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Rumor: Hurray And KongZhong Discussing Possible WVAS Merger

Chinese media report that Wang Qingdai and Wang Shaojian, who are respectively CEO and COO of Hurray (HRAY), are holding secret discussions with Zhou Yunfan, CEO of KongZhong (KONG), on a possible merger of wireless value-added service companies.

As wireless value-added service providers, KongZhong and Hurray each have their own advantages, but both rely on identical mobile revenue sources. In addition, new consumer-friendly wireless regulations in China are expected to dramatically decrease future earnings for these companies.

KongZhong's unaudited second quarter 2006 financial results show total revenues in the second quarter of 2006 grew 64% year-over-year and 8% sequentially to US$30.07 million.

KongZhong revenue from 2.5G services grew 2% from the same period in 2005 but decreased 23% from the first quarter of 2006 to US$13.77 million. WAP revenue in the second quarter of 2006 was US$6.67 million, a decrease of 32% from the same quarter of 2005 and a decrease of 25% from the first quarter of 2006. The company says it continues to face pressure from China Mobile's policy changes and intensifying competition in WAP.

Total operating expenses for KongZhong in the second quarter of 2006 were US$10.10 million, an increase of 82% year-over-year and 9% quarter-over-quarter. The company recorded US$0.47 million in non-cash share-based compensation expense in the second quarter, compared to US$0.35 million in the first quarter of 2006.

As of June 30, 2006, KongZhong had US$122.29 million in cash and cash equivalents. Cash flow from operating activities totalled US$4.63 million in the second quarter of 2006.

Hurray recorded total second quarter revenues of US$18.3 million, a growth of 10.2% quarter-over-quarter and 22.1% year-over-year, exceeding previously reaffirmed guidance.

Total wireless value-added services revenues were US$16.6 million for the second quarter of 2006, a growth of 14.5% as compared with US$14.5 million in the previous quarter and growth of 23.7% as compared with US$13.4 million in the second quarter of 2005.

Hurray's net income was US$1.7 million for the second quarter of 2006, representing an increase of 84.9% as compared to US$0.9 million for the previous quarter, and a decrease of 66.0% as compared to US$5.0 million for the second quarter of 2005. Net margin was 9.3% for the second quarter of 2006 as compared to 5.5% for the previous quarter and 33.4% for the second quarter of 2005.

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