsidiaries established outside of China should be deemed as resident enterprises, our global income, other than the dividends from our PRC subsidiaries, will be subject to PRC corporate income tax at a rate of 25%. See "Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Our global income may be subject to PRC tax under the corporate income tax law, which would have a material adverse effect on our results of operations."

We have adopted the gross presentation for VAT and business tax, and therefore VAT and business tax are included in revenues and cost of revenues. A pilot program for transition from business tax to VAT for revenues from certain industries was launched in Shanghai on January 1, 2012. On August 1, 2013, all regions in China have launched the pilot program. On June 1, 2014, the pilot program has been extended to more industries.

Prior to the pilot program, our subsidiaries and variable interest entities incorporated in China were subject to business tax. After the launch, our subsidiaries and variable interest entities incorporated in China are subject to VAT at an effective rate of 6% for revenues derived from overseas licensing, software development and relevant technology consulting services. In addition, according to the applicable tax rules and regulations, being a technology development business and technology export enterprise, an entity may enjoy VAT exemption for revenues generated from software development and relevant technology consulting services, and overseas licensing, respectively.

For operation of online games, the tax treatment varies depending on the nature of games and the local tax policies of provinces where the games are operated. In general, our variable interest entities incorporated in China are subject to VAT at a rate of 6% or 17% (with refund on the portion of tax payment exceeding an effective tax rate of 3%) and business tax at a rate of 5% plus related surcharges on revenues from online game operations.

jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. According to the Mainland and Hong Kong Taxation Arrangement, dividends paid by a foreign-invested enterprise in China to its direct holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5% (if the foreign investor owns directly at least 25% of the shares of the foreign-invested enterprise). As PW Hong Kong, which holds 100% equity interest of PW Software, Shanghai PW Software and PW Game Software, is a Hong Kong tax resident, dividends declared by our aforesaid PRC subsidiaries to PW Hong Kong should be subject to the withholding tax at a rate of 5%.

For the potential distribution of dividends to our shareholders, we accrue and record the withholding income tax for all standalone undistributed earnings of our PRC subsidiaries. For the years ended December 31, 2012, 2013 and 2014, withholding taxes of RMB19.6 million, RMB26.5 million and RMB21.3 million (US$3.4 million) were accrued and recorded as deferred tax liabilities, respectively. For our variable interest entities, we will continue to indefinitely reinvest the remaining undistributed earnings to fulfill working capital needs and non-cancellable contractual commitments, to fund capital expenditures to expand our business in China. The unrecognized deferred tax liabilities related to the withholding tax on undistributed earnings of our variable interest entities at a rate of 5% as of December 31, 2012, 2013 and 2014 were approximately RMB60.5 million, RMB69.8 million and RMB77.9 million (US$12.6 million), respectively.

Our subsidiaries and variable interest entities which license our games to certain overseas licensees are subject to withholding taxes on the license fees and usage-based royalties received from our licensees in various jurisdictions outside of China. Our overseas licensees pay the withholding taxes to the local tax authorities on our behalf. We recognize such foreign withholding taxes as income tax expense when related revenue of initial fees and ongoing usage-based royalties are recognized. We recognized RMB9.9 million, RMB8.2 million and RMB12.5 million (US$2.0 million) as income tax expense related to withholding taxes for the years ended December 31, 2012, 2013 and 2014, respectively.

Since our inception, inflation in China has not had a material adverse impact on our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2012, 2013 and 2014 were increases of 2.5%, 2.5% and 1.5%, respectively. Although we have not been materially affected by inflation, we may be affected if China experiences higher rates of inflation in the future.

We prepare financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (i) the reported amounts of our assets and liabilities, (ii) the disclosure of our contingent assets and liabilities at the end of each fiscal period and (iii) the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these estimates based on our own historical experience, knowledge and assessment of current business and other conditions, and our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.

When reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgment and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.

Most of our revenues are earned through providing online game operation services to players. We have been providing online game services for our client-based online PC games to our players pursuant to a time-based revenue model and an item-based revenue model. Under the time-based revenue model, we charge players based on the time they spend playing our games. Under the item-based revenue model, the basic game play functions are free of charge, and we charge users for purchases of in-game items.

Revenue recognition policies adopted for time-based and item-based revenue models are as follows:

Time-based revenue model. We recognize revenues when the online points representing the playing time are actually used by the players to play our games.

Item-based revenue model. Under this model, the players can access our games free of charge, but may utilize their activated prepaid cards or online points credited to their accounts to purchase in-game items. We categorize our in-game items as either consumable items or permanent ownership items. Management determines whether a virtual item is permanent or consumable by such item's real functions and features in the game, which does not require any estimate or assumption.

Consumable items, such as facial expressions and fireworks, represent in-game items that can be consumed by a specific player action or expire over a pre-determined expiration time. We keep track of the consumption or expiration of all the consumable items in the game. The common characteristics of the consumable items include (a) items will be no longer displayed on the player's game account after a specified period of time ranging from several days to several months or after a player consumes the items through performing in-game actions, and (b) once the items are consumed or expired, we do not have further obligations in connection with such items. Revenues in relation to consumable items are recognized over the period that they are expiring or after they are consumed, as our obligations in connection with such items have been fully rendered to our players after their consumption or expiration.

Permanent ownership items, such as mine stones, materials, clothing and riding mounts, represent in-game items that are accessible to the players who purchased the items, or "paying players," as long as such players play the game. We will provide continuous online game services in connection with these permanent ownership items until they are no longer used by our players. Since we cannot determine the actual lives of these permanent ownership items without considering the player's future activities in that game, revenues in relation to the permanent ownership items are recognized over their estimated lives. We consider player behavior patterns in estimating the lives of permanent ownership items, including period that the paying players typically play our games, which are affected by various factors such as acceptance and popularity of expansion packs, promotional events launched and market conditions. We believe that the estimated player life of all paying players, or "estimated player life," which is the average period between the first date the paying players charge their activated prepaid cards or online points to their accounts and the last date these paying players would play the game,

represents our best estimate for the lives of the in-game permanent ownership items purchased by the paying players.

A paying player's estimated player life represents the player's existing life in the game plus the player's estimated future life. The existing life is the period from the first date the player charged the activated prepaid cards or online points to his/her account in the game to the date of the player's last log-off from the game. We use actual data for all paying players in the game since the game's launch to determine the paying players' existing life.

The key assumptions and estimates used to determine the estimated player life is to estimate the game's paying players' future playing life which is based on the probability of the game's paying players returning to the game after a given period of inactivity. We use a statistical model to estimate such probability for each of our games based on historical log-on patterns of all of its paying players over years of game operations starting from the launch of the games. Below are the major steps employed by us to estimate the game's paying players' future life:

The "estimated player life" of a game is the average of all paying player's estimated player life.

For PRC self-developed games with more than 3-year operating history, we determine the estimated player life separately for each of our individual games. For the games developed by our overseas subsidiaries, given the fact that the games are considerably different from those developed by our PRC team in game design and concept, playing manner, game environment setting, monetization strategy and target customer groups, we start to estimate the game's own estimated player life after the game's operating history reaches 18 months. For games without sufficient operating history, we consider estimated player life for our other games with similar characteristics, as well as other factors such as acceptance and popularity of the games and the future operating strategies for the games to determine the estimated player life of the games. Those factors are subjective and require judgment.

In addition, we have adopted the policy of performing the reassessment of the estimated player life of each game twice a year in various quarters on a rotating basis for the games with the operating history less than five years and once a year for the games with the operating history more than five years. We will keep revising such estimates in the future as the games' operation periods become longer and we continue to gain more operating history and data. Any adjustments arising from changes in the estimates of lives of in-game items would be applied prospectively on the basis that such changes are caused by new information indicating a change in the player behaviors pattern. Any changes in our estimate of lives of the in-game items may result in our revenues being recognized on a different basis than in prior periods and may cause our operating results to fluctuate.

For the years ended December 31, 2012, 2013 and 2014, the estimated player life of our different games that generated more than 90% of our revenues ranged from 155 days to 491 days, 107 days to 561 days and 102 days to 661 days, respectively. The increase in the upper end of the estimated player life is primarily due to the longer estimated player life in foreign countries based on the analysis of the overseas player behavior patterns as a result of our continuous expansion in overseas online game

markets. The operating history and data collected for certain games have exceeded 3 years and we adopted the estimated player life for each of these individual games in 2014, which resulted in the decrease in the lower end of the estimated player life.

Under both the time-based and the item-based revenue models, proceeds received from sales of online points to players are recorded as deferred revenues, while proceeds received from sales of online points to distributors and sales of prepaid cards are initially recorded as advances from customers. As we do not have control over and generally do not know the ultimate selling price of the prepaid cards or online points sold by the distributors, net proceeds received from distributors after deduction of sales discounts are recorded as advances from customers. Upon activation of the game cards or charge of the online points, these advances from customers are immediately transferred to deferred revenues. We provide sales incentives in the form of rebates to major distributors that meet or exceed the sales target. Accrued rebates, which are settled in the form of additional free prepaid cards, will result in higher average discount rate on in-game points, and will partially delay the revenue recognition until the consumption of free prepaid cards. According to our published expiration policy, prepaid cards will expire on the expiration date printed thereon. The proceeds from the expired prepaid cards that have never been activated are recognized as other income upon expiration of the cards. For the years ended December 31, 2012, 2013 and 2014, we recognized RMB4.4 million, RMB1.6 million and RMB1.7 million (US$0.3 million) as other income from expired cards, respectively.

In the case of prepaid online points obtained by players through prepaid cards or other channels, once these points are charged to a player's personal online game account, they will not expire as long as the personal game account remains active, i.e. being accessed or charged by the player. The unused online points in an inactive personal game account are recognized as revenues when the likelihood that we would provide further online game service with respect to such online points is remote. We recognized revenue related to the inactive accounts based on the estimated churn rate of the inactive players and the unused game points and items in these accounts. We believe we have sufficient operating history to reliably estimate the inactive players' churn rate. We have adopted the policy of performing the reassessment of the estimated churn rate annually and considered its estimates to be reasonable. For the years ended December 31, 2012, 2013 and 2014, we recognized RMB98.4 million, RMB98.4 million and RMB93.3 million (US$15.0 million), respectively, as revenue from the unused game points and items in the accounts inactive for greater than 360 consecutive days.

For the years ended December 31, 2012, 2013 and 2014, the amount of revenues attributable to consumable virtual goods were RMB1,799.7 million, RMB1,845.6 million and RMB1,396.1 million (US$225.0 million), respectively, and the amount of revenues attributable to permanent virtual goods were RMB424.7 million, RMB661.9 million and RMB1,144.6 million (US$184.5 million), respectively.

We operate mobile games under the item-based revenue model. We distribute mobile games to end-users through digital storefronts and game platforms, such as Apple's App Store and Qihoo 360's game platform. These storefronts and game platforms sell in-game virtual currencies, which are used by game players for virtual items in our mobile games. After retaining their revenue sharing amounts at a pre-agreed percentage, the storefronts and platforms remit us the proceeds that they have received from game players.

We record revenue generated from mobile games on a gross basis, which is based on the total amount billed to game players, including the commissions retained by digital storefronts and game platforms, as we are acting as the principal and the primary obligor toward game players for the games distributed through digital storefronts and game platforms. The principal agent consideration is based on an assessment of various factors, including but not limited to whether we (i) are the primary obligor in the arrangement; (ii) have latitude in establishing the selling price; (iii) change the product or perform part of the service and (iv) have involvement in the determination of product and service specifications.

We recognize revenue, when persuasive evidence of an arrangement exists, the service has been provided to the end-users, the price paid by the user is fixed or determinable, and collectability is reasonably assured. Consistent with the our revenue recognition policies for client-based online PC games, under the item-based revenue model, for the purposes of determining when the service has been provided to the end-users, we have determined that an implied obligation exists to the paying user to continue displaying the purchased virtual items within the game over the virtual items' estimated useful lives. However, currently, due to our limited operating history of mobile games, we do not have the ability to differentiate the redemption respectively on consumable or permanent items and track the consumption of each consumable item. Therefore, we recognize revenues earned from the sale of virtual items with regard to a mobile game ratably over paying players' estimated player life, which is the average period between the first date the paying players charge online points to their accounts and the expected last date these paying players would play the game.

For mobile games, paying players' estimated player lives represent the weighted average playing period based on the paying players' churn rate. The key estimates and prediction used to determine the estimated player life is to estimate the game's paying players' churn rate which is the attrition statistics based on the logging behaviors of those paying players in the following months after their first in-game deposit. To compute the paying players' estimated player lives, we use actual data for all paying players in a mobile game since the game's launch, and track the logging history of all paying players since the first date the paying players charge online points to their accounts until the last date these paying players play the game. Below are the major steps employed by us to estimate the mobile game's paying players' estimated player life:

For mobile games we operated more than one year, we determine the estimated player life separately for each of our individual games. For games without sufficient operating history, we consider estimated player life for our other games with similar characteristics and sufficient operating history, or refer to industry practice, as well as consider other factors such as acceptance and popularity of the games and the future operating strategies for the games to determine the estimated player life of the games. Those factors are subjective and require judgment.

In addition, we have adopted the policy of performing the reassessment of the estimated player life of each game twice a year in various quarters on a rotating basis. We will keep revising such estimates in the future as the games' operation periods become longer and we continue to gain more operating history and data. Any adjustments arising from changes in the estimates of lives of in-game items would be applied prospectively on the basis that such changes are caused by new information indicating a change in the player behaviors pattern. Any changes in our estimate of lives of the in-game items may result in our revenues being recognized on a different basis than in prior periods and may cause our operating results to fluctuate.

For the year ended December 31, 2013, the estimated player life of our mobile games was 90 days. For the year ended December 31, 2014, one of our mobile games has reached one year operating

history, and thus we assessed the game's estimated player time by using the game's own logging history and estimated a player life of 125 days. For other mobile games which are not similar to that one, considering they have not reached one year operating history in 2014, we continue to use the estimated player life of 90 days based on prior year practice.

We believe our estimates to be reasonable in view of actual mobile game operating data available, characteristics of mobile games in design and operations, as well as common practices in industry. However, given the relatively short operation history of our mobile games, the estimate of player pay life may not accurately depict such period. We will keep revising such estimates in the future as the games' operation periods become longer and we continue to gain more operating history and data. Any adjustments arising from changes in the estimates of player pay life would be applied prospectively on the basis that such changes are caused by new information indicating a change in the player behaviors pattern. Any changes in our estimate of player pay life may result in our revenues being recognized on a different basis than in prior periods and may cause our operating results to fluctuate.

We have adopted the gross presentation for VAT and business tax, therefore VAT and business tax are included in revenues and cost of revenues. The amount of net VAT and business tax with related surcharge included in our cost of revenues for the years ended December 31, 2012, 2013 and 2014 were RMB117.6 million, RMB157.8 million and RMB195.1 million (US$31.4 million), respectively.

We enter into licensing arrangements with licensees to operate our games in other countries and regions. These licensing agreements provide for two revenue streams: the initial fees and the usage-based royalty fees.

In certain licensing arrangements, we provide free upgrades, maintenance support and training (i.e. PCS) for the first year, and the licensee has the option to purchase PCS in subsequent years at a specified renewal rate. In these arrangements, we allocate the initial fee into two parts. The first part represents the license of the game and is recognized as revenue upon commercial launch. The second part represents PCS and is recognized ratably over the one-year PCS period.

In other licensing arrangements, we provide PCS over the full licensing period for no additional charge. In those cases, the total amount of the initial fee is recognized ratably over the full contractual licensing period.

PRC laws and regulations currently prohibit or restrict foreign-invested companies from holding certain licenses required to operate online games and online reading services, including internet content provision, internet culture operation and internet publishing licenses, or engaging in the investment in certain technology, media and telecommunications sectors. In light of these restrictions, we rely on our variable interest entities to hold and maintain the licenses necessary to operate the online games or investment in certain technology, media and telecommunications companies in China. We have entered into a series of contractual arrangements with PW Network and its equity owners, PW Literature and its equity owners, Perfect Moment and its equity owners, Trendsters Investment and its equity owners and PW Digital Technology and its equity owners, respectively. As a result of these contractual arrangements, we have the ability to effectively control PW Network, PW Literature, Perfect Moment,

Trendsters Investment and PW Digital Technology, and we are considered the primary beneficiary of these entities, and accordingly these entities are variable interest entities of our company under U.S. GAAP and we consolidate the results in our consolidated financial statements. In December 2013, we entered into a definitive agreement to sell PW Literature to an unrelated party, and PW Literature ceased to be our variable interest entity. We have consulted our PRC legal counsel in assessing our ability to control PW Network, Perfect Moment, Trendsters Investment and PW Digital Technology through these contractual arrangements. Any changes in PRC laws and regulations that affect our ability to control these entities might preclude us from consolidating these entities in the future.

On February 2, 2012, a Chinese company unrelated to our company sought a court order of attachment against the assets of Jiuzhou Tianyuan, which was later withdrawn in July 2012 according to a court record.

Costs incurred for the development of online game products prior to the establishment of technological feasibility are expensed when incurred and are included in product development expenses. Once an online game product has reached technological feasibility, all subsequent product development costs are capitalized until the product is available for general release to customers. Commencing the game is available for marketing use, the capitalized product development costs are amortized as online game related costs over the estimated life of the game.

The evaluation of technological feasibility establishment requires significant judgment and is carried out on a product-by-product basis. Typically the establishment of technological feasibility is featured by the completion of both technical design and game design documentation, and only occurs when the online games have a proven ability to be operated in the online game environment in the market. Online game products development costs consist primarily of salaries and benefits paid, depreciation and other expenses in relation to the development, maintenance, monitoring and management of our online game products.

For the years ended December 31, 2012, 2013 and 2014, the amount of online game development costs capitalized as intangible assets was approximately RMB5.9 million, RMB47.9 million and RMB19.2 million (US$3.1 million), respectively.

Property, equipment and intangible assets are stated at historical cost less accumulated depreciation and amortization. Depreciation of property and equipment is computed using a straight-line method over the estimated useful lives of the assets, generally 33 to 45 years for buildings, 20 years for office improvements and between four and six years for all other property and equipment. Amortization of intangible assets is computed using a straight-line method over the estimated useful lives of the assets, which are generally two to twenty years. Judgment is required to determine the estimated useful lives of assets, especially for servers, including determining how long existing equipment can function and when new technologies will be introduced at cost-effective price points to replace existing equipment. Changes in these estimates and assumptions could materially impact our financial position and results of operations.

Intangible assets arising from the asset acquisitions and business combinations are recognized and measured at fair value upon acquisition. Intangible assets from such transactions are amortized using the straight-line method over the assets estimated economic useful lives. Qualified online game development costs, capitalized as intangible assets, are amortized over the estimated life of the corresponding online games.

Long-lived assets including intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, or that the useful life is shorter than we had originally estimated. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of any impairment charge for long-lived assets including certain identifiable intangible assets that we expect to hold and use is based on the amount the carrying value exceeds the fair value of the asset. Indefinite-lived intangible assets are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of the intangible asset to its carrying amount. If the carrying amount exceeds the fair value, an impairment charge is recognized equal in amount to that excess.

The impairment charges of intangible assets recorded in cost of revenues for the years ended December 31, 2012, 2013 and 2014 amounted to RMB11.2 million, nil and RMB6.2 million (US$1.0 million), respectively. The impairment charges of intangible assets recorded in general and administrative expenses for the years ended December 31, 2012, 2013 and 2014 amounted to RMB1.6 million, RMB5.0 million and RMB23.3 million (US$3.8 million), respectively. The impairment charges of intangible assets recorded in research and development expenses for the years ended December 31, 2012, 2013 and 2014 amounted to nil, nil and RMB6.4 million (US$1.0 million), respectively. The impairment charges of long-lived assets recorded in cost of revenues for the years ended December 31, 2012, 2013 and 2014 amounted to RMB8.1 million, RMB18.9 million and RMB2.5 million (US$0.4 million), respectively.

Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired in a business combination.

Goodwill is not depreciated or amortized but is tested for impairment at reporting unit level on an annual basis every November 30, and in between annual tests when an event occurs or circumstances change that could indicate that the asset might be impaired. Commencing in September 2011, in accordance with the FASB revised guidance on "Testing of Goodwill for Impairment," a company first has the option to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the company decides, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is mandatory. Otherwise, no further testing is required. The quantitative impairment test consists of a comparison of the fair value of each reporting unit with its carrying amount, including goodwill. If the carrying amount of each reporting unit exceeds its fair value, an impairment charge equal to the difference between the implied fair value of the reporting unit's goodwill and the carrying amount of goodwill will be recorded. Application of a goodwill impairment test requires significant management judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. The judgment in estimating the fair value of reporting units includes estimating future cash flows, determining appropriate discount rates and making other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit.

We have determined that we operate in two principal operating segments: (i) PRC operations and (ii) International operations. Under PRC operating segment, we identified one reporting unit as PRC online game business for goodwill impairment testing.

Under international operating segment, we identified the following three reporting units for 2014 goodwill impairment testing: Runic Games, U.S. online game business and Unknown Worlds.

In September 2014, in view of U.S. online game business' performance during 2014 and near-term business outlook that were below our expectations, we performed an interim assessment on the goodwill related to the reporting unit of U.S. online game business and recorded an estimated goodwill impairment charge of RMB40.2 million (US$6.5 million) in the third quarter of fiscal year 2014. The goodwill impairment charge of RMB40.2 million (US$6.5 million) had no cash flow impact.

As of November 30, 2014, we performed our annual goodwill impairment analysis of each reporting unit, based on which an impairment charge of RMB18.0 million (US$2.9 million) associated with Unknown Worlds reporting unit was recognized in view of sequential decline of revenue generated from the pay-per-install game developed by Unknown Worlds and its near-term business outlook. Thereafter, all goodwill arising from the acquisition of Unknown Worlds in February 2013 was fully impaired. The goodwill impairment charge of RMB18.0 million (US$2.9 million) had no cash flow impact.

For the annual goodwill impairment analysis of U.S. online game business reporting unit, in view of the recent interim goodwill impairment assessment performed in September 2014, we assessed qualitative factors including macroeconomic conditions, industry and market considerations, the unit's overall financial performance and other events that may affect the reporting unit and determined that it is not more-likely-than-not that the fair value of the U.S. online game business reporting unit is less than its carrying amount and concluded that no further assessment was necessary. For the remaining reporting units, namely PRC online game business and Runic Games, we compared the fair value of the reporting units with their carrying amounts using income approach, and concluded that the fair value of the reporting units exceeded their carrying values and determined that no adjustment to the carrying value of goodwill for these reporting units was necessary. For PRC online game business reporting unit, the percentage by which fair value exceeds carrying value of goodwill was approximately 21.6%. For Runic Games reporting unit, the percentage by which fair value exceeds carrying value of goodwill was approximately 16.2%.

We used discounted cash flow method to estimate the fair value of our reporting units. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, and assumptions that are consistent with the plans and estimates being used to manage our business, determining appropriate discount rates, estimation of the long-term rate of growth for the our business, estimation of the duration over which cash flows will occur, determination of our weighted average cost of capital, and terminal value. The estimates of fair value of a reporting unit result from a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions at a point in time. The valuations are based on information available as of the impairment review date and are based on expectations and assumptions that have been deemed reasonable by management. Any changes in key assumptions, including unanticipated events and circumstances, may affect the accuracy or validity of such estimates and could potentially result in an impairment charge. Sensitivity assessment of certain key assumptions for the reporting units during the annual goodwill impairment testing is presented below:

We recorded goodwill impairment charges amounted to RMB40.8 million, RMB77.3 million and RMB58.2 million (US$9.4 million) for the years ended December 31, 2012, 2013 and 2014, respectively.

Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. We have signed lease arrangements for servers and offices premises. We have assessed these arrangements to be operating leases because (i) the lease does not transfer the ownership to us by the end of the lease term, (ii) the lease does not contain any bargain purchase option, (iii) the lease term is less than 75% of the estimated economic life of the assets and (iv) the present value of the minimum lease payments at the beginning of the lease term is less than 90% of the fair value to the lessor less any investment credit retained by the lessor. Payments made under operating leases are charged to the consolidated statements of income and comprehensive income on a straight-line basis over the lease periods as specified in the lease agreements. Judgment is required to determine the estimated economic lives or the fair values of the servers. Changes in these estimates and assumptions could materially impact our financial position and results of operations.

In September 2006, we adopted a share incentive plan, which was subsequently supplemented and amended. Prior to the amendment to the plan in February 2009, 32,145,000 Class B ordinary shares have been reserved for future issuance under the share incentive plan. On February 28, 2009, our shareholders approved an amendment to the share incentive plan that effectively increased the number of Class B ordinary shares authorized for issuance under the share incentive plan by 10,000,000. The 10,000,000 additional Class B ordinary shares were registered for issuance pursuant to a registration statement on Form S-8 filed on August 10, 2009 (File No. 333-161193). On November 14, 2009, our shareholders approved a further amendment to the share incentive plan that increased the number of Class B ordinary shares authorized for issuance under the share incentive plan to 44,645,000. In addition, the option expiry date was changed to the earlier of (i) the tenth anniversary of the grant date, unless an earlier time is set in the option award agreement, (ii) three months after the termination of service with us other than for disability or death, or (iii) one year after the termination of service with us due to disability or death. The amendment applies to share options granted after November 14, 2009. On August 14, 2010, our shareholders approved a 2010 Share Incentive Plan, under which 30,000,000 Class B ordinary shares have been reserved for future issuance and such shares were registered on Form S-8 filed on September 13, 2010 (File No. 333-169333). On November 22, 2013, our shareholders approved a 2013 Share Incentive Plan, 5,024,818 shares have been reserved in the award pool for future issuance. Starting January 1, 2015, the award pool will be increased by a number on the first day of each year equal to 2% of the then total number of Class B ordinary shares outstanding, provided that at no time the unissued shares reserved in the award pool immediately after such annual increase shall exceed 5% of the then total number of Class B ordinary shares outstanding.

During 2014, we granted options to purchase an aggregate of 200,000 Class B ordinary shares to some of our senior executives and employees. In addition to service-based share options, we granted performance-based share options to our officers and employees.

We use the Black-Scholes option pricing model to determine the fair value of share options. The determination of the fair value of share-based compensation awards on the date of grant using an option-pricing model is affected by our share price as well as assumptions regarding a number of complex and subjective variables, including our expected share price volatility over the term of the awards, the expected term of the awards, risk-free interest rates and expected dividends. When estimating the fair value of our ordinary shares, both internal and external sources of information are reviewed. Furthermore, we are required to estimate forfeitures at the time of grant and record share-based compensation expenses only for those awards that are expected to vest. If actual forfeitures differ from these estimates, we may need to revise those estimates used in subsequent periods.

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, which are characteristics not present in our option grants. Existing valuation models, including the Black-Scholes and lattice binomial models, may not provide reliable measures of the fair value of our share-based compensation. Consequently, there is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may be significantly different from the actual values realized upon the exercise, expiration, early termination or forfeiture of those share-based payments in the future. Certain share-based compensation awards, such as employee share options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair value originally estimated on the grant date and reported in our financial statements. Alternatively, values that are significantly higher than fair values originally estimated on the grant date and reported in our financial statements may be realized from these instruments. There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values.

If factors change and we employ different assumptions for estimating share-based compensation expense in future periods or if we decide to use a different valuation model, our share-based compensation in future periods may differ significantly from what we have recorded in prior periods and could materially affect our operating income, net income and net income per share. For our service-based share option awards, share-based compensation cost is measured at the grant date based on the fair value of the awards and is recognized as an expense on a straight-line basis, net of estimated forfeitures, over the requisite service period, which is generally the vesting period. For our performance-based share option awards, the performance goals and vesting schedule of these awards are determined by the board of directors. For the performance-based awards, an evaluation is made each quarter as to the likelihood of performance criteria being met. Share-based compensation expenses are then recorded for the number of options expected to vest on a graded-vesting basis, net of estimated forfeitures, over the requisite service period, which is generally the vesting period.

A change in any of the terms or conditions of stock options shall be accounted for as a modification of the plan. Therefore, we calculate incremental compensation cost of a modification as the excess of the fair value of the modified option over the fair value of the original option immediately before its terms are modified, measured based on the share price and other pertinent factors at the modification date. For vested options, we would recognize incremental compensation cost in the period the modification occurs. For unvested options, we would recognize, over the remaining requisite service period, the sum of the incremental compensation cost and the remaining unrecognized compensation cost for the original award on the modification date.

The application of these principles may be subject to further interpretation and refinement over time. There are significant differences among valuation models and there is a possibility that we will adopt different valuation models in the future. This may result in a lack of consistency in future periods and materially affect the fair value estimates of share-based compensation awards. It may also result in a lack of comparability with other companies that use different models, methods and assumptions.

In 2014, our board of directors approved a restructuring plan of our research and development teams, under which five new controlled companies have been formed. Non-controlling interest of each of these five controlled companies was granted to be beneficially held by our key research and development employees. The shares held by our key employees were recognized as share-based compensation expenses in our consolidated financial statements to be amortized over the requisite service periods of these key employees on a straight-line basis.

We account for income taxes as described in note 3(21) and note 19 in our consolidated financial statements. Under this method, deferred income taxes are recognized for the tax consequences of 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 the consolidated statements of income and comprehensive income in the period of change. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that all or a portion of the deferred tax assets will not be realized. Accordingly, we will record valuation allowances to reduce our deferred tax assets if and when we believe it is more likely than not that we will not be able to utilize the deferred tax asset amounts based on our estimates of future taxable income and prudent and feasible tax planning strategies. Management must make assumptions, judgments and estimates to determine our current provision for income taxes and our deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset. Our judgments, assumptions and estimates relative to current provision for income tax take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law and our interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements. When there is no clarity in the change of the PRC corporate income tax, we would accrue based on tax law requirements and then subsequently evaluate whether there is any new information that would change the accrual. Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations. Actual operating results and the underlying amount and category of income in future years could make our current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, and thus materially impact our financial position and results of operations.

Our subsidiaries and variable interest entities which license our games to certain overseas licensees are subject to withholding taxes on the license fees and usage-based royalties received from our licensees in various jurisdictions outside of China. Our overseas licensees pay the withholding taxes to the local tax authorities on our behalf. We recognize such foreign withholding taxes as income tax expense when related revenue of initial fees and ongoing usage-based royalties are recognized. Accordingly, we recognized the foreign income tax of approximately RMB9.9 million, RMB8.2 million and RMB12.5 million (US$2.0 million) in our consolidated financial statements as income tax expense in 2012, 2013 and 2014, respectively.

Under the PRC corporate income tax law which went into effect on January 1, 2008, dividends attributable to earnings generated after January 1, 2008 and payable by a foreign-invested enterprise in China to its foreign investors are subject to a 10% withholding tax unless any such foreign investor's jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. According to the Mainland and Hong Kong Taxation Arrangement, dividends paid by a foreign-invested enterprise in China to its direct holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5% (if the foreign investor owns directly at least 25% of the shares of the foreign-invested enterprise). As PW Hong Kong, which holds 100% equity interest of PW Software, Shanghai PW Software and PW Game Software, is a Hong Kong tax resident, dividends declared by our aforesaid PRC subsidiaries to PW Hong Kong should be subject to the withholding tax at a rate of 5%.

The guidance on accounting for uncertainties in income taxes prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Guidance was also provided on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. Significant judgment is required in evaluating our uncertain tax positions and determining its provision for income taxes.

Our reporting currency is Renminbi, or RMB. The functional currency of Perfect World Co., Ltd., our Cayman Islands holding company, is U.S. dollars. The functional currency of our international subsidiaries is evaluated on a case-by-case basis and is often the local currency. On December 1, 2013, PW Hong Kong changed its functional currency prospectively from RMB to U.S. dollars to reflect the increased concentration of its activities in U.S. dollars. The change was triggered by the completion of the reorganization of our overseas business structure, following which PW Hong Kong became the parent of our overseas subsidiaries in Europe, U.S., Japan and Korea. The change in functional currency of PW Hong Kong has immaterial impact on our consolidated financial statements for the year ended December 31, 2013.

Transactions denominated in currencies other than functional currency are translated into functional currency at the exchange rates quoted by authoritative banks prevailing at the dates of the transactions. Exchange gains and losses resulting from those foreign currency transactions denominated in a currency other than the functional currency are recorded as a component of "others, net" in the consolidated statements of income and comprehensive income.

The financial statements of our overseas subsidiaries are translated from their functional currency into RMB, our reporting currency. Assets and liabilities denominated in foreign currencies are translated into RMB using the applicable exchange rates quoted by the People's Bank of China at the balance sheet dates. Equity accounts other than earnings generated in current period are translated into RMB at the appropriate historical rates. Revenues, expenses, gains and losses are translated into RMB using the periodic weighted average exchange rates. The resulting foreign currency translation adjustments are recorded as "accumulated other comprehensive income/(loss)" in shareholders' equity.

If our operational strategies change in the future, there may be changes in our functional currency.

Our equity investments are comprised of investments in privately held companies. We account for an equity investment over which we have significantly influence but do not own a majority equity interest or lack of control using the equity method. For equity investment over which we do not have significant influence, the cost method accounting is used. We assess our equity investments for other-than-temporary impairment by considering factors as well as all relevant and available

information including, but not limited to, current economic and market conditions, the operating performance of the invested companies including current earnings trends and other company-specific information including recent financing rounds. Impairment charges on equity investment are included in "share of (loss)/income from equity investments." For the years ended December 31, 2012, 2013 and 2014, nil, nil and RMB4.4 million (US$0.7 million) were recorded as impairment charges, respectively. For our investment to the venture capital fund accounted for under equity method, we retain the industry-specific guidance applied by the venture capital fund as an investment company, as a result of which we recognize the share on the changes of the fair values of the venture capital fund's investments as "share of (loss)/income from equity investments" in our consolidated statements of income and comprehensive income.

On May 28, 2014, the FASB and IASB issued their long-awaited converged standard on the recognition of revenue from contracts with customers. The standard is intended to improve the financial reporting of revenue and improve comparability of the top line in financial statements globally. The FASB is amending the FASB Accounting Standards Codification and creating a new Topic 606, Revenue from Contracts with Customers, to supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, the amendments supersede some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction—Type and Production—Type Contracts. For a public entity, the amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. We are currently evaluating the impact on our consolidated financial statements of adopting this guidance.

In June 2014, under ASC 718, Compensation—Stock Compensation, the FASB issued Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. These amendments apply to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a performance target could be achieved and still be eligible to vest in the award if and when the performance target is achieved. For all entities, the amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. We are currently evaluating the impact on our consolidated financial statements of adopting this guidance.

In August 2014, the FASB issued Presentation of Financial Statements—Going Concern. This standard requires management to evaluate for each annual and interim reporting period whether it is probable that the reporting entity will not be able to meet its obligations as they become due within one year after the date that the financial statements are issued. If the entity is in such a position, the standard provides for certain disclosures depending on whether or not the entity will be able to successfully mitigate its going concern status. This guidance is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. Early application is permitted. We do not anticipate that adoption will have a significant impact on our financial position, results of operations, or cash flows.

The following table sets forth a summary of our consolidated statements of income and comprehensive income as a percentage of net revenues for the periods indicated.

	For the Year Ended December 31,

	2012						2013						2014
	RMB			%			RMB			%			RMB			US$			%
	(in thousands except percentages)
Consolidated Statements of Income and Comprehensive Income Data:
Online game operation revenues		2,499,419			90.2			2,800,321			91.7			3,597,595			579,827			93.6
Licensing revenues		171,564			6.2			149,318			4.9			168,956			27,231			4.4
Other revenues		99,604			3.6			103,024			3.4			76,673			12,357			2.0
Total revenues		2,770,587			100.0			3,052,663			100.0			3,843,224			619,415			100.0
Cost of revenues(1)		(539,936	)		(19.5	)		(711,648	)		(23.3	)		(1,115,831	)		(179,839	)		(29.0	)
Gross profit		2,230,651			80.5			2,341,015			76.7			2,727,393			439,576			71.0
Research and development expenses		(797,067	)		(28.7	)		(886,084	)		(29.0	)		(1,072,884	)		(172,917	)		(27.9	)
Sales and marketing expenses		(520,620	)		(18.8	)		(729,657	)		(23.9	)		(859,236	)		(138,484	)		(22.4	)
General and administrative expenses		(306,256	)		(11.1	)		(310,044	)		(10.2	)		(396,130	)		(63,845	)		(10.3	)
Goodwill impairment		(40,770	)		(1.5	)		(77,290	)		(2.5	)		(58,211	)		(9,382	)		(1.5	)
Total operating expenses(1)		(1,664,713	)		(60.1	)		(2,003,075	)		(65.6	)		(2,386,461	)		(384,628	)		(62.1	)
Operating profit		565,938			20.4			337,940			11.1			340,932			54,948			8.9
Total other income		127,641			4.6			154,021			5.0			236,288			38,083			6.2
Income before tax		693,579			25.0			491,961			16.1			577,220			93,031			15.1
Income tax expense		(116,119	)		(4.2	)		(69,998	)		(2.3	)		(121,494	)		(19,581	)		(3.2	)
Net income from continuing operations, net of tax		577,460			20.8			421,963			13.8			455,726			73,450			11.9
Discontinued operations(2):
Loss from discontinued operations, net of tax		(30,215	)		(1.1	)		(44,322	)		(1.5	)		—			—			—
Gain from disposal of discontinued operations, net of tax		—			—			166,288			5.5			—			—			—
(Loss)/income from discontinued operations, net of tax(1)		(30,215	)		(1.1	)		121,966			4.0			—			—			—
Net Income		547,245			19.7			543,929			17.8			455,726			73,450			11.9
Net (income)/loss attributable to non-controlling interests		(6,594	)		(0.2	)		(1,515	)		(0.0	)		15,664			2,524			0.4
Net income attributable to the Company's shareholders		540,651			19.5			542,414			17.8			471,390			75,974			12.3
Net Income		547,245			19.7			543,929			17.8			455,726			73,450			11.9
Other comprehensive loss: Foreign currency translation adjustment		(20,112	)		(0.7	)		(45,994	)		(1.5	)		(30,513	)		(4,918	)		(0.8	)
Comprehensive income		527,133			19.0			497,935			16.3			425,213			68,532			11.1
Comprehensive (income)/loss attributable to non-controlling interests		(6,594	)		(0.2	)		(1,515	)		(0.0	)		15,664			2,524			0.4
Comprehensive income attributable to the Company's shareholders		520,539			18.8			496,420			16.3			440,877			71,056			11.5

Revenues. In 2014, we generated revenues of RMB3.8 billion (US$619.4 million), an increase of 25.9% from RMB3.1 billion in 2013.

Online game operation revenues were RMB3.6 billion (US$579.8 million) in 2014, an increase of 28.5% from RMB2.8 billion in 2013. Online game operation revenues generated from PRC operations were RMB3.0 billion (US$486.0 million) in 2014 as compared to RMB2.1 billion in 2013. The increase in online game operation revenues generated from PRC operations was primarily due to the combined effects of (i) the continued strength of our mobile game Return of the Condor Heroes Mobile, and the revenue growth following the commercial launches of a series of new mobile games in 2014, such as CrossGate Mobile and Forsaken World Mobile; (ii) the increased revenue contribution from some of the client-based online PC games that we operate in China, such as DOTA2, Perfect World II and Swordsman Online; and (iii) the natural decline in revenues of some of our other client-based online PC games which reached a relatively mature stage of their respective life circle.

Online game operation revenues generated from international operations were RMB582.4 million (US$93.9 million) in 2014 as compared to RMB664.4 million in 2013. The decrease was primarily due to the natural decline of some of the existing games operated by our U.S. subsidiary, and the lack of significant new game launch in the U.S. market in 2014.

Licensing revenues were RMB169.0 million (US$27.2 million) in 2014, representing a 13.2% increase from RMB149.3 million in 2013. The increase was largely associated with some of our new games launched in certain overseas markets in 2014.

Other revenues were RMB76.7 million (US$12.4 million) in 2014, compared to RMB103.0 million in 2013. The decrease was primarily due to fewer installations of "Torchlight 2," our popular pay-per-install game released in 2012, partially offset by an increase in advertising revenue from our game portals.

Cost of Revenues. In 2014, our cost of revenues amounted to RMB1.1 billion (US$179.8 million), or 29.0% of our revenues, representing an increase of RMB404.2 million (US$65.1 million) from RMB711.6 million, or 23.3% of our revenues in 2013.

Cost of PRC operations. In 2014, our cost of PRC operations was RMB835.1 million (US$134.6 million), compared to RMB401.9 million in 2013. The increase was mainly attributable to an increase in revenue sharing to third parties by RMB339.0 million (US$54.6 million), resulting from the revenue increase of our mobile games and licensed games.

Cost of international operations. In 2014, our cost of international operations was RMB280.8 million (US$45.3 million), compared to RMB309.7 million in 2013. The decrease from 2013 was mainly due to a decrease in impairment charge by RMB14.3 million (US$2.4 million) associated with certain of our smaller games and a decrease in sales-related tax by RMB13.6 million (US$2.2 million).

Gross Profit. In 2014, our gross profit was RMB2.7 billion (US$439.6 million), an increase of 16.5% from RMB2.3 billion in 2013. Our gross margin decreased to 71.0% in 2014 from 76.7% in 2013 primarily due to lower profit margin from mobile games and licensed games.

Operating Expenses. In 2014, our operating expenses were RMB2.4 billion (US$384.6 million), an increase of 19.1% from RMB2.0 billion in 2013. The year-over-year increase in operating expenses was mainly due to an increase in personnel costs and an increase in advertising and promotional expenses.

Research and development expenses. In 2014, our research and development expenses increased by 21.1% to RMB1.1 billion (US$172.9 million) from RMB886.1 million in 2013, primarily due to the increase in personnel costs from RMB706.7 million in 2013 to RMB897.8 million (US$144.7 million) in 2014.

Sales and marketing expenses. In 2014, our sales and marketing expenses increased by 17.8% to RMB859.2 million (US$138.5 million) from RMB729.7 million in 2013. The increase was primarily due to an increase in advertising and promotional expenses from RMB409.6 million in 2013 to RMB482.8 million (US$77.8 million) in 2014 as we launched several new games during the year, and an increase in personnel costs from RMB180.2 million in 2013 to RMB214.6 million (US$34.6 million) in 2014.

General and administrative expenses. In 2014, our general and administrative expenses increased by 27.8% to RMB396.1 million (US$63.8 million) from RMB310.0 million in 2013. The increase was mainly due to the impairment of intangibles via acquisitions amounted to RMB23.3 million (US$3.8 million) associated with our U.S. subsidiary, an increase in personnel costs by RMB18.0 million (US$2.9 million), and an increase in professional service fee by RMB10.5 million (US$1.7 million).

Goodwill impairment. In 2014, our goodwill impairment amounted to RMB58.2 million (US$9.4 million), as compared to RMB77.3 million in 2013. The goodwill impairment was associated with our U.S. subsidiaries in 2014 and our Japanese subsidiary in 2013 respectively. For goodwill impairment, see "—Critical Accounting Policies—Goodwill."

Total Other Income. In 2014, our total other income increased by 53.4% to RMB236.3 million (US$38.1 million) from RMB154.0 million in 2013. The increase was primarily due to an equity investment gain of RMB38.2 million (US$6.2 million) in 2014, including a gain of approximately RMB28.5 million (US$4.6 million) from the disposal of ordinary shares of Shanda Games, as compared to an equity investment loss of RMB15.2 million in 2013, and to a lesser extent, due to an increase in foreign exchange gain by RMB20.5 million (US$3.3 million) in 2014.

Income Tax Expense. Our income tax expense was RMB121.5 million (US$19.6 million) in 2014, as compared to RMB70.0 million in 2013. The increase was primarily due to the decrease in deferred tax assets of RMB59.8 million (US$9.6 million) in 2014 as a result of the valuation allowance provided by our U.S. subsidiaries.

Net Income from Continuing Operations. As a result of the foregoing, we had a net income from continuing operations of RMB455.7 million (US$73.5 million) in 2014, as compared to RMB422.0 million in 2013.

(Loss) / Income from Discontinued Operations, net of tax. We had no loss or income from discontinued operations in 2014, as compared to an income from discontinued operation of RMB122.0 million in 2013.

Net (income) / Loss Attributable to Non-controlling Shareholders. In 2014, net loss attributable to non-controlling shareholders was RMB15.7 million (US$2.5 million), as compared to net income of RMB1.5 million in 2013. While we generated significant net income on the consolidated basis for the year ended December 31, 2014, our majority owned subsidiaries or their variable interest entities had net loss in the year mainly resulting from operating loss and /or amortization expenses of intangible assets arising from business acquisitions.

Net Income Attributable to the Company's Shareholders. Net income attributable to our shareholders was RMB471.4 million (US$76.0 million) in 2014, as compared to RMB542.4 million in 2013.

Revenues. In 2013, we generated revenues of RMB3.1 billion, an increase of 10.2% from RMB2.8 billion in 2012.

Online game operation revenues were RMB2.8 billion in 2013, an increase of 12.0% from RMB2.5 billion in 2012. Online game operation revenues generated from PRC operations were RMB2.1 billion in 2013 as compared to RMB1.9 billion in 2012. The increase in online game operation revenues generated from PRC operations was primarily attributable to the strong performance of several of our new games, including Swordsman Online and Saint Seya Online, which were launched in China in 2013.

Online game operation revenues generated from international operations were RMB664.4 million in 2013 as compared to RMB580.2 million in 2012. The increase was primarily attributable to the continued strength of our U.S. and European subsidiaries, including the strong contribution of our new game Neverwinter launched in the United States and Europe in 2013, and the expanded online game operation by our own subsidiaries in Southeast Asia and Korea. This was partially offset by underperformance of some of the existing games in the Japanese market.

Licensing revenues were RMB149.3 million in 2013, representing a 13.0% decrease from RMB171.6 million in 2012. The decrease was primarily because more of our games began to be operated by our own subsidiaries in some overseas markets in 2013.

Other revenues were RMB103.0 million in 2013, compared to RMB99.6 million in 2012.

Cost of Revenues. In 2013, our cost of revenues amounted to RMB711.6 million, or 23.3% of our revenues, representing an increase of RMB171.7 million from RMB539.9 million, or 19.5% of our revenues in 2012.

Cost of PRC operations. In 2013, our cost of PRC operations was RMB401.9 million, representing an increase of 27.7% from RMB314.7 million in 2012. The increase was primarily due to an increase by RMB44.3 million in revenue sharing paid to third parties, including mobile game distribution platforms and an increase in internet data center cost by RMB23.7 million in 2013.

Cost of international operations. In 2013, our cost of International operations was RMB309.7 million, representing an increase of 37.5% from RMB225.3 million in 2012. The increase was mainly due to an increase in sales-related tax by RMB34.4 million, an increase in revenue sharing paid to third parties by RMB18.6 million associated with our new game launched in 2013 and an increase in impairment charge of RMB10.8 million associated with certain of our smaller games in 2013.

Gross Profit. In 2013, our gross profit was RMB2.3 billion, an increase of 4.9% from RMB2.2 billion in 2012. Our gross margin decrease to 76.7% in 2013 from 80.5% in 2012 primarily due to an increase in revenue sharing paid to third parties and an increase in sales-related tax in our overseas operations.

Operating Expenses. In 2013, our operating expenses were RMB2.0 billion, an increase of 20.3% from RMB1.7 billion in 2012. The year-over-year increase in operating expenses was mainly due to an increase in advertising and promotional expenses and an increase in personnel costs.

Research and development expenses. In 2013, our research and development expenses increased by 11.2% to RMB886.1 million from RMB797.1 million in 2012, primarily due to an increase in personnel costs from RMB619.1 million in 2012 to RMB706.7 million in 2013.

Sales and marketing expenses. In 2013, our sales and marketing expenses increased by 40.2% to RMB729.7 million from RMB520.6 million in 2012, primarily due to an increase in advertising and promotion cost from RMB243.7 million in 2012 to RMB409.6 million in 2013 as we launched several new games during the year and started to ramp up promotions for mobile games.

General and administrative expenses. In 2013, our general and administrative expenses slightly increased by 1.2% to RMB310.0 million from RMB306.3 million in 2012.

Goodwill impairment. In 2013, our goodwill impairment amounted to RMB77.3 million as compared to RMB40.8 million in 2012. The goodwill impairment was associated with our Japanese subsidiary. As of December 31, 2013, all goodwill arising from the acquisition of our Japanese subsidiary in April 2010 was fully impaired.

Total Other Income. In 2013, our total other income was RMB154.0 million compared to RMB127.6 million in 2012. The increase was primarily due to platform services commissions amounting to RMB21.5 million in 2013, as compared to nil in 2012. Platform services commissions are the commissions generated from the technical support provided to our cooperated platform starting from 2013.

Income Tax Expense. Our income tax expense was RMB70.0 million in 2013, a decrease of 39.7%, from RMB116.1 million in 2012. The decrease was primarily due to the decrease in the operating profit in 2013 and some of the new games launched in 2013 are operated by some of our controlled entities that enjoy a greater preferential tax treatment.

Net Income from Continuing Operations. As a result of the foregoing, we had a net income from continuing operations of RMB422.0 million in 2013, as compared to RMB577.5 million in 2012.

(Loss) / Income from Discontinued Operations, net of tax. In December 2013, we sold the online reading business to an unrelated party, the related gain of RMB166.3 million was recorded in the "gain from disposal of discontinued operations, net of tax" account in the consolidated statements of income and comprehensive income. In 2013, loss from discontinued operations was RMB44.3 million, as compared to loss of RMB30.2 million in 2012.

Net Income Attributable to Non-controlling Shareholders. In 2013, net income attributable to non-controlling shareholders was RMB1.5 million, as compared to RMB6.6 million in 2012.

Net Income Attributable to the Company's Shareholders. Net income attributable to our shareholders was RMB542.4 million in 2013, as compared to RMB540.7 million in 2012.

We are a holding company that conducts our operations primarily through our PRC wholly owned subsidiaries and their variable interest entities in China and through our overseas subsidiaries. The flow of earnings from our PRC wholly owned subsidiaries and their variable interest entities is as follows:

The payment of dividends by entities organized in China is subject to limitations. Regulations in the PRC currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. The differences between our retained earnings as calculated pursuant to PRC accounting standards and regulations and retained earnings presented in our financial statements as of December 31, 2014 were not material. Such differences were mainly attributable to the timing differences in recognizing overseas licensing revenues.

Our PRC subsidiaries and variable interest entities are also required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year to their general reserves until the accumulative amount of such reserves reach 50% of their registered capital. These reserves are not distributable as cash dividends. In addition, if our PRC subsidiaries incur debt on their own behalf, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us.

In addition, we are required to accrue monthly for staff welfare benefits for the full-time employees of our subsidiaries and the variable interest entities incorporated in the PRC and make contributions to the government and relevant state sponsored pension and medical plans with all the amounts accrued. Such staff welfare benefits include medical care, welfare subsidies, unemployment insurance, pension benefits and housing fund and are determined based on certain percentages of the employees' respective salaries in accordance with relevant regulations. The amount of such cash contributions may increase due to our expanding workforce as we grow our business or increase wage levels. However, we do not expect that such increase will have a material effect on our liquidity.

Furthermore, our wholly owned PRC subsidiaries and variable interest entities are subject to the PRC government controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. Most of our revenues and expenses are denominated in Renminbi. We may need to convert a portion of our revenues into other currencies to meet our foreign currency obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval by complying with certain procedural requirements.

On the other hand, foreign exchange transactions by our subsidiaries and affiliated entities in China under capital accounts continue to be subject to significant foreign exchange controls and require the approval of, or registration with, PRC governmental authorities. In particular, if our subsidiaries or affiliated entities in China borrow foreign currency loans from their holding companies outside the PRC or other foreign lenders, these loans must be registered with SAFE, and if we finance them by means of additional capital contributions, these capital contributions must be approved or registered by certain government authorities including SAFE, the Ministry of Commerce or their local counterparts. These limitations could affect the ability of these entities to obtain foreign exchange through debt or equity financing, and could affect the business operations and liquidity of these entities.

Since 2006, we have financed our operations primarily through cash flows from operations.

As of December 31, 2014, we had RMB933.8 million (US$150.5 million) in cash and cash equivalents, 65.8% of which were denominated in Renminbi. As of December 31, 2014, cash and cash equivalents held by our consolidated variable interest entities amounted to RMB522.0 million (US$84.1 million). Our current cash and cash equivalents primarily consist of cash on hand and demand deposits, which have original maturities of three months or less. We believe our cash and cash equivalents are sufficient to fund our operations, commitments, capital expenditures, etc. for at least the next 12 months. We expect positive operating cash flow as we generally receive cash payments from distributors upon delivery of our prepaid cards to them and from players when they deposit cash into their online accounts.

The following table sets forth a summary of our cash flows for the periods indicated:

Net cash provided by operating activities in 2014 was RMB923.3 million (US$148.8 million), decreased by 10.6% from RMB1.0 billion in 2013, which was primarily due to the increase in our cash outflows related to costs and expenses. Net cash provided by operating activities in 2014 was primarily attributable to (i) a net income of RMB455.7 million (US$73.4 million), (ii) adding back certain non-cash expenses including the depreciation and amortization expenses in the amount of RMB222.6 million (US$35.9 million), share-based compensation expenses in the amount of RMB51.5 million (US$8.3 million), goodwill impairment in the amount of RMB58.2 million (US$9.4 million), and impairment of intangible assets and other long-lived assets in the amount of RMB38.4 million (US$6.2 million), offset by investment income picked under equity method in the amount of RMB38.2 million (US$6.2 million), and exchange gain in the amount of RMB27.2 million (US$4.4 million), (iii) adding back changes in working capital accounts that positively affected operating cash flow, including an increase of RMB125.1 million (US$20.2 million) in deferred revenues, an increase of RMB72.6 million (US$11.7 million) in salary and welfare payable, an increase of RMB68.2 million (US$11.0 million) in accounts payable, an increase of RMB17.1 million

(US$2.8 million) in accrued expenses and other liabilities, and a decrease of RMB33.4 million (US$5.4 million) in long term prepayments, (iv) offset by changes in certain working capital accounts that negatively affected operating cash flow, primarily including an increase in accounts receivable of RMB177.5 million (US$28.6 million), an increase in current prepayments and other assets of RMB49.4 million (US$8.0 million) and a decrease in advance from customers of RMB34.9 million (US$5.6 million).

Net cash provided by operating activities in 2013 was RMB1.0 billion, increased by 39.7% from RMB739.5 million in 2012, which was primarily due to the increase of our online game operation revenues. Net cash provided by operating activities in 2013 was primarily attributable to (i) a net income of RMB543.9 million, (ii) adding back certain non-cash expenses including the share-based compensation expenses in the amount of RMB97.3 million, depreciation and amortization expenses in the amount of RMB200.2 million, goodwill impairment in the amount of RMB77.3 million, impairment of intangible assets and other long-lived assets in the amount of RMB23.9 million and offset by gain from disposal of discontinued operations in the amount of RMB166.3 million, (iii) adding back changes in working capital accounts that positively affected operating cash flow including an increase of RMB38.6 million in accounts payable, an increase of RMB53.2 million in salary and welfare payable and an increase of RMB357.5 million in deferred revenues and (iv) offset by changes in certain working capital accounts that negatively affected operating cash flow primarily including an increase in accounts receivable of RMB81.0 million, an increase in current prepayments and other assets of RMB126.1 million and a decrease in advance from customers of RMB29.3 million.

Net cash provided by operating activities in 2012 was RMB739.5 million, primarily attributable to (i) a net income of RMB547.2 million, (ii) adding back certain non-cash expenses including the share-based compensation expenses in the amount of RMB71.1 million, depreciation and amortization expenses in the amount of RMB183.1 million, goodwill impairment in the amount of RMB40.8 million and impairment of intangible assets and other long-lived assets in the amount of RMB21.0 million, (iii) adding back changes in working capital account that positively affected operating cash flow including a decrease of RMB32.4 million in accounts receivable and an increase of RMB38.0 million in advances from customer and (iv) offset by changes in certain working capital accounts that negatively affected operating cash flow primarily including an increase in current and non-current prepayments and other assets of RMB92.2 million, a decrease in deferred revenue of RMB57.0 million and a decrease in taxes payable of RMB48.2 million.

Net cash used in investing activities in 2014 was RMB1.3 billion (US$210.7 million). Net cash used in investing activities in 2014 primarily related to (i) cash paid for purchase of short-term investments in the amount of RMB3.1 billion (US$500.1 million), (ii) increase of restricted cash in the amount of RMB559.0 million (US$90.1 million), (iii) net cash paid in 2014 for our several strategic business acquisitions and equity investments in the amount of RMB456.5 million (US$73.6 million), (iv) cash paid for purchase of property, equipment, software, intangible assets and office building renovation in the amount of RMB147.8 million (US$23.8 million), and (v) cash paid for capitalized product development cost in the amount of RMB19.2 million (US$3.1 million); and was partially offset by the cash inflow related to the maturities of short-term investments in the amount of RMB2.8 billion (US$448.1 million), the disposal of PW Literature in the amount of RMB167.0 million (US$26.9 million), and the increase of cash in the amount of RMB28.5 million (US$4.6 million) from the purchase and disposal of ordinary shares of Shanda Games.

Net cash provided by investing activities in 2013 was RMB10.3 million. Net cash provided by investing activities in 2013 primarily related to the decrease of restricted cash in the amount of RMB665.4 million, the maturities of short-term investments in the amount of RMB1.9 billion and was offset by (i) cash paid for purchase of property, equipment, software, intangible assets and office

building renovation in the amount of RMB348.2 million, (ii) net cash paid for our several strategic business acquisitions and equity investments in 2013 in the amount of RMB391.9 million, (iii) cash paid for purchase of short-term investments in the amount of RMB1.7 billion, (iv) cash paid for capitalized product development cost in the amount of RMB44.2 million and (v) cash outflow related to disposal of PW Literature in the amount of RMB24.0 million.

Net cash used in investing activities in 2012 was RMB1.7 billion. Net cash used in investing activities in 2012 primarily related to (i) cash paid for purchases of short-term investments in the amount of RMB1.4 billion, (ii) an increase in restricted cash and restricted time deposit of RMB363.8 million to maintain guarantee balance at bank as a collateral for the U.S. dollar short-term bank loans or to meet the requirement of specific business operations, (iii) cash paid for capital contribution of the venture capital fund in the amount of RMB200.0 million, (iv) purchases of property, equipment and software in the amount of RMB108.8 million to support our expanded operations, (v) cash paid for purchases of long-term time deposits in the amount of RMB50.0 million; and was partially offset by the maturities of short-term investments in the amount of RMB470.0 million.

Net cash provided by financing activities was RMB120.9 million (US$19.5 million) in 2014, primarily related to RMB726.0 million (US$117.0 million) cash received from short-term bank loans, partially offset by RMB491.9 million (US$79.3 million) used to repay short-term bank loans and RMB146.4 million (US$23.6 million) used to pay dividends to our shareholders.

Net cash used in financing activities was RMB618.4 million in 2013, primarily related to RMB742.9 million used to repay short-term bank loans and RMB137.1 million used to pay dividends to our shareholders, partially offset by RMB216.2 million cash received from short-term bank loans.

Net cash used in financing activities was RMB375.2 million in 2012, primarily related to RMB409.6 million used to repay short-term bank loans and RMB607.6 million used to pay dividends to our shareholders, partially offset by RMB596.8 million cash received from short-term bank loans.

We incurred capital expenditures of RMB147.8 million (US$23.8 million) in 2014. Our capital expenditures in 2014 were used primarily to purchase servers, computer equipment and intangible assets for the further expansion of our operations. We believe that our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures, for at least the next 12 months. We also plan to fund our capital expenditures beyond the next 12 months with cash flows from our operations. We may, however, require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our existing cash is insufficient to meet our requirements, we may seek to sell additional equity securities, issue debt securities or borrow from lending institutions.

We incurred capital expenditures of RMB348.2 million in 2013. Our capital expenditures in 2013 were used primarily to purchase business office property, servers, computer equipment and intangible assets for the further expansion of our operations.

We incurred capital expenditures of RMB115.4 million in 2012. Our capital expenditures in 2012 were used primarily to purchase servers, computer equipment and intangible assets for the further expansion of our operations.

Our research and development efforts are primarily to keep pace with technological advances in order to make our online game development capabilities and our games competitive in the market. We intend to maintain and strengthen our internal game development capabilities and export more games to more countries and regions. For the years ended December 31, 2012, 2013 and 2014, our research and development expenses were RMB797.1 million, RMB886.1 million and RMB1.1 billion (US$172.9 million), respectively.

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2014 to December 31, 2014 that are reasonably likely to have a material effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

We are not a party to any financial guarantees or off-balance sheet arrangements as defined by the SEC Financial Reporting Release 67 (FRR-67), "Disclosure in Management's Discussion and Analysis about Off-Balance Sheet Arrangement and Aggregate Contractual Obligations." We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder's equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.

The following table sets forth our contractual obligations and commercial commitments as of December 31, 2014:

In 2011, we entered into a limited partnership agreement to invest up to RMB643.5 million as a limited partner in a venture capital fund over a nine-year period. In early 2013, we increased our committed capital for an additional RMB396.0 million and the investment term was changed to a 12-year period. As of December 31, 2014, we have contributed RMB615.7 million to the venture capital fund. We will contribute the remaining committed capital of RMB423.8 million over the investment term upon the capital call by the general partner. The venture capital fund is managed by one general partner unrelated to us. See "Item 4. Information on the Company—A. History and Development of the Company."

Other than the obligations set forth above, we did not have any material long-term debt obligations, operating lease obligations, purchase obligations or other long-term liabilities as of December 31, 2014.

The following table sets forth information regarding our executive officers and directors as of the date of this annual report.

Mr. Michael Yufeng Chi is our founder and chairman of the board of directors. Mr. Chi was also our chief executive officer since the inception of our company to August 2012 and then co-CEO until March 2013. Prior to founding our company, Mr. Chi founded Beijing Golden Human Co., Ltd. in 1996, the predecessor of Human Education and Technology Co., Ltd., or Human Education, a leading Chinese education software and education solution provider in China. Mr. Chi has served as the chairman of Human Education since its inception. From 2003 to 2004, Mr. Chi also served as a vice president and the chief technology officer of Tsinghua Unisplendour Corporation Limited, an information technology company listed on the Shenzhen Stock Exchange. In 2011, Mr. Chi was named one of the "2010 Most Influential Individuals in the Chinese Game Industry" at the 2010 China Game Industry Annual Conference. In 2009, Mr. Chi was named one of the "Top 10 Most Influential Individuals in Chinese Online Game Industry for the Past Decade" according to the 2009 Chinese Online Game Industry Survey for the Past Decade conducted in the China Digital Entertainment Exposition and Conference. In 2007, Mr. Chi was named one of the "2007 Most Influential Individuals in Chinese Game Industry" at the China International Digital Content Expo 2007. In 2002, Mr. Chi was named one of the "Outstanding Young Entrepreneurs in Beijing" by the Beijing Youth Federation and the Beijing Young Entrepreneur Association, and one of the "Outstanding Private Entrepreneurs" by the All-China Association of Industry & Commerce and the China Non-Governmental Science Technology Entrepreneurs Association. In 2001, Mr. Chi was named one of the "Outstanding Young Persons of China's Software Industry" by the MIIT and the All-China Youth Federation. Mr. Chi

received his bachelor's degree in chemistry from Tsinghua University in 1994 and his MBA degree from China Europe International Business School in 2004.

Mr. Daniel Dong Yang has served as our independent director since October 31, 2009. Mr. Yang has been a partner of SAIF Partners, an Asian private equity firm, since 2004 and served as a director from 2001 to 2004. He currently serves as a director of several companies, such as Vancl.com and 58.com, both of which are IT companies located in China. From 2000 to 2001, he served as an investment officer and director of Softbank China Venture Capital, a venture capital firm in China. Mr. Yang received his bachelor's degree in computer science from Tsinghua University in 1995, and his master degree in accounting from University of Southern California in 1997. Mr. Yang is a Chartered Financial Analyst.

Dr. Bing Xiang has served as our independent director since July 25, 2007. Dr. Xiang has served as an independent director of a number of public companies listed on New York Stock Exchange, Shenzhen Stock Exchange and Hong Kong Stock Exchange, respectively. For example, he is the independent director of Yunnan Baiyao Group Co., Ltd. and Dan Form Holdings Company Limited. Dr. Xiang has been a professor and the founding Dean of Cheung Kong Graduate School of Business since the inception of the school in 2002. Prior to that, Dr. Xiang was a professor and founding director of EMBA and Executive Education programs at the Guanghua School of Management, Peking University. He has also taught at the Hong Kong University of Science and Technology, Chinese University of Hong Kong and China Europe International Business School. Dr. Xiang received his bachelor's degree from Xi'an University of Transportation in 1983 and a Ph.D. degree in accounting from University of Alberta in 1991.

Mr. Han Zhang has served as our independent director since July 2008. Since 2007, Mr. Zhang has served as a partner of Share Capital Partners Ltd., a Chinese venture capital firm. Mr. Zhang served as the general manager of Greatwall Fund Management Co., Ltd., a fund management company in China, from 2004 to 2005. He also served as the deputy general manager of Rongtong Fund Management Co., Ltd., a fund management company in China, from 2001 to 2003. From 1999 to 2000, Mr. Zhang was the general manager assistant and the investment director of Penghua Fund Management Co., Ltd., a fund management company in China. He was the deputy manager of the Finance Department of China National Technical Import & Export Corporation and also the general manager of CNTIC Shanghai Investment Advisory Co., Ltd. from 1994 to 1998. Mr. Zhang received his bachelor's degree in chemistry from the Peking University in 1985 and his EMBA degree from China Europe International Business School in 2004.

Mr. Robert Hong Xiao has been with us since May 2008 and has served as our chief executive officer since March 2013. Previously, Mr. Xiao served as our senior vice president in charge of our human resources and administration, later our chief operating officer, and then our co-CEO. Prior to joining us, Mr. Xiao was at Dell (China) Company Limited from 2005 to 2008, first serving as the director of the learning and development department and then as the director of the talent management department. From 2003 to 2005, Mr. Xiao served as the director of people and organizational development department in Philips (China) Investment Co., Ltd. From 2001 to 2003, Mr. Xiao was at Cisco Systems Hong Kong Ltd., first as the manager of the career and leadership development and then as the manager of the leadership and human resources development department. Prior to that, Mr. Xiao served as the manager of the organizational effectiveness department in Cisco Systems (China) Networking Technologies Co., Ltd. from 2000 to 2001. In 2014, Mr. Xiao was voted the winner of the "2013 Outstanding Individual in the Game Industry" in the 2013 Chinese Internet Industry Survey. In 2013, Mr. Xiao was named one of the "2013 Top 10 Influential Individuals in the Chinese Game Industry" at the 2013 China Game Industry Annual Conference and the "2013 Outstanding Entrepreneurs of the Chinese Animation and Game Industry" at the 2013 Annual Conference of Chinese e-Game Industry, respectively. Mr. Xiao received his bachelor's degree in

physics from Tsinghua University in 1989, and received his master's and Ph.D. degrees in engineering from University of Southern California, in 1991 and 1995, respectively.

Mr. Kelvin Wing Kee Lau has been our chief financial officer since March 2007. Prior to joining us, Mr. Lau was the chief financial officer of Beijing Media Corporation Limited, a company listed on the Stock Exchange of Hong Kong Limited, from 2004 to 2007. From 2000 to 2004, Mr. Lau was a group finance director of Shanghai Ogilvy & Mather Advertising Limited Beijing Branch. He worked for PricewaterhouseCoopers Beijing office as an audit senior manager in 2000 and an audit manager from 1996 to 1999. Mr. Lau received his bachelor's degree in business administration from Hong Kong Baptist University in 1990. He received his EMBA degree in 2011 from Cheung Kong Graduate School of Business in China. Mr. Lau is a member of Association of Chartered Certified Accountants and Hong Kong Institute of Certified Public Accountants.

Mr. Di He has been our chief technology officer since February 2006 in charge of research and development of our Angelica 3D game engine and our game development. Prior to joining us, Mr. He served as the chief technology officer of E-Pie Entertainment and Technology Co., Ltd, a game development company, from 2001 to 2006 and was involved in the programming of several PC games such as "Great Qin Warriors," "Shanghai Dragon" and "War in Burma." From 2004 to 2006, he was seconded to our company and was involved in the development of our game engine and online games. From 1998 to 2001, Mr. He worked part-time with Beijing Golden Human Co., Ltd. and was in charge of development of PC games such as "Honor & Freedom I" and "Honor & Freedom II." Mr. He received his bachelor's and master's degrees in automation from Tsinghua University in 1998 and 2001, respectively.

Mr. Qing Li has been with us since February 2006 and is our chief development officer. Prior to joining us, Mr. Li served as the chief design officer of E-Pie Entertainment and Technology Co., Ltd, a game development company, from 2001 to 2006 and was in charge of the design of several PC games such as "Great Qin Warriors," "Shanghai Dragon" and "War in Burma." From 2004 to 2006, he was seconded to our company and in charge of game design. When working with Beijing Golden Human Co., Ltd. from 1998 to 2001, Mr. Li was in charge of the design of several PC games such as "Honor & Freedom I" and "Honor & Freedom II." Mr. Li received his bachelor's degree in engineering physics and master's degree from the Institute of Nuclear Technology at Tsinghua University in 1997 and 2000, respectively. He received his EMBA degree in 2010 from Cheung Kong Graduate School of Business in China.

Mr. Qi Zhu has been with us since November 2004 and is our chief strategic product officer. Previously, he served as the chief publishing officer, Asia, in charge of our game operations and publishing in Asia. Prior to joining us, Mr. Zhu served as the vice president of Beijing Qianxiang Tiancheng Technology Co., Ltd., a company engaged in development and services of internet products in 2004. From 2003 to 2004, Mr. Zhu was the deputy general manager of Beijing CIMO Technology Co., Ltd., an internet entertainment company. Before that, he was a marketing director of Beijing Globallink Computer Technology Co., Ltd., a Chinese online game developer and operator, from 2000 to 2003. Mr. Zhu was a branch manager of Lenovo (Beijing) Co., Ltd., a computer company in China, from 1998 to 2000. Mr. Zhu received his bachelor's degree in metal forming from University of Science and Technology Beijing in 1995 and his master's degree in business economics from Chinese Academy of Social Sciences in 1998 in China. In 2009, he received his EMBA degree from Cheung Kong Graduate School of Business in China.

Mr. Xiaoyin Lu has been with us since February 2006 and is our chief artist. Prior to joining us, Mr. Lu served as the art director of E-Pie Entertainment and Technology Co., Ltd., a game development company, from 2001 to 2006 and was in charge of the art work of several PC games such as "Great Qin Warriors," "Shanghai Dragon" and "War in Burma." The trailer animation of "Great Qin Warriors," which was directed by Mr. Lu, won the "Best Visual Effects Award" and the "Best

Technological Applications Award" from the Chinese Television Artists Association. From 2004 to 2006, he was seconded to our company and in charge of art management. Mr. Lu received his bachelor's degree in fine art from Zhejiang Normal University in 2001 and EMBA degree from Cheung Kong Graduate School of Business in China in 2010.

Mr. Yunfan Zhang joined us in February 2013 and has served as our chief operating officer since January 2015. Prior to that, Mr. Zhang served as our vice president and later became our senior vice president, in charge of the mobile game publishing business. Prior to joining us, Mr. Zhang served as the CEO of Beijing Zhizhu Network Technology Co., Ltd. from 2008 to 2012. He served as a general manager of Duowan.com from 2005 to 2008. From 2003 to 2005, he served as a product supervisor at NetEase, Inc. Mr. Zhang received his bachelor's degree in Economics from Jiangxi University of Finance and Economics in 2003 and MBA degree from National University of Singapore in 2013.

Mr. Alan Chen has been with us since January 2008 and is our senior vice president in charge of Internet investment in North America. Previously, he was our chief publishing officer of the U.S. and Europe, responsible for our game publishing and overall business operations in the U.S. and Europe. From 2006 to 2007, Mr. Chen served as the chief technology officer of The9 Limited, where he led game development and technical operations. Prior to that, Mr. Chen was an executive vice president of Hewlett-Packard (China) Ltd., where he was in charge of the company's enterprise server and storage business. He also served as vice president of professional services, greater China, at Lucent Technologies (China) Ltd. from 2003 to 2005, and general manager of carrier packet solutions at Nortel Networks (China) Ltd. from 1998 to 2003. Mr. Chen received both his Bachelor's degree and Master's degree in telecommunications engineering from the Beijing University of Posts and Telecommunications in 1982 and 1987, respectively. He received his Ph.D. degree in 1994 in electrical engineering from the University of Ottawa.

Mr. Alex Yiran Xu has been with us since March 2010 and is our senior vice president in charge of strategic partnership and investment. Previously, Mr. Xu served as our vice president of strategy and later chief business officer. Prior to joining us, Mr. Xu served as a director for strategic investment at Giant Interactive Group Inc. from 2008 to 2010. He was one of the founders and served as a director for game development and operations at RealNetworks China from 2005 to 2007, and led business development, investment and new game development at Sohu.com Inc. from 2003 and 2005. Prior to that, Mr. Xu founded multiple startup companies in the internet and game industries and led the development of one of the earliest 3D game engines and 3D games in China. Mr. Xu received his dual bachelor's degree in automation and precision instrument design in 1996 and master's degree in precision instrument design in 1999, both from Tsinghua University, and MBA degree in 2007 from a joint program offered by Tsinghua University and the Chinese University of Hong Kong.

Mr. Zhengrong Huang has been with us since March 2009 and is our senior vice president, responsible for our research and development, game publishing and overall business operations in the U.S. and Europe. Previously, Mr. Huang served as our vice president and later became senior vice president in charge of ARC game platform, global network operation and IT infrastructure. Prior to joining us, Mr. Huang served as a director of Asia Pacific region at Bitband Technologies Ltd., an IPTV technology provider, from 2003 to 2009. He served as a vice president at Beijing Huanuo Information Technology Co., Ltd., a company engaged in the networking service, from 2000 to 2003. He was a vice president at Infosec Technologies Co., Ltd., a company provided network security solution, from 1998 to 2000. From 1996 to 1998, Mr. Huang was an engineer of Network Research Center of Tsinghua University. Mr. Huang received his dual bachelor's degree in computer science and technology and economics and management in 1994, and master's degree in computer science and technology in 1996 from Tsinghua University.

Mr. Haiyi Li has been with us since December 2006 and is our senior vice president in charge of PC game publishing and operation in the domestic market. Previously, Mr. Li was in charge of our product management and operation of PC game in the domestic market as our director and later vice president. Prior to joining us, he served as a director at Sohu.com Inc. from 2003 to 2006. From 2001 to 2003, Mr. Li was a senior project manager of NetEase, Inc. From 2000 to 2001, he was a product manager of Cyts Sysnet Electronics Co., Ltd., a company mainly engaged in IT consultant and system integration service for insurance companies. Mr. Li received his bachelor's degree in international economics and business from Sichuan University of Science and Engineering in 2000. He is pursuing his EMBA degree from National University of Singapore.

Mr. Cheng Wei has been with us since November 2004 and is our senior vice president responsible for game publishing and operation in East Asia. Previously, Mr. Wei was in charge of our product management and operation in the domestic market and East Asia as our director and later vice president. Prior to joining us, Mr. Wei served as a marketing director at Beijing Shimo Technology Co., Ltd., an online game operator, in 2003, and later in 2004 he served as a marketing director at Beijing Qianxiang Tiancheng Technology Co., Ltd., a company engaged in development and services of Internet products. From 2000 to 2003, he was a business development manager at Ourgame.com. Mr. Wei received his bachelor's degree in economic information management in 2000 from Shandong University of Construction Materials Industry (currently University of Jinan) and EMBA degree from National University of Singapore in 2014.

Ms. Yuyun Wang has been with us since December 2004 and is our senior vice president responsible for global branding, strategic cooperation and public relations. Previously, Ms. Wang was in charge of our game marketing and operation in the domestic market as our director and later vice president. Prior to joining us, Ms. Wang served as a marketing director at 8848.net from 2000 to 2003, a company engaging in E-commerce business. Ms. Wang received her EMBA degree from National University of Singapore in 2012.

There is no family relationship between any of our executive officers or directors.

For the year ended December 31, 2014, we paid an aggregate of approximately RMB46.0 million (US$7.4 million) and approximately RMB1.4 million (US$0.2 million) in cash compensation to our senior executive officers and directors, respectively. For the year ended December 31, 2014, we paid an aggregate of approximately RMB1.1 million (US$0.2 million) for pension and other social insurance contribution for our senior executive officers pursuant to PRC statutory requirements. For options granted to our officers and directors, see "Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers—Share Incentive Plan."

We have entered into employment agreements with each of our senior executive officers. We may terminate a senior executive officer's employment for cause, at any time, without prior notice or remuneration, for certain acts of the officer, including, but not limited to, material violation of our internal policies, failure to perform agreed duties or embezzlement that cause material damage to us, or a conviction of a crime. A senior executive officer may terminate his or her employment at any time by a 30-day prior written notice. Each senior executive officer is entitled to certain benefits upon termination, including a severance payment equal to a certain specified number of months of his or her then salary, if he or she resigns for certain good reasons specified by the employment agreement or if his or her employment was terminated without causes.

We have adopted a share incentive plan in 2006, or the 2006 Plan, to motivate, attract and retain employees, directors and consultants and to promote the success of our business. In February 2009, we amended and restated the 2006 Plan, under which the maximum number of ordinary shares reserved for future issuances upon exercise of options and other equity incentives granted under the 2006 Plan was increased to 42,145,000 Class B ordinary shares. In November 2009, we further amended the 2006 Plan to increase the maximum number of ordinary shares reserved for future issuances under the plan to 44,645,000 Class B ordinary shares. On August 14, 2010, our shareholders approved a 2010 Share Incentive Plan, or the 2010 Plan, under which 30,000,000 Class B ordinary shares have been reserved for future issuance. On November 22, 2013, our shareholders approved a 2013 Share Incentive Plan, or the 2013 Plan, under which 5,024,818 shares have been reserved in the award pool for future issuance. Starting January 1, 2015, the award pool will be increased by a number on the first day of each year equal to 2% of the then total number of Class B ordinary shares outstanding, provided that at no time the unissued shares reserved in the award pool immediately after such annual increase shall exceed 5% of the then total number of Class B ordinary shares outstanding. The following table summarizes, as of April 26, 2015, the outstanding options that we granted to our current directors and executive officers and to other individuals as a group under our 2006 Plan, 2010 Plan and 2013 Plan.

Name			Grant Date	Expiration Date

Michael Yufeng Chi	464,000	4.852	July 30, 2009	**
	160,650	4.292	March 18, 2011	***
	500,000	2.076	August 29, 2012	***
Daniel Dong Yang	*	4.852	December 30, 2009	***
Robert Hong Xiao	139,400	4.292	March 18, 2011	***
	150,000	2.076	August 29, 2012	***
	2,440,000	2.2	May 29, 2013	***
Kelvin Wing Kee Lau	*	1.782	March 3, 2009	**
	*	4.292	March 18, 2011	***
	*	2.076	August 29, 2012	***
	*	2.2	May 29, 2013	***
Di He	*	2.076	August 29, 2012	***
	*	2.2	May 29, 2013	***
Qing Li	*	4.292	March 18, 2011	***
	*	2.076	August 29, 2012	***
	*	2.2	May 29, 2013	***
Qi Zhu	*	1.782	March 3, 2009	**
	*	4.292	March 18, 2011	***
	*	2.076	August 29, 2012	***
	*	2.2	May 29, 2013	***
Xiaoyin Lu	*	4.292	March 18, 2011	***
	*	2.076	August 29, 2012	***
	*	2.2	May 29, 2013	***
Yunfan Zhang	*	2.2	May 29, 2013	***
Alan Chen	*	4.292	March 18, 2011	***
	*	2.076	August 29, 2012	***
	*	2.2	May 29, 2013	***
Alex Yiran Xu	*	4.292	March 18, 2011	***
	*	2.076	August 29, 2012	***
	*	2.2	May 29, 2013	***

Name			Grant Date	Expiration Date

Zhengrong Huang	*	2.976	May 27, 2009	**
	*	4.292	March 18, 2011	***
	*	2.076	August 29, 2012	***
	*	2.2	May 29, 2013	***
Haiyi Li	*	4.292	March 18, 2011	***
	*	2.2	May 29, 2013	***
Cheng Wei	*	1.782	March 3, 2009	**
	*	4.292	March 18, 2011	***
	*	2.076	August 29, 2012	***
	*	2.2	May 29, 2013	***
Yuyun Wang	*	1.782	March 3, 2009	**
	*	4.292	March 18, 2011	***
	*	2.076	August 29, 2012	***
	*	2.2	May 29, 2013	***
Other individuals as a group	174,305	1.782	March 3, 2009	**
	4,230	4.852	July 30, 2009	**
	97,345	4.852	March 3, 2010	***
			May 18, 2010
			August 19, 2010
			September 20, 2010
	2,184,375	4.292	March 18, 2011	***
			June 7, 2011
	21,875	3.488	August 5, 2011	***
	1,012,665	2.076	August 29, 2012	***
	150,000	2.102	March 14, 2013	***
	1,762,810	2.2	May 29, 2013	***
	200,000	2.178	March 21, 2014	***

Plan Administration. Our board of directors or our compensation committee administers the share incentive plans. The compensation committee or the full board of directors, as appropriate, determines the provisions and terms and conditions of our awards.

Types of Awards. The following briefly describes the principal features of the various awards that may be granted under our share incentive plan.

Termination of the Share Incentive Plan. Unless terminated earlier, the amended 2006 Plan will expire in 2019, the 2010 Plan will expire in 2020, and the 2013 Plan will expire in 2023. Our board of directors has the authority to amend or terminate these share incentive plans subject to shareholder approval with respect to certain amendments. However, no such action may impair the rights of any recipient of the awards unless agreed by the recipient.

Every director attended all of the meetings of our board of directors and its committees on which he served after becoming a member of our board. No director is entitled to any severance benefits upon termination of his directorship with us. In 2014, our board of directors held meetings four times.

Our board of directors currently consists of four directors. A director is not required to hold any shares in the company by way of qualification. A director may vote with respect to any contract or transaction in which he is interested, provided that he has disclosed the nature of his interest in such contract or transaction at or prior to its consideration and any vote thereon. The directors may exercise all the powers of the company to borrow money, mortgage its undertaking, property and uncalled capital, and issue debentures or other securities whether outright or as security for any obligation of the company or of any third party.

We have established two committees under the board of directors: the audit committee and the compensation committee. We currently do not plan to establish a nominating committee. The independent directors of our company will select and recommend to the board for nomination by the board such candidates as the independent directors, in the exercise of their judgment, have found to be well qualified and willing and available to serve as our directors prior to each annual meeting of our shareholders at which our directors are to be elected or re-elected. In addition, our board of directors has resolved that director nomination be approved by a majority of the board as well as a majority of the independent directors of the board. In compliance with Rule 5605 of the NASDAQ Stock Market Rules, all of the members of each of our board committees are independent directors. We have adopted a charter for each of the board committees. Each committee's members and responsibilities are described below.

Audit Committee. Our audit committee consists of Daniel Dong Yang, Bing Xiang and Han Zhang. We have determined that Daniel Dong Yang, Bing Xiang and Han Zhang satisfy the "independence" requirements of Rule 10A-3 under the Exchange Act, as amended, and Rule 5605 of

the NASDAQ Stock Market Rules. Our board of directors has determined that Daniel Dong Yang is an audit committee financial expert as defined in the instructions to Item 16A of the Form 20-F. The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things:

Compensation Committee. Our compensation committee consists of Daniel Dong Yang and Bing Xiang. We have determined that Daniel Dong Yang and Bing Xiang satisfy the "independence" requirements of Rule 5605 of the NASDAQ Stock Market Rules. The compensation committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which their compensation is deliberated. The compensation committee is responsible for, among other things:

In 2014, our compensation committee passed unanimous written resolutions in lieu of meeting once.

Under Cayman Islands law, our directors have a duty of loyalty to act honestly in good faith with a view to our best interests. Our directors also have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association.

Our officers are elected by and serve at the discretion of the board of directors. Our directors are not subject to a term of office and hold office until such time as they are removed from office by ordinary resolution or the unanimous written resolution of all shareholders. A director will be removed from office automatically if, among other things, the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; or (ii) dies or is found by our company to be or becomes of unsound mind.

We had 4,568, 4,805 and 5,378 employees as of December 31, 2012, 2013 and 2014, respectively. None of our employees are represented under collective bargaining agreements. We consider our relations with our employees to be good.

The following table sets forth information with respect to the beneficial ownership of our ordinary shares (including shares represented by our ADSs), assuming each share is entitled to one vote, as of April 26, 2015, by:

	Share Beneficially Owned

	Number⁽¹⁾		%⁽²⁾
Directors and Executive Officers:
Michael Yufeng Chi⁽³⁾		41,896,575		16.8
Daniel Dong Yang⁽⁴⁾		*		*
Bing Xiang		—		—
Han Zhang⁽⁴⁾		*		*
Robert Hong Xiao⁽⁴⁾		*		*
Kelvin Wing Kee Lau⁽⁴⁾		*		*
Di He⁽⁵⁾		2,622,320		1.1
Qing Li⁽⁴⁾		*		*
Qi Zhu⁽⁴⁾		*		*
Xiaoyin Lu⁽⁴⁾		*		*
Yunfan Zhang⁽⁴⁾		*		*
Alan Chen⁽⁴⁾		*		*
Alex Yiran Xu⁽⁴⁾		*		*
Zhengrong Huang⁽⁴⁾		*		*
Haiyi Li⁽⁴⁾		*		*
Cheng Wei⁽⁴⁾		*		*
Yuyun Wang⁽⁴⁾		*		*
All Directors and Executive Officers as a Group⁽⁶⁾		55,028,040		21.4
Principal Shareholders:
Perfect Human Holding Company Limited⁽⁷⁾		40,959,425		16.5
Fosun International Limited⁽⁸⁾		29,344,530		11.8
Greenwoods Asset Management Limited⁽⁹⁾		17,840,240		7.2

(3): Represents 27,542,625 Class A ordinary shares and 13,416,800 Class B ordinary shares held by Perfect Human Holding Company Limited, a British Virgin Islands company controlled by Mr. Michael Yufeng Chi and 937,150 Class B ordinary shares underlying the options granted to Mr. Michael Yufeng Chi which are exercisable within 60 days after April 26, 2015. Perfect Human Holding Company Limited has pledged 10,003,315 Class B ordinary shares to a third-party lender as collateral for certain loans received from the lender. The business address for Mr. Chi is Perfect World Plaza, Tower 306, 86 Beiyuan Road, Chaoyang District Beijing 100101, People's Republic of China.
(4): Represents Class B ordinary shares held and/or issuable upon exercise of all of the options that are exercisable within 60 days after April 26, 2015. The business address for these individuals is Perfect World Plaza, Tower 306, 86 Beiyuan Road, Chaoyang District Beijing 100101, People's Republic of China.
(5): Represents 2,128,570 Class A ordinary shares and 493,750 Class B ordinary shares including Class B ordinary shares held by Mr. He in the form of ADSs and Class B ordinary shares underlying the options granted to Mr. He which are exercisable within 60 days after April 26, 2015. The business address for Mr. He is Perfect World Plaza, Tower 306, 86 Beiyuan Road, Chaoyang District Beijing 100101, People's Republic of China.
(6): Includes ordinary shares held and issuable upon exercise of all of the options that are exercisable within 60 days after April 26, 2015 held by all of our directors and senior executive officers as a group.
(7): Represents 27,542,625 Class A ordinary shares and 13,416,800 Class B ordinary shares held by Perfect Human Holding Company Limited, a British Virgin Islands company controlled by Mr. Michael Yufeng Chi. Mr. Chi is the sole director of Perfect Human Holding Company Limited. See also note (3) to this table above. The address for Perfect Human Holding Company Limited is P.O. Box 173, Kingston Chambers, Road Town, Tortola, British Virgin Islands.
(8): Based on the Schedule 13G/A filed with the SEC on February 11, 2015. Fosun International Limited is the beneficial owner of 29,344,530 shares of our Class B ordinary shares in the form of ADSs. Fosun International Limited is a company organized under the laws of the Hong Kong Special Administrative Region of China and its principal business address is Room 808, ICBC Tower, 3 Garden Road, Central, Hong Kong.
(9): Based on the Schedule 13G filed with the SEC on April 16, 2015. Greenwoods Asset Management Limited and its affiliates beneficially owned 17,840,240 shares of our Class B ordinary shares in the form of ADSs. Greenwoods Asset Management Limited is a company organized under the laws of the Cayman Islands and its principal business address is Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KY1111-1, Cayman Islands.

Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class B ordinary shares are entitled to one vote per share, while holders of Class A ordinary shares are entitled to 10 votes per share. We issued Class B ordinary shares represented by our ADSs in our initial public offering in July 2007. Holders of our Class A ordinary shares may choose to convert their Class A ordinary shares into the same number of Class B ordinary shares at any time. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company. See "Item 3. Key Information—D. Risk Factors—Risks Related to Our ADSs—Our dual-class ordinary share structure with different voting rights could discourage others from pursuing

any change of control transactions that holders of our Class B ordinary shares and ADSs may view as beneficial."

To our knowledge, as of April 26, 2015, approximately 88.3% of our total issued ordinary shares (including shares reserved and set aside for future issuance to employees upon exercise of vested options) were held by a record shareholder in the United States, Deutsche Bank Trust Company Americas, the depositary of our ADS program. The number of beneficial owners of our ADSs in the United States is likely to be much larger than the number of the record holder of our ordinary shares in the United States.

For options granted to our officers and directors, see "Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers—Share Incentive Plan."

Various regulations in China currently restrict or prevent foreign-invested entities from holding certain licenses required to operate online games, including internet content provision, internet culture operation and internet publishing licenses. We conduct a portion of our online game and internet content provision businesses in China through PW Software's contractual arrangements with PW Network, one of our variable interest entities. PW Software's relationships with PW Network and its equity owners are governed by the following contractual arrangements entered into in September 2006, as amended and restated in April 2007.

Exclusive Technology Support and Service Agreement. Under the exclusive technology support and service agreement between PW Software and PW Network, PW Software has the exclusive right to provide to PW Network technical support and services related to PW Network's online game operations. PW Software owns the intellectual property rights developed by either PW Software or PW Network in the performance of this agreement. PW Network pays PW Software quarterly service fees, the amount of which is determined by PW Software and PW Network based on the complexity, time spent, contents and value of the technical services provided by PW Software as well as the market price of similar services. This agreement is effective until March 9, 2024. PW Software may early terminate this agreement by providing a 30-day prior notice to PW Network, while PW Network has no right to early terminate this agreement. If any party enter bankruptcy or becomes insolvent, this agreement will be automatically terminated.

Development Cooperation Agreement. Under the development cooperation agreement between PW Network and PW Software, which was further revised in April 2008, PW Network exclusively engages PW Software to develop software for PW Network's operation. PW Network and PW Software jointly own the intellectual property rights developed by PW Software and shares the proceeds from such rights on an agreed percentage. PW Network pays PW Software monthly service fees, the amount of which is determined by PW Software and PW Network based on the complexity, time spent, cost, contents and value of the development work done by PW Software as well as the market price of similar work. This agreement is effective until March 9, 2024 and can be early terminated by mutual agreement of the parties.

Business Operation Agreement. Under the business operation agreement among PW Software, PW Network and the shareholders of PW Network, PW Software provides guidance and advice on PW

Network's daily operations and financial management systems. The shareholders of PW Network must elect the candidates recommended by PW Software as PW Network's directors, and procure the appointment of PW Network's senior executives as per PW Software's designation. Moreover, PW Network and its shareholders agree that without the prior consent of PW Software, PW Network will not engage in any transactions that could materially affect the assets, business, personnel, rights, liabilities or operations of PW Network, including incurrence or assumption of any indebtedness of more than RMB400,000, sale or purchase of any assets or rights, incurrence of any encumbrance on any of its assets or intellectual property rights in favor of a third party, amendment of its articles of association or business scope, or change of its normal operation procedures. The agreement also provides that if any of the agreements between PW Software and PW Network is terminated, PW Software is entitled to terminate all of the other agreements between itself and PW Network. This agreement is effective until March 9, 2024 or the early termination by PW Software.

Call Option Agreement. Under the call option agreement among the equity owners of PW Network, PW Network and PW Software, the equity owners of PW Network irrevocably granted PW Software or its designated person an exclusive option to purchase from PW Network's equity owners, to the extent permitted under PRC law, all or part of the equity interests in PW Network for the higher of (i) RMB10,000 or (ii) the minimum amount of consideration permitted by the applicable law. PW Software or its designated person has sole discretion to decide when to exercise the option. This agreement is effective until March 9, 2024. PW Software may early terminate this agreement by providing a 30-day prior notice, while other parties have no right to terminate this agreement without a consensus of the parties involved.

Equity Pledge Agreement. Under the equity pledge agreement among the equity owners of PW Network, PW Network and PW Software, the equity owners of PW Network pledged all of their equity interests in PW Network to PW Software to guarantee PW Network's performance of its obligations under the exclusive technology support and service agreement, the development cooperation agreement, the business operation agreement and the call option agreement. If PW Network or either of its equity owners breaches its respective contractual obligations, PW Software, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The equity owners of PW Network agreed not to take any actions that would prejudice PW Software's interest. We completed the registration of the pledge of the equity interest of PW Network in 2012. This agreement is effective until March 9, 2024.

Power of Attorney. Each equity owner of PW Network has executed a power of attorney to appoint PW Software as its attorney-in-fact to exercise all of its rights as equity owner of PW Network, including voting rights and the rights to transfer any or all of its equity interest in PW Network. The appointment of PW Software as attorney-in-fact will remain effective until the termination of the above business operation agreement or the dissolution of PW Software.

We conducted a portion of our online games and internet content provision businesses in China through PW Game Software's contractual arrangements with PW Digital Technology, one of our variable interest entities. PW Game Software's relationships with PW Digital Technology and its equity owners are governed by a series contractual arrangements, including the Business Operation Agreement, Call Option Agreement, Equity Pledge Agreement and Power of Attorney between PW Game Software and PW Digital Technology and its equity owners and the Exclusive Technology Support and Service Agreement and Development Cooperation Agreement between PW Game Software and PW Digital Technology. The terms of these contractual arrangements are substantially the same as the contractual agreements between PW Software and PW Network and its equity owners except that the former agreements were entered into in August 2013, as amended and restated in

December 2013, and the term will end on December 10, 2033. We completed the registration of the pledge of the equity interest of PW Digital Technology in 2014. In addition, each of PW Digital Technology's equity owners has entered into a loan agreement with PW Game Software, under which PW Game Software agrees to extend RMB9.0 million interest-free loan to Mr. Michael Yufeng Chi and RMB1.0 million interest-free loan to Mr. Xiaoxi Yang solely for them to fund the capitalization of PW Digital Technology. The term of the loans is twenty years.

In 2011, we entered into a limited partnership agreement to invest up to RMB643.5 million as a limited partner in a venture capital fund over a nine-year period. The venture capital fund will invest in high growth companies in the technology, media and telecommunication industries. In early 2013, we increased our committed capital for an additional RMB396.0 million and the investment term was changed to 12 years. The venture capital fund intends to invest the additional capital received as a limited partner into another private equity fund, which focuses on investment into mature companies in the consumer and retail, financial services, health care, TMT, energy and natural resources, and high value-added manufacturing industries in China. The venture capital fund is managed by a general partner unrelated to us. Because various regulations in China currently restrict or prevent foreign-invested entities from engaging in certain technology, media and telecommunications industries which are the targeted industries of the venture capital fund, we use Trendsters Investment, a variable interest entity we established in November 2011, as an investment vehicle to hold our investment in the fund. Trendsters Investment does not itself make investment decisions for the fund or involve in the management of the fund. PW Software has entered into a series of contractual agreements with Trendsters Investment and its equity owners, namely Mr. Qing Li and Mr. Qi Zhu, in November 2011. Such contractual arrangements are substantially the same as the contractual arrangements between PW Software and PW Network and its equity owners and will remain effective until August 2026. We completed the registration of the pledge of the equity interest of Trendsters Investment in 2012. In addition, each of Messrs Li and Zhu entered into a loan agreement with PW Software in October 2011, under which PW Software agreed to make an RMB0.5 million interest-free loan to each of Messrs Li and Zhu solely for them to fund the capitalization of Trendsters Investment. The term of the loans is twenty years.

The business operation agreement, call option agreement, equity pledge agreement and power of attorney between PW Software and Perfect Moment and its equity owners and the exclusive technology support and service agreement and development cooperation agreement between PW Software and Perfect Moment are substantially the same as the contractual agreements between PW Software and PW Network and its equity owners. The business operation agreement, call option agreement, equity pledge agreement and power of attorney will remain effective until 2024, and the exclusive technology support and service agreement and development cooperation agreement will remain effective until 2026. We completed the registration of the pledge of the equity interest of Perfect Moment in 2012. As a result of these contractual arrangements, we are considered to be the primary beneficiary of Perfect Moment and Perfect Moment is a variable interest entity of our company under U.S. GAAP. Accordingly, we consolidate Perfect Moment's results of operations, assets and liabilities in our financial statements. In August 2011, Perfect Moment sold PW Pictures to Beijing Ever Joy Pictures Co., Ltd., which is majority-owned by Mr. Michael Yufeng Chi, our founder and chairman of the board of directors. After the sale, Perfect Moment, then known as Beijing Perfect Moment Pictures Co., Ltd., no longer had material business operations and changed its name to Beijing Perfect Moment Network Technology Co., Ltd.

Various regulations in China restrict or prevent foreign-invested entities from holding certain licenses required to operate online reading business, including internet content provision, internet culture operation and internet publishing licenses. In light of these restrictions, we had operated our online reading business through PW Literature based on a series of contractual arrangements between PW Software, PW Literature and its equity owners, before we sold PW Literature to an unrelated party in December 2013. The contractual agreements between PW Software and PW Literature and its equity owners were substantially the same as the contractual agreements between PW Software and PW Network and its equity owners. In December 2013, we sold PW Literature to Beijing Baidu Netcom Science Technology Co., Ltd., an unrelated party, to sharpen our focus on our core online game development and operation business. Upon the closing of this transaction in December 2013, PW Literature ceased to be our variable interest entity.

On April 26, 2015, we entered into a Merger Agreement with Perfect Peony Holding Company Limited, or Parent, a Cayman Islands company beneficially owned by Mr. Michael Yufeng Chi, and Perfect World Merger Company Limited, or Merger Sub, a wholly owned subsidiary of Parent. See "Item 4. Information of the Company—A. History and Development of the Company" for more information of the Merger Agreement.

In April 2010, we invested RMB27.0 million for a 20% equity interest in Zhizhu Network. We started to make payments for advertising fees to Zhizhu Network on a project-by-project basis in late 2011. In 2012, 2013 and 2014, the marketing services provided by Zhizhu Network to us amounted to RMB0.9 million, RMB3.4 million and RMB3.2 million (US$0.5 million), respectively.

In 2012, 2013 and 2014, we received office rental income amounted to RMB0.7 million, RMB6.3 million and RMB10.2 million (US$1.6 million) from PW Pictures, respectively.

In 2012, 2013 and 2014, we made a number of equity investments in various entities with each individual investment equity interest ranging from 10% to 49% and we have significant influence over these companies. For the years ended December 31, 2012, 2013 and 2014, the aggregate license fees paid to our investees were amounting to nil, RMB3.0 million and RMB3.8 million (US$0.6 million), respectively; the aggregate short-term loans to our investees were amounting to nil, nil and RMB2.0 million (US$0.3 million), respectively, with 2% annual interest rate of each individual loan; the aggregate considerations for copyrights purchased from our investees were amounting to nil, nil and RMB9.1 million (US$1.5 million), respectively; the aggregate fees charged for marketing services provided by our investees were amounting to nil, nil and RMB2.3 million (US$0.4 million), respectively.

In November 2014, in line with our restructuring plan of our research and development teams, Chongqing Zulong Entertainment Technology Co., Ltd. was formed, among other controlled companies. Mr. Qing Li, our chief development officer, beneficially owns minority equity interest in Chongqing Zulong Entertainment Technology Co., Ltd. The equity interest beneficially owned by Mr. Qing Li was recognized as share-based compensation expenses in our consolidated financial statements and would be amortized over the requisite service period on a straight-line basis.

See "Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers" for a description of the employment agreements we have entered into with our senior executive officers.

See "Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers—Share Incentive Plan."

We have appended consolidated financial statements filed as part of this annual report.

We are subject to legal proceedings, investigations and claims incidental to the conduct of our business from time to time.

On or around January 8, 2012, a number of anonymous allegations against our company and Mr. Yufeng Chi were posted on certain Chinese language websites. The independent audit committee of the board of directors of our company engaged an international legal counsel to conduct an internal investigation into these allegations. In the process of the investigation, the independent legal counsel consulted with independent forensic accountants and reported its findings directly to the audit committee. The independent legal counsel had no prior relationship with our company. The major findings of the internal investigation include the following:

On May 10, 2012, a civil case entitled Li Hong v. Perfect World Co., Ltd., et al., Case No. 12-Cv-3741, was filed in the United States District Court for the Southern District of New York against us and Mr. Michael Yufeng Chi alleging, among other things, federal securities law violations arising from alleged lack of disclosure relating to the transactions with Zhizhu Network and the sale of our film and television business to a company majority owned by Mr. Michael Yufeng Chi referenced above. The plaintiff sought compensatory damages and injunctive relief in the complaint filed in the court. The case was dismissed with prejudice by the court in August 2012.

On February 1, 2013, a Delaware company sued PW USA (Parallel Networks, LLC v. Perfect World Entertainment, Inc., Case No. 13-cv-00182) and ten other companies in related actions for patent infringement in the United States District Court for the District of Delaware. The plaintiff alleged that PW USA's installers, downloaders and/or launchers, which are downloaded by users from our websites in connection with the distribution of our games, infringed two of its patents. We settled this case in June 2013.

In September 2013, Shanghai Xuanting Entertainment Information Technology Co., Ltd., or Shanghai Xuanting, an affiliate of Shanda Interactive Entertainment Limited, filed a complaint against PW Literature, alleging that PW Literature had infringed upon its copyrights to noval "Yong Sheng." We had defended the action vigorously and appealed upon the judgment against us. The final judgment is in favor of Shanghai Xuanting and finds that PW Literature should pay RMB3.0 million to Shanghai Xuanting. The adverse effect of the judgment on our results of operations, financial position and cash flows was immaterial.

In December 2013, Shanghai Xuanting filed another complaint against PW Literature, alleging that software developed by PW Literature infringed its copyright in a number of novels. The case has not gone to trial as of the date of this annual report. We believe the case are without merit and intend to defend the actions vigorously. Regardless of the outcome of this lawsuit, we believe that such proceeding, when finally resolved, are unlikely to have a material adverse effect on our results of operations, financial position and cash flows. The possible range of loss cannot be estimated since the case is still at its early stage.

In May 2014, Uniloc USA, Inc. and Uniloc Uxembourg S.A. sued PW USA for patent infringement in the United States District Court for the District of Texas. The plaintiffs alleged that the product activation system and customer software activation/registration process employed by PW USA infringed their patents. We believe that the case is without merit and intend to defend vigorously. We do not expect this pending proceeding to have a material adverse effect on our results of operations, financial position and cash flows, even if it is determined against us. The possible range of loss cannot be estimated since the case is still at its early stage.

In March 2012, our board of directors approved a change in our dividend policy to reflect our intention to distribute part of the earnings of our wholly owned PRC subsidiaries to our shareholders from time to time. On March 14, 2012, our board of directors declared special cash dividends to our shareholders of record as of the close of business on April 6, 2012, at US$0.40 per Class A or Class B ordinary share, or US$2.00 per ADS, each representing five Class B ordinary shares. On April 13, 2012, we distributed the dividends which amounted to RMB607.6 million.

On March 10, 2013, the board of directors declared an annual cash dividends in the aggregate amount of approximately US$22 million to our shareholders of record as of the close of business on April 8, 2013, at US$0.09 per Class A or Class B ordinary share, or US$0.45 per ADS, each representing five Class B ordinary shares. On April 15, 2013, we distributed the dividends which amounted to RMB137.1 million.

On March 8, 2014, the board of directors declared an annual cash dividends in the aggregate amount of approximately US$24 million to our shareholders of record as of the close of business on April 3, 2014, at US$0.096 per Class A or Class B ordinary share, or US$0.48 per ADS, each representing five Class B ordinary shares. On April 15, 2014, we distributed the dividends of RMB146.4 million (US$23.6 million) in cash.

As of the date of this annual report, we do not have any plan to declare or distribute any dividends.

Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.

Our ADSs, each representing five of our Class B ordinary shares, have been listed on NASDAQ since July 26, 2007 under the symbol "PWRD."

The following table provides the high and low trading prices for our ADSs on NASDAQ for (1) the years 2010, 2011, 2012, 2013 and 2014, (2) each of the four quarters of 2013 and 2014 and (3) each of the past six months.

	Trading Price ($)

	High		Low
2010
Full Year		44.63		20.75
2011
Full Year		29.10		9.00
2012
Full Year		17.46		8.44
2013
Full Year		22.82		9.72
First Quarter		12.73		10.29
Second Quarter		17.76		9.72
Third Quarter		22.82		17.41
Fourth Quarter		20.49		16.26
2014
Full Year		26.25		14.78
First Quarter		26.25		17.38
Second Quarter		22.30		16.55
Third Quarter		23.49		18.34
Fourth Quarter		21.62		14.78
October		21.62		19.19
November		21.12		17.60
December		18.44		14.78
2015
First Quarter		19.42		18.20
January		19.42		18.20
February		19.09		18.61
March		18.88		18.40
April (through April 24, 2015)		18.86		17.81

Our ADSs, each representing five of our Class B ordinary shares, have been listed on the NASDAQ under the symbol "PWRD."

The following are summaries of material provisions of our currently effective amended and restated memorandum and articles of association, as well as the Companies Law (2013 Revision) insofar as they relate to the material terms of our ordinary shares.

The Registered Office of our company is at the offices of Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands or at such other place as our board of directors may from time to time decide. The objects for which our company is established are unrestricted and we have full power and authority to carry out any object not prohibited by the Companies Law (2013 Revision), as amended from time to time, or any other law of the Cayman Islands.

General. Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. All of our outstanding ordinary shares are fully paid and non-assessable. 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 our ordinary shares are entitled to such dividends as may be declared by our board of directors subject to the Companies Law.

Conversion. Each Class A ordinary share is convertible into one Class B ordinary share at any time by the holder thereof. Class B ordinary shares are not convertible into Class A ordinary shares under any circumstances. Upon any transfer of Class A ordinary shares by a holder thereof to any person or entity which is not an affiliate of such holder (as defined in our memorandum and articles of association), such Class A ordinary shares shall be automatically and immediately converted into the equal number of Class B ordinary shares. In addition, if at any time our founder and chairman of the board of directors, Mr. Michael Yufeng Chi, and his affiliates collectively own less than 5% of the total number of the issued and outstanding Class A ordinary shares, each issued and outstanding Class A ordinary share shall be automatically and immediately converted into one Class B ordinary share, and we shall not issue any Class A ordinary shares thereafter.

Voting Rights. All of our shareholders have the right to receive notice of shareholders' meetings and to attend, speak and vote at such meetings. In respect of matters requiring shareholders' vote, each Class A ordinary share is entitled to 10 votes, and each Class B ordinary share is entitled to one vote. A shareholder may participate at a shareholders' meeting in person, by proxy or by telephone

conference or other communications equipment by means of which all the shareholders participating in the meeting can communicate with each other. At any shareholders' meeting, a resolution put to the vote of the meeting shall be decided on a show of hands unless voting by way of a poll is required or demanded accordingly.

A quorum for a shareholders' meeting consists of one or more shareholders holding at least one third of the outstanding voting share capital of the Company present in person or by proxy or, if a corporation or other non-natural person, by its duly authorized representative. We shall, if required by the Companies Law, hold a general meeting of shareholders as our annual general meeting and shall specify the meeting as such in the notices calling it. Our board of directors may call extraordinary general meetings, and they must on shareholders' requisition convene an extraordinary general meeting. A shareholder requisition is a requisition of shareholders holding at the date of deposit of the requisition not less than 20% of the then voting power represented by the issued shares of our company as at that date carries the right of voting at general meetings of our company. Advance notice of at least five days is required for the convening of our annual general meeting and other shareholders' meetings.

An ordinary resolution to be passed 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 important matters such as a change of name. Holders of the ordinary shares may effect certain changes by ordinary resolution, including altering the amount of our authorized share capital, consolidating and dividing all or any of our share capital into shares of larger amount than our existing share capital and canceling any shares.

Transfer of Shares. Subject to the restrictions of our memorandum and articles of association, as applicable, any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in writing and executed by or on behalf of the transferor.

Our board of directors may, in their absolute discretion (except with respect to a transfer from a shareholder to its affiliate(s)), decline to register any transfer of shares without assigning any reason therefor. If our board of directors refuses to register a transfer they shall notify the transferee within two months of such refusal. Notwithstanding the foregoing, if a transfer complies with the holder's transfer obligations and restrictions set forth under applicable law (including but not limited to U.S. securities law provisions related to insider trading) and our articles of association, our board of directors shall promptly register such transfer. Further, any director is authorized to confirm in writing addressed to the registered office to authorize a share transfer and to instruct that the register of members be updated accordingly, provided that the transfer complies with the holder's transfer obligations and restrictions set forth under applicable law and our articles of association and such holder is not the director who authorizes the transfer or an entity affiliated with such director. Any director is authorized to execute a share certificate in respect of such shares for and on behalf of our company.

The registration of transfers may be suspended at such time and for such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended for more than 45 days in any year.

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 on a pro rata basis. If our 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 on the specified time are subject to forfeiture.

Redemption of Shares. Subject to the provisions of the Companies Law, we may issue shares on terms that are subject to redemption, at our option or at the option of the holders, on such terms and in such manner as may be determined by special resolution.

Repurchase of Shares. Subject to the provisions of the Companies Law and our articles of association, our board of directors may authorize repurchase of our shares in accordance with the manner of purchase specified in our articles of association without seeking shareholder approval.

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 written consent of the holders of at least a majority 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.

Inspection of Books and Records. No holders of our ordinary shares who is not a director shall have any right of inspecting any of our accounts, books or documents except as conferred by the Companies Law or authorized by the directors or by us in general meeting. However, we will make this annual report, which contains our audited financial statements, available to shareholders and ADS holders. See "Item 10. Additional Information—H. Documents on Display."

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 annual report on Form 20-F.

See "Item 4. Information on the Company—B. Business Overview—Government Regulations—Regulation of Foreign Currency Exchange and Dividend Distribution."

The following summary of certain Cayman Islands, PRC and United States federal income tax consequences of an investment in our ADSs or ordinary shares 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 or differing interpretation, possibly with retroactive effect. This summary does not deal with all possible tax consequences relating to an investment in our ADSs or ordinary shares, such as the tax consequences under other federal, state, local and other tax laws not addressed herein.

According to Maples and Calder, our Cayman Islands counsel, 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 brought within the jurisdiction of, the Cayman Islands. The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by our company. There are no exchange control regulations or currency restrictions in the Cayman Islands.

If we were considered a PRC resident enterprise under the corporate income tax law, our non-resident shareholders and ADS holders may be subject to the withholding tax at the rate of 10% upon the dividends payable by us or upon any gains realized from the transfer of our shares or ADSs, if such income is deemed derived from China, provided that in the case of non-resident enterprise shareholders, (i) such foreign enterprise investor has no establishment or premises in China, or (ii) it has establishment or premises in China but its income derived from China has no real connection with such establishment or premises. If we were required under the corporate income tax law to withhold PRC income tax on our dividends payable to our non-resident enterprise shareholders and ADS holders, or if any gains realized from the transfer of our shares or ADSs by our non-resident enterprise shareholders and ADS holders were subject to the withholding tax, your investment in our shares or ADSs could be materially and adversely affected.

Provided that our Cayman Islands holding company, Perfect World Co., Ltd., is not deemed to be a PRC resident enterprise, holders of our ADSs and ordinary shares who are not PRC residents will not be subject to PRC income tax on dividends distributed by us or gains realized from the sale or other disposition of our shares or ADSs. SAT Bulletin 7 clarifies that, if a non-resident enterprise derives income by acquiring and selling shares in an offshore listed enterprise in the public market, such income will not be subject to PRC tax. However, given the uncertainty as to the application of Circular 698 and SAT Bulletin 7, we and our non-PRC resident investors may be at a risk of being required to file a return and being taxed under Circular 698 and SAT Bulletin 7, and we may need to spend valuable resources to comply with Circular 698 and SAT Bulletin 7 or to establish that we should not be taxed under these regulations.

For more information, see "Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Our non-PRC resident enterprise investors face PRC tax uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises."

The following discussion describes the principal U.S. federal income tax consequences to U.S. Holders (defined below) under present law of the acquisition, ownership and disposition of the ADSs or ordinary shares. This summary applies only to U.S. Holders that hold the ADSs or ordinary shares as capital assets (generally, property held for investment) within the meaning of the Internal Revenue Code of 1986, as amended, or the Code, and that have the U.S. dollar as their functional currency. This discussion is based on the tax laws of the United States as in effect on the date of this annual report and including the Code, its legislative history, U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this annual report, as well as judicial and administrative interpretations thereof available on or before such date. All of the foregoing authorities are subject to change or differing interpretation, which change could apply retroactively and could affect the tax consequences described below. No ruling has been sought from the IRS with respect to the U.S. federal income tax consequences described below, and there can be no assurance that the IRS or a court will not take a contrary position.

The following discussion does not deal with the tax consequences to any particular investor or to persons in special tax situations such as:

INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S. FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR ORDINARY SHARES.

The discussion below of the U.S. federal income tax consequences to "U.S. Holders" will apply if you are a beneficial owner of ADSs or ordinary shares and you are, for U.S. federal income tax purposes,

If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of our ADSs or ordinary shares, the tax treatment of a partner in such partnership will depend on the status of such partner and the activities of such partnership.

The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations in the deposit agreement and any related agreement have been and will be complied with in accordance with their terms. If you hold ADSs, you generally will be treated as the beneficial owner of the underlying ordinary shares represented by those ADSs for U.S. federal income tax purposes.

We disclosed in our annual reports for 2012 and 2013 that we believe we may have been a PFIC in prior taxable years. Similarly, we believe we may have been a PFIC for our taxable year ended December 31, 2014, as well. This determination is made based on our significant cash balances, the market price of the ADSs and ordinary shares and the composition of our income and assets. However, because the application of the PFIC rules to our facts and circumstances is unclear in many important legal and factual respects, and the required calculations for 2014 yielded results that were close to the line, no assurances may be given in this regard.

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, 25% or more (by value) of the stock. In applying this rule, however, it is not clear whether the contractual arrangements between us and our variable interest entities will be treated as ownership of stock. Although the law in this regard is unclear, we treat our variable interest entities as being owned by us for U.S. federal income tax purposes, not only because we control their management decisions but also because we are entitled to substantially all of the economic benefits associated with these entities, and, as a result, we consolidate these entities' operating results in our consolidated U.S. GAAP financial statements. If it were determined, however, that we were not the owner of our variable interest entities for U.S. federal income tax purposes, we would likely be treated as a PFIC even if we would not otherwise have been treated as a PFIC for that particular year.

We must make a separate determination after the close of each taxable year as to whether we were a PFIC for that year. Accordingly, we may continue to be, or become, a PFIC in 2015 or future taxable years. Whether we are or will be classified as a PFIC in the current or any future taxable year will be determined on the basis of, among other things, the market price of our ADSs or ordinary shares (which may fluctuate considerably), our asset values (including, among other items, the level of cash, cash equivalents, and securities held for investment purposes), and gross income (including whether such income is active versus passive income) for such taxable year, all of which are subject to change. We have not sought a ruling from the Internal Revenue Service, or IRS, with respect to our PFIC status. In the event that we determine that we are not a PFIC in 2015 or in a future taxable year, there can be no assurance that the IRS or a court will agree with our determination.

Provided we are a PFIC for any taxable year during which you hold ADSs or ordinary shares, we generally will continue to be treated as a PFIC with respect to you for all succeeding years during which you hold ADSs or ordinary shares, unless we cease to be a PFIC and you make a "deemed sale" election with respect to the ADSs or ordinary shares, as applicable. If such an election is made, you will be deemed to have sold the ADSs or ordinary shares you hold at their fair market value as of the last day of the last year during which we were a PFIC, and any gain from such deemed sale would be taxed as an "excess distribution" as described below. Any loss from the deemed sale would not be recognized. After the deemed sale election, your ADSs or ordinary shares with respect to which such election was made will generally not be treated as shares in a PFIC unless we subsequently become a PFIC. You are urged to consult your tax advisor regarding our potential status as a PFIC as well as the consequences of making the deemed sale election.

For each taxable year that we are treated as a PFIC with respect to you, 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 ADSs or ordinary shares, unless, with respect to the ADSs, 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 ADSs or ordinary shares will be treated as an excess distribution. Under these special tax rules:

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 for such years, and gains (but not losses) realized on the sale of the ADSs or ordinary shares cannot be treated as capital, even if you hold the ADSs or ordinary shares as capital assets.

If we are treated as a PFIC with respect to you for any taxable year during which you hold the ADSs or ordinary shares and any entity treated as our non-U.S. subsidiary for U.S. federal income tax purposes is also a PFIC, you would generally be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of the PFIC rules to any such entity. U.S. Holders are urged to consult their tax advisors regarding the applicability of the PFIC rules to such entities.

A U.S. Holder of "marketable stock" (defined below) of a PFIC may make a mark-to-market election for such stock to elect, to some degree, out of the tax treatment discussed in the preceding paragraphs. If you make a valid mark-to-market election for the ADSs, you will include in income for each year that we are treated as a PFIC with respect to you an amount equal to the excess, if any, of the fair market value of the ADSs as of the close of your taxable year over your adjusted tax basis in such ADSs. You will be allowed a deduction for the excess, if any, of the adjusted tax basis of the ADSs over their fair market value as of the close of the taxable year. However, deductions will be allowable only to the extent of any net mark-to-market gains on the ADSs 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 ADSs, will be treated as ordinary income. Ordinary loss treatment will also apply to the deductible portion of any mark-to-market loss on the ADSs, as well as to any loss realized on the actual sale or disposition of the ADSs, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such ADSs. Your tax basis in the ADSs will be adjusted to reflect any such income or loss amounts. Also, the tax rules that apply to distributions by corporations which are not PFICs would generally apply to distributions by us, except that the lower capital gains rate applicable to qualified dividend income (discussed below under "—Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares") may not apply. If a U.S. Holder makes a mark-to-market election in respect of a corporation classified as a PFIC and such corporation ceases to be classified as a PFIC, the holder generally will not be required to take into account the mark-to-market gain or loss described above during any period that such corporation is not classified as a PFIC.

The mark-to-market election is available only for "marketable stock," which is stock that is regularly traded (or traded in other than de minimis quanitities on at least 15 days during each calendar quarter) on a qualified exchange or other market, as defined in applicable U.S. Treasury regulations. Our ADSs are listed on the NASDAQ, which is a qualified exchange or other market for these purposes. Consequently, if the ADSs continue to be listed on the NASDAQ and are regularly traded, and you are a holder of ADSs, we expect that the mark-to-market election will be available to you, but no assurances may be given in this regard.

Because a mark-to-market election, as a technical matter, cannot be made for any lower-tier PFICs that we may own, you may continue to be subject to the PFIC rules with respect to your indirect interest in any investments held by us that are treated as equity interests in a PFIC for U.S. federal income tax purposes.

In the case of a U.S. Holder that has held ADSs during any taxable year in respect of which we were treated as a PFIC with respect to such U.S. Holder and continues to hold such ADSs (or any portion thereof) and has not previously determined to make a mark-to-market election and who later considers making a mark-to-market election, special tax rules may apply relating to "purging the PFIC taint" of such ADSs.

We do not intend to provide information necessary for U.S. Holders to make qualified electing fund, or QEF, elections, which, if available, would result in tax treatment different from, and generally less adverse than, the general tax treatment of PFICs described above. If you hold ADSs or ordinary shares in any year in which we are treated as a PFIC with respect to you, you will generally be required to file IRS Form 8621. Significant penalties are imposed for the failure to file such form if required.

You are urged to consult your tax advisor regarding the application of the PFIC rules to your investment in ADSs or ordinary shares, including the possibility of making a mark-to-market election, the unavailability of the QEF election, and the Form 8621 filing requirement, taking into account the uncertainty as to whether we are or may become a PFIC.

The discussion below under "Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares" and "Taxation of Disposition of ADSs or Ordinary Shares" applies only in the event that we are not classified as a PFIC, nor treated as such with respect to you, for United States federal income tax purposes.

Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares

Subject to the passive foreign investment company rules discussed above, the gross amount of all our distributions to you with respect to the ADSs or ordinary shares (including the amount of any PRC tax withheld) generally will be included in your gross income as dividend income on the date of actual or constructive receipt by the depositary, in the case of ADSs, or by you, in the case of ordinary shares, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Because we currently do not and do not intend to calculate our earnings and profits under United States federal income tax principles, any distribution paid will generally be treated as a "dividend" for United States federal income tax purposes. Any dividends we pay will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations.

With respect to certain non-corporate U.S. Holders, including individual U.S. Holders, dividends will be "qualified dividend income" that is taxed at the lower applicable capital gains rate, provided that certain conditions are satisfied, including (1) the ADSs are readily tradable on an established securities market in the United States or we are eligible for the benefits of a qualifying income tax treaty with the United States that includes an exchange of information program, (2) we are neither a "passive foreign investment company" nor treated as such with respect to you (as discussed above) for our taxable year in which the dividend is paid and the preceding taxable year, and (3) certain holding period requirements are met. U.S. Treasury guidance indicates that common or ordinary shares, or ADSs representing such shares, are considered for the purpose of clause (1) above to be readily tradable on an established securities market in the United States if they are listed on the NASDAQ, as are our ADSs (but not our ordinary shares). There can be no assurance that our ADSs will be considered readily tradable on an established securities market in later years. If we are treated as a "resident enterprise" for PRC tax purposes under the PRC corporate income tax law, a U.S. Holder may be subject to withholding taxes on dividends paid on our ADSs or ordinary shares. However, we may be eligible for the benefits of the income tax treaty between the United States and the PRC, and dividends we pay on our shares, regardless of whether such shares are represented by ADSs, would be eligible for reduced rates of taxation applicable to qualified dividend income as described above. For more information regarding the PRC corporate income tax law, see "Item 3. Key Information—D. Risk

Factors—Risks Related to Our Business—Our global income may be subject to PRC tax under the corporate income tax law, which would have a material adverse effect on our results of operations." You should consult your tax advisors regarding the availability of the lower capital gains rate applicable to qualified dividend income for dividends paid with respect to our ADSs or ordinary shares and in light of our belief that we may have been a PFIC for our taxable year ended December 31, 2014, and prior taxable years.

Dividends will generally be treated as income from foreign sources for United States foreign tax credit purposes and will generally constitute "passive category income," or, in the case of certain U.S. Holders, "general category income." Depending on your particular facts and circumstances, you may be eligible to claim a U.S. foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on our ADSs or ordinary shares. A U.S. Holder who does not elect to claim a foreign tax credit for foreign tax withheld may instead claim a deduction for U.S. federal income tax purposes in respect of such withholding but only for a year in which the U.S. Holder elects to do so for all creditable foreign income taxes. The rules relating to the determination of the foreign tax credit are complex and you should consult your tax advisors regarding the availability of a foreign tax credit in your particular circumstances.

Subject to the passive foreign investment company rules discussed above, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of an ADS or ordinary share equal to the difference, if any, between the amount realized (in U.S. dollars) for the ADS or ordinary share and your tax basis (in U.S. dollars) in the ADS or ordinary share. The gain or loss generally will be capital gain or loss. If you are a non-corporate U.S. Holder, such as an individual U.S. Holder, that has held the ADS or ordinary share for more than one year, you will be eligible for reduced tax rates. The deductibility of capital losses is subject to limitations. Any such gain or loss that you recognize will generally be treated as U.S. source gain or loss for U.S. foreign tax credit limitation purposes, which will generally limit the availability of U.S. foreign tax credits, subject to exceptions and limitations. However, if we are treated as a "resident enterprise" for PRC tax purposes, we may be eligible for the benefits of the income tax treaty between the United States and the PRC. In such event, if PRC withholding tax were to be imposed on any gain from the disposition of the ADSs or ordinary shares, a U.S. Holder that is eligible for the benefits of the income tax treaty between the United States and the PRC may elect to treat the gain as PRC source income. For more information, see "Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—Our global income may be subject to PRC tax under the corporate income tax law, which would have a material adverse effect on our results of operations." You should consult your tax advisors regarding the proper treatment of gain or loss in your particular circumstances, including the availability of the foreign tax credit in the event that withholding tax is imposed under Circular 698 or SAT Bulletin 7 (for more information, see "Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Our non-PRC resident enterprise investors face PRC tax uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises.").

Legislation enacted in 2010 generally imposes a 3.8% Medicare tax on a portion or all of the net investment income of certain individuals with a modified adjusted gross income of over US$200,000 (or US$250,000 in the case of joint filers or US$125,000 in the case of married individuals filing separately) and on the undistributed net investment income of certain estates and trusts. For these purposes, net investment income generally includes interest, dividends (including dividends paid with respect to our ADSs or ordinary shares), annuities, royalties, rents, net gain attributable to the disposition of property not held in a trade or business (including net gain from the sale, exchange or other taxable disposition

of an ADS or ordinary share) and certain other income, reduced by any deductions properly allocable to such income or net gain. Special rules may apply if we are treated as a PFIC with respect to a U.S. Holder. U.S. Holders are urged to consult their tax advisors regarding the applicability of the Medicare tax to their income and gains in respect of their investment in the ADSs or ordinary shares.

Dividend payments with respect to ADSs or ordinary shares and proceeds from the sale, exchange or redemption of ADSs or ordinary shares may be subject to information reporting to the IRS and possible U.S. backup withholding at a current rate of 28%, unless the conditions of an applicable exception are satisfied. Backup withholding will not apply to a U.S. Holder that furnishes a correct taxpayer identification number and makes any other required certification or that is otherwise exempt from backup withholding. U.S. Holders that are required to establish their exempt status generally must provide such certification on IRS Form W-9. U.S. Holders should consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.

Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim for refund with the IRS and furnishing any required information in a timely manner.

Pursuant to the Hiring Incentives to Restore Employment Act of 2010, individual U.S. Holders and certain domestic entities may be required to submit certain information to the IRS with respect to his, her or its beneficial ownership of our ADSs or ordinary shares, if such ADSs or ordinary shares are not held on his, her or its behalf by a financial institution. This law also imposes penalties and potential other adverse tax consequences if a U.S. Holder is required to submit such information to the IRS and fails to do so. You are urged to consult your tax advisors regarding the potential reporting requirements that may be imposed with respect to ownership of ADSs or ordinary shares.

We previously filed with the SEC our registration statement on Form F-1 (Registration No. 333-144282) and the prospectus under the Securities Act of 1933, with respect to our ordinary shares. We have also filed with the SEC a related registration statement on F-6 (Registration No. 333-144296) to register the ADSs.

We are subject to the periodic reporting and other informational requirements of the Exchange Act, as amended. Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F: (1) within six months after the end of each fiscal year, which is December 31, for fiscal years ending before December 15, 2011; and (2) within four months after the end of each fiscal year for fiscal years ending on or after December 15, 2011. 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 100 F Street, N.E., Room 1580, Washington, D.C. 20549. 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 website 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.

We will furnish Deutsche Bank Trust Company Americas, the depositary of our ADSs, with our annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders' meetings and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information contained in any notice of a shareholders' meeting received by the depositary from us.

In accordance with NASDAQ Stock Market Rules 5250(d), we will post this annual report on Form 20-F on our website at http://www.pwrd.com.

While our reporting currency is Renminbi, we transact business in multiple currencies by operating online games through our own overseas subsidiaries and licensing our games to third party overseas licensees. Our international revenues, costs and expenses, as well as assets and liabilities denominated in foreign currencies expose us to the risk of fluctuations in foreign currency exchange rates against the functional currencies of our overseas subsidiaries and Renminbi. Therefore, fluctuations in currency exchange rates could have an impact on our financial condition. Fluctuations in exchange rates, particularly between the foreign currencies against the major functional currencies of our controlled entities and Renminbi, affect our gross and net profit margins and could result in foreign exchange and operating losses. Although in general, our exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will be affected by the foreign exchange rate between U.S. dollars and RMB because the value of our business is effectively denominated in RMB, while the ADSs are traded in U.S. dollars. We recorded a net foreign currency exchange gain of approximately RMB27.2 million (US$4.4 million) in 2014 principally due to appreciation of U.S. dollar against Euro, the functional currency of our European subsidiary. We may experience additional foreign exchange gain or loss in the future to the extent we hold financial assets denominated in foreign currencies other than the functional currencies in our various subsidiaries and controlled entities.

The value of the Renminbi against the U.S. dollar and other currencies is affected by changes in China's political and economic conditions and by China's foreign exchange policies, among other things. In July 2005, the PRC government changed its decades-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. After June 2010, the Renminbi began to appreciate against the U.S. dollar again, although there have been some periods when it has lost value against the U.S. dollar, as it did for example during certain periods in 2014. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.

To the extent that we need to convert the functional currencies of our overseas subsidiaries into RMB for our operations, appreciation of the RMB against those functional currencies would have an adverse effect on the RMB amount we receive from the conversion. We have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency exchange risk. For the year ended December 31, 2014, we recorded RMB30.5 million (US$4.9 million) of foreign currency translation loss in other comprehensive income. If the exchange rates of RMB against the major functional currencies of our controlled entities are 10% higher than those we used in our financial statements, our foreign currency translation loss in other comprehensive income would have been increased by approximately RMB27.2 million.

Our exposure to interest rate risk primarily relates to interest income generated by excess cash invested in demand deposits with original maturities of three months or less. We have not used any significant derivative financial instruments to manage our interest rate risk exposure. 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 be different from expectations due to changes in market interest rates.

ADR holders will be charged a fee for each issuance of ADSs, including issuances resulting from distributions of shares, rights and other property, and for each surrender of ADSs in exchange for deposited securities. The fee in each case is $5.00 for each 100 ADSs (or any portion thereof) issued or surrendered.

The following additional charges shall be incurred by the ADR holders, by any party depositing or withdrawing shares or by any party surrendering ADRs or to whom ADRs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by us or an exchange of stock regarding the ADRs or the deposited securities or a distribution of ADRs), whichever is applicable:

We will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from time to time between us and the depositary. The fees described above may be amended from time to time.

The depositary collects its fees for issuance and cancellation of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions, or by directly billing investors, or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide services until its fees for those services and any other unpaid fees are paid.

Our depositary has agreed to reimburse us for the establishment and maintenance of the ADS program and to provide us with assistance in relation to our investor relations program, the training of staff and certain other matters. Further, the depositary has agreed to share with us certain fees payable to the depositary by holders of ADSs. As of December 31, 2014, the aggregate amount payable to us from our depositary was US$0.8 million, which is to reimburse our investor relations activities spending and other related expenses incurred as a result of the listing of our ADSs on the NASDAQ Global Select Market.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

Our chief executive officer and chief financial officer have performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act, as amended) as of the end of the period covered by this annual report. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2014.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) under the Exchange Act, as amended. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of any of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based upon criteria established in the "Internal Control—Integrated Framework (2013)" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management has concluded that our internal control over financial reporting was effective as of December 31, 2014.

PricewaterhouseCoopers Zhong Tian LLP, our independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2014, as stated in its report, which appears on page F-2 of this annual report.

During the year ended December 31, 2014, there were no changes in our internal control over financial reporting that occurred that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Our board of directors has determined that Daniel Dong Yang, an independent director and member of our audit committee, is an audit committee financial expert.

Our board of directors has adopted a code of business conduct and ethics that applies to our directors, officers, employees and agents, including certain provisions that specifically apply to our chief executive officer, chief financial officer, and any other persons who perform similar functions for us. We have posted a copy of our code of business conduct and ethics on our website at http://www.pwrd.com. We hereby undertake to provide to any person without charge, a copy of our code of business conduct and ethics within ten working days after we receive such person's written request.

The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by PricewaterhouseCoopers Zhong Tian LLP, our principal external auditors, for the periods indicated.

The policy of our audit committee is to pre-approve all audit and non-audit services provided by PricewaterhouseCoopers Zhong Tian LLP, including audit services, audit-related services, tax services and other services as described above, other than those for de minimis services which are approved by the Audit Committee prior to the completion of the audit.

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

As a foreign private issuer whose securities are listed on the NASDAQ Global Select Market, we are permitted to follow certain home country corporate governance practices in lieu of the requirements of the NASDAQ Stock Market Marketplace Rules (the "NASDAQ Rules") pursuant to NASDAQ Rule 5615(a)(3), which provides for such exemption to compliance with the NASDAQ Rule 5600 Series. We intend to rely on the exemption available to foreign private issuers for the requirement to hold an annual meeting of shareholders under NASDAQ Rule 5620. We are not required to hold meetings of our shareholders every year under the laws of the Cayman Islands and will not voluntarily meet this requirement. As a result of our use of the "foreign private issuer" exemption, our investors will not have the same protection afforded to shareholders of companies that are subject to all of NASDAQ's corporate governance requirements.

Other than the home country practice disclosed above, we have followed and intend to continue to follow the applicable corporate governance standards under the NASDAQ Stock Market Rules.

The consolidated financial statements of Perfect World Co., Ltd. and its subsidiaries are included at the end of this annual report.

Exhibit Number			Description of Document

	2.2		Registrant's Specimen Certificate for Ordinary Shares (incorporated by reference to Exhibit 4.2 from our Registration Statement on Form F-1 Amendment No. 1 (file no. 333-144282) filed with the Securities and Exchange Commission on July 11, 2007).
	2.3		Form of Amended and Restated Deposit Agreement among the Registrant, the depositary and holders of the American Depositary Receipts (incorporated by reference to Exhibit 3.a (1) from our Registration Statement on Form F-6 Amendment No. 1 (file no. 333-144282) filed with the Securities and Exchange Commission on August 23, 2011).
	4.1		Amended and Restated Share Incentive Plan, effective November 14, 2009 (incorporated by reference to Exhibit 4.5 of our annual report on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on June 14, 2010).
	4.2		2010 Share Incentive Plan, effective July 21, 2010 (incorporated by reference to Exhibit 4.4 from our Registration Statement on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on May 9, 2011).
	4.3		2013 Share Incentive Plan, effective November 22, 2013 (incorporated by reference to Exhibit 99.6 of Form 6-K (file no. 001-33587) filed with the Securities and Exchange Commission on November 4, 2013).
	4.4		Form of Indemnification Agreement with the Registrant's directors (incorporated by reference to Exhibit 10.2 from our Registration Statement on Form F-1 (file no. 333-144282) filed with the Securities and Exchange Commission on July 2, 2007).
	4.5		English Translation of Form of Employment Contract between the Registrant and a Senior Executive Officer of the Registrant (incorporated by reference to Exhibit 10.3 from our Registration Statement on Form F-1 (file no. 333-144282) filed with the Securities and Exchange Commission on July 2, 2007).
	4.6		English Translation of Form of Intellectual Property Right Transfer, Non-Competition and Confidentiality Agreement between PW Network and its Founders (incorporated by reference to Exhibit 10.4 from our Registration Statement on Form F-1 (file no. 333-144282) filed with the Securities and Exchange Commission on July 2, 2007).
	4.7		English Translation of Form of Intellectual Property Right Transfer, Non-Competition and Confidentiality Agreement between PW Software and a Senior Executive Officer (incorporated by reference to Exhibit 10.5 from our Registration Statement on Form F-1 (file no. 333-144282) filed with the Securities and Exchange Commission on July 2, 2007).
	4.8		English Translation of Exclusive Technology Support and Service Agreement between PW Software and PW Network dated as of April 4, 2007 (incorporated by reference to Exhibit 10.6 from our Registration Statement on Form F-1 (file no. 333-144282) filed with the Securities and Exchange Commission on July 2, 2007).
	4.9		English Translation of Development Cooperation Agreement between PW Network and PW Software dated as of April 4, 2007 (incorporated by reference to Exhibit 10.7 from our Registration Statement on Form F-1 (file no. 333-144282) filed with the Securities and Exchange Commission on July 2, 2007).
	4.10		English Translation of Business Operation Agreement among PW Software, PW Network, Beijing Shiji Xiangshu Technology Co., Ltd. and Beijing Jiuzhou Tianyuan Investment Management Co., Ltd. dated as of April 4, 2007 (incorporated by reference to Exhibit 10.8 from our Registration Statement on Form F-1 (file no. 333-144282) filed with the Securities and Exchange Commission on July 2, 2007).

Exhibit Number			Description of Document

	4.11		English Translation of Call Option Agreement among PW Software, PW Network, Beijing Shiji Xiangshu Technology Co., Ltd. and Beijing Jiuzhou Tianyuan Investment Management Co., Ltd. dated as of April 4, 2007 (incorporated by reference to Exhibit 10.9 from our Registration Statement on Form F-1 (file no. 333-144282) filed with the Securities and Exchange Commission on July 2, 2007).
	4.12		English Translation of Equity Pledge Agreement among PW Software, PW Network, Beijing Shiji Xiangshu Technology Co., Ltd. and Beijing Jiuzhou Tianyuan Investment Management Co., Ltd. dated as of April 4, 2007 (incorporated by reference to Exhibit 10.10 from our Registration Statement on Form F-1 (file no. 333-144282) filed with the Securities and Exchange Commission on July 2, 2007).
	4.13		English Translation of Power of Attorney signed by Beijing Shiji Xiangshu Technology Co., Ltd. and Beijing Jiuzhou Tianyuan Investment Management Co., Ltd. dated as of April 4, 2007 (incorporated by reference to Exhibit 10.11 from our Registration Statement on Form F-1 (file no. 333-144282) filed with the Securities and Exchange Commission on July 2, 2007).
	4.14		English Translation of Supplementary Agreement to the Development Cooperation Agreement between PW Network and PW Software dated as of April 1, 2008 (incorporated by reference to Exhibit 4.31 from our Annual Report on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on May 16, 2008).
	4.15		English Translation of Loan Agreement between PW Software and Mr. Michael Yufeng Chi dated as of May 20, 2008, including a Commitment Letter issued by Mr. Michael Yufeng Chi dated as of April 10, 2009 (incorporated by reference to Exhibit 4.37 from our Annual Report on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on June 19, 2009).
	4.16		English Translation of Loan Agreement between PW Software and Mr. Qi Zhu dated as of May 20, 2008, including a Commitment Letter issued by Mr. Qi Zhu dated as of April 10, 2009 (incorporated by reference to Exhibit 4.38 from our Annual Report on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on June 19, 2009).
	4.17		English Translation of Exclusive Technology Support and Service Agreement between PW Software and PW Literature dated as of June 25, 2008 (incorporated by reference to Exhibit 4.39 from our Annual Report on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on June 19, 2009).
	4.18		English Translation of Development Cooperation Agreement between PW Software and PW Literature dated as of June 25, 2008 (incorporated by reference to Exhibit 4.40 from our Annual Report on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on June 19, 2009).
	4.19		English Translation of Business Operation Agreement among PW Software, PW Literature, Mr. Michael Yufeng Chi and Mr. Qi Zhu dated as of June 25, 2008 (incorporated by reference to Exhibit 4.41 from our Annual Report on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on June 19, 2009).
	4.20		English Translation of Call Option Agreement among PW Software, PW Literature, Mr. Michael Yufeng Chi and Mr. Qi Zhu dated as of June 25, 2008 (incorporated by reference to Exhibit 4.42 from our Annual Report on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on June 19, 2009).

Exhibit Number			Description of Document

	4.21		English Translation of Equity Transfer Agreement among Mr. Michael Yufeng Chi, Mr. Qi Zhu and Mr. Yunfan Zhang dated as of July 25, 2011 (incorporated by reference to Exhibit 4.22 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012).
	4.22		English Translation of the Equity Pledge Agreement among PW Software, PW Literature and shareholders of PW Literature effective as of July 25, 2011 (incorporated by reference to Exhibit 4.23 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012).
	4.23		English Translation of Power of Attorney signed by Mr. Michael Yufeng Chi, Mr. Qi Zhu and Mr. Yunfan Zhang effective as of July 25, 2011 (incorporated by reference to Exhibit 4.24 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012).
	4.24		English Translation of Exclusive Technology Support and Service Agreement between PW Software and PW Pictures dated as of February 12, 2011 (incorporated by reference to Exhibit 4.26 from our Annual Report on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on May 9, 2011).
	4.25		English Translation of Development Cooperation Agreement between PW Software and PW Pictures dated as of February 12, 2011 (incorporated by reference to Exhibit 4.27 from our Annual Report on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on May 9, 2011).
	4.26		English Translation of Business Operation Agreement among PW Software, Beijing Perfect Moment Pictures Co., Ltd., and shareholders of Beijing Perfect Moment Pictures Co., Ltd., dated as of February 12, 2011 (incorporated by reference to Exhibit 4.28 from our Annual Report on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on May 9, 2011).
	4.27		English Translation of Call Option Agreement among PW Software, Beijing Perfect Moment Pictures Co., Ltd., and shareholders of Beijing Perfect Moment Pictures Co., Ltd. dated as of February 12, 2011 (incorporated by reference to Exhibit 4.29 from our Annual Report on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on May 9, 2011).
	4.28		English Translation of Equity Pledge Agreement among PW Software, Beijing Perfect Moment Pictures Co., Ltd., and shareholders of Beijing Perfect Moment Pictures Co., Ltd. dated as of February 12, 2011 (incorporated by reference to Exhibit 4.30 from our Annual Report on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on May 9, 2011).
	4.29		English Translation of Power of Attorney signed by Mr. Michael Yufeng Chi and Mr. Tian Liang dated as of February 12, 2011 (incorporated by reference to Exhibit 4.31 from our Annual Report on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on May 9, 2011).
	4.30		English Translation of Exclusive Technology Support and Service Agreement between PW Software and Perfect Moment dated as of August 1, 2011 (incorporated by reference to Exhibit 4.31 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012).

Exhibit Number			Description of Document

	4.31		English Translation of Development Cooperation Agreement between PW Software and Perfect Moment dated as of August 1, 2011 (incorporated by reference to Exhibit 4.32 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012).
	4.32		English Translation of Business Operation Agreement among PW Software, Perfect Moment and shareholders of Perfect Moment, dated as of December 2, 2011 (incorporated by reference to Exhibit 4.33 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012).
	4.33		English Translation of Call Option Agreement among PW Software, Perfect Moment and shareholders of Perfect Moment dated as of December 2, 2011 (incorporated by reference to Exhibit 4.34 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012).
	4.34		English Translation of Equity Pledge Agreement among PW Software, Perfect Moment and shareholders of Perfect Moment dated as of December 3, 2011 (incorporated by reference to Exhibit 4.35 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012).
	4.35		English Translation of Power of Attorney signed by Mr. Michael Yufeng Chi and Mr. Qi Zhu dated as of December 2, 2011 (incorporated by reference to Exhibit 4.36 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012).
	4.36		English Translation of Exclusive Technology Support and Service Agreement between PW Software and Trendsters Investment dated as of November 4, 2011 (incorporated by reference to Exhibit 4.37 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012).
	4.37		English Translation of Development Cooperation Agreement between PW Software and Trendsters Investment dated as of November 4, 2011 (incorporated by reference to Exhibit 4.38 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012).
	4.38		English Translation of Business Operation Agreement among PW Software, Trendsters Investment and shareholders of Trendsters Investment, dated as of November 4, 2011 (incorporated by reference to Exhibit 4.39 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012).
	4.39		English Translation of Call Option Agreement among PW Software, Trendsters Investment and shareholders of Trendsters Investment dated as of November 4, 2011 (incorporated by reference to Exhibit 4.40 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012).
	4.40		English Translation of Equity Pledge Agreement among PW Software, Trendsters Investment and shareholders of Trendsters Investment dated as of November 4, 2011 (incorporated by reference to Exhibit 4.41 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012).
	4.41		English Translation of Power of Attorney signed by Mr. Qing Li and Mr. Qi Zhu dated as of November 4, 2011 (incorporated by reference to Exhibit 4.42 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012).
	4.42		English Translation of Loan Agreement between PW Software and Mr. Qing Li and Mr. Qi Zhu dated as of November 4, 2011 (incorporated by reference to Exhibit 4.43 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012).

Exhibit Number			Description of Document

	4.43		English Translation of Limited Partnership Agreement for Tianjin Trendsters Venture Capital Limited Partnership dated as of December 2, 2011 (incorporated by reference to Exhibit 4.42 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on April 26, 2013).
	4.44		English Translation of Amendment to Limited Partnership Agreement for Tianjin Trendsters Venture Capital Limited Partnership dated as of March 5, 2013 (incorporated by reference to Exhibit 4.43 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on April 26, 2013).
	4.45		English Translation of Exclusive Technology Support and Service Agreement between PW Game Software and PW Digital Technology dated as of December 10, 2013 (incorporated by reference to Exhibit 4.45 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on April 29, 2014).
	4.46		English Translation of Development Cooperation Agreement between PW Game Software and PW Digital Technology dated as of December 10, 2013 (incorporated by reference to Exhibit 4.46 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on April 29, 2014).
	4.47		English Translation of Business Operation Agreement among PW Game Software, PW Digital Technology and shareholders of PW Digital Technology dated as of December 10, 2013 (incorporated by reference to Exhibit 4.47 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on April 29, 2014).
	4.48		English Translation of Call Option Agreement among PW Game Software, PW Digital Technology and shareholders of PW Digital Technology dated as of December 10, 2013 (incorporated by reference to Exhibit 4.48 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on April 29, 2014) .
	4.49		English Translation of Equity Pledge Agreement among PW Game Software, PW Digital Technology and shareholders of PW Digital Technology dated as of December 10, 2013 (incorporated by reference to Exhibit 4.49 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on April 29, 2014).
	4.50		English Translation of Power of Attorney signed by Mr. Michael Yufeng Chi and Mr. Xiaoxi Yang dated as of December 10, 2013 (incorporated by reference to Exhibit 4.50 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on April 29, 2014).
	4.51		English Translation of Loan Agreement, dated as of July 30, 2013 between PW Game Software and Mr. Yufeng Chi, and Loan Agreement, dated December 10, 2013, between PW Game Software and Mr. Xiaoxi Yang (incorporated by reference to Exhibit 4.51 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on April 29, 2014).
	4.52		Share Purchase Agreement between Shanda SDG Investment Limited and Perfect World Co., Ltd. dated as of April 18, 2014 (incorporated by reference to Exhibit 4.52 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on April 29, 2014).

		Description of Document

4.53		Adherence Agreement among Perfect World Co., Ltd., Shanda Interactive Entertainment Limited and Primavera Capital (Cayman) Fund I L.P. dated as of April 18, 2014 (incorporated by reference to Exhibit 4.53 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on April 29, 2014).
4.54		Adherence Agreement among FV Investment Holdings, Shanda Interactive Entertainment Limited, Primavera Capital (Cayman) Fund I L.P. and Perfect World Co., Ltd., dated April 25, 2014 (incorporated herein by reference to Exhibit 7.07 to amendment No. 3 to Schedule 13D filed by Shanda Interactive Entertainment Limited with the SEC on April 28, 2014).
4.55		Adherence Agreement among CAP IV Engagement Limited, Shanda Interactive Entertainment Limited, Primavera Capital (Cayman) Fund I L.P., Perfect World Co., Ltd. and FV Investment Holdings, dated May 19, 2014 (incorporated herein by reference to Exhibit 7.08 to amendment No. 4 to Schedule 13D filed by Shanda Interactive Entertainment Limited with the SEC on May 19, 2014).
4.56		Share Purchase Agreement among Perfect World Co., Ltd., Primavera Capital (Cayman) Fund I L.P. and Shanghai Buyout Fund L.P., dated September 1, 2014 (incorporated herein by reference to Exhibit 7.05 to amendment No. 3 to Schedule 13D filed by Perfect World Co., Ltd. with the SEC on September 2, 2014).
4.57		Withdrawal Notice executed by Perfect World Co., Ltd., FV Investment Holdings, and CAP IV Engagement Limited, and acknowledged and agreed by Shanda Interactive Entertainment Limited and Primavera Capital (Cayman) Fund I L.P., dated September 1, 2014 (incorporated herein by reference to Exhibit 7.06 to amendment No. 3 to Schedule 13D filed by Perfect World Co., Ltd. with the SEC on September 2, 2014).
4.58		Consent and Release executed by Shanda SDG Investment Limited, Primavera Capital (Cayman) Fund I L.P. and Perfect World Co., Ltd., dated September 1, 2014 (incorporated herein by reference to Exhibit 7.07 to amendment No. 3 to Schedule 13D filed by Perfect World Co., Ltd. with the Securities and Exchange Commission on September 2, 2014).
4.59		Agreement and Plan of Merger among Perfect Peony Holding Company Limited, Perfect World Merger Company Limited and Perfect World Co., Ltd. dated April 26, 2015 (incorporated herein by reference to Exhibit 99.2 to Form 6-K filed by Perfect World Co., Ltd. with the SEC on April 27, 2015).
4.60		Limited Guarantee issued by Perfect Human Holding Company Limited in favor of Perfect World Co., Ltd. dated April 26, 2015 (incorporated herein by reference to Exhibit 99.3 to Form 6-K filed by Perfect World Co., Ltd. with the SEC on April 27, 2015).
8.1	*	Subsidiaries and Consolidated Entities of the Registrant.
11.1		Code of Business Conduct and Ethics of the Registrant (incorporated by reference to Exhibit 99.1 from our Registration Statement on Form F-1 (file no. 333-144282) filed with the Securities and Exchange Commission on July 2, 2007).
12.1	*	CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
12.2	*	CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
13.1	**	CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13.2	**	CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and comprehensive income, changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of Perfect World Co., Ltd. and its subsidiaries at December 31, 2014 and December 31, 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 15 of the accompanying Form 20-F. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers Zhong Tian LLP
Beijing, the People's Republic of China
April 30, 2015

		December 31,			December 31,			December 31,

	Notes	2013			2014			2014
		RMB			RMB			US$(Note 3-(5))
Assets
Current assets
Cash and cash equivalents	3(6),6		1,212,157,293			933,826,251			150,505,472
Restricted cash and time deposits	3(6),5,6		226,100,000			785,145,000			126,542,404
Short-term investments	3(7),6		1,307,892,890			1,680,156,566			270,792,084
Accounts receivable, net	3(9),7		197,715,605			363,828,085			58,638,443
Due from related parties	24		3,393,089			7,381,412			1,189,668
Prepayments and other assets	8		424,839,088			305,408,441			49,222,906
Deferred tax assets	19(d)		40,387,485			42,672,938			6,877,629

Total current assets			3,412,485,450			4,118,418,693			663,768,606

Non current assets
Equity investments	3(10),9		470,018,715			799,797,289			128,903,924
Time deposits	6		108,135,489			56,203,194			9,058,311
Restricted time deposits	3(6),5,6		7,597,873			7,640,679			1,231,454
Property, equipment and software, net	3(11),10		1,353,740,512			1,309,447,262			211,044,590
Construction in progress	3(12)		14,051,462			8,179,806			1,318,345
Intangible assets, net	3(13),13		330,718,241			291,036,300			46,906,537
Goodwill	3(15),14		511,270,880			479,663,396			77,307,707
Prepayments and other assets			86,177,977			59,077,740			9,521,603
Deferred tax assets	19(d)		50,830,484			70,195			11,313

Total assets			6,345,027,083			7,129,534,554			1,149,072,390



Liabilities and Shareholders' Equity
Current liabilities
Accounts payable (including amounts of the consolidated variable interest entities ("VIEs") without recourse to the primary beneficiaries of RMB67,041,366 and RMB132,744,631 (US$21,394,551) as of December 31, 2013 and 2014, respectively.)			95,908,036			165,426,666			26,661,941
Short-term bank loans (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of Nil as of December 31, 2013 and 2014.)	15		213,391,500			446,687,000			71,992,876
Advances from customers (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB98,095,951 and RMB62,309,170 (US$10,042,415) as of December 31, 2013 and 2014, respectively.)	3(16)		102,469,102			65,894,840			10,620,320
Salary and welfare payable (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB46,858,285 and RMB70,507,030 (US$11,363,671) as of December 31, 2013 and 2014, respectively.)			287,057,153			359,667,845			57,967,934
Taxes payable (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB24,364,827 and RMB28,658,921 (US$4,618,980) as of December 31, 2013 and 2014, respectively.)			59,756,556			77,921,853			12,558,723
Accrued expenses and other liabilities (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB142,668,385 and RMB76,017,961 (US$12,251,871) as of December 31, 2013 and 2014, respectively.)	16		188,939,187			112,929,130			18,200,872
Due to related parties (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB41,750 and RMB2,818,875 (US$454,320) as of December 31, 2013 and 2014, respectively.)	24		91,750			2,868,875			462,379
Deferred revenues (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB577,673,767 and RMB676,581,571 (US$109,045,155) as of December 31, 2013 and 2014, respectively.)	3(17)		742,171,227			863,406,258			139,155,829
Deferred tax liabilities (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB262,000 and RMB345,000 (US$55,604) as of December 31, 2013 and 2014, respectively.)	19(d)		87,173,299			108,548,529			17,494,847
Deferred government grants (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB5,000,000 and RMB1,200,000 (US$193,405) as of December 31, 2013 and 2014, respectively.)			5,000,000			1,368,270			220,525

Total current liabilities			1,781,957,810			2,204,719,266			355,336,246
Non current liabilities
Deferred revenues (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB11,709,845 and RMB18,149,363 (US$2,925,146) as of December 31, 2013 and 2014, respectively.)	3(17)		38,655,431			35,669,989			5,748,959
Deferred tax liabilities (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB9,087,650 and RMB18,684,696 (US$3,011,426) as of December 31, 2013 and 2014, respectively.)	19(d)		13,408,787			20,391,642			3,286,536
Other long-term liabilities (including amounts of the consolidated VIEs without recourse to the primary beneficiaries of RMB1,000,000 and Nil as of December 31, 2013 and 2014, respectively.)			2,800,000			—			—

Total liabilities			1,836,822,028			2,260,780,897			364,371,741

Commitments and contingencies	25
Shareholders' Equity
Ordinary shares (US$0.0001 par value, 10,000,000,000 shares authorized, 29,671,195 Class A ordinary shares issued and outstanding, 217,308,865 Class B ordinary shares issued and outstanding as of December 31, 2013; 29,671,195 Class A ordinary shares issued and outstanding, 219,078,955 Class B ordinary shares issued and outstanding as of December 31, 2014)	18		197,003			198,091			31,926
Additional paid-in capital	18		452,966,738			520,217,528			83,843,846
Statutory reserves	3(22)		312,339,625			331,730,844			53,465,307
Accumulated other comprehensive loss	3(4)		(126,536,702	)		(157,049,083	)		(25,311,718	)
Retained earnings			3,832,064,435			4,137,631,977			666,865,225

Total Perfect World Shareholders' Equity			4,471,031,099			4,832,729,357			778,894,586
Non-controlling interests			37,173,956			36,024,300			5,806,063

Total Shareholders' Equity			4,508,205,055			4,868,753,657			784,700,649

Total Liabilities and Shareholders' Equity			6,345,027,083			7,129,534,554			1,149,072,390

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

Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2012, 2013 and 2014

		For the years ended December 31,

	Notes	2012			2013			2014			2014
		RMB			RMB			RMB			US$(Note 3-(5))
Revenues
Online game operation revenues			2,499,418,794			2,800,321,186			3,597,594,615			579,827,002
Licensing revenues			171,563,574			149,317,502			168,955,522			27,230,687
Other revenues			99,603,687			103,024,305			76,673,267			12,357,488

Total Revenues	3(16)		2,770,586,055			3,052,662,993			3,843,223,404			619,415,177
Cost of revenues	3(18)		(539,935,810	)		(711,648,433	)		(1,115,830,359	)		(179,839,210	)

Gross profit			2,230,650,245			2,341,014,560			2,727,393,045			439,575,967
Operating expenses
Research and development expenses	3(19)		(797,067,359	)		(886,083,719	)		(1,072,883,640	)		(172,917,455	)
Sales and marketing expenses	3(23)		(520,619,687	)		(729,657,246	)		(859,236,282	)		(138,483,751	)
General and administrative expenses			(306,255,965	)		(310,043,825	)		(396,130,362	)		(63,844,625	)
Goodwill impairment			(40,769,946	)		(77,290,117	)		(58,211,063	)		(9,381,920	)

Total operating expenses			(1,664,712,957	)		(2,003,074,907	)		(2,386,461,347	)		(384,627,751	)

Operating profit			565,937,288			337,939,653			340,931,698			54,948,216

Other income / (expenses)
Share of (loss) / income from equity investments			(5,334,495	)		(15,198,149	)		38,249,264			6,164,662
Interest income			94,565,745			93,212,910			110,136,012			17,750,703
Interest expense			(21,866,732	)		(7,674,899	)		(12,585,525	)		(2,028,418	)
Others, net	17		60,276,060			83,680,334			100,488,122			16,195,745

Total other income			127,640,578			154,020,196			236,287,873			38,082,692

Income before tax			693,577,866			491,959,849			577,219,571			93,030,908
Income tax expense	3(21), 19(a)(c)		(116,119,365	)		(69,997,794	)		(121,493,950	)		(19,581,270	)

Income from continuing operations, net of tax			577,458,501			421,962,055			455,725,621			73,449,638

Discontinued operations	3(29),12
Loss from discontinued operations, net of tax			(30,214,733	)		(44,322,061	)		—			—
Gain from disposal of discontinued operations, net of tax			—			166,288,268			—			—

(Loss) / income from discontinued operations, net of tax			(30,214,733	)		121,966,207			—			—

Net income			547,243,768			543,928,262			455,725,621			73,449,638

Net (income) / loss attributable to the non-controlling interests			(6,593,580	)		(1,514,629	)		15,664,513			2,524,661

Net income attributable to the Company's shareholders			540,650,188			542,413,633			471,390,134			75,974,299



Net income			547,243,768			543,928,262			455,725,621			73,449,638
Other comprehensive loss: Foreign currency translation adjustment	3(4)		(20,112,491	)		(45,993,516	)		(30,512,381	)		(4,917,703	)

Comprehensive income	3(28)		527,131,277			497,934,746			425,213,240			68,531,935

Comprehensive (income) / loss attributable to non-controlling interests			(6,593,580	)		(1,514,629	)		15,664,513			2,524,661

Comprehensive income attributable to the Company's shareholders			520,537,697			496,420,117			440,877,753			71,056,596



Net earnings per share, basic
Continuing operations			2.39			1.72			1.90			0.31
Discontinued operations			(0.13	)		0.50			—			—

Total earnings per share, basic			2.26			2.22			1.90			0.31



Net earnings per share, diluted
Continuing operations			2.35			1.70			1.86			0.30
Discontinued operations			(0.12	)		0.49			—			—

Total earnings per share, diluted			2.23			2.19			1.86			0.30



Net earnings per ADS, basic
Continuing operations			11.94			8.62			9.51			1.53
Discontinued operations			(0.63	)		2.50			—			—

Total earnings per ADS, basic			11.31			11.12			9.51			1.53



Net earnings per ADS, diluted
Continuing operations			11.77			8.49			9.32			1.50
Discontinued operations			(0.62	)		2.46			—			—

Total earnings per ADS, diluted			11.15			10.95			9.32			1.50



Shares used in calculating basic net earnings per share			239,119,233			243,958,465			247,943,431			247,943,431
Shares used in calculating diluted net earnings per share			242,495,660			247,712,898			252,939,407			252,939,407
Amount attributable to the Company's shareholders:
Income from continuing operations, net of tax			570,864,921			420,447,426			471,390,134			75,974,299
(Loss) / income from discontinued operations, net of tax			(30,214,733	)		121,966,207			—			—

Net income			540,650,188			542,413,633			471,390,134			75,974,299



Total share-based compensation costs included in:	3(20),18
Cost of revenues			(4,570,357	)		(3,671,402	)		(1,455,604	)		(234,601	)
Research and development expenses			(34,818,684	)		(34,243,440	)		(17,389,174	)		(2,802,626	)
Sales and marketing expenses			(10,111,863	)		(12,351,112	)		(8,210,980	)		(1,323,370	)
General and administrative expenses			(21,643,688	)		(25,627,116	)		(24,438,505	)		(3,938,772	)
Loss from discontinued operations, net of tax			—			(21,450,000	)		—			—

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

Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2012, 2013 and 2014

	Class A and Class B ordinary shares

									Accumulated other comprehensive loss
					Additional paid-in capital		Statutory reserve					Retained earnings			Non- controlling interests			Total shareholders' equity
	Shares		Amount		Additional paid-in capital		Statutory reserve					Retained earnings			Non- controlling interests			Total shareholders' equity
			RMB		RMB		RMB		RMB			RMB			RMB			RMB
Balance as of January 1, 2012		230,909,215		186,948		212,421,037		268,014,793		(60,430,695	)		3,538,087,071			27,129,516			3,985,408,670
Net profit		—		—		—		—		—			540,650,188			6,593,580			547,243,768
Foreign currency translation loss		—		—		—		—		(20,112,491	)		—			—			(20,112,491	)
Share-based compensation costs		—		—		71,144,592		—		—			—			—			71,144,592
Appropriation to statutory reserves		—		—		—		4,923,933		—			(4,923,933	)		—			—
Ordinary shares issued upon exercise of employee stock options		11,138,640		7,012		45,849,541		—		—			—			—			45,856,553
Dividends to shareholders (Note 23)		—		—		—		—		—			(607,623,579	)		—			(607,623,579	)
Change in the Company's economic interests in affiliates (Note 11-(1))		—		—		389,338		—		—			—			(10,509,842	)		(10,120,504	)
Capital contribution from non-controlling interests or VIE shareholders		—		—		—		—		—			—			3,000			3,000

Balance as of December 31, 2012		242,047,855		193,960		329,804,508		272,938,726		(80,543,186	)		3,466,189,747			23,216,254			4,011,800,009

Net profit		—		—		—		—		—			542,413,633			1,514,629			543,928,262
Foreign currency translation loss		—		—		—		—		(45,993,516	)		—			—			(45,993,516	)
Share-based compensation costs		—		—		75,893,070		—		—			—			21,450,000			97,343,070
Appropriation to statutory reserves		—		—		—		39,400,899		—			(39,400,899	)		—			—
Ordinary shares issued upon exercise of employee stock options		4,932,205		3,043		47,269,160		—		—			—			—			47,272,203
Dividends to shareholders (Note 23)		—		—		—		—		—			(137,138,046	)		—			(137,138,046	)
Change in the Company's economic interests in affiliates (Note 11-(2), Note 12)		—		—		—		—		—			—			(9,006,927	)		(9,006,927	)

Balance as of December 31, 2013		246,980,060		197,003		452,966,738		312,339,625		(126,536,702	)		3,832,064,435			37,173,956			4,508,205,055

Net profit / (loss)		—		—		—		—		—			471,390,134			(15,664,513	)		455,725,621
Foreign currency translation loss		—		—		—		—		(30,512,381	)		—			—			(30,512,381	)
Share-based compensation costs		—		—		47,332,010		—		—			—			4,162,253			51,494,263
Appropriation to statutory reserves		—		—		—		19,391,219		—			(19,391,219	)		—			—
Ordinary shares issued upon exercise of employee stock options		1,770,090		1,088		19,918,780		—		—			—			—			19,919,868
Dividends to shareholders (Note 23)		—		—		—		—		—			(146,431,373	)		—			(146,431,373	)
Change in the Company's economic interests in an affiliate		—		—		—		—		—			—			118,604			118,604
Capital contribution from non-controlling interests or VIE shareholders		—		—		—		—		—			—			10,234,000			10,234,000

Balance as of December 31, 2014		248,750,150		198,091		520,217,528		331,730,844		(157,049,083	)		4,137,631,977			36,024,300			4,868,753,657

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

Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2013 and 2014

	For the years ended December 31,

	2012			2013			2014			2014
	RMB			RMB			RMB			US$(Note 3-(5))
Cash flows from operating activities:
Net income		547,243,768			543,928,262			455,725,621			73,449,638
Adjustments for:
Share-based compensation costs		71,144,592			97,343,070			51,494,263			8,299,369
Depreciation and amortization expenses		183,116,153			200,173,823			222,581,361			35,873,604
Exchange gain		(3,334,352	)		(6,677,643	)		(27,182,781	)		(4,381,069	)
Share of loss / (income) from equity investments		5,334,495			15,198,149			(38,249,264	)		(6,164,662	)
Goodwill impairment		40,769,946			77,290,117			58,211,063			9,381,920
Impairment of intangible assets and other long-lived assets		20,969,607			23,898,022			38,386,266			6,186,743
Loss from disposal of property, equipment and software		1,717,286			625,332			4,387,863			707,195
Provision for doubtful accounts		—			—			12,540,836			2,021,216
Deferred income tax		(11,042,445	)		17,461,751			73,644,148			11,869,282
Gain from disposal of discontinued operations, net of tax		—			(166,288,268	)		—			—
Changes in assets and liabilities:
Accounts receivable		32,371,438			(80,989,868	)		(177,454,546	)		(28,600,481	)
Current prepayments and other assets		(51,451,855	)		(126,121,310	)		(49,443,553	)		(7,968,854	)
Due from/to related parties		35,000			(3,451,339	)		(2,811,198	)		(453,083	)
Non current prepayments and other assets		(40,737,629	)		825,308			33,427,815			5,387,586
Accounts payable		(5,892,676	)		38,630,097			68,209,252			10,993,336
Advances from customers		38,031,835			(29,274,312	)		(34,947,884	)		(5,632,576	)
Salary and welfare payable		27,187,649			53,166,528			72,598,852			11,700,811
Taxes payable		(48,243,256	)		8,696,017			22,834,713			3,680,288
Accrued expenses and other liabilities		(10,774,994	)		10,904,719			17,143,555			2,763,040
Deferred revenues		(56,955,712	)		357,540,494			125,052,570			20,154,816
Long-term liabilities		—			—			(2,800,000	)		(451,278	)

Net cash provided by operating activities		739,488,850			1,032,878,949			923,348,952			148,816,841

Cash flows from investing activities:
Purchase of property, equipment and software		(83,664,515	)		(234,925,652	)		(82,058,570	)		(13,225,441	)
Cash paid for construction in progress		(25,136,551	)		(55,931,098	)		(21,960,979	)		(3,539,467	)
Purchase of intangible assets		(6,602,754	)		(57,390,839	)		(43,807,915	)		(7,060,554	)
Payment for capitalized product development costs		(5,651,100	)		(44,175,803	)		(19,171,502	)		(3,089,885	)
(Increase) / decrease in restricted cash and restricted time deposits		(363,776,200	)		665,362,180			(559,045,000	)		(90,101,699	)
Cash paid for equity investments		(200,000,000	)		(256,232,823	)		(340,590,730	)		(54,893,261	)
Cash received from disposal of equity investment		—			—			2,000,000			322,341
Cash paid for business acquisitions, net of cash acquired		—			(135,694,387	)		(115,919,662	)		(18,682,858	)
Cash paid for purchase of additional ownership interests in subsidiaries		(10,120,504	)		—			—			—
Purchase of ordinary shares in a public company (Note 9)		—			—			(615,280,000	)		(99,165,136	)
Cash received from sale of ordinary shares in a public company (Note 9)		—			—			643,731,796			103,750,733
Cash received from disposal of PW Literature, net of cash disposed		—			(23,977,214	)		167,025,141			26,919,566
Purchase of short-term investments		(1,437,228,875	)		(1,710,000,000	)		(3,102,741,238	)		(500,071,115	)
Maturities of short-term investments		470,017,875			1,863,300,000			2,780,477,561			448,131,638
Purchase of time deposits		(50,000,000	)		—			—			—

Net cash (used in) / provided by investing activities		(1,712,162,624	)		10,334,364			(1,307,341,098	)		(210,705,138	)

Cash flows from financing activities:
Exercises of share options		45,182,450			45,399,876			22,957,189			3,700,027
Capital contribution from non-controlling interests or VIE shareholders		3,000			—			10,234,000			1,649,421
Short-term bank loans		596,752,900			216,176,500			726,030,400			117,014,860
Repayment of bank loans		(409,558,500	)		(742,887,100	)		(491,902,000	)		(79,280,211	)
Dividends to shareholders		(607,623,579	)		(137,138,046	)		(146,431,373	)		(23,600,453	)

Net cash (used in) / provided by financing activities		(375,243,729	)		(618,448,770	)		120,888,216			19,483,644

Effect of exchange rate changes on cash and cash equivalents		(2,663,345	)		(12,239,897	)		(15,227,112	)		(2,454,168	)

Net (decrease) / increase in cash		(1,350,580,848	)		412,524,646			(278,331,042	)		(44,858,821	)

Cash and cash equivalents, beginning of the period		2,150,213,495			799,632,647			1,212,157,293			195,364,293

Cash and cash equivalents, end of the period		799,632,647			1,212,157,293			933,826,251			150,505,472



Supplemental schedule of non-cash investing activities:
Reclassification of time deposits now maturing within one year to short-term investments		(280,000,000	)		—			(50,000,000	)		(8,058,537	)
Release of restricted time deposits to short-term investments		(120,000,000	)		—			—			—
Consideration payable related to equity investment and business combination		—			(122,000,000	)		(24,048,000	)		(3,875,834	)
Consideration receivable related to disposal of PW Literature		—			174,280,000			4,061,115			654,533
Reclassification of short-term investments to time deposits due to the extension of the contract term		—			(53,041,400	)		—			—
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes		(171,912,187	)		(74,180,785	)		(44,906,080	)		(7,237,546	)
Cash paid during the year for interest expenses		(23,147,135	)		(7,696,577	)		(12,585,525	)		(2,028,418	)

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

The accompanying consolidated financial statements include the financial statements of Perfect World Co., Ltd. (the "Company") and its subsidiaries and VIEs. The Company was incorporated in the Cayman Islands on June 28, 2006. The Company has been listed on the NASDAQ in the United States of America since July 26, 2007. The Company, all the subsidiaries and the VIEs are collectively referred to as the "Group."

Details of the subsidiaries and VIEs as of December 31, 2014 are described below:

Subsidiaries			Place and Date of incorporation or date of acquisition

Beijing Perfect World Software Co., Ltd. ("PW Software")	100	%	Beijing, China, August 2006
Perfect Online Holding Limited ("PW Hong Kong")	100	%	Hong Kong, China, December 2007
Perfect World Entertainment Inc. ("PW USA")	100	%	Delaware, USA, April 2008
Perfect Game Holding Limited ("PW BVI")	100	%	British Virgin Islands, October 2008
Perfect Star Co., Ltd. ("PW Malaysia")	100	%	Labuan, Malaysia, January 2009
Global InterServ (Caymans) Inc. ("InterServ Caymans")	100	%	Cayman Islands, acquired in February 2009
InterServ Information and Technology (Shanghai) Co., Ltd. ("InterServ Shanghai")	100	%	Shanghai, China, acquired in February 2009
Chengdu Perfect World Software Co., Ltd. ("Chengdu PW Software"), formerly known as Chengdu InterServ Information and Technology Co., Ltd. ("InterServ Chengdu")	100	%	Chengdu, China, acquired in February 2009
Perfect World Interactive Entertainment Co., Ltd. ("PW Interactive")	100	%	Cayman Islands, March 2009
Perfect Sky Online Co., Limited ("PW Sky")	100	%	Hong Kong, China, May 2009
Perfect Entertainment Zone N.V. ("PW Antilles")	100	%	Netherlands Antilles, August 2009
Perfect World Interactive Technology Co., Ltd. ("PW Taiwan")	100	%	Taiwan, China, November 2009
Perfect World Universal Coöperatieve U.A. ("PW Universal")	100	%	Netherlands, December 2009
Shanghai Perfect World Software Co., Ltd. ("Shanghai PW Software")	100	%	Shanghai, China, December 2009
Perfect World Europe B.V. ("PW Europe")	100	%	Netherlands, January 2010
C&C Media Co., Ltd. ("C&C Media")	100	%	Japan, acquired in April 2010
CCO Co., Ltd. ("CCO")	100	%	Japan, acquired in April 2010
Beijing Perfect World Digital Entertainment Software Co., Ltd. ("PW Digital Software")	100	%	Beijing, China, April 2010
Runic Games, Inc. ("Runic Games")	74.47	%	Delaware, USA, acquired in May 2010
Beijing Perfect World Game Software Co., Ltd. ("PW Game Software")	100	%	Beijing, China, August 2010
Cryptic Studios, Inc. ("Cryptic Studios")	100	%	California, USA, acquired in August 2011
Happy Moment Holding Limited ("Happy Moment")	100	%	British Virgin Islands, August 2011
Happy Fantasy Limited ("Happy Fantasy")	100	%	British Virgin Islands, August 2011
Perfect Management Holding Limited ("Perfect Management")	100	%	British Virgin Islands, October 2011
Perfect World Korea Co., Ltd. ("PW Korea"), formerly known as NGL Co., Ltd. ("NGL")	100	%	Korea, November 2011
Zongheng Limited ("Zongheng Cayman")	70	%	Cayman Islands, acquired in January 2012
Perfect World Games Online Limited ("PW Games Online"), formerly known as Zongheng Online LIMITED ("Zongheng Hong Kong")	70	%	Hong Kong, China, acquired in January 2012
Huanxiang Zongheng Software Technology Co., Ltd. ("Zongheng Software")	70	%	Beijing, China, acquired in January 2012
Perfect Play SDN. BHD. ("Perfect Play")	100	%	Labuan, Malaysia, November 2012
Unknown Worlds Entertainment, Inc. ("Unknown Worlds")	60	%	California, USA, acquired in February 2013
Perfect World (Thailand) Co., Ltd. ("PW Thailand")	100	%	Bangkok, Thailand, September 2013
Perfect World Games (Singapore) Pte. Ltd. ("PW Singapore")	100	%	Singapore, June 2014
Fedeen Games Limited ("Fedeen HK")	70	%	Hong Kong, China, September 2014
Beijing Perfect World Software Technology Development Co., Ltd. ("PW Software Technology")	100	%	Beijing, China, October 2014

VIEs			Place and Date of incorporation or date of acquisition

Beijing Perfect World Network Technology Co., Ltd. ("PW Network")	100	%	Beijing, China, March 2004
Shanghai Perfect World Network Technology Co., Ltd. ("Shanghai PW Network")	100	%	Shanghai, China, November 2008
Chengdu Perfect World Network Technology Co., Ltd. ("Chengdu PW Network")	100	%	Chengdu, China, February 2009
Beijing Perfect World Digital Entertainment Co., Ltd. ("PW Digital")	100	%	Beijing, China, September 2009
Chengdu Ye Net Science and Technology Development Co., Ltd. ("Ye Net")	100	%	Chengdu, China, acquired in January 2011
Hefei Perfect World Network Technology Co., Ltd. ("Hefei PW Network")	100	%	Hefei, China, January 2011
Beijing Perfect Moment Network Technology Co., Ltd. ("Perfect Moment"), formerly known as Beijing Perfect Moment Pictures Co., Ltd.	100	%	Beijing, China, February 2011
Tianjin Trendsters Investment Co., Ltd. ("Trendsters Investment")	100	%	Tianjin, China, November 2011
Beijing Perfect World Digital Technology Co., Ltd. ("PW Digital Technology")	100	%	Beijing, China, August 2013
Wuhu Huitian Shengshi Network Technology Co., Ltd. ("Wuhu Huitian")	100	%	Wuhu, China, acquired in December 2013
Guangdong Perfect World Educational Investment Co., Ltd. ("PW Educational Investment")	100	%	Zhuhai, China, February 2014
Chongqing Perfect World Interactive Technology Co., Ltd. ("Chongqing PW Interactive")	100	%	Chongqing, China, April 2014
Fuzhou Online Game Information Technology Co., Ltd. ("Fuzhou Online Game")	100	%	Fuzhou, China, acquired in June 2014
Fedeen Games (Shanghai) Co., Ltd. ("Fedeen SH")	66	%	Shanghai, China, June 2014
Chongqing MeiQi Interactive Technology Co., Ltd. ("MeiQi Interactive")	51	%	Chongqing, China, July 2014
Chongqing Star Entertainment Co., Ltd. ("Star Entertainment")	100	%	Chongqing, China, August 2014
Freejoy Technology (Chongqing) Co., Ltd. ("Freejoy Technology")	51	%	Chongqing, China, November 2014
Chongqing Enlightron Games Technology Co., Ltd. ("Enlightron Games")	51	%	Chongqing, China, November 2014
Tianjin Ledo Interactive Technology Co., Ltd. ("Ledo Interactive TJ")	51	%	Tianjin, China, November 2014
Chongqing Zulong Entertainment Technology Co., Ltd. ("Zulong Entertainment")	51	%	Chongqing, China, November 2014
Chongqing Superpop Interactive Technology Co., Ltd. ("Superpop Interactive")	51	%	Chongqing, China, November 2014
Arc Games Co., Ltd. ("Arc Games")	100	%	Tianjin, China, November 2014

The Group is principally engaged in research, development, operation and licensing of online games. The Group's principal operations and geographic markets are in the People's Republic of China (the "PRC"), United States of America, Europe, Japan, Southeast Asia and Korea.

The Company is a Cayman Islands company and, as such, it is classified as a foreign enterprise under Chinese laws, and the Company's wholly owned PRC subsidiaries, PW Software and PW Game Software, are foreign-invested enterprises. Various regulations in China currently restrict or prevent foreign-invested entities from holding certain licenses required to operate online games, including Internet content provision, Internet culture operations and Internet publishing licenses, or engaging in the investment in certain technology, media and telecommunications sectors. In light of these restrictions, the Company relies on its VIEs to hold and maintain the licenses necessary to operate the online games, or investment in certain technology, media and telecommunication companies in China.

The Company through its wholly owned PRC subsidiaries entered into a series of contractual arrangements with its VIEs and their respective equity owners to provide the Company with effective control over the VIEs. These include exclusive technology support and service agreements, development cooperation agreements, business operation agreements, call option agreements, equity pledge agreements and power of attorneys.

There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including those that govern the Group's VIE contractual arrangements. In the opinion of management, it is currently unclear what impact the PRC government actions would have on the Group and on its ability to consolidate the financial results of these VIEs in the Group's consolidated financial statements, if the PRC government authorities were to find the Group's legal structure and the contractual arrangements with its VIEs to be in violation of PRC laws and regulations. The relevant regulatory authorities would have broad discretion in dealing with such violation, including, but not limited to, levying fines, confiscating income, revoking business or operating licenses, requiring the Company to restructure the relevant ownership structure or operations, and requiring the Company to discontinue all or any portion of the online game operations or investment in certain technology, media and telecommunications sectors. Any of these actions could cause significant disruption to the Company's business operations and may materially and adversely affect the Company's business, financial condition and results of operations.

If the imposition of any of these government actions causes the Company no longer able to conclude that these entities are VIEs of the Company, of which the Company is the primary beneficiary, the Group would no longer be able to consolidate the financial results of these entities in the Group's consolidated financial statements. In the opinion of management, the likelihood for the Company to lose such ability is remote based on current facts and circumstances. The Company's operations depend on the VIEs to honor their contractual agreements with the Company. Almost all of these agreements are governed by PRC law and disputes arising out of these agreements are expected to be decided by arbitration in China. The management believes that each of the contractual agreements constitutes valid and legally binding obligations of each party to such contractual agreements under PRC Laws. However, the interpretation and implementation of the laws and regulations in the PRC and their application to an effect on the legality, binding effect and enforceability of contracts are subject to the discretion of competent PRC authorities, and therefore there is no assurance that relevant PRC authorities will take the same position as the Group herein in respect of the legality, binding effect and enforceability of each of the contractual agreements. Meanwhile, since the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to the Company to enforce the contractual arrangements should the VIEs or their shareholders fail to perform their obligation under those arrangements.

The following consolidated financial statement balances and amounts of the Group's VIEs and their subsidiaries were included in the accompanying consolidated financial statements as of

December 31, 2013 and December 31, 2014, and for the years ended December 31, 2012, 2013 and 2014:

The recognized revenue-producing assets held by the Group's VIEs include goodwill and the intangible assets acquired through business combination, purchased copyrights and domain names, licensed game software, servers and leasehold improvements relating to office facilities. The balances of these assets as of December 31, 2013 and 2014 were included in the line of "Non current assets" in the table above. Goodwill primarily represents the expected synergies from combining the acquired businesses with the business of the Group. Please refer to Note 11 for details of goodwill and intangible assets acquired through business combination.

The unrecognized revenue-producing assets held by the Group's VIEs mainly consist of intellectual property, licenses, and trademarks that the Group relies on to operate its self-developed and third

party licensed games. As of December 31, 2014, the VIEs have developed copyright registrations and applications, including but not limited to copyrights covering self-developed game software and game engines. Some of these copyrights have been granted and are currently held by the VIEs, while others are still in the process of being registered. The VIEs own ICP license and other online game operation license. Moreover, the VIE has made registrations for certain trademarks related to the Group's brand and games, and domain names for the operation. These unrecognized revenue-producing assets have no book value, appraisal value or any other value that can be disclosed.

Under the contractual arrangements with the VIEs, the Company has the power to direct activities of the VIEs and can have assets transferred out of the VIEs under its control. Therefore, the Company considers that there is no asset in any of the consolidated VIEs that can be used only to settle obligations of the VIEs, except for registered capital and PRC statutory reserves. As all consolidated VIEs are incorporated as limited liability companies under the PRC Company Law, creditors of the VIEs do not have recourse to the general credit of the Company for any of the liabilities of the consolidated VIEs.

Currently there is no contractual arrangement that requires the Company to provide additional financial support to the VIEs. As the Company is conducting its online game business mainly through the VIEs, the Company may provide such support on a discretionary basis in the future, which could expose the Company to a loss.

The following is a summary of the contractual agreements between PW Software and PW Network and its equity owners entered into in September 2006, as amended and restated in April 2007.

Exclusive Technology Support and Service Agreement. Under the exclusive technology support and service agreement between PW Software and PW Network, PW Software has the exclusive right to provide to PW Network technical support and services related to PW Network's online game operations. PW Software owns the intellectual property rights developed by either PW Software or PW Network in the performance of this agreement. PW Network pays PW Software quarterly service fees, the amount of which is determined by PW Software and PW Network based on the complexity, time spent, contents and value of the technical services provided by PW Software as well as the market price of similar services. This agreement is effective until March 9, 2024. PW Software may early terminate this agreement by providing a 30-day prior notice to PW Network, while PW Network has no right to early terminate this agreement. If any party enter bankruptcy or become insolvent, this agreement will be automatically terminated.

Development Cooperation Agreement. Under the development cooperation agreement between PW Network and PW Software, which was further revised in April 2008, PW Network exclusively engages PW Software to develop software for PW Network's operations. PW Network and PW Software jointly own the intellectual property rights developed by PW Software and shares the proceeds from such rights on an agreed percentage. PW Network pays PW Software monthly service fees, the amount of which is determined by PW Software and PW Network based on the complexity, time spent, cost, contents and value of the development work done by PW Software as well as the market price of

similar work. This agreement is effective until March 9, 2024 and can be early terminated by mutual agreement of the parties.

Business Operation Agreement. Under the business operation agreement among PW Software, PW Network and the shareholders of PW Network, PW Software provides guidance and advice on PW Network's daily operations and financial management systems. The shareholders of PW Network must elect the candidates recommended by PW Software as PW Network's directors, and procure the appointment of PW Network's senior executives as per PW Software's designation. Moreover, PW Network and its shareholders agree that without the prior consent of PW Software, PW Network will not engage in any transactions that could materially affect the assets, business, personnel, rights, liabilities or operations of PW Network, including incurrence or assumption of any indebtedness of more than RMB400,000, sale or purchase of any assets or rights, incurrence of any encumbrance on any of its assets or intellectual property rights in favor of a third party, amendment of its articles of association or business scope, or change of its normal operation procedures. The agreement also provides that if any of the agreements between PW Software and PW Network is terminated, PW Software is entitled to terminate all of the other agreements between itself and PW Network. This agreement is effective until March 9, 2024 or the early termination by PW Software.

The contractual agreements between PW Software and Beijing Huanxiang Zongheng Chinese Literature Website Co., Ltd., or PW Literature, and its equity owners were substantially the same as

the contractual agreements between PW Software and PW Network and its equity owners except that the former agreements were entered into in June 2008 and would remain effective until June 24, 2028. In addition, each equity owner of PW Literature has respectively entered into a loan agreement with PW Software as of May 20, 2008, under which PW Software agreed to make an RMB500,000 interest-free loan to each equity owner of PW Literature respectively solely for the latter to fund the capitalization of PW Literature. The term of the loans is twenty years. In December 2013, the Group consummated the divesture of online reading business, and sold all its economic interest in PW Literature, the VIE, to an unrelated party (See Note 12). The above mentioned contractual agreements between PW Software, PW Literature and its equity owners were terminated upon the closing of the transaction on December 31, 2013. All the previous loans to the equity owners of PW Literature were paid back in the first quarter of 2014.

The contractual agreements between PW Software and Perfect Moment and its equity owners are substantially the same as the contractual agreements between PW Software and PW Network and its equity owners except that the former agreements were entered into in February 2011, as amended and restated in August 2011 and December 2011, respectively, and will remain effective until March 9, 2024.

The contractual agreements between PW Software and Trendsters Investment and its equity owners are substantially the same as the contractual agreements between PW Software and PW Network and its equity owners except that the former agreements were entered into in November 2011 and will remain effective until August 21, 2026. In addition, each equity owner of Trendsters Investment has respectively entered into a loan agreement with PW Software as of October 25, 2011, under which PW Software agreed to make an RMB500,000 interest-free loan to each equity owner of Trendsters Investment respectively solely for the latter to fund the capitalization of Trendsters Investment. The term of the loans is twenty years.

The contractual agreements between PW Game Software and PW Digital Technology and its equity owners are substantially the same as the contractual agreements between PW Software and PW Network and its equity owners except that the former agreements were entered into in August 2013, as amended and restated in December 2013, and will remain effective until August 24, 2033. In addition, each equity owner of PW Digital Technology has respectively entered into a loan agreement with PW Game Software as of July 30, 2013 and December 10, 2013, respectively, under which PW Game Software agreed to make an RMB9,000,000 and RMB1,000,000 interest-free loan to each equity owner of PW Digital Technology respectively solely for the latter to fund the capitalization of PW Digital Technology. The term of the loans is twenty years.

The Company completed the registration of the pledge of PW Literature's equity interest in early 2011 and again in 2012 after the change of PW Literature's equity owners in July 2011 with local Administration for Industry and Commerce. This is no longer valid after the completion of disposal of PW Literature. The Company completed the registration of the pledge of the equity interests of Perfect Network, Perfect Moment and Trendsters Investment in 2012 with local Administration for Industry and Commerce. The Company completed the registration of the pledge of the equity interests of PW Digital Technology in March 2014 with local Administration for Industry and Commerce.

Various fees are billed to the relevant VIEs on a monthly or quarterly basis and are due within 10 business days after receipt of the invoices by the VIEs. The total amount of fees paid by the VIEs to the Group's PRC wholly owned subsidiaries since the entering of the VIE contractual arrangements ranged approximately from 45% to 75% of the revenues generated by respective games operated by these VIEs. For the years ended December 31, 2012, 2013 and 2014, the total amount of fees paid by the Group's PRC wholly owned subsidiaries to its VIEs amounted to approximately RMB1,058,328,538, RMB1,217,670,080 and RMB1,428,113,295, respectively.

The contractual arrangements between the VIEs and the relevant wholly owned subsidiaries of the Company are silent regarding renewals of these contractual arrangements. However, as the VIEs are controlled by the Company through the power of attorney granted to the Company by each nominee shareholder of the VIEs, the contractual arrangements will be renewed at the request of the Company.

Currently, there is no contractual arrangement that requires the Company to provide additional financial support to the VIEs. As the Company is conducting certain businesses in the PRC mainly through the VIEs, the Company may provide such support on a discretionary basis in the future, which could expose the Company to a loss.

The Ministry of Commerce published a discussion draft of the proposed Foreign Investment Law (the "Draft Law") in January 2015 aiming to, upon its enactment, replace the existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-owned Enterprise Law, together with their implementation rules and ancillary regulations.

Among other things, the Draft Law introduces the principle of "actual control" in determining whether a company is considered a foreign-invested enterprise. The Draft Law specifically provides that entities established in China but ultimately controlled, including through a VIE structure with contractual arrangement, by foreign investors will be treated as foreign-invested enterprises, and, therefore, be subject to the foreign investment restrictions or prohibitions set forth in a "negative list" to be separately issued by the State Council later.

The Ministry of Commerce is currently soliciting comments on this draft and substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation. The Draft Law, if enacted as proposed, may cause significant disruption to the Group's business operations, and have severe adverse impact on the Group's corporate structure, corporate governance, financial condition and results of operations.

The consolidated financial statements of the Group have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Significant accounting policies followed by the Group in the preparation of the accompanying consolidated financial statements are summarized below.

The consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries and VIEs. VIEs are consolidated if the Company determines that it is the primary beneficiary. All intercompany transactions are eliminated.

Net income or losses of the Company's majority-owned subsidiaries and VIEs and amortization expenses of intangible assets arising from related business combinations are attributed to their parents and non-controlling interests based on the proportional economic interests of the respective parents and non-controlling interests in such entities or contractual arrangements that determine the attribution of income or losses. Net income or losses attributable to the non-controlling shareholders are recorded in the Group's Consolidated Statements of Income and Comprehensive Income.

In 2014, the Company's board of directors approved a restructuring plan of its research and developments ("R&D") teams, under which five new controlled entities ("New Entities") have been formed. The Company holds majority equity interests in each of these five entities. The non-controlling interest of each of these five new entities would be beneficially held by the Company's key R&D employees who are required to work for the New Entities during requisite service periods of two or three years. See Note 18-(4) for more details. Net income or losses of the New Entities would be attributed to non-controlling interests upon the completion of the requisite service periods.

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affected the reported amount of the assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported revenues and expenses during the reported periods. Actual results may differ from those estimates.

Significant accounting estimates in the Group's consolidated financial statements mainly include the useful life of in-game items, churn rate of the inactive players, useful life of property, equipment and software and intangible assets, fair value of assets and liabilities acquired in asset acquisition and business combinations, assessment for impairment of long-lived assets, intangible assets and goodwill, realization of deferred tax assets, provision for bad debt, share-based compensation expenses, and fair value of the investments made by the venture capital fund ("VC Fund").

The Group's reporting currency is Renminbi ("RMB"). The functional currency of Perfect World Co., Ltd., the listing entity incorporated in the Cayman Islands, is United States dollars

("US dollars" or "US$"). The functional currency of the Group's other international subsidiaries is evaluated on a case-by-case basis and is often the local currency. On December 1, 2013, PW Hong Kong changed its functional currency prospectively from RMB to US dollars, to reflect the increased concentration of its activities in US dollars. The change was triggered by the completion of the Group's reorganization of its overseas business structure, and PW Hong Kong became the parent of the Group's overseas subsidiaries in Europe, U.S., Japan and Korea, in addition to its PRC subsidiaries. The change in functional currency of PW Hong Kong has immaterial impact on the Group's consolidated financial statements for the year ended December 31, 2013.

Transactions denominated in currencies other than functional currency are translated into functional currency at the exchange rates quoted by authoritative banks prevailing at the dates of the transactions. Exchange gains and losses resulting from those foreign currency transactions denominated in a currency other than the functional currency are recorded as a component of Others, net in the Consolidated Statements of Income and Comprehensive Income. Total exchange gain were RMB3,334,352, RMB6,677,643 and RMB27,182,781 for the years ended December 31, 2012, 2013 and 2014, respectively.

The financial statements of the Group's overseas subsidiaries are translated from their functional currency into RMB. Assets and liabilities denominated in foreign currencies are translated into RMB using the applicable exchange rates quoted by the People's Bank of China at the balance sheet dates. Equity accounts other than earnings generated in current period are translated into RMB at the appropriate historical rates. Revenues, expenses, gains and losses are translated into RMB using the periodic weighted average exchange rates. The resulting foreign currency translation adjustments are recorded as Accumulated other comprehensive income / (loss) in shareholders' equity. Total foreign currency translation adjustment loss were RMB20,112,491, RMB45,993,516 and RMB30,512,381 for the years ended December 31, 2012, 2013 and 2014, respectively.

Translations of balances in the Consolidated Balance Sheets, Consolidated Statements of Income and Comprehensive Income and Consolidated Statements of Cash Flows from RMB into US$ as of and for the year ended December 31, 2014 are solely for the convenience of the readers and were calculated at the rate of US$1.00=RMB6.2046, representing the noon buying rate in The City of New York for cable transfer of RMB as certified for customs purpose by the Federal Reserve Bank of New York on December 31, 2014. No representation is made that the RMB amounts could have been, or could be, converted, realized or settled into US$ at that rate on December 31, 2014, or at any other rate.

Cash and cash equivalents represent cash on hand, demand deposits and highly-liquid investments placed with banks or other financial institutions, which have original maturities of three months or less.

Cash and time deposits that are restricted as to withdrawal or use for current operations is classified as restricted cash and time deposits. Cash and time deposits that are restricted as to withdrawal or use for other than current operations is classified as non-current. The Group's restricted

cash and time deposits and non current restricted time deposits mainly represents (a) cash and time deposits held in a designated bank account for the sole purpose of guarantees for office rental; and (b) cash and time deposits that are pledged for short-term loans.

The Group invested in certain financial instruments with a variable interest rate indexed to the performance of underlying assets. These financial instruments had maturity dates within one year and are classified as short-term investments. In addition, short-term investments also comprise of the time deposits placed with banks with original maturities longer than three months but less than one year. These investments were recorded at fair value with the unrealized gains or losses recorded as Accumulated other comprehensive income in shareholders' equity. Realized gains are reflected as a component of interest income.

The Group assesses whether there are any other-than-temporary impairment to its short-term investments due to declines in fair value or other market conditions. Declines in fair values that are considered other-than-temporary are recorded as an impairment charge in the Consolidated Statements of Income and Comprehensive Income. No impairment charges were recorded for the years ended December 31, 2012, 2013 and 2014.

Financial instruments of the Group primarily comprise cash and cash equivalents, restricted cash and time deposits, short-term investments, accounts receivable, due from related parties, other receivables included in current and non current prepayments and other assets, long-term time deposits, restricted time deposits, accounts payable, short-term bank loans, accrued expenses and other liabilities, equity investment in the VC Fund. The carrying values of the short-term financial instruments approximate their fair value due to the short maturity of those instruments. The carrying value of the long-term time deposits, including interests accrued, approximates their fair value as the agreed interest rates are close to market rate at each period end.

The Group measures its cash equivalents, short-term investments and time deposits at fair value. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:

Accounts receivable are recorded net of allowance for bad debts. An allowance for doubtful accounts is provided based on an aging analysis of accounts receivable balances, historical bad debt rates, repayment patterns, customer credit worthiness and industry trend analysis. The Group also makes a specific allowance if there is strong evidence showing that the receivable is likely to be unrecoverable.

Equity investments are investments in privately held companies. The Group accounts for an equity investment over which it has significant influence but does not own a majority of the equity interest or lack of control using the equity method. For equity investments which the Group does not have significant influence, the cost method accounting is applied.

In 2011, the Group entered into a limited partnership agreement to invest in a VC Fund as a limited partner, and the Group accounted for the equity investments in the VC Fund under equity method. In applying the equity method, starting from 2014, the Group retains the industry-specific guidance applied by the VC Fund as an investment company, as a result of which the Group recognizes its share on the changes of the fair values of the VC Fund's investments as "Share of (loss) / income from equity investments" in the Group's Consolidated Statements of Income and Comprehensive Income.

The Group assesses its equity investments for other-than-temporary impairment by considering factors as well as all relevant and available information including, but not limited to, current economic and market conditions, the operating performance of the invested companies including current earnings trends and other company-specific information such as financing rounds. Impairment charges on equity investments are included in "Share of (loss) / income from equity investments." For the years ended December 31, 2012, 2013 and 2014, Nil, Nil and RMB4,448,952 were recorded as impairment charges, respectively.

Property, equipment and software are stated at cost less accumulated depreciation and impairment. Property, equipment and software are depreciated at rates sufficient to write off their costs less

impairment and residual value, if any, over the estimated useful lives on a straight-line basis. The estimated useful lives are as follows:


		Estimated useful life
Office building		33 - 45 years
Office furniture		5 years
Computers & office equipment		4 years
Game servers		4 years
Motor vehicle		6 years
Office improvement		20 years
Leasehold improvement		Lesser of the term of the lease or the estimated useful lives of the assets
Software		5 years

Repairs and maintenance costs are expensed as incurred. Gain or loss on the disposal of property and equipment is the difference between the net sale proceeds and the carrying amount of the relevant assets and is recognized in the Consolidated Statements of Income and Comprehensive Income.

Direct costs that are related to the construction of fixed assets and incurred in connection with bringing the assets to their intended use are capitalized as construction in progress. Construction in progress is transferred to specific fixed asset items and the depreciation of these assets commences when the assets are ready for their intended use.

Copyrights such as intellectual property licensed from third parties to develop online games, domain names and game engines purchased from third parties are initially recorded at cost and amortized on a straight-line basis over the estimated useful economic life of approximately two to twenty years.

The Group performs valuation of the intangible assets arising from assets acquisition and business combinations to determine the relative fair value to be assigned to each asset acquired. The acquired

intangible assets are recognized and measured at fair value and are expensed or amortized using the straight-line approach over the assets' estimated economic useful lives as follows:


		Estimated useful life
Game engine		5 years
Non-compete agreements		3 - 5 years
Completed game		1.6 - 6 years
Customer relationships		3 - 6.5 years
Trade name, domain name and license acquired from business combinations		Indefinite life

The accounting treatment for in-process research and developments ("IPR&D") varies based on how they were acquired. IPR&Ds acquired from an asset acquisition are expensed at the acquisition date if it has no alternate future use. For IPR&Ds acquired from a business combination, they were initially measured at fair value using market participant assumptions and were capitalized as indefinite-lived assets until the abandonment or completion of the associated research and development efforts. After initial recognition, those assets shall be considered indefinite-lived and tested for impairment until the associated research and development activities are either completed, at which point a determination of the assets' useful lives and methods of amortization should be made, or are abandoned. Research and development expenditures that are incurred after the acquisition, including those for completing the research and development activities related to the acquired intangible research and development assets, are generally expensed as incurred.

The Group capitalizes the research and development costs qualified for the capitalization as intangible assets and amortized over the estimated life of the corresponding online games, commencing from these games are available for marketing use. See Note 3-(19) for more details regarding online game product development costs.

Long-lived assets including intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, or that the useful life is shorter than the Group had originally estimated. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of any impairment charge for long-lived assets including certain identifiable intangible assets that management expects to hold and use is based on the amount the carrying value exceeds the fair value of the asset. Indefinite-lived intangible assets are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of the intangible asset to its carrying amount. If the carrying amount exceeds the fair value, an impairment charge is recognized equal in amount to that excess. The impairment charges of intangible assets

recorded in cost of revenues for the years ended December 31, 2012, 2013 and 2014 were amounting to RMB11,201,856, Nil and RMB6,185,698, respectively. The impairment charges of intangible assets recorded in general and administrative expenses for the years ended December 31, 2012, 2013 and 2014 were amounting to RMB1,649,923, RMB4,972,726 and RMB23,279,508, respectively. The impairment charges of intangible assets recorded in research and development expenses for the years ended December 31, 2012, 2013 and 2014 were amounting to Nil, Nil and RMB6,418,553, respectively. The impairment charges of long-lived assets recorded in cost of revenues for the years ended December 31, 2012, 2013 and 2014 were amounting to RMB8,117,828, RMB18,925,296 and RMB2,502,507, respectively. The impairment of above mentioned intangible assets (mainly comprise of online game development costs) and long-lived assets (mainly comprise of prepaid license and royalty fees) recorded in cost of revenues was primarily caused by unsatisfactory performance of the Group's certain smaller games in 2012, 2013 and 2014. The impairment of above mentioned intangible assets recorded in general and administrative expenses was caused by impairment of trademark recognized from the acquisition of C&C Media in April 2010 and U.S. subsidiary in August 2011. The impairment of above mentioned intangible asset recorded in research and development expenses was caused by impairment of a game development engine purchased from a third party in September 2011.

Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired in a business combination.

Goodwill is not depreciated or amortized but is tested for impairment on an annual basis every November 30, and in between annual tests when an event occurs or circumstances change that could indicate that the asset might be impaired. Commencing in September 2011, in accordance with the FASB revised guidance on "Testing of Goodwill for Impairment," a company first has the option to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the company decides, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is mandatory. Otherwise, no further testing is required. The quantitative impairment test consists of a comparison of the fair value of each reporting unit with its carrying amount, including goodwill. If the carrying amount of each reporting unit exceeds its fair value, an impairment charge equal to the difference between the implied fair value of the reporting unit's goodwill and the carrying amount of goodwill will be recorded. Application of a goodwill impairment test requires significant management judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. The judgment in estimating the fair value of reporting units includes estimating future cash flows, determining appropriate discount rates and making other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit. The goodwill impairment charges for the years ended December 31, 2012, 2013 and 2014 were RMB40,769,946, RMB77,290,117 and RMB58,211,063, respectively. See Note 14 for more details regarding goodwill.

The Group earns majority of its revenue through providing online game operation services to players pursuant to two types of revenue models: a time-based revenue model and an item-based revenue model. For online games using the time based revenue model, players are charged based on the time they spend playing games. Under the item-based revenue model, the basic game play functions are free of charge, and players are charged for purchases of in-game items. For games which use the time-based revenue model, revenue is recognized based upon the actual usage of the game playing time by the players. For games which use the item-based revenue model, revenues from the sales of in-game items are recognized when the items are consumed by the customers or over the estimated lives of the items. The average period that players typically play the games and other player behavior patterns, which are affected by various factors such as acceptance and popularity of expansion packs, promotional events launched and market conditions, are utilized to arrive at the best estimates for lives of these in-game items.

The Group assesses the estimated lives of in-game items for all the item-based online games periodically. If there are indications of any significant changes to the estimated lives of the in-game items, it would be applied in the period of change prospectively.

For the client-based online PC games, under both the time-based and the item-based revenue models, proceeds received from sales of online points to players are recorded as deferred revenues, while proceeds received from sales of online points to distributors and sales of prepaid cards are initially recorded as advances from customers. As the Group does not have the control over and generally does not know the ultimate selling price of the prepaid cards or online points sold by the distributors, net proceeds received from distributors after deduction of sales discounts are recorded as advances from customers. Upon activation or charge of the game cards or the online points, these advances from customers are immediately transferred to deferred revenues. The Group provides sales incentives in the form of rebates to major distributors that meet or exceed the sales target. Accrued rebates, which are settled in the form of additional free prepaid cards, will result in higher average discount rate on in-game points, and will partially delay the revenue recognition until the consumption of free prepaid cards.

Prepaid cards will expire on the expiration date printed thereon. The proceeds from the expired game cards that have never been activated are recognized as other income upon expiration of the cards. For the years ended December 31, 2012, 2013 and 2014, the Group recognized RMB4,428,309, RMB1,555,307 and RMB1,656,035 as other income from expired game cards, respectively.

inactive players and the unused game points and items in these accounts. The Group believes it has a sufficiently long operating history to reliably estimate the inactive players' churn rate. The Group has adopted the policy of performing the reassessment of the estimated churn rate annually and considered its estimates to be reasonable. For the years ended December 31, 2012, 2013 and 2014, the Group recognized RMB98,367,393, RMB98,439,474 and RMB93,251,836 as revenue from the unused game points and items in the accounts inactive for more than 360 consecutive days, respectively.

The Group primarily operates mobile games under the item-based revenue model. The Group distributes mobile games to end-users through digital storefronts and game platforms such as Apple's App Store and Qihoo 360's game platform. These storefronts and platforms sell in-game virtual currencies to game players, which thereafter are redeemed by game players for virtual items in the mobile games operated by the Group. The storefronts and platforms remit the proceeds that they have received from game players to the Group, after retaining their revenue-sharing amounts at a pre-agreed percentage.

The Group records revenue generated from mobile games on a gross basis, which is based on the total amount billed to the game players, including the commissions retained by digital storefronts and game platforms, as the Group is acting as the principal and the primary obligor toward game players for the games distributed through digital storefronts and game platforms. The principal agent consideration is based on an assessment of various factors, including but not limited to whether the Group (i) is the primary obligor in the arrangement; (ii) has latitude in establishing the selling price; (iii) changes the product or performs part of the service and (iv) has involvement in the determination of product and service specifications.

The Group recognizes revenue, when persuasive evidence of an arrangement exists, the service has been provided to the end-users, the price paid by the user is fixed or determinable, and collectability is reasonably assured. Consistent with the Group's revenue recognition policies for client-based online PC games, under the item-based revenue model, for the purposes of determining when the service has been provided to the end-users, the Group has determined that an implied obligation exists to the paying user to continue displaying the purchased virtual items within the game over the virtual items' estimated useful lives. However, currently, due to the limited operating history of mobile games, the Group does not have the ability to differentiate the redemption respectively on consumable or permanent items and track the consumption of each consumable item. Therefore, the Group recognizes revenue from the sale of virtual currencies and other virtual items with regard to a mobile game ratably over the paying players' estimated player life, which is the average period between the first date the paying players charge online points to their accounts and the expected last date these paying players would play the game.

The Group enters into licensing arrangements with licensees to operate the Group's games in other countries and regions. These licensing agreements provide two revenue streams: the initial fees and the usage-based royalty fees.

In certain licensing arrangements, the Group provides free upgrades, maintenance support and training (i.e. post-contract customer support or PCS) for the first year, and the licensee has the option to purchase PCS in subsequent years at a specified renewal rate. In these arrangements, the Group allocates the initial fee into two parts. The first part represents the license of the game and is recognized as license revenue immediately once the games are launched. The second part represents PCS and is recognized ratably over the PCS contractual period.

In other licensing arrangements, the Group provides PCS over the full licensing period at no additional charge. In those cases, the total amount of the initial fee is recognized ratably over the full contractual licensing period.

According to the license agreements, the Group is also entitled to ongoing usage-based royalties determined based on the amount of money charged to the players' accounts or services payable by players in a given country or region. The usage-based royalties are recognized when they are earned, provided that the collection is probable.

For online game revenues, deferred revenues represent a) the portion of unexpired online point fees received from players that are either unredeemed by players, or redeemed to virtual items which have not been consumed or expired, and b) proceeds from storefronts and platforms pending to be recognized over the estimated player life. For licensing revenues, deferred revenues represent the unamortized balance of the initial license fee paid by licensees. Non current deferred revenues are primarily comprised of unamortized initial license fees and unrecognized online game revenues from the in-game virtual items to be recognized beyond the next 12 months.

The deferred revenues related to online game operation as of December 31, 2013 and 2014 were RMB774,622,249 and RMB886,018,689, respectively. The deferred revenues related to licensing as of December 31, 2013 and 2014 were RMB6,204,409 and RMB13,057,558, respectively.

Costs of revenues consist primarily of server and bandwidth leasing fees, staff costs involved in the operation of online games including network operation and customer services, revenue-sharing cost or royalties paid to third parties, value added tax ("VAT"), business tax and other direct costs of providing these services.

The Group has adopted the gross presentation for VAT and business tax. VAT and business tax are included in revenues and cost of revenues.

The total amount of net VAT and business tax with related surcharges recorded in cost of revenues for the years ended December 31, 2012, 2013 and 2014 were RMB117,562,400, RMB157,804,042 and RMB 195,083,998, respectively.

Costs incurred for the development of online game products prior to the establishment of technological feasibility are expensed when incurred and are included in product development expenses. Once an online game product has reached technological feasibility, all subsequent online game product development costs are capitalized until the product is available for general release to customers. Commencing the game is available for marketing use, the capitalized product development costs are amortized as a component of online game related costs over the estimated life of the game.

For the years ended December 31, 2012, 2013 and 2014, the amount of online game development costs capitalized as intangible assets was approximately RMB5,875,774, RMB47,863,589 and RMB19,171,502, respectively.

Share-based compensation expense is for share awards, including share options and restricted shares. For service-based share options awards, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense on a straight-line basis, net of estimated forfeitures, over the requisite service period, which is generally the vesting period. For performance-based share options awards, the performance goals and vesting schedule of these awards are determined by the board of directors. For the performance-based awards, an evaluation is made each quarter as to the likelihood of the performance criteria being met. Share-based compensation costs are then recorded for the number of options expected to vest on a graded-vesting basis, net of estimated forfeitures, over the requisite service period, which is generally the vesting period. The Black-Scholes option pricing model is used to determine the fair value of share options. The determination of the fair values of share-based compensation awards on the date of grant using the Black-Scholes option pricing model is affected by the share price as well as assumptions regarding a number of complex and subjective variables, including the expected share price volatility over the expected term of the awards, the expected term of the awards, risk-free interest rates and expected dividends. The market price of the underlying shares on the grant date is applied in determining the fair value of the ordinary shares.

A change in any of the terms or conditions of stock options shall be accounted for as a modification of the plan. Therefore, the Group calculates incremental compensation cost of a modification as the excess of the fair value of the modified option over the fair value of the original option immediately before its terms are modified, measured based on the share price and other pertinent factors at the modification date. For vested share options, the Group would recognize incremental compensation cost in the period the modification occurs. For unvested share options, the Group would recognize, over the remaining requisite service period, the sum of the incremental

compensation cost and the remaining unrecognized compensation cost for the original award on the modification date.

Current income taxes are provided on the basis of income for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions. Deferred income taxes are provided using the liability method. Under this method, deferred income taxes are recognized for the tax consequences of 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 purpose. The effect on deferred taxes of a change in tax rates is recognized in the Consolidated Statements of Income and Comprehensive Income in the period of change. 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.

In order to assess uncertain tax positions, the Group applies a more likely than not threshold and a two-step approach for the tax position measurement and financial statement recognition. For the two-step approach, the first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

The Group's subsidiaries and the VIEs incorporated in China are required to make appropriations to certain reserves.

In accordance with the China Foreign Investment Enterprises laws, those of the Group's China-based subsidiaries that are considered under PRC law to be wholly foreign-owned enterprises are required to make appropriations from their after-tax profit as determined under generally accepted accounting principles in the PRC (the "after-tax-profit under PRC GAAP") to non-distributable reserve funds, including (i) a general reserve fund, (ii) an enterprise expansion fund, and (iii) a staff bonus and welfare fund. Each year, at least 10% of the after-tax-profit under PRC GAAP is required to be set aside as general reserve fund until such appropriations for the fund equal 50% of the registered capital of the applicable entity. The appropriations for the other two reserve funds are at the Group's discretion as determined by the board of directors of each entity.

Pursuant to the China Company Laws, those of the Group's China-based entities that are considered under PRC law to be VIEs are required to make appropriations to non-distributable reserve funds, comprising the statutory surplus reserve and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the People's Republic of China (the "PRC GAAP"). Appropriation to the statutory surplus reserve should be at

least 10% of the after-tax net income determined in accordance with the legal requirements in the PRC until the reserve is equal to 50% of the entities' registered capital. Appropriation to the discretionary surplus reserve is made at the discretion of the board of directors.

The staff bonus and welfare fund is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation. Other statutory reserves are established for the purpose of offsetting accumulated losses, enlarging productions or increasing share capital.

For the years ended December 31, 2012, 2013 and 2014, profit appropriation to general reserve fund and statutory surplus reserve for the Group's entities incorporated in China was approximately RMB4,923,933, RMB39,400,899 and RMB19,391,219, respectively. No appropriation to other reserves were made for any of the years presented.

The Group expenses advertising costs as incurred. Total advertising expenses were RMB160,279,673, RMB318,854,568 and RMB328,834,695 for the years ended December 31, 2012, 2013 and 2014, respectively, and were recorded in sales and marketing expenses.

Each lease is classified at the inception date as either a capital lease or an operating lease. For the lessee, a lease is a capital lease if any of the following conditions exist: (a) ownership is transferred to the lessee by the end of the lease term, (b) there is a bargain purchase option, (c) the lease term is at least 75% of the property's estimated remaining economic life or (d) the present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the leaser at the inception date. A capital lease is accounted for as if there was an acquisition of an asset and an incurrence of an obligation at the inception of the lease. All other leases are accounted for as operating leases. The Group has no capital leases for any of the years presented.

Basic earnings per share is computed by dividing net income attributable to holders of ordinary shares by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share is calculated by dividing net income attributable to common shareholders as adjusted for the effect of dilutive common equivalent shares, if any, by the weighted average number of common and dilutive common share equivalents outstanding during the period. Common share equivalents consist of the common shares issuable upon the exercise of share options (using the treasury stock method). Common share equivalents are not included in the denominator of the diluted earnings per share calculation when inclusion of such shares would be anti-dilutive, such as in a period in which a net loss is recorded. Stock options with performance conditions are included in the computation of diluted EPS if the options are dilutive and if their conditions (a) have been satisfied at the reporting date or (b) would have been satisfied if the reporting date was the end of the contingency period.

The board of directors of the Company may from time to time declare dividends (including interim dividends) and distributions on shares of the Company outstanding and authorize payment of the same out of the funds of the Company lawfully available.

Under PRC regulations, the Group's subsidiaries incorporated in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC GAAP and relevant regulations. In addition, the Group's subsidiaries are required to annually appropriate 10% of net after-tax income to the statutory general reserve fund (see Note 3-(22)) prior to payment of any dividends, unless such reserve fund has reached 50% of their respective registered capital. The reserve fund is not distributable in the form of cash dividends to the Company.

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker ("CODM"), or decision making group, in deciding how to allocate resources and in assessing performance. The Group's CODM is the Chief Executive Officer.

The Group's organizational structure is based on a number of factors that the CODM uses to evaluate, view and run its business operations which include, but are not limited to, customer base, homogeneity of products and technology. The Group's operating segments are based on this organizational structure and information reviewed by the Group's CODM to evaluate the operating segment results.

Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding those resulting from investments by shareholders and distributions to shareholders. The Group has recognized the foreign currency translation adjustments as Other comprehensive income / (loss) in the Consolidated Statements of Income and Comprehensive Income. See Note 3-(4) for more details concerning the foreign currency translation adjustments.

A discontinued operation is a component of the Group that may be a reportable segment or an operating segment, a reporting unit, a subsidiary or an asset group that has been disposed or is held for sale. The results of that component are separately reported as "discontinued operations" in the Consolidated Statements of Income and Comprehensive Income. The comparative Consolidated Statements of Income and Comprehensive Income are restated as if the operation had been discontinued from the start of the comparative period. The assets and liabilities of such component classified as "discontinued operations" or "assets/liabilities held for sale" are presented separately in the assets and liabilities, respectively, of the Consolidated Balance Sheets upon such classification being made.

On May 28, 2014, the FASB and IASB issued their long-awaited converged standard on the recognition of revenue from contracts with customers. The standard is intended to improve the financial reporting of revenue and improve comparability of the top line in financial statements globally. The FASB is amending the FASB Accounting Standards Codification and creating a new Topic 606, Revenue from Contracts with Customers, to supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. For a public entity, the amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Group is currently evaluating the impact on its consolidated financial statements of adopting this guidance.

In June 2014, under ASC 718, Compensation—Stock Compensation, the FASB issued Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. These amendments apply to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a performance target could be achieved and still be eligible to vest in the award if and when the performance target is achieved. For all entities, the amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The Group is currently evaluating the impact on its consolidated financial statements of adopting this guidance.

In August 2014, the FASB issued Presentation of Financial Statements—Going Concern. This standard requires management to evaluate for each annual and interim reporting period whether it is probable that the reporting entity will not be able to meet its obligations as they become due within one year after the date that the financial statements are issued. If the entity is in such a position, the standard provides for certain disclosures depending on whether or not the entity will be able to successfully mitigate its going concern status. This guidance is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. Early application is permitted. The Company does not anticipate that adoption will have a significant impact on its financial position, results of operations, or cash flows.

There are no customers whose revenues individually represent greater than 10% of the total revenues for the years ended December 31, 2012, 2013 and 2014.

Online game operation revenues from the Group's certain games operated in China, namely Zhu Xian, Perfect World II and Return of the Condor Heroes Mobile, in aggregate contributed 42%, 32% and 34% of the Group's total revenues in 2012, 2013 and 2014, respectively. Except for Zhu Xian, Perfect World II and Return of the Condor Heroes Mobile, none of the rest of the Group's games operated in any single country individually contributed more than 10% of the Group's total revenues in 2012, 2013 or 2014.

Financial instruments that potentially subject the Group to significant concentrations of credit risk primarily consist of cash and cash equivalents, restricted cash, short-term investments, time deposits and restricted time deposits. As of December 31, 2013 and 2014, majority of all of the Group's cash and cash equivalents, restricted cash and time deposits, short-term investments, time deposits and restricted time deposits were held by major financial institutions located in the PRC, Hong Kong and U.S., which management believes are of high credit quality. China does not have an official deposit insurance program, nor does it have an agency similar to The Federal Deposit Insurance Corporation ("FDIC") in the United States. However, the Group believes that the risk of failure of any of these PRC banks is remote. Bank failure is extremely uncommon in China and the Group believes that those PRC banks that hold the Company's cash and cash equivalents, restricted cash, short-term investments and time deposits are financially sound based on public available information.

A majority of the Group's operating transactions are denominated in RMB and a significant portion of the Group's assets and liabilities is denominated in RMB. RMB is not freely convertible into foreign currencies. The value of RMB is subject to changes in the central government policies and to international economic and political developments. In the PRC, certain foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People's Bank of China ("PBOC"). Remittances in currencies other than RMB by the Group in China must be processed through PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to process the remittance.

To meet guarantee requirement for office rental, the Group has RMB7,597,873 and RMB7,640,679 non current restricted time deposits as of December 31, 2013 and 2014. To maintain guarantee balances at the bank as a collateral for the banking facility or short-term loans of US dollars (see Note 15), as of December 31, 2013 and December 31, 2014, the Group has RMB226,100,000 and RMB785,145,000 restricted cash and time deposits, respectively, which were bank deposits with the original term of one year at certain banks.

As of December 31, 2013 and 2014, information about inputs into the fair value measurements of the Group's assets that are measured at fair value on a recurring basis in periods subsequent to their initial recognition is as follows:

When available, the Group uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Group will measure fair value using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such as interest rates and currency rates. Following is a description of the valuation techniques that the Group uses to measure the fair value of assets that the Group reports on its balance sheet at fair value on a recurring basis.

Money market fund. The Group values its money market fund using observable inputs that reflect quoted prices for securities with identical characteristics, and accordingly, the Group classifies the valuation techniques that use these inputs as Level 1.

Available-for-sale securities. The Group's available-for-sale securities consisted of structured deposits with certain financial institutions. Available-for-sale securities are valued using alternative pricing sources and models utilizing market observable inputs, and accordingly the Group classifies the valuation techniques that use these inputs as Level 2.

Time deposits. The Group values its time deposits put in certain bank account using quoted prices for securities with similar characteristics and other observable inputs, and accordingly, the Group classifies the valuation techniques that use these inputs as Level 2.

Restricted cash and restricted time deposits. Restricted cash and restricted time deposits are valued based on the pervasive interest rate in the market, and accordingly, the Group classifies the valuation techniques that use these inputs as Level 2.

Equity investment in the VC Fund. The Group's share on the changes in the fair value of the VC Fund's investments was recorded in the Group's Consolidated Statements of Income and Comprehensive Income. The valuation of the fair value of the VC Fund's investments is based on inputs that are unobservable in the markets. Therefore, the Group classifies the valuation technique as Level 3 of fair value measurement.

The following are other financial instruments not measured at fair value in the Consolidated Balance Sheets, but for which the fair value was estimated for disclosure purposes.

Short-term receivables and payables. Accounts receivable, due from related parties, other receivables included in prepayments and other assets are financial assets with carrying values that approximate fair value due to their short term nature. Accounts payable, short-term bank loans, accrued expenses and other liabilities, and due to related parties are financial liabilities with carrying values that approximate fair value due to their short term nature. The rates of interest under the loan agreements with the lending banks were determined based on the prevailing interest rates in the market. The Group classifies the valuation techniques that use these inputs as Level 2 of fair value measurements of short-term bank loans. The Group estimated fair values of other short-term receivables and payables using the discounted cash flow method. The Group classifies the valuation technique as Level 3 of fair value measurement, as it uses estimated cash flow input which is unobservable in the market. For the years ended December 31, 2013 and 2014, there were no materially differences between the fair values and the carrying amounts.

There were no changes to the fair value measurement techniques, or movement of amounts from one Level to another for the years ended December 31, 2013 and 2014.

Accounts receivable are mainly related to the sale of game cards to distributors, initial license fees, usage based royalty fees due from licensees and revenue-sharing due from distribution channels. As the Company determined it is likely that some of the accounts receivable would not be collected based on the regular reviews performed in 2014, the Company made additional provision of RMB12,540,836 for bad debt for the year ended December 31, 2014.

	Cost Method						Equity Method

	TiKL			Other Investments			Zhizhu Network			Unknown Worlds			Venture Capital Fund			Youtang			Daqu			Other Investments			Total
	RMB			RMB			RMB			RMB			RMB			RMB			RMB			RMB			RMB
Balance as of December 31, 2012		—			—			20,944,906			16,400,017			190,487,134			—			—			—			227,832,057
Investments		—			—			—			5,098,956			197,982,823			20,000,000			40,000,000			18,250,000			281,331,779
Share of (loss) / income in equity investments		—			—			(589,264	)		971,817			(13,345,038	)		(700,401	)		(109,401	)		(1,425,862	)		(15,198,149	)
Converted to controlling interest (Note 11-(2))		—			—			—			(22,457,817	)		—			—			—			—			(22,457,817	)
Foreign currency translation adjustments		—			—			—			(12,973	)		(1,476,182	)		—			—			—			(1,489,155	)

Balance as of December 31, 2013		—			—			20,355,642			—			373,648,737			19,299,599			39,890,599			16,824,138			470,018,715
Investments		30,762,509			14,150,939			—			—			217,737,036			—			16,000,000			43,578,726			322,229,210
Disposal		—			—			—			—			—			—			—			(666,667	)		(666,667	)
Share of income / (loss) in equity investments		—			—			580,639			—			15,511,502			907,621			(149,039	)		(3,851,386	)		12,999,337
Impairment charges		—			—			—			—			—			—			—			(4,448,952	)		(4,448,952	)
Foreign currency translation adjustments		(167,500	)		(77,737	)		—			—			(61,082	)		—			—			(28,035	)		(334,354	)

Balance as of December 31, 2014		30,595,009			14,073,202			20,936,281			—			606,836,193			20,207,220			55,741,560			51,407,824			799,797,289

In September 2014, the Group made an investment of RMB30,762,509 in TiKL Inc. ("TiKL") to acquire 9% of its equity interest.

Other investments under cost method comprise of a number of equity investments in various entities with each individual investment amount ranging from approximately RMB4.9 million to RMB9.2 million. The Group adopted cost method for these investments as it has no significant influence over these investees.

In May 2014, the Group acquired a total of 30,326,005 Class A ordinary shares of Shanda Games Limited (NASDAQ: GAME), or Shanda Games, a leading online game developer, operator and publisher in China, from Shanda SDG Investment Limited, for a total consideration of US$100 million (RMB615.3 million) in cash. In September 2014, the Group sold such 30,326,005 Class A ordinary shares of Shanda Games at premium for a total consideration of US$104.6 million (RMB643.7 million) in cash to Shanghai Buyout Fund L.P., an unrelated third party. The disposal gain amounting to US$4.6 million (RMB28.5 million) was recorded in Share of income from equity investment.

In April 2010, the Group made an investment of RMB27.0 million in Beijing Zhizhu Network Technology Co., Ltd. ("Zhizhu Network"), a related party, to acquire 20% of its equity interest.

In August 2011, the Group made an investment of RMB10,803,330 in Unknown Worlds to acquire 40% of its equity interest. In February 2013, the Group started to consolidate Unknown Worlds as it acquired additional 20% equity interest in Unknown Worlds for RMB5,098,956 and obtained control of Unknown Worlds. See Note 11-(2) for more details.

In 2011, the Group entered into a limited partnership agreement to invest up to RMB643.5 million in a VC Fund over a nine-year period as a limited partner. The VC Fund is managed by one general partner unrelated to the Group and is focusing on companies with high-growth potentials in certain technology, media and telecommunications sectors. In March 2013, the Group increased its committed capital for an additional RMB396.0 million into the VC Fund, and the investment term was changed to 12 years. The Group holds 99% equity interest in the VC Fund and can exercise significant influence over the VC Fund but does not obtain control over it, therefore the Group accounts for this investment using the equity method of accounting. As of December 31, 2014, the Group has contributed RMB615.7 million to the VC Fund.

In July 2013, the Group made an investment of RMB20,000,000 in Shanghai Youtang Network Technology Co., Ltd. ("Youtang"), to acquire 20% of its equity interest. In July 2014, the Group signed an agreement to sell all its shares in Youtang at a cash consideration of RMB50,000,000 to an unrelated third party, which is a public company listed on Shenzhen Stock Exchange in China. This transaction was subject to approval by Chinese Securities Regulatory Commission, which approved the transaction in March 2015. The transaction has been completed in April 2015.

In December 2013, the Group made an investment of RMB40,000,000 in Beijing Shouyou Daqu Technology Co., Ltd. ("Daqu"), to acquire 30% of its equity interest, of which RMB20,000,000 was paid upon investment. The remaining RMB20,000,000 was paid in 2014. In June 2014, the Group made an investment of RMB16,000,000 to acquire an additional 10% equity interest in Daqu.

Other investments under equity method comprise of a number of equity investments in various entities with each individual investment amount ranging from approximately RMB0.4 million to RMB12.0 million. The Group adopted equity method for these investments as the Group considered it has significant influence over these companies.

In accordance with Rule 4-08 of Regulation S-X, as the 10% significant subsidiary test was met for the year ended December 31, 2014, the Company summarizes the condensed financial information of the investees of the Company's equity investments accounted for under equity method as below:

The depreciation expenses for property, equipment and software were RMB123,749,329, RMB132,442,355 and RMB140,412,434 for the years ended December 31, 2012, 2013 and 2014, respectively.

In April 2009, the Group made an investment of approximately RMB15,000,000 in Ye Net to acquire 30% of its equity interest. Ye Net is principally engaged in web game development and operation. The equity interest of the Group in Ye Net was increased to 37.5% in 2010 triggered by certain key performance indicator set in the original agreement with no additional consideration paid. In January 2011, the Group acquired additional 42.5% equity interest of Ye Net triggered by certain key performance indicator set in the original agreement, for a total consideration of RMB3,000,000. The gain recognized on revaluation of the previously held equity method investment in Ye Net was not material.

As of December 31, 2011, the Group held 80% equity interest in Ye Net. The non-controlling interest was recognized based on its acquisition date fair value, and was subsequently adjusted by attribution of net income or loss and other comprehensive income or loss based on its relative ownership interests in Ye Net.

In a business combination achieved in stages, the Group re-measured its previously held equity interest in Ye Net at its acquisition-date fair value using the discounted cash flow method. The excess of (i) the total of the value of consideration transferred, fair value of the non-controlling interests and acquisition date fair value of previously held equity interest in Ye Net over (ii) the fair value of the identifiable net assets of Ye Net was recorded as goodwill relating to the PRC operating segment. The goodwill is not expected to be deductible for tax purposes. The Group made estimates and judgments in determining the fair value of acquired assets and liabilities, based on independent appraisal reports

and management's experience with similar assets and liabilities. The final purchase price allocation results as of the acquisition date were set out below:

Goodwill primarily represents the expected synergies from combining operations of the Group and Ye Net, which are complementary in a way to each other, and any other intangible benefits that would accrue to the Group that do not qualify for separate recognition. The fair value of non-controlling interest was estimated by applying an income approach. No measurement period adjustment has been recorded.

Based on the assessment on the acquired company's financial performance made by the Group, the acquired company is not considered material to the Group. Thus the presentation of the pro forma financial information with regard to a summary of the results of operations of the Group for the business combination is not required.

In July 2012, the Group further entered into a share transfer agreement with the other equity holders of Ye Net, to acquire the remaining 20% equity interest held by the other equity holders for a consideration of approximately RMB4,444,444. The Group holds 100% equity in Ye Net after this transaction. As the Group maintained controlling financial interest before and after the acquisition, such change in ownership interest was accounted for as an equity transaction and no gain or loss shall be recognized. Hence, the difference between the purchase consideration and the carrying amount of the non-controlling interest, amounting to RMB912,252, was recorded in additional paid-in capital of the Group.

In August 2011, the Group made an investment of approximately RMB10,803,330 in Unknown Worlds to acquire 40% of its equity interest. Unknown Worlds is principally engaged in game

development and operation. In February 2013, the Group acquired additional 20% equity interest of Unknown Worlds for a total consideration of approximately RMB5,098,956. The gain recognized on revaluation of the previously held equity method investment in Unknown Worlds was not material. The Group holds 60% equity in Unknown Worlds after this transaction. As the Group obtained control of Unknown Worlds on the acquisition date, it started to consolidate Unknown Worlds' financial statements thereafter. The non-controlling interest was recognized based on its acquisition date fair value, and was subsequently adjusted by attribution of net income or loss and other comprehensive income or loss based on its relative ownership interests in Unknown Worlds.

In a business combination achieved in stages, the Group re-measured its previously held equity interest in Unknown Worlds at its acquisition date fair value using the discounted cash flow method. The excess of (i) the total of the value of consideration transferred, fair value of the non-controlling interests and acquisition date fair value of previously held equity interest in Unknown Worlds over (ii) the fair value of the identifiable net assets of Unknown Worlds was recorded as goodwill relating to the International operating segment. The goodwill is not expected to be deductible for tax purposes. The Group made estimates and judgments in determining the fair value of acquired assets and liabilities, based on management's experience with similar assets and liabilities. The final purchase price allocation results as of the acquisition date were set out below:

Goodwill primarily represents the expected synergies from combining operations of the Group and Unknown Worlds, which are complementary in a way to each other, and any other intangible benefits that would accrue to the Group that do not qualify for separate recognition. The fair value of non-controlling interest was estimated by applying an income approach. No measurement period adjustment has been recorded.

Based on the assessment on the acquired company's financial performance made by the Group, the acquired company is not considered material to the Group. Thus the presentation of the pro forma

financial information with regard to a summary of the results of operations of the Group for the business combination is not required.

In December 2013, the Group invested approximately RMB255,000,000 to acquire 100% equity interest of Wuhu Huitian, of which RMB153,000,000 was paid upon acquisition. The remaining non-contingent purchase consideration of RMB102,000,000 would be paid in one year from the contract date. Upon consummation of the transaction, Wuhu Huitian became the Group's wholly owned subsidiary. The main purpose of the acquisition is to create synergies and provide better support for the Group's gaming business, and to capture new growth opportunities in the broad spectrum of the future gaming industry. As of December 31, 2014, the Group has paid RMB101,200,000 out of the remaining purchase consideration to the original shareholders of Wuhu Huitian.

The acquisition had been accounted for as a business combination and the results of operations of Wuhu Huitian from the acquisition date have been included in the Group's consolidated financial statements. The allocation of the purchase price is as follows:

The excess of purchase price over net tangible assets and identifiable intangible assets acquired were recorded as goodwill relating to the PRC operating segment. The goodwill is not expected to be deductible for tax purposes. No significant measurement period adjustment has been recorded.

In April 2014, the Group entered into an agreement to acquire 100% equity interest of Fuzhou Online Game. Pursuant to the pricing mechanism stipulated in the agreement and a supplemental agreement signed in September 2014, the total consideration for the acquisition amounted to RMB48,248,000, among which RMB17,624,000 is subject to an adjustment based on the fair value of equity of Fuzhou Online Game as of the settlement date prior September 3, 2015 and which is considered as contingent consideration that is recorded at fair value. For the year ended December 31, 2014, the Group has paid cash consideration of RMB25,000,000. As of December 31, 2014, the Group did not expect a material change in the fair value of the equity of Fuzhou Online Game on future settlement date, as a result of which there was no adjustment in the balance of contingent consideration payable for the year ended December 31, 2014.

As a result of the above transactions, Fuzhou Online Game became the Group's wholly owned subsidiary. Fuzhou Online Game is principally engaged in game portal operation. The main purpose of the acquisition is to create synergies and provide better support for the Group's gaming business, and to capture new growth opportunities in the broad spectrum of the future gaming industry.

The acquisition had been accounted for as a business combination. The excess of (i) the total consideration over (ii) the fair value of the identifiable net assets of Fuzhou Online Game was recorded as goodwill relating to the PRC operating segment. The goodwill is not expected to be deductible for tax purposes. The Group made estimates and judgments in determining the fair value of acquired assets and liabilities, based on management's experience with similar assets and liabilities. The purchase price allocation results as of the acquisition date were set out below:

In December 2013, the Company, the equity owners of PW Literature, and Beijing Baidu Netcom Science Technology Co., Ltd. ("Baidu"), entered into a definitive agreement to sell PW Literature to Baidu, for a total consideration of RMB191,500,000, for the acquisition of PW Literature's equity interests and the repayment of PW Literature's loan from the Company. The transaction was completed on December 31, 2013. The Company has recorded the disposal gain of RMB166,288,268 in the "Gain from disposal of discontinued operations, net of tax" account in the Consolidated Statements of Income and Comprehensive Income for the year ended December 31, 2013. The disposal gain represented the excess of (i) the total consideration net of direct transaction cost incurred for the disposal over (ii) the carrying value of the net assets of PW Literature, loan provided to and non-controlling interests in PW Literature as of the disposal date. Prior to the sale, PW Literature was included in the Company's PRC operating segment. The amount due from Baidu amounting to RMB54,280,000 was received in January 2014. Of the loan due from PW Literature amounting to RMB112,745,141 was repaid in July 2014 and RMB4,061,115 are expected to be repaid in December 2015.

Because there was no significant continuing cash flow from PW Literature expected to be generated by the ongoing entity and the Group will not have any significant continuing involvement in the operations of PW Literature after December 31, 2013, the revenues and expenses related to the operations of PW Literature have been segregated from continuing operations and reported as discontinued operations for all periods. Following are revenues and (loss) / income from discontinued operations:

Following are the carrying amounts of the major classes of assets and liabilities included as part of a disposal group as of disposal day:

	As of December 31, 2013										As of December 31, 2014

	Gross Carrying Amount		Accumulated Amortization			Impairment			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Impairment			Net Carrying Amount
	RMB		RMB			RMB			RMB		RMB		RMB			RMB			RMB
Copyrights		125,988,632		(56,056,872	)		—			69,931,760		153,120,143		(79,387,981	)		(6,418,553	)		67,313,609
Game engine		36,355,980		(24,489,448	)		—			11,866,532		42,885,594		(30,180,638	)		—			12,704,956
Non-compete agreements.		29,355,984		(27,703,206	)		—			1,652,778		32,987,828		(28,757,050	)		—			4,230,778
Trade name, domain name and license		123,427,084		(15,737,622	)		(6,622,649	)		101,066,813		141,935,889		(17,043,403	)		(29,902,157	)		94,990,329
Customer relationships		25,433,530		(7,719,641	)		—			17,713,889		28,903,530		(14,104,385	)		—			14,799,145
Completed game		148,640,168		(60,457,472	)		(2,122,400	)		86,060,296		149,098,967		(93,297,050	)		(3,930,246	)		51,871,671
IPR&D		2,184,736		—			—			2,184,736		2,184,736		—			—			2,184,736
Online game development costs		76,223,499		(26,902,606	)		(9,079,456	)		40,241,437		95,395,000		(38,996,616	)		(13,457,308	)		42,941,076
Others		1,040,000		(1,040,000	)		—			—		1,040,000		(1,040,000	)		—			—

Total		568,649,613		(220,106,867	)		(17,824,505	)		330,718,241		647,551,687		(302,807,123	)		(53,708,264	)		291,036,300

Amortization expenses for the intangible assets were RMB59,366,824, RMB67,731,468 and RMB82,168,927 for the years ended December 31, 2012, 2013 and 2014, respectively.

The estimated amortization expenses for the above intangible assets for future annual periods:

The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after the Group's acquisition. The changes in the carrying value of goodwill and accumulated impairment charges by segment are as follows:

	Online Game Related Operation

	PRC			International			Total
	RMB			RMB			RMB
Balance as of December 31, 2012
Goodwill		112,424,861			337,174,502			449,599,363
Accumulated impairment charges		(1,818,861	)		(38,951,085	)		(40,769,946	)

		110,606,000			298,223,417			408,829,417



Transaction in 2013
Increase in goodwill related to acquisition		186,974,504			18,315,375			205,289,879
Impairment charges		—			(77,290,117	)		(77,290,117	)
Foreign currency translation adjustment		—			(25,558,299	)		(25,558,299	)
Balance as of December 31, 2013
Goodwill		299,399,365			329,931,578			629,330,943
Accumulated impairment charges		(1,818,861	)		(116,241,202	)		(118,060,063	)

		297,580,504			213,690,376			511,270,880



Transaction in 2014
Increase in goodwill related to acquisition		24,515,702			—			24,515,702
Impairment charges		—			(58,211,063	)		(58,211,063	)
Foreign currency translation adjustment		—			2,087,877			2,087,877
Balance as of December 31, 2014
Goodwill		323,915,067			332,019,455			655,934,522
Accumulated impairment charges		(1,818,861	)		(174,452,265	)		(176,271,126	)

		322,096,206			157,567,190			479,663,396

The Group performs its annual goodwill impairment test of each reporting unit as of November 30, or more frequently, if certain events or circumstances warrant. Events or changes in circumstances which might indicate potential impairment in goodwill include the company-specific factors, including, but not limited to, stock price volatility, market capitalization relative to net book value, and projected revenue, market growth and operating results. Determining the number of reporting units and the fair value of a reporting unit requires the Group to make judgments and involves the use of significant estimates and assumptions. Under PRC operating segment, the Group identified one reporting unit as PRC online game business. Under International operating segment, the Group identified the following three reporting units for goodwill impairment testing: U.S. online game business, Runic Games and Unknown Worlds.

In September 2014, in view of U.S. online game business' performance during 2014 and near-term business outlook that were below our expectations, the Group performed an interim assessment on the goodwill related to the reporting unit of U.S. online game business and recognized an estimated goodwill impairment charge of RMB40,242,058 in the third quarter of fiscal year 2014. The impairment

assessment on U.S. online game business' goodwill weighted the results from the income approach and considered a combination of factors, including, but not limited to, market conditions, expected future cash flows, growth rates and discount rates, which require the Group to make certain estimates and assumptions regarding industry economic factors and future profitability of the business.

As of November 30, 2014, the Group performed its annual goodwill impairment analysis of each reporting unit, based on which an impairment charge of RMB17,969,005 associated with Unknown Worlds reporting unit was recognized in view of sequential decline of revenue generated from the pay-per-install game developed by Unknown Worlds and its near-term business outlook. Thereafter, all goodwill arising from the acquisition of Unknown Worlds in February 2013 was fully impaired.

For the annual goodwill impairment analysis of U.S. online game business reporting unit, in view of the recent interim goodwill impairment assessment performed in September 2014, the Group assessed qualitative factors including macroeconomic conditions, industry and market considerations, the unit's overall financial performance and other events that may affect the reporting unit and determined that it is not more-likely-than-not that the fair value of the U.S. online game business reporting unit is less than its carrying amount and concluded that no further assessment was necessary. For the remaining reporting units, namely PRC online game business and Runic Games, the Group compared the fair value of the reporting units with their carrying amounts using income approach, and concluded that the fair value of the reporting units exceeded their carrying values and determined that no adjustment to the carrying value of goodwill for these reporting units was necessary. For PRC online game business reporting unit, the percentage by which fair value exceeds carrying value of goodwill was approximately 21.6%. For Runic Games reporting unit, the percentage by which fair value exceeds carrying value of goodwill was approximately 16.2%.

The Group used discounted cash flow method to estimate the fair value of their reporting units. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, and assumptions that are consistent with the plans and estimates being used to manage the Company's business, determining appropriate discount rates, estimation of the long-term rate of growth for the Company's business, estimation of the duration over which cash flows will occur, determination of the Company's weighted average cost of capital, and terminal value. The estimates of fair value of a reporting unit result from a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions at a point in time. The valuations are based on information available as of the impairment review date and are based on expectations and assumptions that have been deemed reasonable by management. Any changes in key assumptions, including unanticipated events and circumstances, may affect the accuracy or validity of such estimates and could potentially result in an additional impairment charge.

The goodwill impairment charges for the years ended December 31, 2012, 2013 and 2014 were RMB40,769,946, RMB77,290,117 and RMB58,211,063, respectively.

In August 2011, the Group entered into a loan agreement with a bank whereby on August 19, 2011 the Group effectively pledged certain time deposits with a total amount of RMB177,688,627 to secure a bank loan, totaling US$24,000,000 and bearing interest at 2.65% per annum over 3-month London Inter-Bank Offered Rate ("LIBOR") with the maturity date of August 19, 2012. Pursuant to the supplementary agreement to the loan agreement dated on August 19, 2012, the maturity date has been extended to August 19, 2013, with interest at 2.35% per annum over 3-month LIBOR. The bank loan was fully repaid in August 2013.

In March 2012, the Group entered into a loan agreement with a bank whereby on March 30, 2012, the Group effectively pledged certain time deposits with a total amount of RMB658,715,750 to secure a bank loan, totaling US$95,000,000 and bearing interest at 2.19% per annum. The bank loan was fully repaid in April, 2013.

In April 2013, the Group entered into a loan agreement with a bank whereby on April 8, 2013, the Group effectively pledged certain time deposits with a total amount of RMB161,000,000 to secure a bank loan, totaling US$25,000,000 carrying a floating rate of interest based on 3-month LIBOR plus 1%. The bank loan was fully repaid in March, 2014.

In August 2013, the Group entered into a loan agreement with a bank whereby on August 13, 2013, the Group effectively pledged certain time deposits with a total amount of RMB65,100,000 to secure a bank loan, totaling US$10,000,000 and bearing interest at 1% per annum over 3-month LIBOR. The bank loan was fully repaid in August 2014.

In April 2014, the Group entered into a banking facility agreement with a bank whereby on April 7, 2014, the Group effectively pledged certain time deposits with a total amount of RMB152,145,000 to secure a bank loan, totaling US$23,000,000 and bearing interest at 1% per annum over 1-month LIBOR. The bank loan was fully repaid in April 2015.

In April 2014, the Group entered into a banking facility agreement with a bank whereby on April 24, 2014, the Group effectively pledged certain time deposits with a total amount of RMB33,000,000 to secure a bank loan, totaling US$5,000,000 and bearing interest at 1% per annum over 1-month LIBOR. The bank loan was fully repaid in April 2015.

In May 2014, the Group entered into a banking facility agreement with a bank whereby on May 14, 2014, the Group effectively pledged certain time deposits with a total amount of RMB300,000,000 to secure a bank loan, totaling US$45,000,000 and bearing interest at 3.3877% per annum. The bank loan was fully repaid in October 2014. The pledged time deposits remained outstanding until May 13, 2015.

In May 2014, the Group entered into another banking facility agreement with a bank whereby on May 15, 2014, the Group effectively pledged certain time deposits with a total amount of RMB300,000,000 to secure a bank loan, totaling US$45,000,000 and bearing interest at 2.47% per annum over 3-month LIBOR. The bank loan was fully repaid in February 2015. The pledged time deposits were released on April 28, 2015.

The above pledged time deposits were classified as restricted time deposits due to the restrictions in use in due periods.

Government financial incentives are financial benefit granted to certain enterprises by the municipal government to encourage business development in local area. These government financial incentives are calculated with reference to either the group companies' taxable income or revenue, as the case may be. In order to be eligible for certain government financial incentives, the Group must meet a number of criteria, both financial and non-financial. In addition, the Group's qualification is further subject to the discretion of the municipal government to immediately eliminate or reduce these financial incentives. As there is no further obligation for the Group to perform to encourage companies' business development, government financial incentives are recognized as other income when received.

Platform service fees are earned from the technical support service provided to a third party's platform.

On September 6, 2006, the board of directors of the Company approved the Pre-IPO Share Incentive Plan, which was subsequently supplemented and revised by obtaining the approval from the board of directors of the Company on June 19, 2007. According to the revised Share Incentive Plan, 32,145,000 Class B ordinary shares were reserved to be issued to any qualified employees, as determined by the Board. On July 4, 2008, the Company's shareholders approved the amendment to the Share Incentive Plan by changing the option expiry date to the earlier of (i) termination of service with the Company, or (ii) the tenth anniversary of the grant date, unless an earlier time is set in the option award agreement. The amendment applies to share options granted after July 4, 2008.

On February 28, 2009, the Company's shareholders approved an amendment to the share incentive plan that effectively increased the number of Class B ordinary shares authorized for issuance under the share incentive plan by 10,000,000. On November 14, 2009, the Company's shareholders approved a further amendment to the share incentive plan that increased the number of Class B ordinary shares authorized for issuance under the share incentive plan to 44,645,000. In addition, the option expiry date was changed to the earlier of (i) the tenth anniversary of the grant date, unless an earlier time is set in the option award agreement, (ii) three months after the termination of service with the Company other than for disability or death, or (iii) one year after the termination of service with the Company due to disability or death. The amendment applies to share options granted after November 14, 2009.

On August 14, 2010, the Company's shareholders approved a 2010 Share Incentive Plan, under which 30,000,000 Class B ordinary shares have been reserved for future issuance.

On November 22, 2013, the Company's shareholders approved a 2013 Share Incentive Plan, under which 2% of the total number of Class B ordinary shares outstanding as of November 22, 2013, the date when this plan was approved by the Company's board of directors, 5,024,818 shares have been reserved in the award pool for future issuance.

Starting January 1, 2015, the award pool will be increased by a number on the first day of each year equal to 2% of the then total number of Class B ordinary shares outstanding, provided that at no time the unissued shares reserved in the award pool immediately after such annual increase shall exceed 5% of the then total number of Class B ordinary shares outstanding.

The Company granted 4,615,000, 12,700,000 and 200,000 service-based share options to its officers (including directors) and employees for the years ended December 31, 2012, 2013 and 2014, respectively. These awards generally vest over a four-year term, the vesting schedule of each share option award is determined by the board of directors.

Share-based compensation expenses related to service-based share options of RMB60,985,488, RMB69,852,854 and RMB46,382,853 were recognized in the Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2012, 2013 and 2014, respectively. The unamortized compensation costs related to unvested awards not yet recognized were RMB57,758,897 as

of December 31, 2014, adjusted for estimated forfeitures, and the weighted average period over which it would be recognized was 2.25 years.

The summary of service-based share options activities under the Share Incentive Plan as of December 31, 2014, and changes during the year is presented below:

The weighted-average grant date fair value of options granted during the years ended December 31, 2012, 2013 and 2014 were RMB4.80 (US$0.76), RMB5.95 (US$0.96) and RMB15.12 (US$2.46) per option, respectively.

The total intrinsic value of options exercised during the years ended December 31, 2012, 2013 and 2014 were RMB133,116,835, RMB19,681,115 and RMB16,487,975, respectively. The intrinsic value is calculated as the difference between the closing price of the Company's stock on the date of exercise and the exercise price of the options. The Company expects to issue new ordinary shares to satisfy share option exercises.

The estimated fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing method with the following assumptions:

Performance-based awards are generally vested over a four-year term. The performance goals and vesting schedule of these awards are determined by the board of directors. For those awards, an evaluation is made each quarter as to the likelihood of performance criteria being met. Compensation expenses are then adjusted to reflect the number of shares expected to vest to date. No performance-based options granted during the years ended December 31, 2012, 2013 and 2014.

Share-based compensation expenses related to performance-based share options of RMB10,159,104, RMB6,040,216 and RMB1,305,230 were recognized in the Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2012, 2013 and 2014, respectively. The unamortized compensation costs related to the unvested awards not yet recognized were RMB46,791 as of December 31, 2014, adjusted for estimated forfeitures and expected to vest performance-based options, and weighted average period over which it would be recognized was 0.39 year.

The summary of performance-based share options activities under the Share Incentive Plan as of December 31, 2014 and changes during the year is presented below:

The total intrinsic value of options exercised during the years ended December 31, 2012, 2013 and 2014 were RMB26,389,075, RMB39,472,482 and RMB8,185,565, respectively. The intrinsic value is calculated as the difference between the closing price of the Company's stock on the date of exercise and the exercise price of the options.

In 2013, the Company's board of directors approved a grant of restricted shares representing 30% equity interest of a wholly controlled entity of the Company to the management of the entity as an equity incentive. As of December 31, 2013, the restricted shares were fully vested and the compensation cost amounting to RMB21,450,000, which was measured at the grant date based on 30% of the fair value of the entity was recorded as expense accordingly. The fair market value of the entity was estimated by using a combination of the income approach and market approach.

In 2014, the Company's board of directors approved a restructuring plan of its R&D teams, under which five New Entities have been formed. The Company holds 51% equity interests in these New Entities, and the remaining 49% of each of these five New Entities would be beneficially held by the Company's key R&D employees. The key R&D employees are required to work for the New Entities during requisite service periods of two or three years.

In addition to the nominal amount of cash to register the New Entities, the Company contributed extra cash and certain intangible assets to the New Entities, thus effectively granted share awards of the New Entities to the R&D employees. Given that those entities were newly set up, the fair value of the share awards on grant date approximates 49% of the additionally contributed cash and intangible assets. The total compensation cost of RMB119.9 million would be amortized over the requisite service periods on a straight-line basis. Accordingly, approximately RMB3.8 million was recognized as share-based compensation expenses for the year ended December 31, 2014.

Under the current laws of the Cayman Islands and British Virgin Islands, the Company and its subsidiaries in Cayman Islands and British Virgin Islands are not subject to tax on their income or capital gain. Additionally, upon payments of dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed.

PW USA, Runic Games, Cryptic Studios and Unknown Worlds are generally subject to corporate income tax rates ranging from 15% to 35% at the federal level and, in some instances, are also subject to tax at the state level. State tax rates vary by jurisdiction. The Group's sales proceeds from online game operation in the State of Massachusetts and Washington of the U.S. are subject to sales tax at

rates of 6.25% and 6.5%, respectively. For other states where the Group operates its online games, sales tax is not levied according to local tax regulation.

Under the current Hong Kong Inland Revenue Ordinance, the Group's subsidiaries in Hong Kong are subject to 16.5% income tax on their taxable income generated from operations in Hong Kong. Additionally, payments of dividends from PW Hong Kong to the Company are not subject to any Hong Kong withholding tax. Hong Kong does not levy turnover tax.

PW Malaysia engages in offshore licensing activity. It is subject to a fix amount corporate income tax of MYR20,000 a year. Perfect Play engages in onshore business activities, and is subject to a 25% corporate income tax rate. The Group's sales proceeds from online game operation supporting service conducted in Malaysia are subject to service tax at a rate of 6%.

The Group's subsidiary established in Taiwan is subject to 17% corporate income tax rate (taxable income up to TWD120,000 is exempt). The Group's sales proceeds from online game operation supporting service conducted in Taiwan are subject to VAT at a rate of 5%.

The fiscal unity PW Universal in Netherlands engages in intra-group licensing and local sales and marketing. The standard corporate income tax rate is 25%. A lower rate of 20% applies to the first EUR200,000 of taxable income. The Group's sales proceeds from online game operation conducted in the Netherlands are subject to VAT at a rate of 21%.

The corporate income tax rate applicable to C&C Media and CCO Co., Ltd. is 40.7% in 2012, 38.0% in 2013, 38.0% from January 1 to March 31, 2014 and 35.6% from April 1 to December 31, 2014. The Group's sales proceeds from online game operation conducted in Japan are subject to consumption tax at a rate of 5% from January 1 to March 31, 2014 and 8% from April 1 to December 31, 2014.

PW Korea is generally subject to corporate income tax rates ranging from 11.0% to 24.2%. The Group's sales proceeds from online game operation conducted in Korea are subject to VAT at a rate of 10%.

PW Thailand is subject to a corporate income tax rate of 20%. The Group's sales proceeds from online game operation conducted in Thailand are subject to VAT at a rate of 7%.

For PW Singapore, 75% of the first SGD10,000 of normal chargeable income is exempt from tax, and 50% of the next SGD290,000 is exempt from tax. The balance of chargeable income is fully taxable at the standard rate of 17%. The Group's sales proceeds from online game operation conducted in Singapore are subject to goods and services tax at a rate of 7%.

A Pilot Program for transition from business tax to VAT for revenues from certain industries was launched in Shanghai on January 1, 2012. On August 1, 2013, all regions in China have launched the pilot program. On June 1, 2014, the pilot program has extended to more industries.

Prior to the pilot program, the Group's subsidiaries and VIEs incorporated in China were subject to business tax.

After the launch of the pilot program, the Group's subsidiaries and VIEs incorporated in China are subject to VAT at an effective rate of 6% for revenues from oversea licensing, software development and relevant technology consulting services. In addition, according to the applicable tax rules and regulations, being a technology development business and technology export enterprise, an entity may enjoy VAT exemption for revenues generated from software development and relevant technology consulting services, and oversea licensing, respectively.

For operation of online games, the tax treatment varies depending on the nature of games and the local tax policies of provinces where the games are operated. In general, the Group's VIEs incorporated in China are subject to VAT at the rate of 6% or 17% (with refund on the portion of tax payment exceeds an effective tax rate of 3%) or Business Tax at the rate of 5% plus related surcharges on revenues from online game operations.

On March 16, 2007, the National People's Congress of PRC enacted a corporate income tax law, under which foreign-invested enterprises and domestic companies would be subject to corporate income tax at a uniform rate of 25%. There will be a five-year transition period for foreign-invested enterprises, during which foreign-invested enterprises are allowed to continue to enjoy their existing preferential tax treatments. Preferential tax treatments will continue to be granted to entities which conduct businesses in certain encouraged sectors and to entities otherwise classified as "software enterprises" and/or "high and new technology enterprises," whether foreign-invested enterprises or domestic companies.

Under the corporate income tax law, enterprises that were established before March 16, 2007 and already enjoyed preferential tax treatments will continue to enjoy them (i) in the case of preferential

tax rates, for a period of five years from January 1, 2008 to December 31, 2012, or (ii) in the case of preferential tax exemption or reduction for a specified term, until the expiration of such term.

Shanghai PW Network has been qualified as having "software enterprise" status from 2009 to 2013, and "high and new technology enterprise" status from 2014 to 2016. Therefore, Shanghai PW Network was entitled to the tax exemption in 2009 and 2010 and was subject to a 50% income tax reduction to a rate of 12.5% from 2011 to 2013 as a "software enterprise," and enjoyed a preferential tax rate of 15% in 2014.

PW Digital Software and PW Digital have been qualified as having "software enterprise" status from 2010 to 2014. PW Digital Software and PW Digital were entitled to the tax exemption in 2010 and 2011 and were subject to a 50% income tax reduction to a rate of 12.5% in 2012, 2013 and 2014.

PW Game Software has been qualified as a "software enterprise" from 2010 to 2014. PW Game Software achieved cumulative taxable income for the year ended December 31, 2013, and therefore was entitled to the tax exemption in 2013 and 2014. PW Game Software will be subject to a 50% income tax reduction to a rate of 12.5% from 2015 to 2017, provided that it continues to be qualified as a "software enterprise" during such period.

Hefei PW Network has been qualified as having "software enterprise" status from 2013. Hefei PW Network achieved cumulative taxable income for the year ended December 31, 2013, and therefore was entitled to the tax exemption in 2013 and 2014 as a "software enterprise." Hefei PW Network will be subject to a 50% income tax reduction to a rate of 12.5% from 2015 to 2017, provided that it continues to be qualified as a "software enterprise" during such period.

Chengdu PW Network has been qualified as having "software enterprise" status from 2010. Chengdu PW Network achieved cumulative taxable income for the year ended December 31, 2014, and therefore was entitled to the tax exemption in 2014. Chengdu PW Network will continue to enjoy the tax exemption in 2015 and be subject to a 50% income tax reduction to a rate of 12.5% from 2016 to 2018, provided that it continues to be qualified as a "software enterprise" during such period.

Except for PW Network, PW Software, Shanghai PW Network, PW Digital Software, PW Digital, PW Game Software, Hefei PW Network and Chengdu PW Network, the Group's other major China-based subsidiaries and VIEs are subject to a 25% corporate income tax rate.

Under the PRC corporate income tax law which went into effect on January 1, 2008, dividends attributable to the earnings generated after January 1, 2008 and payable by a foreign-invested

enterprise in China to its foreign investors are subject to a 10% withholding tax unless any such foreign investor's jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. According to the Mainland and Hong Kong Taxation Arrangement, dividends paid by a foreign-invested enterprise in China to its direct holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5% (if the foreign investor owns directly at least 25% of the shares of the foreign-invested enterprise). As PW Hong Kong, which holds 100% equity interest of PW Software, Shanghai PW Software and PW Game Software, is a Hong Kong tax resident, dividends declared by the Group's aforesaid PRC subsidiaries to PW Hong Kong should be subject to the withholding tax at a rate of 5%.

For the potential distribution of dividends to the Company's shareholders, the Group accrues and records the withholding income tax for all standalone undistributed earnings of the Group's PRC subsidiaries. For the years ended December 31, 2012, 2013 and 2014, withholding taxes of RMB19,645,562, RMB26,540,876 and RMB21,295,237 were accrued and recorded as deferred tax liabilities, respectively. For the Group's VIEs, the Group will continue to indefinitely reinvest the remaining undistributed earnings to fulfill working capital needs and non-cancellable contractual commitments, to fund capital expenditures to expand the Group's business in China. The unrecognized deferred tax liabilities related to the withholding tax on undistributed earnings of the Group's VIEs at a rate of 5% as of December 31, 2013 and 2014 were approximately RMB69,817,831 and RMB77,909,816, respectively.

The license fees and royalties received from the Group's licensees in various jurisdictions outside of the PRC are subject to withholding taxes at various tax rates. The Group recognized RMB9,888,633, RMB8,247,703 and RMB12,525,132 as income tax expenses related to withholding taxes during the years ended December 31, 2012, 2013 and 2014, respectively.

Reconciliation of the difference between PRC statutory income tax rate and the Group's effective income tax rate for the years ended December 31, 2012, 2013 and 2014 is as follows:

The following table sets forth the computation of the effects of the tax incentive and holidays granted to the subsidiaries and VIEs of the Company for the years ended December 31, 2012, 2013 and 2014, respectively:

The net operating loss carryforwards are resulting from operating losses of some subsidiaries and VIEs of the Group that had losses at their individual entity level.

As of December 31, 2014, the Group's U.S. subsidiaries had federal and state net operating loss carryforwards of approximately RMB225,160,024 and RMB155,883,915, respectively, to offset future taxable income. The federal and state net operating loss carryforwards, if not utilized, will expire beginning in 2030 and 2029, respectively. Federal and California tax laws impose restrictions on the utilization of net operating loss carryforwards in the event of an ownership change, as defined in Section 382 of the Internal Revenue Code. The Company's ability to utilize its net operating loss carryforwards are subject to limitations under these provisions.

As of December 31, 2014, the Group's U.S. subsidiaries, had federal and state R&D credit carryforwards of RMB32,149,195 and RMB32,659,569, respectively, to offset future tax liability. The federal R&D credit, if not utilized, will expire beginning 2029.

Valuation allowance assessment is based on the weight of all available evidences, both positive and negative. A valuation allowance is provided when positive evidence is insufficient to overcome a significant piece of negative evidence such as a cumulative loss in recent years. In considering the relative impact of negative and positive evidence, the Company considered factors including (i) future reversals of existing taxable temporary differences; (ii) future taxable income exclusive of reversing temporary differences and carryforwards; and (iii) tax planning strategies. The weight given to the potential effect of negative and positive evidence was commensurate with the extent to which it can be objectively verified. PW USA and its wholly owned subsidiary filed a combined income tax return, and

generated cumulative losses in recent years. The Company determined that it is more likely than not that the Company would not generate sufficient taxable income in the future to utilize such deferred tax assets carryforwards. Therefore, the Company provided a full amount of valuation allowance amounting to RMB137,801,919 for the related deferred tax assets as of December 31, 2014.

The following table summarizes the activity related to the Group's uncertain tax benefits from January 1, 2012 to December 31, 2014:

As of December 31, 2012, 2013 and 2014, the Group's U.S. subsidiaries, primary Cryptic Studios, recorded unrecognized tax benefits related to R&D credits. The Group does not anticipate the uncertain tax positions to significantly increase or decrease within twelve months of December 31, 2014.

The Group is required to accrue monthly for staff welfare benefits for the full-time employees of its subsidiaries and the consolidated VIEs incorporated in the PRC and make contributions to the government and relevant state sponsored pension and medical plans with all the amounts accrued. Such staff welfare benefits include medical care, welfare subsidies, unemployment insurance, pension benefits and housing fund and are determined based on certain percentages of the employees' respective salaries in accordance with relevant regulations. The amount of such cash contributions may increase due to the Group's expanding workforce as the Group grows its business or increase wage levels. However, the Group does not expect that such increase will have a material effect on its liquidity. The total amounts charged to the Consolidated Statements of Income and Comprehensive Income for such employee benefits amounted to approximately RMB140,611,985, RMB168,494,855 and RMB196,560,871 for the years ended December 31, 2012, 2013 and 2014, respectively. The PRC government is responsible for the medical benefits and ultimate pension liability to these employees and the Group's obligation is limited to the amounts contributed.

The following table sets forth the computation of basic and diluted earnings per ordinary share for the years ended December 31, 2012, 2013 and 2014:

	For the years ended December 31,

	2012			2013		2014
	RMB			RMB		RMB
Numerator:
Amount attributable to the Company's shareholders:
Income from continuing operations, net of tax		570,864,921			420,447,426		471,390,134
(Loss) / income from discontinued operations, net of tax		(30,214,733	)		121,966,207		—

Net income		540,650,188			542,413,633		471,390,134



Denominator:
Weighted-average number of ordinary shares outstanding, basic		239,119,233			243,958,465		247,943,431
Effect of dilutive share options		3,376,427			3,754,433		4,995,976

Weighted-average number of ordinary shares outstanding, diluted		242,495,660			247,712,898		252,939,407



Net earnings per ordinary share , basic
Continuing operations		2.39			1.72		1.90
Discontinued operations		(0.13	)		0.50		—

Total earnings per ordinary share, basic		2.26			2.22		1.90



Net earnings per ordinary share, diluted
Continuing operations		2.35			1.70		1.86
Discontinued operations		(0.12	)		0.49		—

Total earnings per ordinary share, diluted		2.23			2.19		1.86

For the years ended December 31, 2012, 2013 and 2014, options to purchase ordinary shares that were anti-dilutive and excluded from the calculation of diluted net income per share were approximately 13,602,359, 13,864,973 and 9,752,223, respectively.

The Group has determined that it operates in two principal operating segments: 1) PRC operations and 2) International operations. Information regarding the business segments provided to the Group's CODM on regular basis is at the revenue level or segment cost and operating expenses level. The Group's CODM currently does not considers: (1) revenues arising from intercompany transactions between different segments, primarily the intercompany intellectual property rights transfers, or (2) share-based compensation charges, in measuring profit or loss of the operating segments. In August 2011 and December 2013, the Group sold its film and television business segment to a related party and sold its online reading business, which was included in the PRC operating segment prior to sale, respectively. Accordingly, the results of operations for film and television business and online reading business have been reclassified as discontinued operations for all periods presented. The Group currently does not allocate assets to its segments, as its CODM does not use such information to allocate resources to or evaluate the performance of the operating segments.

The following table presents summary information by segments for the years ended December 31, 2012, 2013 and 2014:

Geographic information for the years ended December 31, 2012, 2013, and 2014 is based on the location of the customers. Revenues from external customers by geographic areas were as follows:

The Group's majority long-lived assets are located in the PRC, no geographic information are presented.

On March 10, 2013, the Company's board of directors declared annual cash dividends to the Company's shareholders of record as of the close of business on April 8, 2013, at US$0.09 per Class A or Class B ordinary share, or US$0.45 per ADS, each representing five Class B ordinary shares of the Company. On April 15, 2013, the Company distributed the dividends which amounted to RMB137,138,046.

On March 8, 2014, the Company's board of directors declared an annual cash dividends in the aggregate amount of approximately US$24 million to its shareholders of record as of the close of business on April 3, 2014, at US$0.096 per Class A or Class B ordinary share, or US$0.48 per ADS, each representing five Class B ordinary shares of the Company. On April 15, 2014, the Company distributed the dividends which amounted to RMB146,431,373.

The table below sets forth the major related parties and their relationships with the Group as of December 31, 2014:

During the years ended December 31, 2012, 2013 and 2014, significant related party transactions were as follows:

As of December 31, 2013 and 2014, outstanding amount due from/to related parties were as follows:

Contractual commitments related to office rental, leases signed for co-location services and server rentals, leasehold improvement, building renovation and other purchase obligation are presented in the following table:

The rental expenses including server leasing rental and office rental were approximately RMB158,841,427, RMB203,391,941 and RMB205,077,566 for the years ended December 31, 2012, 2013 and 2014, respectively, and were charged to the Consolidated Statements of Income and Comprehensive Income when incurred.

In 2011, the Group entered into a limited partnership agreement to invest up to RMB643.5 million in a VC Fund over a nine-year period as a limited partner. The VC Fund is managed by one general partner unrelated to the Group and is focusing on companies with high-growth potentials in certain technology, media and telecommunications sectors. In March 2013, the Group increased its committed capital for an additional RMB396.0 million into the VC Fund, and the investment term was changed to 12 years. As of December 31, 2014, the Group has contributed RMB615.7 million to the VC Fund. The remaining committed capital of RMB423.8 million will be contributed over the remaining investment term upon the capital call by the general partner.

In June 2014, the Group entered into an agreement to purchase office premises in Chongqing, China at a total price of approximately RMB104.9 million. The Group prepaid RMB5.0 million as a deposit as of December 31, 2014. The purchase was completed in April 2015.

The Group is subject to a variety of claims and suits that arise from time to time in the ordinary course of its business.

In December 2013, Shanghai Xuanting Entertainment Information Technology Co., Ltd., an affiliate of Shanda Interactive Entertainment Limited, filed a complaint against PW Literature, alleging that software developed by PW Literature infringed its copyright in a number of novels. The case has not gone to trial as of December 31, 2014. The Group believes the case are without merit and intend to defend the actions vigorously. Regardless of the outcome of this lawsuit, the Group believes that such proceeding, when finally resolved, is unlikely to have a material adverse effect on the Group's

results of operations, financial position and cash flows. The possible range of loss cannot be estimated since the case is still at its early stage.

In May 2014, Uniloc USA, Inc. and Uniloc Uxembourg S.A. sued PW USA for patent infringement in the United State District Court for the District of Texas. The plaintiffs alleged that the product activation system and customer software activation/registration process employed by PW USA infringed their patents. The Group believes that the case is without merit and intend to defend vigorously. The Group does not expect this pending proceeding to have a material adverse effect on the Group's results of operations, financial position and cash flows, even if it is determined against the Group. The possible range of loss cannot be estimated since the case is still at its early stage.

Relevant PRC laws and regulations permit payments of dividends by the subsidiaries and the VIEs incorporated in PRC only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Additionally, the Company's subsidiaries and VIEs can only distribute dividends upon approval of the shareholders after they have met the PRC requirements for appropriation to statutory reserve. The general reserve fund and statutory surplus reserve (see Note 3-(22)) require annual appropriations of 10% of net after-tax income should be set aside prior to payment of any dividends, unless such reserve funds have reached 50% of its respective registered capital. As a result of these and other restrictions under PRC laws and regulations, the PRC subsidiaries and VIEs are restricted in their ability to transfer a portion of their net assets to the Company either in the form of dividends, loans or advances. The restricted portion amounted to approximately RMB943.0 million or 19.4% of the Company's total consolidated net assets as of December 31, 2014. Of the total restricted net assets, RMB764.8 million was attributed to the Company's PRC subsidiaries and RMB178.2 million was attributed to the Company's VIEs. The Company requires cash resources from its PRC subsidiaries and VIEs to pay dividends to the Company's shareholders. There were immaterial undistributed retained earnings by the equity accounted investees in the consolidated retained earnings because majority of them have been loss making.

The Company's board of directors received a preliminary non-binding proposal letter dated December 31, 2014 from the Company's founder and chairman of the board of directors, Mr. Michael Yufeng Chi, to acquire all of the Company's outstanding ordinary shares not already directly or indirectly owned by him in a going private transaction for US$20 per ADS in cash, or US$4 per ordinary share in cash. The board of directors of the Company formed a special committee of independent directors on January 2, 2015 to consider the proposal.

On April 26, 2015, the Company entered into a merger agreement with Perfect Peony Holding Company Limited, or Parent (an entity controlled by Mr. Michael Yufeng Chi), and Perfect World Merger Company Limited, or Merger Sub (a wholly owned subsidiary of the Parent). Subject to satisfaction of the merger agreement's terms and conditions, Merger Sub will merge with and into the

Company, with the Company continuing as the surviving corporation and a wholly owned subsidiary of Parent (the "Merger"). Each of the Company's ordinary shares or ADSs will be cancelled in exchange for the right to receive US$4.04 per ordinary share or US$20.20 per ADS in cash without interest, except for shares (including such shares represented by ADSs) already directly or indirectly owned by Mr. Michael Yufeng Chi, and shares held by shareholders who have validly exercised and not effectively withdrawn or lost their rights to dissent from the Merger. The Company's board of directors has approved the Merger, which is subject to approval by the Company's shareholders.


(Mark One)
o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2014.
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to
OR
o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


INTRODUCTION		1
FORWARD-LOOKING INFORMATION		2
PART I.		3
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	3
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	3
ITEM 3.	KEY INFORMATION	3
ITEM 4.	INFORMATION ON THE COMPANY	38
ITEM 4A.	UNRESOLVED STAFF COMMENTS	65
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	65
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	101
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	112
ITEM 8.	FINANCIAL INFORMATION	116
ITEM 9.	THE OFFER AND LISTING	118
ITEM 10.	ADDITIONAL INFORMATION	120
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	130
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	131
PART II.		133
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	133
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	133
ITEM 15.	CONTROLS AND PROCEDURES	133
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	134
ITEM 16B.	CODE OF ETHICS	134
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	134
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	134
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	134
ITEM 16F.	CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT	135
ITEM 16G.	CORPORATE GOVERNANCE	135
ITEM 16H.	MINE SAFETY DISCLOSURE	135
PART III.		135
ITEM 17.	FINANCIAL STATEMENTS	135
ITEM 18.	FINANCIAL STATEMENTS	135
ITEM 19.	EXHIBITS	135
Exhibit 8.1
Exhibit 12.1
Exhibit 12.2
Exhibit 13.1
Exhibit 13.2
Exhibit 15.1
Exhibit 15.2
Exhibit 15.3
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE

	Noon Buying Rate

	Period End		Average(1)		Low		High
	(RMB per US$1.00)
Period
2010		6.6000		6.7696		6.8330		6.6000
2011		6.2939		6.3849		6.6364		6.2939
2012		6.2301		6.2990		6.3879		6.2221
2013		6.0537		6.1412		6.2438		6.0537
2014		6.2046		6.1704		6.2591		6.0402
October		6.1124		6.1251		6.1385		6.1107
November		6.1429		6.1249		6.1429		6.1117
December		6.2046		6.1886		6.2256		6.1490
2015
January		6.2495		6.2181		6.2535		6.1870
February		6.2695		6.2518		6.2695		6.2399
March		6.2145		6.2422		6.2741		6.1955
April (through April 24), 2015		6.1930		6.2000		6.2152		6.1927


				Beneficial Interest
(1)				Contractual arrangements including an Exclusive Technology Support and Service Agreement, a Development Cooperation Agreement, a Business Operation Agreement, a Call Option Agreement and an Equity Pledge Agreement. For a description of these agreements, see "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with PW Network and its Equity Owners."
(2)				Contractual arrangements including a Business Operation Agreement, a Call Option Agreement, an Equity Pledge Agreement and a Power of Attorney. For a description of these agreements, see "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with PW Network and its Equity Owners."
(3)				Contractual arrangements including a Business Operation Agreement, a Call Option Agreement, an Equity Pledge Agreement and a Power of Attorney. For a description of these agreements, see "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with Perfect Moment and its Equity Owners."

	For the Three Months Ended

	March 31, 2014		June 30, 2014		September 30, 2014		December 31, 2014
Quarterly average concurrent users		662,000		661,000		623,000		642,000


Large accelerated filer o		Accelerated filer ý		Non-accelerated filer o


U.S. GAAP ý		International Financial Reporting Standards as issued by the International Accounting Standards Board o		Other o

Game	Date of Launch

Perfect World	January 2006	14
Legend of Martial Arts	September 2006	12
Perfect World II	November 2006	15
Zhu Xian	May 2007	18
Chi Bi	January 2008	12
Hot Dance Party	March 2008	9
Pocketpet Journey West	October 2008	1
Battle of the Immortals	April 2009	8
Fantasy Zhu Xian	October 2009	9
Forsaken World	October 2010	7
Empire of the Immortals	March 2011	3
Return of the Condor Heroes	September 2012	3
Saint Seiya Online	May 2013	3
Swordsman Online	June 2013	4
Holy King	September 2013	—
Legend of the Condor Heroes	September 2014	1

	Payment Due by Period

	Total		Less than 1 Year		1 - 3 Years		3 - 5 Years		More than 5 Years
	(in RMB thousands)
Noncurrent deferred revenues		35,670		—		35,670		—		—
Contractual lease obligations		237,376		96,879		93,648		44,883		1,966
Other purchase obligations		160,579		125,515		14,153		8,602		12,309
Total		433,625		222,394		143,471		53,485		14,275

Directors and Executive Officer		Position/Title

Michael Yufeng Chi	43	Founder and Chairman of the Board of Directors
Daniel Dong Yang	43	Independent Director
Bing Xiang	52	Independent Director
Han Zhang	52	Independent Director
Robert Hong Xiao	49	Chief Executive Officer
Kelvin Wing Kee Lau	50	Chief Financial Officer
Di He	41	Chief Technology Officer
Qing Li	41	Chief Development Officer
Qi Zhu	42	Chief Strategic Product Officer
Xiaoyin Lu	36	Chief Artist
Yunfan Zhang	36	Chief Operating Officer
Alan Chen	54	Senior Vice President
Alex Yiran Xu	42	Senior Vice President
Zhengrong Huang	43	Senior Vice President
Haiyi Li	38	Senior Vice President
Cheng Wei	38	Senior Vice President
Yuyun Wang	37	Senior Vice President

	The Year Ended December 31,

	2013	2014
Audit fees⁽¹⁾	US$1,855,597	US$2,028,656
All other fees⁽²⁾	US$32,271	US$123,059

Exhibit Number			Description of Document

	1.1		Amended and Restated Memorandum and Articles of Association of the Registrant (incorporated by reference to Exhibit 1.1 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on June 19, 2009).
	1.2		Amendments to the Amended and Restated Memorandum and Articles of Association adopted by the shareholders of the Registrant on November 14, 2009 (incorporated by reference to Exhibit 1.2 of our annual report on Form 20-F (file no. 001-33587) filed with the Securities and Exchange Commission on June 14, 2010).
	1.3		Amendments to the Amended and Restated Memorandum and Articles of Association adopted by the shareholders of the Registrant on August 21, 2011 (incorporated by reference to Exhibit 1.3 of our annual report on Form 20-F (file no. 001-33587) filed with the SEC on May 11, 2012).
	2.1		Registrant's Specimen American Depositary Receipt (incorporated by reference to Exhibit A to Exhibit 4.3 from our Registration Statement on Form F-1 Amendment No. 2 (file no. 333-144282) filed with the Securities and Exchange Commission on July 23, 2007).

		Description of Document

15.1	*	Consent of Maples and Calder.
15.2	*	Consent of King & Wood Mallesons.
15.3	*	Consent of PricewaterhouseCoopers Zhong Tian LLP.
101.INS	*	XBRL Instance Document
101.SCH	*	XBRL Taxonomy Extension Schema Document
101.CAL	*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	*	XBRL Taxonomy Extension Presentation Linkbase Document

		Page(s)

Report of Independent Registered Public Accounting Firm			F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2013 and December 31, 2014			F-3
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2012, 2013 and 2014			F-4
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2012, 2013 and 2014			F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2013 and 2014			F-6
Notes to the Consolidated Financial Statements			F-7

	December 31, 2013		December 31, 2014

	RMB		RMB
Current assets		1,956,233,219		2,503,516,805
Non current assets		933,328,152		1,216,314,983

Total assets		2,889,561,371		3,719,831,788



Current liabilities		1,364,036,110		2,052,126,255
Non current liabilities		21,797,495		36,834,059

Total liabilities		1,385,833,605		2,088,960,314

			Fair value measurement at reporting date using

Description	December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	RMB		RMB		RMB		RMB
Assets
Current assets
Cash equivalents:
Time deposits		108,919,301		—		108,919,301		—
Money market fund		786,536		786,536		—		—
Restricted cash and time deposits		226,100,000		—		226,100,000		—
Short-term investments:
Available-for-sale securities		1,138,318,921		—		1,138,318,921		—
Time deposits		169,573,968		—		169,573,968		—
Non current assets
Long-term time deposits		108,135,489		—		108,135,489		—
Restricted time deposits		7,597,873		—		7,597,873		—

Total assets		1,759,432,088		786,536		1,758,645,552		—

	December 31, 2013		December 31, 2014

	RMB		RMB
Accounts receivable, gross		197,715,605		376,368,921
Allowance for doubtful accounts:
Balance at beginning of year		—		—
Additional provision for bad debt		—		(12,540,836	)
Write-offs		—		—

Balance at end of year		—		(12,540,836	)

Accounts receivable, net		197,715,605		363,828,085

	December 31, 2013		December 31, 2014

	RMB		RMB
Interest receivable		15,494,867		34,747,291
Prepaid license and royalty fees		127,709,674		155,730,560
Staff loans		15,369,031		22,242,541
Rent and other deposits		11,713,803		9,796,189
Prepaid advertising and promotion fees		23,311,707		15,233,409
Loan repayment from PW Literature (Note 12)		112,850,000		4,061,115
Receivable from Baidu on sale of PW Literature (Note 12)		54,280,000		—
Tax receivable		21,428,834		11,483,344
Others		42,681,172		52,113,992

Total		424,839,088		305,408,441

	December 31, 2013		December 31, 2014

	RMB		RMB
Balance sheet data:
Current assets		167,559,151		363,036,879
Non current assets		281,478,810		400,264,101
Current liabilities		19,943,244		59,057,731
Non current liabilities		—		—
Non-controlling interests		—		—

		Weighted average amortization period at the acquisition date (in years)

Intangible assets
Completed game	2,860	2.75
IPR&D	2,120	Note 3(13)
Trade name and domain name	1,380	Indefinite
Other identifiable tangible assets and liabilities	19,672

Identifiable net assets acquired (a)	26,032

Cash consideration (b)	3,000
Previously held equity interest on acquisition date (c)	15,170
Non-controlling interest (d)	8,090

Goodwill (b+c+d–a)	228
Goodwill arising from deferred tax liabilities attributed to intangible asset appreciation	1,591

Goodwill	1,819

		Weighted average amortization period at the acquisition date (in years)

Intangible assets
Completed game	7,410	1.9
Other identifiable tangible assets and liabilities	11,941

Identifiable net assets acquired (a)	19,351

Cash consideration (b)	5,099
Previously held equity interest on acquisition date (c)	17,039
Non-controlling interest (d)	12,084

Goodwill (b+c+d–a)	14,871
Goodwill arising from deferred tax liabilities attributed to intangible asset appreciation	3,444

Goodwill	18,315

		Weighted average amortization period at the acquisition date (in years)

Net tangible assets acquired	6,493
Identifiable intangible assets:
Customer relationships	18,220	3
Non-compete agreements	1,700	3
Trade name, domain name and license	50,700	Indefinite

Identifiable net assets acquired (a)	77,113
Cash consideration paid (b)	153,000
Cash consideration payable (c)	102,000

Goodwill (b)+(c)–(a)	177,887
Goodwill arising from deferred tax liabilities attributed to intangible asset appreciation	9,088

Goodwill	186,975

		Weighted average amortization period at the acquisition date (in years)

Net tangible assets acquired	14,485
Identifiable intangible assets:
Trade name & domain name	5,300	Indefinite
Non-compete agreements	3,560	5
Customer relationships	3,470	6.5

Identifiable net assets acquired (a)	26,815
Total consideration (b)	48,248

Goodwill (b–a)	21,433
Goodwill arising from deferred tax liabilities attributed to intangible asset appreciation	3,083

Goodwill	24,516

	December 31, 2013

	RMB
Cash and cash equivalents		14,135,057
Accounts receivable, net		4,674,630
Prepayments and other assets		2,183,108
Other non current assets		2,989,932

Total assets		23,982,727



Received in advance		2,219,499
Salary and welfare payable		2,976,912
Payable to Perfect World		120,000,000
Other current liabilities		3,416,741

Total liabilities		128,613,152

	For the years ended December 31,

	2015		2016		2017		2018		2019 and thereafter
	RMB		RMB		RMB		RMB		RMB
Amortization expenses		68,233,769		52,315,407		32,554,969		23,761,091		47,607,503

	December 31, 2013		December 31, 2014

	RMB		RMB
Professional fee accruals		10,880,372		13,408,151
Accrued expenses		33,384,969		48,246,154
Payables to employees relating to exercise of options		6,673,216		1,899,264
Other taxes and surcharges		3,033,628		3,144,913
Deposits		6,277,082		8,175,481
Consideration payable for business acquisition (Note 11-(3))		102,000,000		800,000
Consideration payable for equity investment (Note 9-(5))		20,000,000		—
Contingent consideration payable for business acquisition (Note 11-(4))		—		23,248,000
Others		6,689,920		14,007,167

Total		188,939,187		112,929,130

Options			Weighted Average Exercise Price			Aggregate Intrinsic Value

			US$			US$
Outstanding as of January 1, 2014	25,927,910			2.96	3.31		24,253,925
Granted	200,000
Exercised	(1,204,490	)
Forfeited or cancelled	(1,723,895	)

Outstanding as of December 31, 2014	23,199,525			2.95	2.39		15,242,323



Vested and expected to vest as of December 31, 2014	22,431,529			2.99	2.36		14,534,499
Exercisable as of December 31, 2014	13,067,655			3.49	1.78		5,904,270

	December 31, 2013			December 31, 2014

	RMB			RMB
Deferred tax assets:
Net operating loss carryforwards		92,659,595			160,956,398
Current reserves and accruals		43,205,785			57,885,594
Depreciation and amortization		10,898,028			14,055,466
R&D Credit		30,024,984			39,799,093
Others		22,863,742			12,076,003

Total deferred tax assets		199,652,134			284,772,554
Less: Valuation allowance		(75,093,072	)		(220,620,764	)

Total deferred tax assets net off valuation allowance		124,559,062			64,151,790
Deferred tax liabilities:
PRC withholding tax on undistributed earnings		86,911,299			108,206,536
Intangible assets arisen from business combination		38,695,869			26,987,012
Others		8,316,011			15,155,280

Total deferred tax liabilities		133,923,179			150,348,828

Net deferred tax liabilities		(9,364,117	)		(86,197,038	)

	For the year ended December 31, 2012

	PRC			International			Consolidated
	RMB			RMB			RMB
Revenues		2,093,057,299			677,528,756			2,770,586,055
Segment costs and operating expenses		(1,472,777,225	)		(660,726,950	)		(2,133,504,175	)

Segment operating profit		620,280,074			16,801,806			637,081,880
Share-based compensation costs								(71,144,592	)
Total other income								127,640,578

Income before tax								693,577,866

Company name		Relationship with the Group

Beijing Jiuzhou Tianyuan Investment Management Co., Ltd. ("Jiuzhou Tianyuan")		Equity owner of PW Network
Beijing Ever Joy Pictures Co., Ltd.		Under the control of Mr. Michael Yufeng Chi
Perfect Pictures and Media Group Co., Ltd. ("PW Pictures"), formerly known as Perfect World (Beijing) Pictures Co., Ltd.		Under the control of Mr. Michael Yufeng Chi
SB Asia Investment Fund II L.P. ("SAIF")		One of the Company's Independent Directors is the Partner of SAIF
Zhizhu Network		An investee of the Company

	December 31, 2013		December 31, 2014

	RMB		RMB
Prepayment to Zhizhu Network for marketing service		656,136		1,553,200
Prepayment to minor investees for game licenses		2,666,667		3,800,000
Short-term loans to minor investees		—		2,000,000
Others		70,286		28,212

Total		3,393,089		7,381,412



Due to Zhizhu Network for marketing service		41,750		770,475
Due to PW Pictures for office rental deposit		50,000		50,000
Investment payable to minor investee		—		1,600,000
Due to minor investees for marketing service		—		148,400
Due to minor investee for game licenses		—		300,000

Total		91,750		2,868,875

PERFECT WORLD CO., LTD.

/s/ Robert Hong Xiao

Robert Hong Xiao

Chief Executive Officer