Table of Contents

(Mark One)
o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
or
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended December 31, 2005
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
or
o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from           to

N/A		The Republic of Korea
(Translation of registrant’s name into English)		(Jurisdiction of incorporation or organization)

Title of Each Class		Name of Each Exchange on Which Registered
Common stock, par value Won 500 per share*		Nasdaq National Market
American depositary shares, each representing one-fourth of a share of common stock

*	Not for trading, but only in connection with the listing of American depositary shares on the Nasdaq National Market pursuant to the requirements of the Securities and Exchange Commission.

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CERTAIN DEFINED TERMS						4
FORWARD-LOOKING STATEMENTS						4
PART I						5
ITEM 1.		IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS				5
		1.A.		Directors and Senior Management		5
		1.B.		Advisers		5
		1.C.		Auditors		5
ITEM 2.		OFFER STATISTICS AND EXPECTED TIMETABLE				5
ITEM 3.		KEY INFORMATION				5
		3.A.		Selected Financial Data		5
		3.B.		Capitalization and Indebtedness		7
		3.C.		Reasons for the Offer and Use of Proceeds		7
		3.D.		Risk Factors		7
ITEM 4.		INFORMATION ON THE COMPANY				26
		4.A.		History and Development of the Company		26
		4.B.		Business Overview		26
		4.C.		Organizational Structure		50
		4.D.		Property, Plants and Equipment		50
ITEM 5.		OPERATING AND FINANCIAL REVIEW AND PROSPECTS				51
		5.A.		Operating Results		51
		5.B.		Liquidity and Capital Resources		65
		5.C.		Research and Development, Patents and Licenses, etc.		67
		5.D.		Trend Information		68
		5.E.		Off-Balance Sheet Arrangements		68
		5.F.		Contractual Obligations		68
ITEM 6.		DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES				69
		6.A.		Directors and Senior Management		69
		6.B.		Compensation		71
		6.C.		Board Practices		71
		6.D.		Employees		73
		6.E.		Share Ownership		73
ITEM 7.		MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS				75
		7.A.		Major Shareholders		75
		7.B.		Related Party Transactions		76
		7.C.		Interests of Experts and Counsel		78
ITEM 8.		FINANCIAL INFORMATION				78
		8.A.		Consolidated Statements and Other Financial Information		78
		8.B.		Significant Changes		79
ITEM 9.		THE OFFER AND LISTING				79
		9.A.		Offer and Listing Details		79
		9.B.		Plan of Distribution		80
		9.C.		Markets		80
		9.D.		Selling Shareholders		80
		9.E.		Dilution		80
		9.F.		Expenses of the Issue		80
ITEM 10.		ADDITIONAL INFORMATION				80
		10.A.		Share Capital		80

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		10.B.		Articles of Incorporation		80
		10.C.		Material Contracts		85
		10.D.		Exchange Controls		88
		10.E.		Taxation		90
		10.F.		Dividends and Paying Agents		98
		10.G.		Statement by Experts		98
		10.H.		Documents on Display		98
		10.I.		Subsidiary Information		98
ITEM 11.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK				98
		11.A.		Quantitative Information about Market Risk		98
		11.B.		Qualitative Information about Market Risk		99
		11.C.		Interim Periods		99
ITEM 12.		DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES				99
		12.A.		Debt Securities		99
		12.B.		Warrants and Rights		99
		12.C.		Other Securities		99
		12.D.		American Depositary Shares		99
PART II						105
ITEM 13.		DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES				105
ITEM 14.		MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS				105
ITEM 15.		CONTROLS AND PROCEDURES				105
ITEM 16.						108
		16.A.		Audit Committee Financial Expert		108
		16.B.		Code of Ethics		108
		16.C.		Principal Accountant Fees and Services		109
		16.D.		Exemptions from the Listing Standards for Audit Committee		109
		16.E.		Purchases of Equity Securities by the Issuer and Affiliated Purchasers		109
PART III						110
ITEM 17.		FINANCIAL STATEMENTS				110
ITEM 18.		FINANCIAL STATEMENTS				110
ITEM 19.		EXHIBITS				110
INDEX TO FINANCIAL STATEMENTS						F-1
EX-4.37 LEASE AGREEMENT
EX-4.38 REAL ESTATE SALE AGREEMENT
EX-4.39 GLOBAL PUBLISHING AGREEMENT
EX-4.40 GLOBAL PUBLISHING AGREEMENT
EX-8.1 LIST OF REGISTRANT'S SUBSIDIARIES
EX-11.1 REGISTRANT'S CODE OF ETHICS
EX-12.1 CEO CERTIFICATION PURSUANT TO SECTION 302
EX-12.2 CFO CERTIFICATION PURSUANT TO SECTION 302
EX-13.1 CEO CERTIFICATION PURSUANT TO SECTION 906
EX-13.2 CFO CERTIFICATION PURSUANT TO SECTION 906

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	•	“China” or the “PRC” are to the People’s Republic of China;
	•	“Government” are to the government of the Republic;
	•	“GRAVITY,” “the Company,” “we,” “us,” “our,” or “our company” are to GRAVITY Co., Ltd. and its subsidiaries.
	•	“Japanese Yen” or “JPY” are to the currency of Japan;
	•	“Korea” or the “Republic” are to The Republic of Korea;
	•	“Taiwan” or the “ROC” are to Taiwan, the Republic of China;
	•	“US$” and “U.S. dollars” are to the currency of the United States; and
	•	“Won” or “W” are to the currency of the Republic of Korea.

	•	future prices of and demand for our products;
	•	future earnings and cash flow;
	•	expansion and growth of our business and operations; and
	•	our prospective operational and financial information.

	•	fluctuations in prices of our products;
	•	potential acquisitions and other business opportunities;
	•	general economic, market and business conditions; and
	•	other risks and factors beyond our control.

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ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

1.A.	Directors and Senior Management

1.B.	Advisers

1.C.	Auditors

ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE

ITEM 3.	KEY INFORMATION

3.A.	Selected Financial Data

		As of and for the Years Ended December 31,
		2001				2002				2003				2004				2005				2005(1)
																						(Unaudited)
		(In millions of Won and thousands of US$, except share and per share data, operating data
		and percentages)
Statement of operations:
Revenues:
Online games — subscription revenue		W	—			W	7,310			W	18,560			W	16,253			W	11,249			US$	11,138
Online games — royalties and license fees			—				2,330				29,727				45,101				37,375				37,005
Mobile games			—				—				43				376				1,664				1,648
Character merchandising, animation and other revenue			167				427				1,185				2,696				3,096				3,065
Total revenues			167				10,067				49,515				64,426				53,384				52,856
Cost of revenues			—				1,738				6,958				10,116				16,038				15,879
Gross profit			167				8,329				42,557				54,310				37,346				36,977
Operating expenses:
Selling, general and administrative			354				4,870				11,360				13,660				30,795				30,490
Research and development			718				815				1,597				2,029				9,219				9,128

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			As of and for the Years Ended December 31,
			2001				2002				2003				2004				2005				2005(1)
																							(Unaudited)
			(In millions of Won and thousands of US$, except share and per share data, operating data
			and percentages)
Operating income (loss)				(905	)			2,644				29,600				38,621				(2,668	)			(2,641	)
Other expenses, net				(3	)			(2,424	)			(6,210	)			(4,879	)			(787	)			(780	)
Income (loss) before income tax expenses, minority interest, and equity in loss of related joint venture				(908	)			220				23,390				33,742				(3,455	)			(3,421	)
Income tax expenses (benefit)				—				542				4,250				5,406				(817	)			(809	)
Income (loss) before minority interest and equity in loss of related joint venture				(908	)			(322	)			19,140				28,336				(2,638	)			(2,612	)
Minority interest				—				—				—				(17	)			(2	)			(2	)
Equity in loss of related joint venture				—				—				—				296				394				390
Net income (loss)			W	(908	)		W	(32	)		W	19,140			W	28,057			W	(3,030	)		US$	(3,000	)
Earnings (loss) per share:
	Basic and diluted per share		W	(492	)		W	(96	)		W	3,730			W	5,056			W	(445	)		US$	(0.44	)
	Basic and diluted per ADS			—				—				—				—				(111	)			(0.11	)
Weighted average number of shares outstanding (basic and diluted)				1,846,575				3,355,616				5,130,895				5,548,900				6,803,147				6,803,147
Balance sheet data:								(Unaudited	)
Cash and cash equivalents			W	1,820			W	560			W	5,405			W	16,405			W	25,874			US$	25,618
Total current assets				2,383				7,916				17,824				46,868				109,428				108,345
Property and equipment, net				522				2,254				5,417				14,760				11,863				11,746
Total assets				3,055				13,617				36,424				68,644				144,857				143,423
Total current liabilities				1,123				8,251				10,575				12,221				19,448				19,255
Total liabilities				2,912				13,707				13,960				18,209				24,073				23,835
Total shareholders’ equity				143				(90	)			22,464				50,435				120,762				119,566
Selected operating data and financial ratios:
Gross profit margin(2)				100.0	%			82.7	%			85.9	%			84.3	%			70.0	%			70.0	%
Operating profit margin(3)				N/M				26.3				59.8				59.9				(5.0	)			(5.0	)
Net profit margin(4)				N/M				(3.2	)			38.7				43.5				(5.7	)			(5.7	)

(1)	For convenience, the Won amounts are expressed in U.S. dollars at the rate of Won 1,010.0 to US$1.00.
(2)	Gross profit margin for each period is calculated by dividing gross profit by total revenues for each such period.
(3)	Operating profit margin for each period is calculated by dividing operating income (loss) by total revenues for each such period.
(4)	Net profit margin for each period is calculated by dividing net income (loss) by total revenues for each such period.

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Year Ended December 31,			At End of Period				Average(1)				High				Low
			(Won per US$1.00)
2001				1,313.5				1,292.0				1,369.0				1,234.0
2002				1,186.3				1,250.4				1,332.0				1,160.6
2003				1,192.0				1,192.1				1,262.0				1,146.0
2004				1,035.1				1,139.3				1,195.1				1,035.1
2005				1,010.0				1,023.8				1,059.8				997.0
2006 (through June 29, 2006)				960.4				962.2				1,002.9				927.4
	January			958.9				981.8				1,002.9				958.9
	February			970.9				969.8				976.3				962.0
	March			971.4				974.7				982.0				966.8
	April			942.8				952.6				970.4				939.6
	May			945.3				940.8				951.5				927.4
	June (through June 29, 2006)			960.4				954.4				961.8				942.7

(1)	Annual and monthly averages are calculated using the average of the daily rates during the relevant period.

	We currently depend on one product, Ragnarok Online, for substantially all of our revenues.

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	If we are unable to consistently develop, acquire, license, launch, market or operate commercially successful online games in addition to Ragnarok Online, our business, financial condition and results of operations may be materially and adversely affected.

	Our limited resources may affect our ability to manage our growth.

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	We depend on license fees and royalty payments from our overseas licensees for a substantial portion of our revenues.

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

	We have a limited operating history, which may make it difficult for you to evaluate our business.

	Rapid technological change may adversely affect our future revenues and profitability.

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	If we fail to retain and hire skilled and experienced game developers or other key personnel in order to design and develop new online games and additional game features, we may be unable to achieve our business objectives.

	Undetected programming errors or flaws in our games could harm our reputation or decrease market acceptance of our games, which would materially and adversely affect our business prospects, reputation, financial condition and results of operations.

	Unexpected network interruptions, security breaches or computer virus attacks could harm our business.

	•	any breakdowns or system failures, including from fire, flood, earthquake, typhoon or other natural disasters, power loss or telecommunications failure, resulting in a sustained shutdown of all or a material portion of our servers;
	•	any disruption or failure in the national or international backbone telecommunications network, which would prevent users in certain countries in which our games are distributed from logging onto or playing our games for which the game servers are all located in other countries; and
	•	any security breach caused by hacking, loss or corruption of data or malfunctions of software, hardware or other computer equipment, and the inadvertent transmission of computer viruses.

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

	We may be subject to claims with respect to the infringement of intellectual property rights of others, which could result in substantial costs and diversion of our financial and management resources.

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

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	We may not be able to successfully implement our growth strategies.

	•	distributing games developed in-house;
	•	publishing games acquired from third parties or developed by third parties through licensing arrangements;
	•	offering our games in countries where we currently have little or no presence;
	•	taking advantage of our popular online games to strengthen our other lines of businesses, such as mobile games, animation and character merchandising;
	•	selectively pursuing acquisitions of, investments in, or joint ventures with, game development companies, technologies and personnel that are complementary to our existing business; and
	•	investing our capital in investment funds which target online game industry, with the goal, among others, of increasing our knowledge of, as well as building relationship with, potential third party developers of online games.

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	Mr. Il Young Ryu, our chairman, chief executive officer and representative director and also the representative director of EZER Inc., our largest shareholder, has substantial control over us and can delay or prevent a change in corporate control.

	Our business may be adversely affected by developments affecting the Korean economy and other of our principal markets.

	We have limited business insurance coverage in Korea.

	Slow growth or contractions in the Internet café industry in Korea may affect our ability to target a core group of potential users.

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	We may be required to take significant actions that are contrary to our business objectives in order to avoid being deemed an investment company as defined under the Investment Company Act of 1940, as amended.

	•	the company is primarily engaged, directly or through a wholly-owned subsidiary or subsidiaries, in a business or businesses other than that of investing, reinvesting, owning, holding or trading in securities; and
	•	40% or less of the fair market value of the company’s assets is represented by investment securities.

	Our businesses may be adversely affected by developments affecting the economies of the countries in which our games are distributed.

	We may have been in 2005, and may be in subsequent years, a passive foreign investment company, which could result in adverse U.S. tax consequences to you.

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We have identified certain material weaknesses in our internal controls over financial reporting. If we fail to achieve and maintain an effective system of internal controls over financial reporting, we may be unable to accurately report our financial results on a timely basis or reduce our ability to prevent or detect fraud, and investor confidence and the market price of our ADSs may be adversely affected.

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	Our senior management team is required to devote a significant amount of attention to matters arising from events related to the embezzlement of funds by the former Chairman.

	Harm from continued regulatory scrutiny and securities litigation

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	Our operations are subject to the regulation of the Internet in certain of the countries in which our games are distributed, such as Korea, China, Taiwan, Japan and Thailand, the impact of which is difficult to predict.

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	Our online games may be subject to governmental restrictions or rating systems, which could delay or prohibit the release of new games or reduce the existing and potential range of our user base.

	The legal systems in some of the countries where our games are distributed have uncertainties which could limit the legal protections available to us.

	If our licensee in Taiwan adopts the model consumer contract promulgated by the ROC Ministry of Economic Affairs or the ROC Ministry of Economic Affairs imposes additional regulatory burdens on our licensee in Taiwan, our licensee in Taiwan may require us to reduce the license fee or royalties, or share the cost of regulatory compliance.

	Our business may be adversely affected by complexities, uncertainties and changes in law and regulations of China regulating Internet companies and businesses operating in China, including those related to online games.

	•	restrictions on content on the Internet, including restriction on distribution of online games containing content that purports to propagate obscenity, gambling or violence, instigate crime, undermine public morality or the cultural traditions of China, or compromise state security or secrets;

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	•	license and permit requirements for companies in the Internet industry, including for importing and operating online games, from various regulatory authorities; and
	•	restrictions on and supervision of Internet cafés, including closing of unlicensed Internet cafés and requiring installation of security software to prevent access to subversive sites.

	Restrictions on currency exchange in certain of the countries in which our games are distributed may limit our ability to receive and remit revenues effectively.

	In many of our markets, we rely heavily on our overseas licensees to operate and distribute our games and to comply with applicable laws and government regulations.

	•	holding the required government licenses for the operation and distribution of our games;
	•	publishing, advertising and marketing our games;
	•	establishing the pricing of our games after consultation with us;
	•	owning and operating the server network and other aspects of game management and maintenance;
	•	providing customer service and trouble-shooting;
	•	maintaining network security and providing back-up for game data and software; and
	•	billing and collecting subscription fees from users and remitting royalty payments to us.

	Restrictions on currency exchange in Korea in certain emergency circumstances may limit our ability to utilize effectively revenues generated in Won to fund our business activities outside Korea or expenditures denominated in foreign currencies.

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	Adverse changes in the withholding tax rates in the countries from which we receive license fees and royalties could adversely affect our net income.

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

	Increased tensions with North Korea could adversely affect us.

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	Disruptions in Taiwan’s political environment could seriously harm our business and operations in Taiwan.

	The economic, political and social conditions, as well as government policies in China, could adversely affect our operations in China.

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	The public shareholders of our ADSs may have more difficulty protecting their interests than they would as shareholders of a U.S. corporation.

	Any dividends paid on our common shares will be in the Won and fluctuations in the exchange rate between the Won and the U.S. dollar may affect the amount received by you.

	Your ability to deposit or withdraw common shares underlying the ADSs into and from the depositary facility may be limited, which may adversely affect the value of your investment.

	•	the aggregate number of common shares we have consented to be deposited for the issuance of ADSs (including deposits in connection with offerings of ADSs and stock dividends or other distributions relating to ADSs); and
	•	the number of common shares on deposit with the custodian for the benefit of the depositary at the time of such proposed deposit;

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

	•	through a general public offering;
	•	to the members of the employee stock ownership association;
	•	upon exercise of a stock option;
	•	in the form of depositary receipts;
	•	to induce foreign direct investment necessary for business in accordance with the Foreign Investment Promotion Act of Korea;
	•	for the purpose of raising funds on an emergency basis;
	•	as necessary for the inducement of technology, to certain companies under an alliance arrangement with us; or
	•	by a public offering or subscribed for by the underwriters for the purpose of listing on the Korean public stock markets.

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	You will not be treated as our shareholder and you will not have shareholder rights such as the voting rights of a holder of common shares.

	You would not be able to exercise dissent and appraisal rights unless you have withdrawn the underlying common shares from the depositary facility and become our direct shareholders.

	We may amend the deposit agreement and the ADRs without your consent for any reason and, if you disagree, your option will be limited to selling the ADSs or withdrawing the underlying securities.

	You may be subject to Korean withholding tax.

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	You may have difficulty bringing an original action or enforcing any judgment obtained outside Korea against us, our directors and officers or other offering participants, such as underwriters or experts, who are not U.S. persons.

ITEM 4.	INFORMATION ON THE COMPANY

4.A.	History and Development of the Company

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				3Q 02				4Q 02				1Q 03				2Q 03				3Q 03				4Q 03				1Q 04				2Q 04				3Q 04				4Q 04				1Q 05				2Q 05				3Q 05				4Q 05				1Q 06
Taiwan		PCU(1)			73,274				112,823				158,695				184,436				206,904				250,030				342,228				339,843				352,592				325,351				344,534				326,848				213,006				134,869				132,539
& Hong Kong		ACU(2)			31,338				53,134				79,410				83,762				91,620				168,913				220,448				176,976				193,132				241,170				283,553				231,980				146,467				104,702				107,141
Thailand		PCU			—				40,807				65,100				60,600				66,700				72,200				82,385				86,133				107,798				130,148				116,672				111,959				102,716				75,373				69,997
		ACU			—				25,451				22,519				37,025				36,048				31,757				43,609				56,465				64,935				81,312				88,475				74,087				71,097				57,948				52,404
Japan		PCU			—				56,033				58,785				75,582				75,026				83,880				89,111				101,983				100,503				104,559				106,195				96,119				93,954				95,706				73,751
		ACU			—				33,875				34,076				32,146				40,634				47,086				50,306				50,132				50,699				56,091				59,345				50,253				52,213				49,647				36,362
China		PCU			—				—				—				112,844				125,183				118,257				147,059				116,208				100,002				78,302				76,993				64,970				58,253				35,336				28,248
		ACU			—				—				—				73,100				87,577				81,725				97,547				81,240				78,509				63,767				62,006				46,840				41,756				23,734				21,909
Korea		PCU			24,966				31,294				28,598				29,103				33,491				27,931				30,059				22,051				26,508				21,459				22,403				15,784				16,516				13,520				13,145
		ACU			13,880				14,930				15,758				14,687				17,554				14,430				15,439				11,236				13,023				10,179				10,569				7,153				8,124				6,401				6,342
USA & Canada		PCU			—				—				—				—				9,000				7,484				9,456				11,230				12,965				10,011				9,190				8,997				8,219				7,433				8,088
		ACU			—				—				—				—				—				5,641				6,995				8,477				8,919				7,108				6,457				5,378				5,426				4,922				5,222

(1)	PCU, or peak concurrent users, represents the highest number of users of Ragnarok Online during the specified time period as recorded on the servers for the various countries.
(2)	ACU, or average concurrent users, represents the average number of concurrent users of Ragnarok Online during the specified time period as recorded on the servers for the various countries.
(3)	We believe that the number of users as measured by PCU or ACU (i) is reflective of our active user base and (ii) is co-related to revenues as revenues from an online game depend on the numbers of users as well as the time spend playing the game. However, PCU and ACU are not measures under K-GAAP or US GAAP and should not be construed as an alternative to operating income or another measure of performance determined in accordance with U.S. GAAP or K-GAAP. Other companies may determine PCU or ACU differently than we do.

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						Year Ended December 31,
						2003								2004								2005(1)
																						(Unaudited)
						(In millions of Won and thousands of US$, except percentages)
Ragnarok Online and R.O.S.E. Online revenues:
		Subscriptions:
			Korea				W16,186				32.7	%			W12,725				19.7	%			W8,548			US$	8,464				16.0	%
			United States(2)				2,374				4.8				3,528				5.5				2,701				2,674				5.1
		Royalties and license fees:
			Japan				11,383				23.0				17,009				26.4				15,447				15,294				28.9
			Taiwan				11,863				24.0				14,350				22.3				9,770				9,674				18.3
			Thailand				3,459				7.0				5,335				8.3				4,817				4,769				9.0
			Others				3,022				6.0				8,407				13.0				7,341				7,268				13.8
				Sub-total			29,727				60.0				45,101				70.0				37,375				37,005				70.0
Mobile games							43				0.1				376				0.6				1,664				1,648				3.1
Character merchandising and other revenue							1,185				2.4				2,696				4.2				3,096				3,065				5.8
	Total revenues						W49,515				100.0	%			W64,426				100.0	%			W53,384			US$	52,856				100.0	%

(1)	For convenience, the Won amounts are expressed in U.S. dollars at the rate of Won 1,010.0 to US$1.00.
(2)	Includes subscription revenues from Canada.

	Maintain and strengthen our competitive position in online games

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	Continue to focus on international expansion

	Enhance development of proprietary games and publication of licensed games

	Taking advantage of our current products for revenue diversification and growth

	Massively multiplayer online role playing games

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						Date of Commercial
Game Title		Description		Game source		Launch/Testing(2)
Ragnarok Online		Action adventure with 99 levels of skill upgrades, which features two- dimensional characters in three-dimensional backgrounds(1)		Developed in-house		Launched in August 2002
Ragnarok Online II		Three-dimensional sequel to Ragnarok Online		Developed in-house		Currently in development with open beta testing planned by the end of 2006
Requiem		Three-dimensional action adventure		Developed in-house		Currently in development with open beta testing with commercialization planned in the first half of 2007
R.O.S.E. Online		Three-dimensional action adventure with seven independent storylines		Licensed from third party developer		Launched in January 2005
Time N Tales		Two-dimensional real- time tactical game		Licensed from third party developer		Commercial launch scheduled in the third quarter of 2006
Emil Chronicle Online		Three-dimensional action adventure		Licensed from third party developer		To be determined

(1)	A game with such features is generally referred to as a 2.5 dimensional game.
(2)	The actual date of commercial launch of games are dependent on a variety of factors, including technical viability and durability, availability of in-house development capability, market conditions, beta testing results and availability of licensing partners in various jurisdictions, among others.

	Massively multiplayer online role playing games currently offered

	Ragnarok Online

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	•	players may assume an ongoing role, or alter-ego, of a particular game character, each with different strengths and weaknesses. In Ragnarok Online, the user starts as a “novice” and undergoes training in a specialized mapped game zone to become familiar with the game features. Once that stage is completed, the user can choose from six basic characters, each with a distinct combination of different traits;
	•	as each game character advances in challenge levels, the character can enter into a greater range of mapped game zones and morph into a more sophisticated game character in terms of game attributes and special powers;
	•	Ragnarok Online characters may visually express the users’ mood and emotions by using emotive icons that appear within a bubble above the characters’ heads. We believe that this feature significantly expands the interface for user interaction and elevates the level of social reality of the game;
	•	game features may be traded or sold within the game, and game characters may simulate real-life experiences such as marriage, group fights and joining a guild. In addition, players may communicate with each other through in-game chatting or instant messaging;
	•	special events are held from time to time to stimulate community formations. For example, we periodically host “fortress raids” for which players are encouraged to organize themselves into a team to compete against other teams to capture a fortress within a set time; and
	•	the game has no preordained ending and is designed to continuously evolve in terms of plots, mapped game zones and character attributes through enhancements from time to time.

	R.O.S.E. Online

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	Time N Tales

	Expected future release of massively multiplayer online role playing games

	Ragnarok Online II

	Requiem

	Emil Chronicle Online

	Casual games currently offered

	STYLIA

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	Expected future release of casual games

	Pucca Online

	Mobile games currently offered

	Our game-related products and services

	Animation

	Game character merchandising

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	Korea

	Overseas markets

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Date of

Date of

License

Commercial

Country

Licensee

Agreement

Launch

Date of Expiry

Japan

GungHo Online Entertainment Inc.

July 2002

December  2002

August 2006(1)

Taiwan/ Hong Kong(2)

Soft-World International

May 2002

October 2002

October 2006(3)

Thailand

Asiasoft International Company Ltd.

June 2002

March 2003

March 2007(4)

China

Shengqu Information Technology

August 2005

May 2003

July 2008

(Shanghai) Co., Ltd(5)

Singapore/Malaysia(2)

Value Central Corporation(6)

May 2003

April 2004

April 2006(7)

Philippines

Level Up! Inc.

March 2003

September  2003

August 2008(8)

Indonesia

PT. Lyto Datarindo Fortuna(9)

February 2003

November 2003

February 2007(10)

Europe(11)

Burda Holdings International GmbH

November 2003

April 2004

April 2006(12)

Australia/ New Zealand(2)

Ongamenet PTY LTD.

July 2004

December  2004

November 2006

Brazil

Level Up! Interactive S.A.

August 2004

February 2005

February 2007

India

Level Up! Network India Pvt. Ltd.

May 2004

March 2006

March 2008

(1)	Renewed in September 2004.
(2)	Governed under a single license agreement covering both markets.
(3)	Renewed in October 2004.
(4)	Renewed in October 2004.
(5)	Shengqu is a wholly owned subsidiary of Shanda Interactive Entertainment Ltd., previously with different licensee.
(6)	Wholly-owned subsidiary of Soft-World International which offers and operates Ragnarok Online through Game Flier (Malaysia) Sdn. Bhd., another subsidiary of Soft-World International.
(7)	License Agreement with Value Central Corporation expired in April 2006. We are considering entering into a new license agreement with Game Flier (Malaysia) Sdn. Bhd. for a period through April 2008. Although we currently do not have a license agreement with Game Flier (Malaysia), Game Flier (Malaysia) services our game in Singapore/Malaysia and has been remitting royalty payments to us.
(8)	Renewed in March 2006.
(9)	Previously with a different licensee.

(10)	Renewed in October 2004.
(11)	Represents massively multiplayer online role playing game operations in Germany, Austria, Switzerland, Italy and Turkey. A single operator services these five countries under one license agreement.
(12)	License Agreement with Burda Holdings International GmbH expired in April 2006. We currently contemplate extending the term of the expired license agreement with Burda through April 2007. Although there is no license agreement in effect, Burda currently continues to service our game in Europe.

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	•	an initial license fee for initial set-up costs, technical support and advisory services that we provide until commercial launch; and
	•	ongoing royalty payments based on a percentage of revenues generated from Ragnarok Online subscription in the respective overseas markets.

	Korea

			Subscription Fees
Individual PC users
	Flat-fee rate			One month				W22,000
				Two months				41,800
				Three months				59,400
	Hourly-fee rate			5 hours				3,300
				20 hours				8,800

							Flat Fee per
			Number of PCs				PC
Internet cafés(1)
	Monthly flat-fee			1-4 PCs				W33,000
				5-10 PCs				31,350
				11-20 PCs				30,250
				21-30 PCs				29,700
				over 30 PCs				28,700
	Hourly-fee rate			300 hours				77,000
				600 hours				154,000
				1,000 hours				238,700
				2,000 hours				455,400

(1)	Actual monthly and hourly-rate fees may vary depending on volume of use by the subscriber.

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	Overseas markets

	Japan

	Taiwan

Points(1) or Days		Retail Price(2)
150 points		NT$	142
450 points			450
30 days			350

(1)	Each time a user logs onto Ragnarok Online, 20 points are deducted. After a user’s playtime exceeds 12 hours, additional 20 points are deducted for every 12 hours of use.
(2)	As of December 31, 2005, the noon buying rate of NT dollars to U.S. dollars quoted by the Federal Reserve Bank of New York was NT$32.8 to US$1.00.

	China

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Points(1) or Days		Retail Price(2)
150 points			RMB9
450 points			30
30 days			45

(1)	Six points are deducted for every hour of use.
(2)	As of December 31, 2005, the noon buying rate of Renminbi to U.S. dollars quoted by the Federal Reserve Bank of New York was RMB 8.07 to US$1.00.

	Thailand

Hours or Days		Retail Price(1)
10 hours			55	Baht
20 hours			89
40 hours			159
15 days			189
30 days			349

(1)	As of December 31, 2005, the noon buying rate of Baht to U.S. dollars quoted by the Federal Reserve Bank of New York was Baht 40.99 to US$1.00.

	The United States

		Retail Price
Hours or Month		Money Order				Wire/Bank Transfer				Credit Card/Debit Card
30 hours		US$	9.99			US$	8.99			US$	7.99
1 month			13.99				12.99				12.00
3 months			35.98				33.99				32.00
6 months			63.48				59.99				57.00

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	In-house game development

	Publishing

	•	Preliminary screening. Our preliminary screening process for a game typically includes our preliminary review and testing of the game and discussions with the game developer regarding technological and operational questions.
	•	In-depth examination, analysis and commercial negotiation. Once a game passes the preliminary screening, we thoroughly review and test the game, conduct a cost analysis, develop operational and financial projections and formulate a preliminary game operating plan. We then begin commercial negotiations with the developer.
	•	Game rating and regulatory registration and approval. Once a license agreement for a game is signed, we submit an application to the Korea Media Rating Board to obtain a game rating. This process generally takes anywhere from seven days to three months. We also typically register our intellectual property rights with respect to our license agreements with the relevant Korean government agency. We or our licensees follow similar procedures in the respective markets where our games are commercially offered.
	•	Testing and marketing. Once the required registration and approvals are obtained, we conduct closed beta testing and open beta testing of the new game and assist the licensor with development of the game. Closed beta testing usually takes 6-12 months for massively multiplayer online role playing games but may take significantly more time if material problems are detected. Open beta testing of massively multiplayer online role playing games usually takes three to six months before commercial launch. We generally commence our other marketing activities for the game during the open beta testing stage. For overseas markets, we also localize the language and content of our games to tailor to the local cultural preferences.

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	•	hire and retain creative personnel to develop games that appeal to our users;
	•	maintain online game platform that is stable and is not prone to server shutdowns, connection problems or other technical difficulties;
	•	provide timely and responsive customer service; and
	•	establish payment systems which are secure and efficient.

	Competition in Korea

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	Competition in overseas markets

	Competition from other game platforms

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	Korea

	The Telecommunications Business Act

	The Act on Consumer Protection for Transactions through Electronic Commerce

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	The Act on Promotion of Information and Communications Network Utilization and Information Protection

	•	it is necessary for the settlement of service charges;
	•	the personal information is processed so that the specific individual is unidentifiable and is provided for compiling statistics, academic research or surveys; or
	•	it is otherwise permitted by other law and regulations.

	The Korean Civil Code and the Telecommunication Framework Act

	The Special Tax Treatment Control Law

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	Other related laws and regulations

	Taiwan

	Consumer protection

	Regulations of Internet content and game software

	•	Excessive depiction of gambling, drug abuse, drug trafficking, robbery, burglary, kidnapping, homicide, or other criminal offenses;
	•	Excessive depiction of the process of suicide;
	•	Plot involving terror, bloodshed, cruelty, or perversion, which is presented in an intense manner, yet is still acceptable to adults in general; or
	•	Depiction of sexual acts or sexual obscenity, or exposure of genitals, through action, image, language, text, dialogue, sound, picture, photograph, or any other form, yet which does not embarrass or disgust adults in general.

	Internet café regulation

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	Privacy protection

	Japan

	Protection of personal information.

	Regulations on sound upbringing of minors

	Thailand

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	Registration of Internet cafés and online game operators

	Regulation of business hours

	Restriction on access by children

	Intellectual property

	China

	•	the Ministry of Information Industry;
	•	the Ministry of Culture;
	•	the State Press and Publications Administration;
	•	the State Copyright Bureau;
	•	the Ministry of Public Security; and
	•	the Bureau of State Secrecy.

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	United States

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	Korea

	United States

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	Japan

ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS

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	Revenue recognition

	•	online games — subscription revenue;
	•	online games — royalties and license fees;
	•	mobile games; and
	•	character merchandising, animation and other revenue.

	Online games — subscription revenue

	Online games — royalties and license fees

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	Mobile games revenue

	Character merchandising, animation and other revenue

	Cost of revenues

	•	operational expenses, server depreciation expenses, server maintenance costs and related personnel costs and amortization of development-related costs as described in “— Critical accounting policies — Capitalized software development costs”; and
	•	royalty payments to Mr. Myoung-Jin Lee, on whose cartoon series our game Ragnarok Online is based.

	Selling, general and administrative expenses

	Research and development expenses

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	Interest expense

	•	until the total payments to YNK Korea reach Won 7,000 million, 50% of our domestic and overseas adjusted revenues from Ragnarok Online. This amount was paid in full as of March 2003; and
	•	once the total payments to YNK Korea exceed Won 7,000 million, 20% of our domestic adjusted revenues from Ragnarok Online and 10% of our overseas adjusted revenues from Ragnarok Online.

	Foreign currency effects

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	Income tax expenses

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	Revenue recognition

	Allowances for doubtful accounts

	Capitalized software development costs

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	Impairment of goodwill and other intangible assets

	Income taxes

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	2005 Compared to 2004

				Year Ended December 31,
				2004				2005				2005(1)				% Change
												(Unaudited)
				(In millions of Won and thousands of US$)
Revenues:
	Online games — subscription revenue			W	16,253			W	11,249			US$	11,138				(30.8	)%
	Online games — royalties and license fees				45,101				37,375				37,005				(17.1	)
	Mobile games				376				1,664				1,648				342.6
	Character merchandising, animation and other revenue				2,696				3,096				3,065				14.8
		Total revenues			64,426				53,384				52,856				(17.1	)
Cost of revenues					10,116				16,038				15,879				58.5
Gross profit					54,310				37,346				36,977				(31.2	)
	Gross profit margin(2)				84.3	%			70.0	%			70.0	%
Operating expenses:
	Selling, general and administrative				13,660				30,795				30,490				125.4
	Research and development				2,029				9,219				9,128				354.4
		Total operating expenses			15,689				40,014				39,618				155.0
Operating income (loss)					38,621				(2,668	)			(2,641	)			(106.9	)
	Operating profit margin(3)				59.9	%			(5.0	)%			(5.0	)%
Other income (expense):
	Interest income				479				2,850				2,822				495.0
	Interest expense				(4,732	)			(2,158	)			(2,137	)			(54.4	)
	Foreign currency gains (losses), net				(625	)			(614	)			(608	)			(1.8	)
	Foreign currency forward transaction, net				—				(853	)			(845	)			N/M
	Others, net				(1	)			(12	)			(12	)			N/M
		Total net other expense			(4,879	)			(787	)			(780	)			(83.9	)
Income (loss) before income tax expenses, minority interest, and equity in loss of related joint venture					33,742				(3,455	)			(3,421	)			(110.2	)
	Income tax expenses (benefit)				5,406				(817	)			(809	)			(115.1	)
Income (loss) before minority interest and equity in loss of related joint venture					28,336				(2,638	)			(2,612	)			(109.3	)
	Minority interest(4)				(17	)			(2	)			(2	)			N/M
	Equity in loss of related joint venture(5)				296				394				390				33.1
Net income (loss)				W	28,057			W	(3,030	)		US$	(3,000	)			(110.8	)%

(1)	For convenience, the Won amounts are expressed in U.S. dollars at the rate of Won 1,010.0 to US$1.00.
(2)	Gross profit margin for each period is calculated by dividing gross profit by total revenues for each period.
(3)	Operating profit margin for each period is calculated by dividing operating income (loss) by total revenues for each period.

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(4)	In 2004, represents the minority interest in GRAVITY Entertainment Corporation, our Japanese subsidiary. We acquired the remaining 50% of voting equity interest in RO Production (the predecessor name of GRAVITY Entertainment Corporation) in October 2004, resulting in RO Production becoming our wholly-owned subsidiary. In 2005, represents the minority interest in NEOCYON, Inc., a 96.11% held subsidiary purchased in December 2005.
(5)	Represents the losses from our 30% equity investment in Animation Production Committee, a Japanese joint venture formed in order to produce and market Ragnarok the Animation through GRAVITY Entertainment Corporation, our Japanese subsidiary. This investment was accounted for using the equity method of accounting.

	Revenues

	•	a 17.1% decrease in royalties and license fees to Won 37,375 million (US$37,005 thousand) in 2005 from Won 45,101 million in 2004, which primarily resulted from an decrease in royalties and license fees due to a decrease in revenues from royalties and license fees attributable to our Ragnarok Online game resulting from increasing competition and as a result of the relative maturity of such game in our principal overseas markets. Royalties and license fees from Ragnarok Online decreased from Won 45,101 million in 2004 to Won 36,574 million (US$36,212 thousand) in 2005; and
	•	a 30.8% decrease in subscription revenue to Won 11,249 million (US$11,138 thousand) in 2005 from Won 16,253 million in 2004. This 30.8% decrease resulted primarily from a 37.8% decrease in subscription revenue in Korea from Ragnarok Online to Won 7,913 million (US$7,835 thousand) in 2005 from Won 12,724 million in 2004, and a 24.5% decrease in the subscription revenue for Ragnarok Online in the United States to Won 2,665 million (US$2,639 thousand) in 2005 from Won 3,528 million in 2004, due to a decrease in playing time by our users of Ragnarok Online resulting from increasing competition and as a result of the relative maturity of such game.

	•	an increase in the subscription revenue from R.O.S.E Online to Won 671 million (US$664 thousand) in 2005, as such game was commercially launched in January 2005;
	•	a 14.8% increase in character merchandising, animation and other revenue to Won 3,096 million (US$3,065 thousand) in 2005 from Won 2,696 million in 2004, which resulted primarily from a 47.78% increase in technical support revenue to Won 467 million (US$462 thousand) from Won 316 million in 2004 and 148.58% increase in animation revenue to Won 614 million (US$608 thousand) from Won 247 million in 2004; and
	•	a 342.6% increase in mobile games revenue to Won 1,664 million (US$1,648 thousand) in 2005 from Won 376 million in 2004, which resulted primarily from increase in sales of mobile games in Taiwan, Japan, the Philippines, Singapore, Malaysia and Thailand and sales of Won 429 million resulting from the acquisition of NEOCYON, Inc. in November and December 2005.

	Cost of revenues

	•	a 53.5% increase in salaries and wages to Won 6,759 million (US$6,692 thousand) in 2005 from Won 4,403 million in 2004, as a result of increased hiring of game developers and overseas support staff from 174 as of December 31, 2004 to 193 as of December 31, 2005 and payment of incentives for the success of Ragnarok Online and 16% increase in average salaries paid to our employees which became effective as of June 2005;

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	•	a 18.9% increase in fee payments to Won 2,250 million (US$2,228 thousand) in 2005 from Won 1,893 million in 2004, as a result of an increase in fees we pay to Korea Internet Data Center for server housing fees due to the commercial launch of R.O.S.E. Online in January 2005;
	•	a 55.4% increase in depreciation to Won 2,422 million (US$2,398 thousand) in 2005 from Won 1,559 million in 2004, as a result of the addition of servers and software in 2005 to better service Ragnarok Online and the addition of servers and software for the introduction of R.O.S.E Online; and
	•	a 2,778.6% increase in stock option plan compensation expense to Won 806 million (US$798 thousand) in 2005 from Won 28 million in 2004, which resulted from the increased amortization period to full year from 8 days in 2004.

	Gross profit and margin

	Operating expenses

	•	a 261.4% increase in fee payments to Won 9,570 million (US$9,475 thousand) in 2005 from Won 2,648 million in 2004, for fees and expenses incurred in connection with the investigation and subsequent restatement of the financial statements;
	•	a 36.0% increase in advertising expenses to Won 6,273 million (US$6,211 thousand) in 2005 from Won 4,614 million in 2004, as a result of our participation in the Tokyo Game Show in September 2005, our participation in the G-star Game Show in November 2005, advertising for Ragnarok Online II and increase in marketing expenses related to the introduction of STYLIA;
	•	a 80.4% increase in salaries and wages to Won 5,694 million (US$5,638 thousand) in 2005 from Won 3,156 million in 2004, primarily as a result of an increase in the number of employees for administrative and other support functions from 148 in 2004 to 161 in 2005 and 16% increase in average salaries paid to our employees which became effective as of June 2005;
	•	an increase in impairment on intangible assets to Won 1,547 million (US$1,532 thousand) in 2005 from nil in 2004, as a result of recognition of impairment losses for the remaining balance of intangible assets recognized in connection with the business combination with TriggerSoft in 2005;
	•	a 779.2% increase in tax and dues to Won 1,398 million (US$1,384 thousand) in 2005 from Won 159 million in 2004, as a result of having to pay back-taxes in the amount of Won 1,060 million, representing the amount of tax benefits granted to us in respect of the building and land at Shinsa-dong in July 2004 for research and development purposes.

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	Operating income and operating margin

	Net other income (expense)

	•	a 54.4% decrease in interest expense from Won 4,732 million in 2004 to Won 2,158 million (US$2,137 thousand) in 2005 as a result of reduction in payments in connection with the loan from YNK Korea, due to the significant decrease in Ragnarok Online revenues and the expiration of the term of the contract with YNK Korea in July 2005;
	•	an increase in interest income from Won 479 million in 2004, to Won 2,850 million (US$2,822 thousand) in 2005 resulting from an increase in short-term financial instruments in 2005;

	•	an increase in net loss on foreign currency forward transactions of Won 853 million (US$845 thousand) in 2005 from nil in 2004.

	Income tax expenses (benefit)

	Minority interest

	Equity in loss of related joint venture

	Net income (loss)

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	2004 Compared to 2003

				Year Ended December 31,
				2003				2004				% Change
				(In millions of Won)
Revenues:
	Online games — subscription revenue			W	18,560			W	16,253				(12.4	)%
	Online games — royalties and license fees				29,727				45,101				51.7
	Mobile games				43				376				N/M
	Character merchandising, animation and other revenue				1,185				2,696				127.5
		Total revenues			49,515				64,426				30.1
Cost of revenues					6,958				10,116				45.4
Gross profit					42,557				54,310				27.6
	Gross profit margin(1)				85.9	%			84.3	%
Operating expenses:
	Selling, general and administrative				11,360				13,660				20.2
	Research and development				1,597				2,029				27.1
		Total operating expenses			12,957				15,689				21.1
Operating income					29,600				38,621				30.5
	Operating profit margin(2)				59.8	%			59.9	%
Other income (expense):
	Interest income				94				479				409.6
	Interest expense				(6,465	)			(4,732	)			(26.8	)
	Foreign currency gains				413				430				4.1
	Foreign currency losses				(278	)			(1,055	)			279.5
	Others, net				26				(1	)			N/M
		Total net other expense			(6,210	)			(4,879	)			(21.4	)
Income before income tax expenses, minority interest, and equity in loss of related joint venture					23,390				33,742				44.3
	Income tax expenses				4,250				5,406				27.2
Income before minority interest and equity in loss of related joint venture					19,140				28,336				48.0
	Minority interest(3)				—				(17	)			N/M
	Equity in loss of related joint venture(4)				—				296				N/M
Net income				W	19,140			W	28,057				46.6	%

(1)	Gross profit margin is calculated as gross profit divided by total revenues.
(2)	Operating profit margin is calculated as operating income divided by total revenues.
(3)	Represents the minority interest in GRAVITY Entertainment Corporation, our Japanese subsidiary. We acquired the remaining 50% of voting equity interest in RO Production in October 2004, resulting in RO Production becoming our wholly-owned subsidiary.

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(4)	Represents the losses from our 30% equity investment in Animation Production Committee, a Japanese joint venture to produce and market Ragnarok the Animation through GRAVITY Entertainment Corporation, our Japanese subsidiary. This investment was accounted for using the equity method of accounting.

	Revenues

	•	an increase in royalties and license fees from Ragnarok Online to Won 45,101 million in 2004 from Won 29,727 million in 2003, primarily as a result of an increase in royalties and license fees from the overseas markets in which Ragnarok Online had already been commercialized and the commercialization of Ragnarok Online in 9 new markets in 2004 compared to 4 in 2003. The increase in revenue attributable to existing markets was Won 13,795 million and attributable to an entry into new markets was Won 1,579 million; and
	•	a 127.5% increase in character merchandising, animation and other revenue to Won 2,696 million in 2004 from Won 1,185 million in 2003, which resulted primarily from a 72.9% increase in character merchandising revenue to Won 2,028 million in 2004 from Won 1,173 million in 2003, a 2,330.77% increase in technical support revenue to Won 316 million from Won 13 million in 2003 and Won 247 million in revenue from animation in 2004 compared to none in 2003;

	•	a 12.4% decrease in subscription revenue to Won 16,253 million in 2004 from Won 18,560 million in 2003. This 12.4% decrease resulted primarily from a 21.4% decrease in subscription revenue in Korea from Ragnarok Online to Won 12,724 million in 2004 from Won 16,186 million in 2003, mainly due to a decrease in playing time by our users of Ragnarok Online in Korea. This decrease was partially offset by a 48.7% increase in the subscription revenue in the United States to Won 3,528 million in 2004 from Won 2,373 million in 2003.

	Cost of revenues

	•	a 63.4% increase in salaries and wages to Won 4,403 million in 2004 from Won 2,695 million in 2003, mainly as a result of an increase in hiring of game developers and overseas support staff from 130 as of December 31, 2003 to 174 as of December 31, 2004;
	•	a 58.4% increase in payments to Won 1,893 million in 2004 from Won 1,195 million in 2003, as a result of an increase in fees we paid to Mr. Myoung-Jin Lee and server housing fees we paid to the KIDC; and
	•	a 41.5% increase in depreciation to Won 1,559 million in 2004 from Won 1,102 million in 2003, which mainly resulted from the addition of servers and software in 2004 to better service Ragnarok Online.

	Gross profit and margin

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	Operating expenses

	•	a 81.6% increase in salaries and wages to Won 3,156 million in 2004 from Won 1,738 million in 2003, primarily as a result of an increase in the number of employees for administrative and other support functions from 86 in 2003 to 148 in 2004;
	•	a 174.7% increase in depreciation expense to Won 989 million in 2004 from Won 360 million in 2003, which mainly resulted from depreciation attributable to leasehold improvements in property and the addition of servers for the introduction of R.O.S.E. Online; and
	•	a 9.0% increase in advertising expenses to Won 4,614 million in 2004 from Won 4,233 million in 2003, which resulted from the hosting of the Ragnarok World Championship in August 2004, a significant increase in marketing expenses related to the introduction of R.O.S.E. Online and our participation in the Tokyo Game Show in September 2004.

	Operating income and operating margin

	Net other income (expense)

	•	a 26.8% decrease in interest expense from Won 6,465 million in 2003 to Won 4,732 million in 2004 as a result of reduction in payment rates on the loan from YNK Korea, effective in March 2003, from 50% of all revenues from Ragnarok Online to 20% for domestic adjusted revenues and to 10% for overseas adjusted revenues from Ragnarok Online despite the significant increase in such revenues;
	•	an increase in interest income from Won 94 million in 2003 to W479 million in 2004 resulting from an increase in short-term financial instruments in 2004 which more than offset; and
	•	an increase in loss in foreign currency transaction from Won 278 million in 2003 to Won 1,055 million in 2004 resulting from the appreciation of the Won against the U.S. dollar during the period.

	Income tax expenses

	Minority interest

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	Equity in loss of related joint venture

	Net income

	Impact of inflation

	Impact of foreign currency fluctuations

	Government, Economic, Fiscal, Monetary or Political Policies or Factors

	Liquidity

		Year Ended December 31,
		2003				2004				2005				2005(1)
														(Unaudited)
		(In millions of Won and thousands of US$)
Cash and cash equivalents at beginning of period		W	560			W	5,405			W	16,405			US$	16,243
Net cash provided by operating activities			15,823				32,642				17,928				17,750
Net cash used in investing activities			(10,564	)			(19,007	)			(79,046	)			(78,263	)
Net cash provided by (used in) financing activities			(414	)			(2,635	)			70,587				69,888
Net increase in cash and cash equivalents			4,845				11,000				9,469				9,375
Cash and cash equivalents at end of period		W	5,405			W	16,405			W	25,874			US$	25,618

(1)	For convenience, the Won amounts are expressed in U.S. dollars at the rate of Won 1,010.0 to US$1.00.

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	•	our investment in short-term financial instruments in the amount of Won 7,300 million in 2004 and Won 50,969 million (US$50,464 thousand) in 2005;
	•	an investment of Won 1,243 million through our Japan subsidiary in the Animation Production Committee, a joint venture for the production and marketing of Ragnarok the Animation, in 2004;
	•	an investment of Won 9,193 million (US$9,102 thousand) in TriggerSoft Corporation and NEOCYON, Inc. in 2005; and
	•	our purchase of Emil Chronicle Online for Won 6,073 million (US$6,013 thousand) in 2005.

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	Capital resources

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			Payments Due by Period
							Between 1				Between 3				Beyond
			Up to 1 Year				and 3 Years				and 5 Years				5 Years				Total
			(In millions of Won)
Long-term debt obligations			W	572			W	419			W	273			W	205			W	1,469
Operating lease obligations				3,262				2,882				—				—				6,144
Purchase obligations				2,400				—				—				—				2,400
	Total		W	6,234			W	3,301			W	273			W	205			W	10,013

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ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Name		Position
Il Young Ryu		Chairman, President, Representative Director and Chief Executive Officer
Seung Taik Baik		Executive director and Chief Marketing Officer

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Name		Position
James Jinho Chang		Independent director and audit committee member
Yongho Park		Independent director and audit committee member
Jungil Lee		Independent director and audit committee member

Name		Position
Kyu Hyeong Lee		Senior Executive Vice President of Human Resources and Chief Compliance Officer
James O. Kwon		Chief Financial Officer
Won Seok Choi		Chief Technology Officer

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	Independent directors

	•	the audit committee;
	•	the director nomination committee; and
	•	the compensation committee.

	Audit committee

	Director nomination committee

	Compensation committee

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			December 31,
			2003				2004				2005
Senior management				4				7				8
Finance				4				8				13
Marketing				18				27				43
Game development and support				225				357				443
	Total			251				399				507

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	•	Stock options may be granted to our officers and employees who have contributed or are qualified to contribute to our establishment, management, overseas business and technical innovation. Notwithstanding the foregoing, no stock options may be granted to any executive officer or employee who is (i) our largest shareholder, (ii) a holder of 10% or more of our shares outstanding, (iii) certain specially related persons of the person set forth in (i) and (ii) above, or (iv) a shareholder who would own 10% or more of our shares upon exercise of options granted under the stock option plan.
	•	Stock options may be granted by a special resolution of our shareholders with the aggregate number of shares issuable not to exceed 50% of the total number of our then issued and outstanding common shares.
	•	Upon exercise of stock options, we will deliver our common shares or pay in cash the difference between the market price of our shares and the option exercise price.
	•	Stock option granted under the stock option plan, in case new shares are issued, will have a minimum exercise price equal to the higher of (i) the market price of our shares calculated pursuant to the method under the Inheritance and Gift Tax Law and (ii) the par value of our shares, and in other cases, will have a minimum exercise price equal to or higher than the market price of our shares calculated pursuant to the method under the Inheritance and Gift Tax Law.
	•	Stock options can vest after two years from the stock option grant date and can be exercised up to five years from the vesting date. The stock option may be cancelled by a resolution of our board of directors if (i) the officer or employee who holds the option voluntarily resigns or is discharged from office prior to the vesting date; (ii) the officer or employee who holds the option causes material damage to us by willful misconduct or negligence; (iii) we are unable to deliver our shares or pay the prescribed amount due to bankruptcy or dissolution, or (iv) the occurrence of any cause for cancellation of stock options specified in the stock option agreement.

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ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

		Number of
		Shares				Percentage
		Beneficially				Beneficially
Name		Owned				Owned
EZER, Inc.(1)			3,640,619				52.39%
Moon Capital Master Fund LP(2)			549,296				7.90%
Ramius Capital Group, L.L.C.(3)			503,837				7.25%
Government of Singapore Investment Corporation Pte Ltd(4)			416,541				5.99%

(1)

On August 30, 2005, Mr. Jung Ryool Kim, our former controlling shareholder and Chairman, sold all of our shares that Mr. Kim and his family members owned to EZER Inc., a Japanese Company (“EZER”), pursuant to a stock purchase agreement by and among Jung Ryool Kim, Ji Young Kim, Young Joon Kim, Ji Yoon Kim and EZER dated August 30, 2005. Pursuant to the share sale transaction, EZER became our largest shareholder. EZER, which is 100% owned by our Chairman and CEO, Il Young Ryu, is the operator of an investment fund established pursuant to a contractual relationship known in Japan as a “tokumei kumiai” (“TK Relationship”) with Techno Groove, Inc. a Japanese company and a wholly-owned subsidiary of Asian Groove, Inc., a Japanese company (“Asian Groove”). The TK Relationship, which is governed by the Commercial Code of Japan, is used in Japan as a means of making and managing investments, and under the investment fund agreement for the TK Relationship (the “TK Agreement”), EZER acts as the operator of a fund, established in Japan under the name of “Asian Star Fund,” using the capital contribution made by Techno Groove as an investor in the fund. Asian Star Fund was established for the sole purpose of investing in our shares.

		In accordance with a Schedule 13/D filed by Techno Grove, among others, their investment in the Asian Star Fund was financed through a loan from Son Assets Management Inc. (“SAM”), a Japanese company, in the amount of Japanese Yen 40 billion. In exchange, Asian Groove, a Japanese company and the parent company of Techno Groove, pledged all of its shares of GungHo Entertainment Online, Inc. (“GungHo”) in custody with Techno Groove, which in turn pledged such shares to SAM.
		Under the terms of the TK Agreement, EZER, as the operator of Asian Star Fund, exercises the sole right, with respect to ownership and voting right of common shares of companies invested in by the Asian Star Fund. Asian Star Fund’s sole investment is in our shares. Techno Groove has no voting or investment power with respect to the securities held by Asian Star Fund. The term of the TK is one year, subject to automatic one-year renewals, unless terminated by either party upon three months prior notice. Upon such termination, the assets of Asian Star Fund must be distributed to Techno Groove by EZER.
		We have in the ordinary course of business, entered into various contracts with GungHo. See Item 4.B. “Information on the Company — Business Overview — Our Markets — Overseas Markets” and Item 10.C. “Additional Information — Material Contracts.”

(2)	As reported in a Schedule 13D/A filed on June 1, 2006. Consists of shares beneficially owned by Moon Capital Master Fund Ltd., Moon Capital Leveraged Master Fund Ltd., Moon Capital Management LP, JWM Capital LLC and John W. Moon.
(3)	As reported in Schedule 13D/A filed on June 1, 2006. Consists of shares beneficially owned by Starboard Value and Opportunity Master Fund Ltd., Parche LLC, RCG Ambrose Master Fund, Ltd., RCG

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	Halifax Fund, Ltd., Ramius Master Fund, Ltd., Ramius Fund III, Ltd, Admiral Advisors, LLC, Ramius Advisors, LLC, Ramius Capital Group, L.L.C. Safe Harbor Master Fund, L.P., Safe Harbor Investment Ltd., and Jeffrey M. Solomon.

(4)	As reported in Schedule 13G/A filed on January 18, 2006. Consists of shares beneficially owned by Government of Singapore Investment Corporation Pte Ltd., Government of Singapore and Monetary Authority of Singapore.

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ITEM 8.	FINANCIAL INFORMATION

8.A.	Consolidated Statements and Other Financial Information

	Class action complaints

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8.B.	Significant Changes

ITEM 9.	THE OFFER AND LISTING

9.A.	Offer and Listing Details

				Price
Period				High				Low
				(In US$)
2005
	First Quarter				13.77				8.04
		January			N/A				N/A
		February			13.77				10.30
		March			11.90				8.04
	Second Quarter				9.72				5.30
		April			9.50				8.02
		May			9.72				5.30
		June			8.70				6.30
	Third Quarter				12.14				5.90
		July			10.05				6.01
		August			12.14				5.90
		September			10.95				7.70
	Fourth Quarter				8.64				6.10
		October			8.64				6.70
		November			7.15				6.24
		December			7.25				6.10
2006 (through June 29, 2006)
	First Quarter				9.75				6.00
		January			7.37				6.63
		February			7.58				6.65
		March			9.75				6.00
	Second Quarter (through June 29, 2006)				9.75				6.83
		April			9.75				8.10
		May			9.05				7.50
		June (through June 29, 2006)			8.03				6.83

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9.B.	Plan of Distribution

9.C.	Markets

9.D.	Selling Shareholders

9.E.	Dilution

9.F.	Expenses of the Issue

ITEM 10.	ADDITIONAL INFORMATION

10.A.	Share Capital

10.B.	Articles of Incorporation

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	•	through a general public offering pursuant to a resolution of the board of directors of no more than 50% of the total number issued and outstanding shares;
	•	to the members of the employee stock ownership association;
	•	upon exercise of a stock option in accordance with our articles of incorporation;
	•	in the form of depositary receipts of no more than 50% of the total number issued and outstanding shares;
	•	to induce foreign direct investment necessary for business in accordance with the Foreign Investment Promotion Act of no more than 50% of the total number issued and outstanding shares;
	•	to domestic or overseas financial institutions, corporations or individuals for the purpose of raising funds on an emergency basis;
	•	as necessary for the inducement of technology, to certain companies under an alliance arrangement with us; or
	•	by a public offering or subscribed for by the underwriters for the purpose of listing on the Stock Market Division or KOSDAQ Market Division of the Korea Exchange of no more than 50% of the total number issued and outstanding shares.

	•	as necessary,
	•	at the request of shareholders holding an aggregate of 3% or more of our outstanding shares, or
	•	at the request of our audit committee.

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	•	amending our articles of incorporation;
	•	removing a director;
	•	effecting a capital reduction;
	•	effecting any dissolution, merger or consolidation with respect to us;
	•	transferring all or any significant part of our business;
	•	acquiring all of the business of any other company or a part of the business of any other company having a material effect on our business;
	•	issuing new shares at a price below the par value; or
	•	any other matters for which such resolution is required under relevant law and regulations.

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10.C.	Material Contracts

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10.D.	Exchange Controls

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10.E.	Taxation

	Dividends on the shares or ADSs

	Taxation of capital gains

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	Tax treaties

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	Inheritance tax and gift tax

	Securities transaction tax

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	U.S. federal income tax considerations

	•	dealers in securities or currencies;
	•	financial institutions;
	•	regulated investment companies;
	•	real estate investment trusts;
	•	tax-exempt entities;
	•	insurance companies;
	•	traders in securities that elect to use the mark-to-market method of accounting for their securities;
	•	persons holding our common shares or ADSs as part of a hedging, integrated, conversion or constructive sale transaction or a straddle;
	•	persons owning (or treated as owning) 10% or more of our voting stock;
	•	persons liable for alternative minimum tax;
	•	investors in pass-through entities; or
	•	persons whose “functional currency” is not the United States dollar.

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	•	an individual citizen or resident of the United States;
	•	a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;
	•	an estate the income of which is subject to U.S. federal income taxation regardless of its source; or
	•	a trust:

	•	that is subject to the primary supervision of a court within the United States and the control of one or more United States persons as described in section 7701(a)(30) of the Code, or
	•	that has a valid election in effect under applicable U.S. Treasury regulations to be treated as a United States person.

	ADSs

	Taxation of dividends

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	•	have held our ADSs or common shares for less than a specified minimum period during which you are not protected from risk of loss; or
	•	are obligated to make payments related to the dividends;

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	•	the fair market of such rights is less than 15 percent of the fair market value of our old ADSs or common shares at the time of distribution, unless you elect to determine the basis of our old ADSs or common shares and of such rights by allocating your adjusted basis of our old ADSs or common shares between our old ADSs or common shares and such rights, based on their relative fair market values on the date of distribution; or
	•	such rights are not exercised and thus expire.

	Taxation of capital gains

	Passive foreign investment companies

	•	at least 75% of our gross income is passive income; or
	•	on average at least 50% of the value (determined on a quarterly basis) of our assets is attributable to assets that produce or are held for the production of passive income.

	•	the excess distribution or gain will be allocated ratably over your holding period for our ADSs or common shares;

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	•	the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income; and
	•	the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

	Information reporting and backup withholding

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10.F.	Dividends and Paying Agents

10.G.	Statement by Experts

10.H.	Documents on Display

10.I.	Subsidiary Information

ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

11.A.	Quantitative Information about Market Risk

	Foreign currency risk

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	Interest rate risk

11.B.	Qualitative Information about Market Risk

11.C.	Interim Periods

ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

12.A.	Debt Securities

12.B.	Warrants and Rights

12.C.	Other Securities

12.D.	American Depositary Shares

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	How will a holder of ADSs receive dividends and other distributions on the shares?

	•	Cash. The depositary will convert any cash dividend or other cash distribution we pay on the shares into U.S. dollars, if it can do so on a reasonable basis and can transfer the U.S. dollars to the United States. If that is not possible or if any government approval is needed and cannot be obtained, the deposit agreement allows the depositary to distribute the foreign currency only to those ADS holders to whom it is possible to do so. It will hold the foreign currency it cannot convert for the account of the ADS holders who have not been paid. It will not invest the foreign currency and it will not be liable for any interest.

	•	Shares. The depositary may distribute additional ADSs representing any shares we distribute as a dividend or free distribution. The depositary will only distribute whole ADSs. It will try to sell shares which would require it to deliver a fractional ADS and distribute the net proceeds in the same way as it does with cash. If the depositary does not distribute additional ADRs, the outstanding ADSs will also represent the new shares.
	•	Rights to purchase additional shares. If we offer holders of our securities any rights to subscribe for additional shares or any other rights, the depositary may make these rights available to holders of ADSs. If the depositary decides it is not legal and practical to make the rights available but that it is practical to sell the rights, the depositary may sell the rights and distribute the proceeds in the same way as it does with cash. The depositary will allow rights that are not distributed or sold to lapse. In that case, holders of ADSs will receive no value for them.

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	•	Other Distributions. The depositary will send to holders of ADSs anything else we distribute on deposited securities by any means it thinks is legal, fair and practical. If it cannot make the distribution in that way, the depositary has a choice. It may decide to sell what we distributed and distribute the net proceeds, in the same way as it does with cash. Or, it may decide to hold what we distributed, in which case ADSs will also represent the newly distributed property. However, the depositary is not required to distribute any securities (other than ADSs) to holders of ADSs unless it receives satisfactory evidence from us that it is legal to make that distribution.

	How are ADSs issued?

	How do ADS holders cancel an ADR and obtain shares?

	How do holders of ADSs vote?

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If We:		Then:
• Change the nominal or par value of our shares • Reclassify, split up or consolidate any of the deposited securities		The cash, shares or other securities received by the depositary will become deposited securities. Each ADS will automatically represent its equal share of the new deposited securities.
• Distribute securities on the shares that are not distributed to holders     of ADSs • Recapitalize, reorganize, merge, liquidate, sell all or substantially all     of our assets, or take any similar action		The depositary may distribute some or all of the cash, shares or other securities it received. It may also deliver new ADRs or ask holders of ADSs to surrender their outstanding ADRs in exchange for new ADRs identifying the new deposited securities.

Persons Depositing Shares or ADR Holders Must Pay:
		For:
US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)			•			Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property
			•			Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates
US$.02 (or less) per ADS			•			Any cash distribution to holders of ADSs
A fee equivalent to the fee that would be payable if securities distributed to holders of ADSs had been shares and the shares had been deposited for issuance of ADSs			•			Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADR holders
US$.02 (or less) per ADSs per calendar year (if the depositary has not collected any cash distribution fee during that year)			•			Depositary services (The depositary may collect these fees at the sole discretion of the depositary, by billing the holders of ADSs for such charge or by deducting such charge from one or more cash dividends or other cash distributions.)

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Persons Depositing Shares or ADR Holders Must Pay:
		For:
Registration or transfer fees Expenses of the depositary in converting foreign currency to U.S. dollars			•			Transfer and registration of shares on our share register to or from the name of the depositary or its agent when holders of ADSs deposit or withdraw shares
Expenses of the depositary Taxes and other governmental charges the depositary or the custodian have to pay on any ADR or share underlying an ADR, for example, stock transfer taxes, stamp duty or withholding taxes			•			Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)
Any charges incurred by the depositary or its agents for servicing the deposited securities			•			No charges of this type are currently made in the Korean market (The depositary may collect these fees at the sole discretion of the depositary, by billing the holders of ADSs for such charge or by deducting such charge from one or more cash dividends or other cash distributions.)

	How may the deposit agreement be amended?

	How may the deposit agreement be terminated?

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	Limits on our obligations and the obligations of the depositary; limits on liability to holders of ADSs

	•	are only obligated to take the actions specifically set forth in the deposit agreement without negligence or bad faith;
	•	are not liable if we or the depositary is prevented or delayed by law or circumstances beyond our or its control from performing our or its obligations under the deposit agreement;
	•	are not liable if we or the depositary exercises discretion permitted under the deposit agreement;
	•	have no obligation to become involved in a lawsuit or other proceeding related to the ADRs or the deposit agreement on behalf of holders of ADSs or on behalf of any other person;
	•	may rely upon any documents we or the depositary believes in good faith to be genuine and to have been signed or presented by the proper party.

	•	payment of stock transfer or other taxes or other governmental charges and transfer or registration fees charged by third parties for the transfer of any shares or other deposited securities;
	•	satisfactory proof of the identity and genuineness of any signature or other information it deems necessary; and
	•	compliance with regulations it may establish, from time to time, consistent with the deposit agreement, including presentation of transfer documents.

	•	When temporary delays arise because: (i) the depositary has closed its transfer books or we have closed our transfer books; (ii) the transfer of shares is blocked to permit voting at a shareholders’ meeting; or (iii) we are paying a dividend on our shares.
	•	When holders of ADSs seeking to withdraw shares owe money to pay fees, taxes and similar charges.
	•	When it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations that apply to ADSs or to the withdrawal of shares or other deposited securities.

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ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

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

ITEM 15.	CONTROLS AND PROCEDURES

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	•	Lack of independent oversight and supervision controls. The Company’s Audit Committee and the system of internal control over financial reporting established by the Audit Committee failed to recognize and detect the fraudulent activities by the former Chairman and certain member of the senior management. The Company did not have adequate controls related to the prevention and detection of fraud, for example, corporate compliance programs and whistleblower hotlines.
	•	Lack of controls over the reported revenues from our overseas licensees. The Company did not have controls designed to detect under-reporting of amounts due to the Company by overseas licensees.
	•	Lack of controls over bank accounts. The former Chairman was able to open overseas bank accounts, with the help of a Company employee without appropriate monitoring, which contributed to the former Chairman’s ability to carry on fraudulent activities without being detected. In addition, the former Chairman had access to the Company’s accounts without oversight, which allowed him to use Company accounts and transfer funds out of such accounts without proper authorization.
	•	Lack of sufficient complement of personnel. The Company did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the selection, application and implementation of U.S. GAAP commensurate with the Company’s financial reporting requirements under the Exchange Act.

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	•	Lack of controls over the purchase and accounting for fixed assets. The Company did not have adequate authorization controls to ensure that assets purchased and paid for by the Company were in fact for the benefit of the Company and did not have adequate controls to verify and ensure that assets recorded in the Company’s balance sheet were in fact in possession of the Company.
	•	Lack of controls over the financial close and reporting process. We did not maintain effective controls, including monitoring, over our financial close and reporting process. Specifically, we do not have adequately designed controls to ensure the completeness, accuracy and restricted access to spreadsheets used in the period-end financial closing process. This control deficiency could result in errors in the performance of consolidations and the preparation of U.S. GAAP financial statements and allow our employees manipulate financial results and override controls.

	•	Change in oversight. We have, since the discovery of the events which led to the Investigation, replaced the members of the Audit Committee in its entirety with three new independent directors and have terminated or removed from office those individuals the Company believes were responsible for the actions which led to the Investigation. In addition, we have created a new position of chief compliance officer, whose mandate is to ensure that the Company’s policies regarding ethics is strictly enforced and to put in place a culture of accountability and independent monitoring to address any potential for such failures happening in the future, including for example the audit and review of database entries of the Company’s major licensees. The chief compliance officer (CCO) reports to both the CEO and to the Audit Committee.
	•	Retain outside consulting firm. We retained the consulting services of a Korean affiliate of a major international accounting firm in June 2005 to enhance our internal control system and to develop an evaluation system to enable our management to evaluate the effectiveness of our internal control over financial reporting (as defined under Rules 13a-15(c) and 15d-15(c) under the Exchange Act) and to assist the Company in the preparation of its financial statement under U.S. GAAP. The accounting firm has recommended various remedial measures and the Company along with our senior management and accounting team are in the process of implementing such recommendations.
	•	Software and systems upgrade. We are in the process of implementing an enterprise resource program, or ERP, with the ultimate aim to provide to senior management integrated and timely reporting of the Company’s financial results and financial condition while minimizing the ability to override established protocols. In addition, the aim of the ERP system will be to segregate duties of various persons and departments to help minimize unauthorized actions and to provide a check to ensure that any irregularities are detected and reported in a timely manner. Also, the Company believes that such a system will minimize errors which were more likely when the Company relied on spreadsheet programs. The Company is in the process of implementing such system and expects to have the system operational by the end of 2006.
	•	Code of ethics. The Company has recently amended its code of ethics to emphasize the need for senior management and all of the employees of the Company to comply with the ethics standards as set forth in the Company’s code of ethics. All new employees are to receive training on the code of ethics.

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		Also, the code of ethics includes a whistle blower process, whereby employees can communicate on an anonymous basis with the CCO or CEO, who are to report such matters to any member of the Audit Committee regarding fraudulent or suspicious activities.

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			Aggregate Fees
			Billed During
			the Year Ended
			December 31,
Type of Services			2004				2005				Nature of Services
			(In millions of
			Won)
Audit Fees				853				1,913			Audit service for Company and its subsidiaries, including restatement audit.
Audit-Related Fees				—				250			Accounting advisory service.
Tax Fees				6				25			Tax return and consulting advisory service.
All Other Fees				—				—			All other services which do not meet the three categories above.
	Total			859				2,188

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ITEM 17.	FINANCIAL STATEMENTS

ITEM 18.	FINANCIAL STATEMENTS

		Page
Index to Financial Statements			F-1
Report of Independent Registered Public Accounting Firm			F-2
Consolidated balance sheets as of December 31, 2004 and 2005			F-3
Consolidated statements of income for the years ended December 31, 2003, 2004 and 2005			F-4
Consolidated statements of changes in shareholders’ equity for the years ended December 31, 2003, 2004 and 2005			F-5
Consolidated statements of cash flows for the years ended December 31, 2003, 2004 and 2005			F-7
Notes to the consolidated financial statements			F-8

	1	.1*		Articles of Incorporation (English translation)
	2	.1*		Form of Stock Certificate of Registrant’s common stock, par value Won 500 per share
	2	.1**		Form of Deposit Agreement among Registrant, The Bank of New York, as depositary, and all holders and beneficial owners of American depositary shares evidenced by American depositary receipts, including the form of American depositary receipt**
	4	.1*		Agreement on the Development of RAGNAROK Online, dated June 26, 2000, between Myoung-Jin Lee and Registrant (translation in English)
	4	.2*		Agreement on the Exclusive License of Copyright Regarding Ragnarok Game Services, dated June 26, 2000, between Myoung-Jin Lee and Registrant (translation in English)
	4	.3*		Cooperation Agreement on Ragnarok Game Services, dated May 31, 2002, between Myoung-Jin Lee and Registrant (translation in English)
	4	.4*		Agreement on Factual Matters, dated November 19, 2002, between Myoung-Jin Lee and Registrant (translation in English)
	4	.5*		Agreement on Ragnarok Game Services and Related Matters, dated January 22, 2003, between Myoung-Jin Lee and Registrant (translation in English)
	4	.6*		Agreement, dated June 3, 2003, between Myoung-Jin Lee and Registrant (translation in English)
	4	.7*		Agreement, dated October 27, 2004, between Myoung-Jin Lee and Registrant (translation in English)
	4	.8*		Investment Agreement, dated February 19, 2002, between Sunny YNK Inc. and Registrant (translation in English)
	4	.9*		Agreement, dated February 21, 2002, between Sunny YNK Inc. and Registrant (translation in English)

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	4	.10†		Share Purchase Agreement, dated May 3, 2005, between Mr. Moon Kyu Kim and Registrant (translation in English)
	4	.11*		Ragnarok License and Distribution Agreement, dated July 24, 2002, between GungHo Online Entertainment Inc. (formerly ONSALE Japan K.K.) (licensee in Japan) and Registrant
	4	.12*		Amendment to Ragnarok License and Distribution Agreement, dated September 23, 2004, between GungHo Online Entertainment Inc. (licensee in Japan) and Registrant
	4	.13*		Ragnarok Exclusive License and Distribution Agreement, dated May 20, 2002, between Soft-World International Corporation (licensee in Taiwan and Hong Kong) and Registrant
	4	.14*		Fourth Amendment to the Exclusive Ragnarok Online License and Distribution Agreement, dated October 19, 2004, between Soft-World International Corporation (licensee in Taiwan and Hong Kong) and Registrant
	4	.15*		Exclusive Ragnarok License and Distribution Agreement, dated October 21, 2002, among Soft-World International Corporation, Value Central Corporation (licensee in China) and Registrant
	4	.16†		Fourth Amendment to the Exclusive Ragnarok License and Distribution Agreement, dated May 18, 2005, among Soft-World International Corporation, Value Central Corporation (licensee in China) and Registrant
	4	.17*		Ragnarok License and Distribution Agreement, dated June 13, 2002, between Asiasoft International Co., Ltd. (licensee in Thailand) and Registrant
	4	.18*		Amendment to the Exclusive Ragnarok Online License and Distribution Agreement, dated October 27, 2004, between Asiasoft International Co., Ltd. (licensee in Thailand) and Registrant
	4	.19*		Exclusive Ragnarok License and Distribution Agreement, dated May 12, 2003, among Soft-World International Corporation, Value Central Corporation (licensee in Malaysia and Singapore) and Registrant
	4	.20*		Exclusive Ragnarok License and Distribution Agreement, dated March 25, 2003, between Level Up! Inc. (licensee in the Philippines) and Registrant
	4	.21†		Third Amendment to the Exclusive Ragnarok License and Distribution Agreement, dated February 18, 2005, between Level Up! Inc. (licensee in the Philippines) and Registrant
	4	.22*		Exclusive Ragnarok License and Distribution Agreement, dated April 2, 2004, between PT. Lyto Datarindo Fortuna (licensee in Indonesia) and Registrant
	4	.23*		Amendment to the Exclusive Ragnarok Online License and Distribution Agreement, dated October 29, 2004, between PT. Lyto Datarindo Fortuna (licensee in Indonesia) and Registrant
	4	.24*		Exclusive Ragnarok Online License and Distribution Agreement, dated November 26, 2003, between Burda Holding International GmbH (licensee in Germany, Austria, Switzerland, Italy and Turkey) and Registrant
	4	.25*		Amendment to the Exclusive Ragnarok Online License and Distribution Agreement, dated December 2, 2003, between Burda Holding International GmbH (licensee in Germany, Austria, Switzerland, Italy and Turkey) and Registrant
	4	.26*		Second Amendment to the Exclusive Ragnarok License and Distribution Agreement, dated November 18, 2004, between Burda Holding International GmbH (licensee in Germany, Austria, Switzerland, Italy and Turkey) and Registrant
	4	.27†		Exclusive Ragnarok License and Distribution Agreement, dated July 16, 2004, between Ongamenet PTY Ltd. (licensee in Australia and New Zealand) and Registrant
	4	.28†		Exclusive Ragnarok License and Distribution Agreement, dated August 15, 2004, between Level Up! Interactive SA (licensee in Brazil) and GRAVITY Co., Ltd.
	4	.29*		Exclusive Ragnarok Software License Agreement, dated May 24, 2004, between Level Up Network India Pvt. Ltd. (licensee in India) and GRAVITY Co., Ltd.
	4	.30*		Lease Agreement, dated August 1, 2004, between Jung Ryool Kim and Registrant (translation in English)
	4	.31*		Equipment Sales Agreement, dated December 1, 2003, between GRAVITY Interactive LLC and Registrant

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	4	.32*		Service and Distribution of Earnings and Profit Agreement, dated April 1, 2003, between GRAVITY Interactive, LLC and Registrant
	4	.33*		Loan Agreement, dated January 1, 2004, between GRAVITY Entertainment Corporation, formerly RO Production Ltd., and Registrant (translation in English)
	4	.34*		Share (syusshi-mochiban) Assignment Agreement, dated October 25, 2004, between GungHo Online Entertainment Inc. and Registrant
	4	.35*		Joint Project Agreement for TV Animation “Ragnarok,” dated October 1, 2004, among GRAVITY Entertainment Corporation, formerly RO Production Ltd., GDH Co., Ltd., TV Tokyo Medianet Co., Ltd., Amuse Soft Entertainment Co., Ltd. and GNG Entertainment Inc (translation in English)
	4	.36*		Ragnarok Sales Agency Agreement, dated April 10, 2002, between Sunny YNK Inc. and Registrant (translation in English)
	4	.37		Lease Agreement, dated October 19, 2005, between GRAVITY Co., Ltd. and Meritz Fire & Marine Insurance Co., Ltd.
	4	.38		Real Estate Sale Agreement, dated May 22, 2006, between GRAVITY Co., Ltd. and Yahoh Communication Ltd.
	4	.39		Global Publishing Agreement, dated November 7, 2005, between GRAVITY Co., Ltd. and Ndoors Corporation.
	4	.40		Global Publishing Agreement, dated November 15, 2005, between GRAVITY Co., Ltd. and Sonnori Co., Ltd.
	8	.1		List of Registrant’s subsidiaries
	11	.1		Registrant’s Code of Ethics (amended)
	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

*		Incorporated by reference to Registrant’s Registration Statement on Form F-1 (File No. 333-122159)
**		Incorporated by reference to Registrant’s Registration Statement on Form F-6 (File No. 333-122160)
†		Previously filed as exhibits to our annual report on Form 20-F filed on June 30, 2005.

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	GRAVITY CO., LTD

	By:	/s/ Il Young Ryu

	Name:	Il Young Ryu

	Title:	Representative Director and Chief Executive Officer

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		Page
Index to Financial Statements			F-1
Report of Independent Registered Public Accounting Firm			F-2
Consolidated balance sheets as of December 31, 2004 and 2005			F-3
Consolidated statements of income for the years ended December 31, 2003, 2004 and 2005			F-4
Consolidated statements of changes in shareholders’ equity for the years ended December 31, 2003, 2004 and 2005			F-5
Consolidated statements of cash flows for the years ended December 31, 2003, 2004 and 2005			F-7
Notes to Consolidated Financial Statements			F-8

F-1

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	/s/ Samil PricewaterhouseCoopers
	Samil PricewaterhouseCoopers

F-2

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												(Note 3)
				2004				2005				2005
												(Unaudited)
				(In millions of Korean Won and
				in thousands of US dollars,
				except share and per share data)
ASSETS
Current assets
	Cash and cash equivalents			W	16,405			W	25,874			$	25,618
	Short-term financial instruments				8,900				59,900				59,307
	Accounts receivable, net				7,377				4,784				4,737
	Deferred expenses				2,588				1				1
	Misappropriated funds receivable				7,482				—				—
	Assets held for sale				—				8,099				8,019
	Other current assets				4,116				10,770				10,663
		Total current assets			46,868				109,428				108,345
Property and equipment, net					14,760				11,863				11,746
Leasehold and other deposits					4,192				3,402				3,368
Intangible assets					549				12,750				12,624
Goodwill					—				1,451				1,437
Other non-current assets					2,275				5,963				5,903
		Total assets		W	68,644			W	144,857			$	143,423
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
	Accounts payable			W	3,742			W	11,279			$	11,167
	Deferred income				5,639				5,233				5,181
	Income tax payable				1,172				552				547
	Current portion of long-term debt				1,150				—				—
	Tax withholdings				28				1,198				1,186
	Other current liabilities				490				1,186				1,174
		Total current liabilities			12,221				19,448				19,255
Long-term deferred income					1,958				2,994				2,964
Leasehold deposit received					2,000				—				—
Accrued severance benefits					960				588				582
Long-term accounts payable					1,063				135				134
Other non-current liabilities					7				908				900
		Total liabilities			18,209				24,073				23,835
Commitments and contingencies
Minority interest					—				22				22
Shareholders’ equity
	Preferred shares, W500 par value, 2,000,000 shares authorized, and no shares issued and outstanding at December 31, 2004 and 2005, respectively				—				—				—
	Common shares, W500 par value, 38,000,000 shares authorized, and 5,548,900 and 6,948,900 shares issued and outstanding at December 31, 2004 and 2005, respectively				2,774				3,474				3,440
	Additional paid-in capital				2,181				74,902				74,160
	Retained earnings				45,617				42,587				42,165
	Accumulated other comprehensive income (loss)				(137	)			(201	)			(199	)
		Total shareholders’ equity			50,435				120,762				119,566
		Total liabilities and shareholders’ equity		W	68,644			W	144,857			$	143,423

F-3

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																(Note 3)
				2003				2004				2005				2005
																(Unaudited)
				(In millions of Korean Won and in thousands of
				US dollars, except share and per share data)
Revenues
	Online games-subscription revenue			W	18,560			W	16,253			W	11,249			$	11,138
	Online games-royalties and license fees				29,727				45,101				37,375				37,005
	Mobile games				43				376				1,664				1,648
	Character merchandising, animation and other revenue				1,185				2,696				3,096				3,065
		Total net revenues			49,515				64,426				53,384				52,856
Cost of revenues					6,958				10,116				16,038				15,879
Gross profit					42,557				54,310				37,346				36,977
Operating expenses
	Selling, general and administrative				11,360				13,660				30,795				30,490
	Research and development				1,597				2,029				9,219				9,128
		Operating income (loss)			29,600				38,621				(2,668	)			(2,641	)
Other income (expenses)
	Interest income				94				479				2,850				2,822
	Interest expense				(6,465	)			(4,732	)			(2,158	)			(2,137	)
	Foreign currency gains (losses), net				135				(625	)			(614	)			(608	)
	Foreign currency forward transaction, net				—				—				(853	)			(845	)
	Others, net				26				(1	)			(12	)			(12	)
		Income (loss) before income tax expenses, minority interest and equity in loss of related joint venture			23,390				33,742				(3,455	)			(3,421	)
Income tax expenses (benefit)					4,250				5,406				(817	)			(809	)
		Income (loss) before minority interest and Equity in loss of related joint venture			19,140				28,336				(2,638	)			(2,612	)
Minority interest					—				(17	)			(2	)			(2	)
Equity in loss of related joint venture					—				296				394				390
		Net income (loss)		W	19,140			W	28,057			W	(3,030	)		$	(3,000	)
Earnings (losses) per share
	Basic and diluted			W	3,730			W	5,056			W	(445	)		$	(0.44	)
Weighted average number of shares outstanding
	Basic and diluted				5,130,895				5,548,900				6,803,147				6,803,147

F-4

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																			Accumulated
															Retained				Other
			No. of								Additional				Earnings				Comprehensive
			Common				Common				Paid-In				(Accumulated				Income
			Shares				Shares				Capital				Deficit)				(Loss)				Total
			(In millions of Korean Won and in thousands of US dollars, except number of shares)
Balance at January 1, 2003				3,400,000			W	1,700			W	-			W	(1,580	)		W	(210	)		W	(90	)
Issuance of common shares				2,148,900				1,074				2,132				—				—				3,206
Comprehensive income (loss)
	Unrealized gains on available-for-sale securities			—				—				—				—				218				218
	Cumulative effect of foreign currency translation			—				—				—				—				(10	)			(10	)
	Net income			—				—				—				19,140				—				19,140
Total comprehensive income																								19,348
Balance at December 31, 2003				5,548,900				2,774				2,132				17,560				(2	)			22,464
Amortization of deferred stock compensation				—				—				49				—				—				49
Comprehensive income (loss)
	Unrealized losses on available-for-sale securities			—				—				—				—				(11	)			(11	)
	Cumulative effect of foreign currency translation			—				—				—				—				(124	)			(124	)
	Net income			—				—				—				28,057				—				28,057
Total comprehensive income																								27,922
Balance at December 31, 2004				5,548,900				2,774				2,181				45,617				(137	)			50,435
Issuance of common shares, net				1,400,000				700				71,137				—				—				71,837
Amortization of deferred stock compensation				—				—				1,584				—				—				1,584
Comprehensive income (loss)
	Unrealized gains on available-for-sale securities			—				—				—				—				3				3
	Cumulative effect of foreign currency translation			—				—				—				—				(67	)			(67	)
	Net loss			—				—				—				(3,030	)			—				(3,030	)
Total comprehensive loss																								(3,094	)
Balance at December 31, 2005				6,948,900			W	3,474			W	74,902			W	42,587			W	(201	)		W	120,762

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																			Accumulated
																			Other
			No. of								Additional								Comprehensive
(Note 3)			Common				Common				Paid-In				Retained				Income
(Unaudited)			Shares				Shares				Capital				Earnings				(Loss)				Total
			(In millions of Korean Won and in thousands of
			US dollars, except number of shares)
Balance at December 31, 2004				5,548,900			$	2,747			$	2,160			$	45,165			$	(136	)		$	49,936
Issuance of common shares, net				1,400,000				693				70,432				—				—				71,125
Amortization of deferred stock compensation				—				—				1,568				—				—				1,568
Comprehensive income (loss)
	Unrealized gains on available-for-sale securities			—				—				—				—				3				3
	Cumulative effect of foreign currency translation			—				—				—				—				(66	)			(66	)
	Net loss			—				—				—				(3,000	)			—				(3,000	)
Total comprehensive loss																								(3,063	)
Balance at December 31, 2005				6,948,900			$	3,440			$	74,160			$	42,165			$	(199	)		$	119,566

F-6

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																	(Note 3)
					2003				2004				2005				2005
																	(Unaudited)
					(In millions of Korean Won and in thousands of
					US dollars)
Cash flows from operating activities
Net income (loss)					W	19,140			W	28,057			W	(3,030	)		$	(3,000	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
	Depreciation and amortization					1,619				3,217				5,370				5,317
	Loss from impairment on investment					777				—				—				—
	Loss on impairment of intangible asset					—				—				1,547				1,532
	Provision for accrued severance benefits					363				913				1,464				1,450
	Stock compensation expense					—				49				1,584				1,568
	Equity in loss of related joint venture					—				296				394				390
	Deferred income taxes					(912	)			(1,155	)			(6,232	)			(6,170	)
	Other					256				15				387				383
Changes in operating assets and liabilities
	Accounts receivable					(1,251	)			(498	)			3,035				3,005
	Deferred expense					122				(1,465	)			2,592				2,566
	Proceeds from joint venture					—				—				401				397
	Misappropriated funds receivable					(6,050	)			(28	)			7,482				7,408
	Other assets					(1,248	)			(973	)			(2,231	)			(2,209	)
	Accounts payable					553				1,221				7,349				7,276
	Deferred income					1,508				3,339				867				858
	Accrued interest					(310	)			(417	)			(318	)			(315	)
	Income tax payable					898				63				(619	)			(613	)
	Long-term accounts payable					434				4				(928	)			(919	)
	Payment of severance benefits					(114	)			(144	)			(2,288	)			(2,265	)
	Other current liabilities					38				148				1,102				1,091
		Net cash provided by operating activities				15,823				32,642				17,928				17,750
Cash flows from investing activities
Increase in short-term financial instruments						(1,600	)			(7,300	)			(50,969	)			(50,464	)
Decrease (increase) of available-for-sale and other investments, net						(1,793	)			151				500				495
Purchase of equity investments						—				(1,243	)			—				—
Purchase of property and equipment						(4,749	)			(12,324	)			(8,459	)			(8,375	)
Disposal of property and equipment						510				22				78				77
Cash paid for acquisition of subsidiaries, net of cash acquired						—				—				(9,193	)			(9,102	)
Purchase of intangible asset						(78	)			(35	)			(6,134	)			(6,073	)
Payment of leasehold deposits						(3,527	)			(279	)			(5,089	)			(5,039	)
Proceeds from leasehold deposits						710				2,000				212				210
Others, net						(37	)			1				8				8
		Net cash used in investing activities			W	(10,564	)		W	(19,007	)		W	(79,046	)		$	(78,263	)
Cash flows from financing activities
Issuance of common stock, net					W	3,206			W	—			W	71,837			$	71,125
Repayment of capital lease liabilities						(500	)			(104	)			—				—
Proceeds from borrowings						8,615				—				39				39
Repayment of long-term debt						(3,135	)			(2,527	)			(1,150	)			(1,138	)
Repayment of borrowings						(8,600	)			(4	)			(139	)			(138	)
		Net cash provided by (used in)
			Financing activities			(414	)			(2,635	)			70,587				69,888
		Net increase in cash and cash equivalents				4,845				11,000				9,469				9,375
Cash and cash equivalents
Beginning of year						560				5,405				16,405				16,243
End of the year					W	5,405			W	16,405			W	25,874			$	25,618

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Table of Contents

1.	Description of Business

2.	Significant Accounting Policies

	Basis of presentation

F-8

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Table of Contents

	Principles of consolidation

						Year of
		Year of				Obtaining				Ownership
Subsidiary		Establishment				Control				Percentage (%)
GRAVITY Interactive, LLC			2003				2003				100.00
GRAVITY Entertainment Corp.			2003				2004				100.00
TriggerSoft Corp.			1997				2005				88.15
NEOCYON, Inc.			2000				2005				96.11
Cybermedia International Inc.(*)			2005				2005				100.00
Mados, Inc.(**)			2005				2005				100.00

	*	Cybermedia International Inc. is a subsidiary of NEOCYON, Inc., which was incorporated as a holding company of Mados, Inc.

**	Mados, Inc. is a subsidiary of Cybermedia International Inc., which was incorporated in Russia to provide online game distribution services.

	Stock split

	Use of estimates

	Risks and Uncertainties

F-9

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Table of Contents

				2003				2004								2005
								Accounts								Accounts
Country		Licensee		Revenues				Receivable				Revenues				Receivable				Revenues
Japan		GungHo(*)			25%				21%				29%				28	%			31%
Taiwan and Honkong		Soft-world International Corporation			24%				30%				23%				9	%			20%
Korea		YNK Korea, Inc. (formerly known as “Sunny YNK Inc.”)			33%				28%				20%				—				9%

(*)	At December 31, 2005, Asian Groove owns directly and indirectly 24.5% of the common stock of GungHo and exercises significant influence. The Company’s accounts receivable relating to GungHo was W1,513 million and W1,343 million as of December 31, 2004 and 2005, respectively.

	Revenue recognition

	Online games-subscription revenue

	Online games-royalties and license fees

F-10

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Table of Contents

	Cash and cash equivalents

	Short-term financial instruments

	Available-for-sale investments

	Allowance for doubtful accounts

	Property and equipment

Building			40 years
Computer and equipment			4 years
Furniture and fixtures			4 years
Software			3 years
Vehicles			4 years

	Accounting for the impairment of long-lived assets

	Capitalized software development costs

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	Research and development costs

	Goodwill

	Definite-lived other Intangible assets

F-12

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Table of Contents

	Advertising

	Accrued severance benefits and Pension Plan

	Foreign currency translation

	Foreign currency transactions

	Income taxes

F-13

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	Fair value of financial instruments

	Derivatives

	Accounting for Stock-Based Compensation

	Earnings per Share

	Recent Accounting Pronouncements

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	Reclassifications

F-15

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Table of Contents

3.	Convenience Translation into United States Dollar Amounts

4.	Allowance for Accounts receivable

		2003				2004				2005
		(In millions of Korean Won)
Balance at beginning of year		W	151			W	242			W	—
Provision for allowances			91				—				31
Write-offs			—				242				—
Balance at end of year		W	242			W	—			W	31

5.	Investment in equity method investee

6.	Acquisitions

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Table of Contents

		(In millions of
		Korean Won)
Current assets		W	34
Non-current assets			200
Intangible assets			1,979
Goodwill			8
Current liabilities		W	214
Deferred tax liabilities			272
Non-current liabilities			108
Net assets acquired		W	1,627

(2)	Acquisition of NEOCYON, Inc.

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Table of Contents

		(In millions of
		Korean Won)
Current assets		W	970
Non-current assets			263
Property and equipment			1,343
Intangible assets			6,526
Goodwill			1,451
Current liabilities			861
Deferred tax liabilities			907
Non-current liabilities		W	1,069
Net assets acquired		W	7,716

7.	Property and Equipment, Net

		2004				2005
		(In millions of
		Korean Won)
Land		W	5,954			W	260
Building			2,234				881
Computer and equipment			5,427				10,251
Furniture and fixtures			537				2,146
Vehicles			190				406
Leasehold improvements			1,043				425
Software externally-purchased			4,200				5,663
			19,585				20,032
Less: accumulated depreciation			4,825				8,169
		W	14,760			W	11,863

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8.	Accrued Severance Benefits

		2003				2004				2005
		(In millions of Korean Won)
Balance at beginning of year		W	164			W	413			W	1,182
Increase due to acquisition of subsidiaries			—				—				230
Provisions for severance benefits			363				913				1,464
Severance payments			(114	)			(144	)			(2,288	)
			413				1,182				588
Less: amounts placed on deposit with insurance company			(71	)			(222	)			—
Balance at end of year		W	342			W	960			W	588

9.	Debt

			2004
			(In millions of Korean Won)
Loans, representing obligations principally to YNK Korea Inc.
	Due 2005		W	1,150
	Less: Current portion			(1,150	)
			W	—

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Table of Contents

10.	Commitments and Contingencies

	Commitments

		2006				2007
		(In millions of
		Korean Won)
Operating lease		W	3,262			W	2,882

	Litigation

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Table of Contents

11.	Shareholders’ Equity

12.	Stock purchase option plan

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Table of Contents

							Weighted-Average				Weighted-Average
			Number of				Exercise Price				Fair Value at
			Stock Options				per Share				Date of Grant
Stock options outstanding as of December 31, 2003				—			W	—			W	—
	Options granted			271,000				71,845				20,211
	Options exercised			—				—				—
	Options forfeited			—				—				—
December 31, 2004				271,000			W	71,845			W	20,211
	Options granted			—				—				—
	Options exercised			—				—				—
	Options forfeited			73,600				48,828				25,275
Stock options outstanding as of December 31, 2005				197,400			W	46,697			W	27,511

							Weighted-Average
							Remaining
			Options				Contractual Life				Options
Exercise Prices			Outstanding				(Yrs)				Exercisable
W45,431				172,400				2.98				—
	55,431			25,000				2.98				—

		Grant Date				Repricing Date
Expected dividend yield			0	%			0	%
Risk-free interest rate			3.50	%			3.54	%
Expected volatility			53	%			53	%
Fair value of stock		W	55,431			W	55,431

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13.	Earnings per Share

		2003				2004				2005
		(In millions of Korean Won, except share and per
		share data)
Net income (loss) available for common shareholders(A)		W	19,140			W	28,057			W	(3,030	)
Weighted average outstanding shares of common shares(B)			5,130,895				5,548,900				6,803,147
Earnings (losses) per share
Basic and diluted (A/ B)		W	3,730			W	5,056			W	(445	)

14.	Income Taxes

				2003				2004				2005
				(In millions of Korean Won)
Income (loss) before income taxes
	Domestic			W	22,332			W	33,338			W	(3,872	)
	Foreign				1,058				404				417
					23,390				33,742				(3,455	)
Current income taxes
	Domestic				4,868				6,253				5,100
	Foreign				294				308				315
					5,162				6,561				5,415
Deferred income taxes
	Domestic				1,044				1,085				5,134
	Foreign				(132	)			70				12
					912				1,155				5,146
Tax effect resulting from business combination					—				—				(1,086	)
		Total income tax expenses (benefit)		W	4,250			W	5,406			W	(817	)

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				2004				2005
				(In millions of
				Korean Won)
Current deferred income tax assets (liabilities)
	Foreign tax credit carryforwards			W	1,502			W	896
	Tax credit carryforwards for research and human
		resource development			351				1,204
	Accrued expense				9				417
	Accrued income				(17	)			(104	)
	Deferred expense				(152	)			—
	Other				(1	)			79
					1,692				2,492
	Less: Deferred tax asset relating to other comprehensive income (loss)				1				76
				W	1,691			W	2,416
Non-current deferred income tax assets (liabilities)
	Foreign tax credit carryforwards			W	—			W	4,881
	Tax credit carryforwards for research and human
		resource development			—				433
	Depreciation and amortization				142				344
	Intangible assets in connection with business combination				—				(874	)
	Impairment on other investment				192				214
	Provisions for severance benefits				145				19
	Unremitted earnings of subsidiary				(111	)			(186	)
	Net operating loss carryforwards in subsidiaries				86				302
	Other				8				2
					462				5,135
	Less: Valuation allowance				86				338
				W	376			W	4,797

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F-25

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Table of Contents

		2003				2004				2005
		(In millions of Korean Won)
Tax expense at Korean statutory tax rate		W	6,947			W	10,021			W	(950	)
Income tax exemption			(3,473	)			(5,011	)			475
Tax credit carryforwards for research and human resource development			—				(351	)			(1,286	)
Foreign tax differential			274				127				116
Expense not deductible for tax purpose			184				139				342
Change in statutory tax rate			(72	)			139				26
Change in valuation allowances			(154	)			86				197
Expiration of unused foreign tax credit			—				214				337
Income tax penalties			633				61				—
Others			(89	)			(19	)			(74	)
Total income tax expense		W	4,250			W	5,406			W	(817	)

15.	Operations by Geographic Area

		2003				2004				2005
		(In millions of Korean Won)
Korea		W	16,475			W	13,524			W	10,093
Japan			12,180				18,372				17,246
Taiwan			11,969				14,643				10,582
Thailand			3,490				5,504				4,933
United States			2,373				3,528				2,701
China			2,089				2,842				1,178
Other			939				6,013				6,651
		W	49,515			W	64,426			W	53,384

16.	Related Party Transactions

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		2003				2004				2005
		(In millions of Korean Won)
Sales to related parties		W	—			W	—			W	55
Purchases from related parties			721				938				861
Amounts due from related parties			3,800				3,899				4
Misappropriated funds receivable			7,441				7,482				—
Amounts due to related parties			—				146				132

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17.	Supplemental Cash Flow Information and Non-Cash Activities

			2003				2004				2005
			(In millions of Korean Won)
Supplemental cash flow information
Cash paid during the year for income taxes			W	4,343			W	6,935			W	6,648
Interest paid				6,773				5,163				2,476
			W	11,116			W	12,098				9,124
Supplemental non-cash activities
Increase of capital lease asset			W	603			W	—			W	—
Acquisitions:
	Fair value of assets acquired		W	—			W	—			W	12,774
	Less: cash acquired			—				—				(150	)
												12,624
	Net cash paid			—				—				(9,193	)
	Liabilities assumed		W	—			W	—			W	3,431

18.	Subsequent event

F-28