10QSB 1 d17629e10qsb.txt FORM 10QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ________________ to________________ Commission file number: 0-18731 FORLINK SOFTWARE CORPORATION, INC. -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in it charter) NEVADA 87-0438458 -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 9F FANG YUAN MANSION, NO. 56, ZHONGGUANCUN SOUTH ROAD YI, HAIDIAN DISTRICT, BEIJING, CHINA -------------------------------------------------------------------------------- (Address of principal executive offices) 011-8610 8802 6368 --------------------------- (issuer's telephone number) -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the issuer filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of August 9, 2004, the issuer had 76,773,207 shares of common stock, $.001 par value, outstanding. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] INDEX

PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. Forlink Software Corporation, Inc. Unaudited Consolidated Condensed Financial Statements For the Three and Six Months ended June 30, 2004 and 2003 F-1 Consolidated Balance Sheets F-2 Consolidated Statements of Operations F-3 Consolidated Statements of Cash Flows F-4 Notes to Consolidated Financial Statements (unaudited) F-5 - F-12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. 2 ITEM 3. CONTROLS AND PROCEDURES. 13 PART II - OTHER INFORMATION 14 SIGNATURES 15

1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. FORLINK SOFTWARE CORPORATION, INC. UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003 F-1 FORLINK SOFTWARE CORPORATION, INC. CONSOLIDATED BALANCE SHEETS (Expressed in US Dollars)

JUNE 30, DECEMBER 31, 2004 2003 ----------- ------------ (UNAUDITED) (AUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,152,300 $ 2,837,997 Accounts receivable 802,560 586,819 Other receivables, deposits and prepayments (Note 3) 662,385 442,641 Inventories (Note 4) 37,754 1,145,098 Amount due from stockholder (Note 5) 21,498 14,251 ----------- ------------ Total current assets 2,676,497 5,026,806 Property, plant and equipment (Note 6) 633,648 466,788 Investment in affiliate (Note 7) 760,870 760,870 Goodwill 1,684,023 1,684,023 ----------- ------------ TOTAL ASSETS $ 5,755,038 $ 7,938,487 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 65,339 $ 1,097,428 Amounts due to stockholders (Note 5) 581,972 251,294 Customer deposits 578,753 1,777,772 Other payables and accrued expenses (Note 8) 194,784 268,806 Income tax payable (Note 9) 34,753 14,700 Other taxes payable (Note 10) 23,858 129,911 ----------- ------------ Total current liabilities 1,479,459 3,539,911 ----------- ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, par value $0.001 per share; 100,000,000 shares authorized; 85,073,207 shares issued and 76,773,207 shares outstanding, respectively 85,073 85,073 Treasury stock (215,800) (215,800) Additional paid-in capital 8,934,812 8,934,812 Accumulated losses (4,528,506) (4,405,509) ----------- ------------ Total stockholders' equity 4,275,579 4,398,576 ----------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,755,038 $ 7,938,487 =========== ===========

See accompanying notes to unaudited consolidated condensed financial statements. F-2 FORLINK SOFTWARE CORPORATION, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Expressed in US Dollars)

THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2004 2003 2004 2003 ---- ---- ---- ---- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) NET SALES $ 585,278 $ 5,824,768 $ 6,114,187 $ 6,550,604 COST OF SALES (359,728) (4,712,271) (4,425,215) (5,227,874) ------------ ------------ ------------ ------------ GROSS PROFIT 225,550 1,112,497 1,688,972 1,322,730 ------------ ------------ ------------ ------------ SELLING EXPENSES (102,212) (64,075) (330,966) (136,655) RESEARCH AND DEVELOPMENT EXPENSES (252,163) (204,491) (519,495) (403,873) GENERAL AND ADMINISTRATIVE EXPENSES (335,306) (184,610) (927,086) (526,684) ------------ ------------ ------------ ------------ TOTAL OPERATING EXPENSES (689,681) (453,176) (1,777,547) (1,067,212) ------------ ------------ ------------ ------------ OPERATING PROFIT/(LOSS) (464,131) 659,321 (88,575) 255,518 INTEREST INCOME 1,953 1,939 7,418 2,719 OTHER INCOME, NET (NOTE 10) 2,353 1,277 9,767 13,942 ------------ ------------ ------------ ------------ PROFIT/(LOSS) BEFORE INCOME TAX (459,825) 662,537 (71,390) 272,179 PROVISION FOR INCOME TAX (NOTE 9) 6,179 (61,524) (51,607) (61,524) ------------ ------------ ------------ ------------ NET PROFIT/(LOSS) $ (453,646) $ 601,013 $ (122,997) $ 210,655 ============ ============ ============ ============ EARNINGS/(LOSS) PER SHARE - BASIC AND DILUTED $ (0.006) $ 0.008 $ (0.002) $ 0.003 ============ ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED 76,773,207 76,773,207 76,773,207 79,078,763 ============ ============ ============ ============

See accompanying notes to unaudited consolidated condensed financial statements. F-3 FORLINK SOFTWARE CORPORATION, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Increase/(Decrease) in Cash and Cash Equivalents (Expressed in US Dollars)

SIX MONTHS ENDED JUNE 30, -------------------------- 2004 2003 ---- ---- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income/(loss) $ (122,997) $ 210,655 Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities Depreciation of property, plant and equipment 51,026 40,503 Change in: Accounts receivable (215,741) 105,856 Other receivables, deposits and prepayments (217,953) (27,372) Note receivable - (96,039) Inventories 1,107,344 376,574 Accounts payable (1,032,089) 128,988 Customer deposits (1,199,019) (156,347) Other payables and accrued expenses (74,022) (109,180) Income tax payable 20,053 57,683 Other taxes payable/recoverable (106,053) (25,927) ----------- ----------- NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES (1,789,451) 505,394 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property, plant and equipment (219,677) (42,497) ----------- ----------- NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES (219,677) (42,497) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Repayment from/(Advances to) stockholders (7,247) 48,912 Advances from /(Repayment to) stockholders 330,678 (2,053) Purchase back of common stock - (215,800) ----------- ----------- NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES 323,431 (168,941) ----------- ----------- NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (1,685,697) 293,956 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,837,997 536,050 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,152,300 $ 830,006 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Income tax paid $ 31,555 $ 3,841 =========== ===========

See accompanying notes to unaudited consolidated condensed financial statements. F-4 FORLINK SOFTWARE CORPORATION, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Expressed in US Dollars) NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS Beijing Slait Science & Technology Development Limited Co. ("Slait") was established in the People's Republic of China (the "PRC") on January 25, 1998 as a limited liability company. Slait commenced operations in May 1998. Slait was beneficially owned by three individual PRC citizens, namely Yi He, Hongkeung Lam and Jing Zeng. Slait has been granted a ten years operation period which can be extended with approvals from relevant PRC authorities. On January 11, 2001, Slait entered into an agreement of Plan of Reorganization ("the Plan") with Forlink Software Corporation, Inc. ("Forlink"). Forlink had issued to the owners of Slait as individuals 59,430,000 authorized shares of common stock of Forlink in exchange of 100% of the registered and fully paid up capital of Slait. In accordance with the terms of the Plan, Forlink transferred $131,039 (RMB1,085,000) to Slait, the amount was disbursed to the original owners of Slait. The closing date of this exchange transaction was August 28, 2001. As a result of the acquisition, the former owners of Slait hold a majority interest in the combined entity. Generally accepted accounting principles require in certain circumstances that a company whose stockholders retain the majority voting interest in the combined business to be treated as the acquirer for financial reporting purposes. Accordingly, the acquisition has been accounted for as a "reverse acquisition" whereby Slait is deemed to have purchased Forlink. However, Forlink remains the legal entity and the Registrant for Securities and Exchange Commission reporting purposes. The historical financial statements prior to August 28, 2001 are those of Slait. All shares and per share data prior to the acquisition have been restated to reflect the stock issuance as a recapitalization of Slait. Subsequent to the reverse acquisition, the principal activities of Slait have been shifted to Forlink Technologies Co., Ltd. ("FTCL") gradually. On February 13, 2004, Slait was officially dissolved in accordance with relevant PRC regulations. On June 18, 2003, Forlink Technologies (Hong Kong) Limited ("FTHK") was incorporated in Hong Kong as a limited liability company with an authorized share capital of $129,032 (HK$1,000,000) divided into 1,000,000 ordinary shares of $0.129 (HK$1) each. At the time of incorporation, two ordinary shares of HK$1 each were issued to the subscribers. In December 2003, 999,998 ordinary shares were issued to Forlink, since then FTHK becomes a wholly owned subsidiary of Forlink. The principal activities of FTHK are investment holding and trading of computer products. F-5 FORLINK SOFTWARE CORPORATION, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Expressed in US Dollars) NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS - CONTINUED To comply with PRC laws and regulations Forlink will conduct its Internet value-added services in PRC via Beijing Forlink Hua Xin Technology Co. Ltd. ("BFHX"). BFHX was established in PRC on September 19, 2003 as a limited liability company. The registered capital of BFHX is $120,733 (RMB1,000,000) and the fully paid up capital was $36,232 (RMB300,000) as of June 30, 2004. In accordance with a directors' resolution of Forlink passed on September 15, 2003, Mr. Yi He and Mr. Xiaoxia Zhao were entrusted as nominee owners of BFHX to hold 70% and 30%, respectively, of the fully paid up capital of BFHX on behalf of Forlink and Forlink is the primary beneficiary. BFHX is considered a Variable Interest Entity ("VIE") and because Forlink is the primary beneficiary, Forlink's consolidated financial statements include BFHX. Upon the request of Forlink, Mr. Yi He and Mr. Xiaoxia Zhao are required to transfer their ownership in BFHX to Forlink or to designees of Forlink at any time for the amount of the fully paid up capital of BFHX. In accordance with a registered capital transfer agreement dated and owners' resolutions of BFHX passed on February 16, 2004, Mr. Xiaoxia Zhao transferred the fully paid up capital of BFHX of $10,870 (RMB90,000) to Mr. Wei Li for $10,870. Mr. Yi He and Mr. Wei Li entered into agreements with Forlink on November 8, 2003 and March 18, 2004 respectively, under which agreements Mr. Yi He and Mr. Wei Li were entrusted as nominee owners of BFHX to hold 70% and 30% of the fully paid up capital of BFHX respectively on behalf of Forlink and Forlink is the primary beneficiary. Upon the request of Forlink, Mr. Yi He and Mr. Wei Li are required to transfer their ownership in BFHX to Forlink or to designees of Forlink at any time for the amount of the fully paid up capital of BFHX. The capital of BFHX was funded by FTCL and recorded as interest-free loans to Mr. Yi He and Mr. Wei Li. These loans were eliminated with capital of BFHX during consolidation. Mr. Yi He is a director and a major stockholder of Forlink. Mr. Xiaoxia Zhao is a former director and a major stockholder of Forlink. Mr. Wei Li is the administration manager of FTCL. BFHX has not commenced operations since the date of establishment. Forlink, its wholly owned subsidiaries and VIE are collectively referred to as "the Company" hereafter. The principal activities of the Company are the development and sale of network software systems and the provision of enterprise application system integration services in the PRC. The Company is also engaged in the sale of computer hardware. F-6 FORLINK SOFTWARE CORPORATION, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Expressed in US Dollars) NOTE 2 - BASIS OF PRESENTATION The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America and present the financial statements of Forlink, its wholly owned subsidiaries and VIE for which Forlink is the primary beneficiary. All material intercompany transactions have been eliminated. The Company has adopted FASB Interpretation No. 46R (revised December 2003) "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46R"). FIN 46R requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns. The accompanying financial data as of June 30, 2004 and December 31, 2003 and for the three and six months ended June 30, 2004 and 2003 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's audited annual financial statements for the year ended December 31, 2003. The preparation of financial statements in conformity with general accepted accounting principles requires management to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from these estimates. In the opinion of Management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows as of June 30, 2004 and December 31, 2003 and for the three and six months ended June 30, 2004 and 2003, have been made. The results of operations for the three and six months ended June 30, 2004 and 2003 are not necessarily indicative of the operating results for the full year. NOTE 3 - OTHER RECEIVABLES, DEPOSITS AND PREPAYMENTS

JUNE 30, DECEMBER 31, 2004 2003 ---- ---- (UNAUDITED) (AUDITED) Other receivables $ 121,277 $ 51,822 Deposits 514,849 344,509 Prepayments 26,259 46,310 ----------- ------------ $ 662,385 $ 442,641 =========== ============

F-7 FORLINK SOFTWARE CORPORATION, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Expressed in US Dollars) NOTE 4 - INVENTORIES

JUNE 30, DECEMBER 31, 2004 2003 ---------- ------------- (UNAUDITED) (AUDITED) Computer hardware and software $ 37,754 $ 1,145,098 ========== =============

All the inventories were purchased for identified system integration contracts. NOTE 5 - RELATED PARTY A related party is an entity that can control or significantly influence the management or operating policies of another entity to the extent one of the entities may be prevented from pursuing its own interests. A related party may also be any party the entity deals with that can exercise that control. AMOUNTS DUE FROM/TO STOCKHOLDERS The Company, from time to time, received from or made repayment to one major stockholder who is also a member of the management of the Company. The amounts due from/to stockholders do not bear any interest and do not have clearly defined terms of repayment. As of June 30, 2004 and December 31, 2003, the amount due from stockholder represented travel advances to Mr. Yi He, a director and stockholder of the Company. As of June 30, 2004 and December 31, 2003, the amounts due to stockholders represented advances from stockholders. RELATED PARTY TRANSACTIONS During the three and six months ended June 30, 2004, net sales derived from an affiliate (note 7) were $177,892 and 244,015 (2003: $21,203 and $33,849). F-8 FORLINK SOFTWARE CORPORATION, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Expressed in US Dollars) NOTE 6 - PROPERTY, PLANT AND EQUIPMENT, NET

JUNE 30, DECEMBER 31, 2004 2003 --------- --------- (UNAUDITED) (AUDITED) Building $ 155,648 $ 155,648 Computer and office equipment 584,546 376,132 Motor vehicles 172,899 165,718 --------- --------- 913,093 697,498 Less: Accumulated depreciation (279,445) (230,710) --------- --------- $ 633,648 $ 466,788 ========= =========

The building is located in Chengdu, PRC and was purchased on behalf of the Company by Mr. Yi He, one of the stockholders and directors of the Company. By a stockholders' resolution passed on March 8, 1999, it was ratified that the title to the building belonged to the Company. The building has been pledged as collateral for the mortgage loan granted to Mr. Yi He. The related mortgage still remains in the name of Mr. Yi He, however, the Company has agreed to pay Mr. Yi He amounts equal to the required mortgage payments. As of June 30, 2004, the amount of the mortgage loan is $49,127 ($53,010 as of December 31, 2003) and is included in "Amounts due to stockholders" on the balance sheet. NOTE 7 - INVESTMENT IN AFFILIATE The Company invested $760,870 in a privately held PRC company for a 17.8% equity interest. The Company records the investment at cost because it does not have the ability to exercise significant influence over the investee. NOTE 8 - OTHER PAYABLES AND ACCRUED EXPENSES

JUNE 30, DECEMBER 31, 2004 2003 -------- ----------- (UNAUDITED) (AUDITED) Other payables $ 14,217 $ 46,055 Accrued salaries & wages 103,815 155,446 Other accrued expenses 76,752 67,305 -------- -------- $194,784 $268,806 ======== ========

F-9 FORLINK SOFTWARE CORPORATION, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Expressed in US Dollars) NOTE 9 - INCOME TAX According to the relevant PRC tax rules and regulations, FTCL and BFHX, being recognized New Technology Enterprises operating within a New and High Technology Development Zone, are entitled to an Enterprise Income Tax ("EIT") rate of 15%. Pursuant to approval documents dated September 23, 1999 and August 2, 2000 issued by the Beijing Tax Bureau and State Tax Bureau respectively, FTCL, being recognized as a New Technology Enterprise, is eligible to full exemption from EIT for fiscal years 1999, 2000, 2001 and 2002. FTCL is also eligible to 50% EIT reduction at the rate of 7.5% for fiscal years 2003, 2004 and 2005. Pursuant to an approval document dated January 19, 2004 issued by State Tax Bureau, BFHX, being recognized as a New Technology Enterprise, is eligible to full exemption from EIT for fiscal years 2004, 2005 and 2006. Hong Kong profits tax is calculated at 17.5% on the estimate assessable profits of FTHK for the period. Income tax represents current PRC EIT and Hong Kong profits tax which are calculated at the statutory income tax rate on the assessable income for the three and six months ended June 30, 2004 and 2003. The difference between the statutory rate and the effective rate relates principally to nondeductible expenses and nontaxable income. The provision for income tax consisted of:

THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2004 2003 2004 2003 ---- ---- ---- ---- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) Current PRC corporate income tax and Hong Kong profits tax $ (6,179) $ 61,524 $ 51,607 $ 61,524 Deferred tax - - - - ---------- ---------- ---------- ---------- Provision for income tax $ (6,179) $ 61,524 $ 51,607 $ 61,524 ========== ========== ========== ==========

F-10 FORLINK SOFTWARE CORPORATION, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Expressed in US Dollars) NOTE 10 - OTHER TAXES PAYABLE Other taxes payable comprise mainly Valued-Added Tax ("VAT") and Business Tax ("BT"). The Company is subject to output VAT levied at the rate of 17% of its operating revenue. The input VAT paid on purchases of materials and other direct inputs can be used to offset the output VAT levied on operating revenue to determine the net VAT payable or recoverable. BT is charged at a rate of 5% on the revenue from other services. In respect of revenue on sales of the Company's self-developed and copyright registered software, if the net amount of value added tax payable exceeds 3% of the software sales, the excess portion of value added tax can be refunded upon the Company's application as part of the government's policy for encouragement of software development in PRC. The Company therefore enjoys an effective net value added tax rate of 3% from this kind of revenue. The refund included in other income were $2,353 and $9,767 and $1,277 and $13,942 for the three and six months ended June 30, 2004 and 2003 respectively. NOTE 11 - STOCK PLAN On August 16, 2002, the Company established a plan of stock-based compensation incentives for selected eligible participants of the Company and its affiliated corporations. This plan is known as the "Forlink Software Corporation, Inc. 2002 Stock Plan" (the "Plan 2002"). The total number of shares of common stock reserved for issuance by Forlink either directly as stock awards or underlying options granted under the Plan 2002 shall not be more than 8,000,000. Under the terms of the Plan 2002, options can be issued to purchase shares of Forlink's common stock. The Board of Directors shall determine the terms and conditions of each option granted to eligible participants, which terms shall be set forth in writing. The terms and conditions so set by the Board of Directors may vary from one eligible participant to another. In the quarter ended September 30, 2003, the Board of Directors determined to grant to the Company's employees 3,457,500 number of stock options to purchase the Company's shares of common stock, $0.001 par value, at an exercise price of $0.10 per share. Except for 800,000 number of stock options would be granted to an employee with 5 years vesting period, 2,657,500 number of stock options would be granted to employees with 3 years vesting period. As at the latest practicable date, July 24, 2004, the Company has not completed the documentation in respect of the options to be issued. F-11 FORLINK SOFTWARE CORPORATION, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Expressed in US Dollars) NOTE 12 - CONCENTRATION OF A CUSTOMER During the period, Customer A accounted for more than 10% of total sales:

THREE MONTHS ENDED JUNE 30, 2004 2003 -------- ---------- (UNAUDITED) (UNAUDITED) Net sales derived from Customer A $367,051 $5,811,234 ======== ========== % to total net sales 63% 99% ======== ========== Account receivable from Customer A 644,807 909,454 ======== ========== % to total accounts receivable 80% 97% ======== ==========

F-12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS. GENERAL Statements contained herein that are not historical facts are forward-looking statements as that term is defined by the Private Securities Litigation Reform Act of 1995. Although we believe that the expectations reflected in such forward-looking statements are reasonable, the forward-looking statements are subject to risks and uncertainties that could cause actual results to differ from those projected. We caution investors that any forward-looking statements made by us are not guarantees of future performance and that actual results may differ materially from those in the forward-looking statements. Such risks and uncertainties include, without limitation: well-established competitors who have substantially greater financial resources and longer operating histories, regulatory delays or denials, ability to compete as a start-up company in a highly competitive market, and access to sources of capital. The following discussion and analysis should be read in conjunction with our financial statements and notes thereto included elsewhere in this Form 10-QSB. Except for the historical information contained herein, the discussion in this Form 10-QSB contains certain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-QSB should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-QSB. The Company's actual results could differ materially from those discussed here. OVERVIEW We are a leading provider of software solutions and information technology services in China (the "PRC" or "China"). We focus on providing Enterprise Application Integration (EAI) solutions for large companies in telecom, finance, and logistic industries. In May 2004, we launched For-online, which deliver enterprise applications and services over the Internet to Small and Medium-sized Enterprises (SMEs) in China. For-online is quickly becoming an important new channel for delivering and distributing our products and services to more customers. On August 28, 2001, we completed the acquisition of Beijing Slait Science & Technology Development Limited Co. ("Slait"). Slait is engaged in the development and sale of network software systems and provision of enterprise application system integration services for telecommunication companies and network services providers in China. Slait is also engaged in the sale of computer hardware. Subsequent to the acquisition, the principal activities of Slait have been gradually shifted to Forlink Technologies Co., Ltd. ("FTCL"). On February 13, 2004, Slait was officially dissolved in accordance with relevant PRC regulations. To comply with PRC laws and regulations Forlink will conduct its Internet value-added services in PRC via Beijing Forlink Hua Xin Technology Co. Ltd. ("BFHX"). BFHX was established in PRC on September 19, 2003 as a limited liability company. The registered capital of BFHX is $120,733 (RMB1,000,000) and the fully paid up capital was $36,232 (RMB300,000) as of June 30, 2004. Mr. Yi He and Mr. Wei Li were entrusted as nominee owners of BFHX to hold 70% and 30%, respectively, of the fully paid up capital of BFHX on behalf of Forlink, and Forlink is the primary beneficiary. BFHX is considered a Variable Interest Entity ("VIE") and because Forlink is the primary beneficiary, Forlink's consolidated financial statements include BFHX. Upon the request of Forlink, Mr. Yi He and Mr. Wei Li are required to transfer their ownership in BFHX to Forlink or to designees of Forlink at any time for the amount of the fully paid up capital of BFHX. 2 Mr. Yi He is a director and a major stockholder of Forlink. Mr. Wei Li is the administration manager of FTCL. BFHX has not commenced operations since the date of establishment. We believe that there are opportunities for us to expand into new business areas and to grow our business both internally and through acquisitions. On June 18, 2003, Forlink Technologies (Hong Kong) Limited ("FTHK") was incorporated in Hong Kong as a limited liability company and subsequently it became our wholly owned subsidiary in December 2003. The principal activities of FTHK are investment holding and trading of computer products. REVENUES Our business includes Forlink brand "For-series" software system sales such as ForOSS, ForRMS, For-Mail and their copyright licensing, "For-series" related system integration, which consists of hardware sales and other related services rendered to customers. The following table shows our revenue breakdown by business line:

Six Months Ended June 30 Year Ended December 31, ------------------------ ----------------------- 2004 2003 2003 2002 ---- ---- ---- ---- Sales of For-series software $ 423,564 $ 400,776 $ 2,223,348 $ 609,739 As a percentage of net sales 7% 6% 23.7% 6.5% For-series related system integration $5,690,623 $6,149,828 $ 7,167,849 $ 8,770,855 As a percentage of net sales 93% 94% 76.3% 93.5%

As indicated in the foregoing table, sales of For-series software as a percentage of net sales increased from 6% in the first half of 2003 to 7% in the first half of 2004. For-series related system integration as a percentage of net sales decreased from 94% in the first half of 2003 to 93% in the first half of 2004. These changes were mainly attributable to our reduced hardware intensive projects and increased software sales. Generally, we offer our products and services to our customers on a total-solutions basis. Most of the contracts we undertake for our customers include revenue from hardware and software sales and professional services. Major Revenues Sales of Products Revenues from sales of products are mainly derived from sales of hardware and proprietary software products. Normally, sales of hardware and proprietary software are in connection with total-solutions basis system integration contracts. Service Revenue Service revenue consists of revenue for the professional services we provide to our customers for network planning, design and systems integration, software development, modification and installation and related training services. Software License Revenue 3 We generate revenue in the form of fees received from customers for licenses to use our software products for an agreed period of time. COST OF REVENUES Our costs of revenue include hardware costs, software-related costs and compensation and travel expenses for the professionals involved in the relevant projects. Hardware costs consist primarily of third party hardware costs. We recognize hardware costs in full upon delivery of the hardware to our customers. Software-related costs consist primarily of packaging and written manual expenses for our proprietary software products and software license fees paid to third-party software providers for the right to sublicense their products to our customers as part of our solutions offerings. The costs associated with designing and modifying our proprietary software are classified as research and development expenses as incurred. OPERATING EXPENSES Operating expenses are comprised of selling expenses, research and development expenses and general and administrative expenses. Selling expenses include compensation expenses for employees in our sales and marketing departments, third party advertising expenses, as well as sales commissions and sales agency fees. Research and development expenses relate to the development of new software and the modification of existing software. We expense such costs as they are incurred. TAXES According to the relevant PRC tax rules and regulations, FTCL and BFHX, being recognized as New Technology Enterprises operating within a New and High Technology Development Zone, are entitled to an Enterprise Income Tax ("EIT") rate of 15%. Pursuant to approval documents dated September 23, 1999 and August 2, 2000 issued by the Beijing Tax Bureau and State Tax Bureau, respectively, FTCL, being recognized as a New Technology Enterprise, is eligible for a full exemption from EIT for the fiscal years 1999, 2000, 2001 and 2002. FTCL is also eligible for a 50% EIT reduction at the rate of 7.5% for the fiscal years 2003, 2004 and 2005. Pursuant to an approval document dated January 19, 2004 issued by the State Tax Bureau, BFHX, being recognized as a New Technology Enterprise, is eligible to full exemption from EIT for the fiscal years 2004, 2005 and 2006. Hong Kong profits tax is calculated at 17.5% on the estimate assessable profits of FTHK for the period. Revenue from the sale of hardware procured in China together with the related system integration is subject to a 17% value added tax. Although sales of software in China are subject to a 17% value added tax as well, companies that develop their own software and have the software registered are generally entitled to a value added tax refund. If the net amount of the value added tax payable exceeds 3% of software sales, the excess portion of the value added tax is refundable upon our application to tax authority. This policy is effective until 2010. Changes in Chinese tax laws may adversely affect our future operations. 4 FOREIGN EXCHANGE A majority of our hardware procured for system integration contracts and an operating lease contract are denominated in U.S. dollars, and substantially all of our revenues and expenses relating to system integration, software and service components of our business are denominated in Renminbi. The value of our shares will be affected by the foreign exchange rate between U.S. dollars and Renminbi because the value of our business is effectively denominated in Renminbi, while our shares are traded in U.S. dollars. Furthermore, a decline in the value of Renminbi could reduce the U.S. dollar equivalent of the value of the earnings from, and our investment in, our subsidiaries in the PRC; while an increase in the value of the Renminbi may require us to exchange more U.S. dollars into Renminbi to meet the working capital requirements of our subsidiaries in China. Depreciation of the value of the U.S. dollar will also reduce the value of the cash we hold in U.S. dollars, which we may use for purposes of future acquisitions or other business expansion. We actively monitor our exposure to these risks and adjust our cash position in the Renminbi and the U.S. dollar when we believe such adjustments will reduce risks. CONSOLIDATED RESULTS OF OPERATIONS NET SALES. Our net sales were $585,278 and $6,114,187, respectively, in the three- and six-month periods ended June 30, 2004, representing decreases of 90% and 7% against the comparable periods in 2003. These decreases were primarily attributable to our on-going efforts to reduce low profit margin hardware intensive projects, which effectively reduced revenue from hardware pass through. We anticipate this transition to be short and our revenue will pick up in future periods from high profit margin software intensive projects. COST OF SALES. Our cost of sales decreased 92% to $359,728, as compared to the same period in 2003. This decrease in costs of sales was primarily attributable to decreased hardware pass through. GROSS PROFIT. Our gross profit was $225,550 and $1,688,972, respectively, in the three- and six-month periods ended June 30, 2004, representing a decrease of 80% and an increase of 28% against the comparable periods in 2003. Gross profit margin increased to 39% and 28%, respectively, in the three- and six-month periods ended June 30, 2004, as compared to 19% and 20% in the comparable periods in 2003. The increase in both gross profit and gross profit margin in the first half of 2004 despite lower net sales was attributable to the significantly decreased Cost of Sales. OPERATING EXPENSES. Total operating expenses increased 52% to $689,681 in the three-month period ended June 30, 2004, from $453,176 in the comparable period in 2003. This increase resulted largely from increases in selling expenses and general and administrative expenses. Selling expenses increased 60% and 142%, respectively, to $102,212 and $330,966 in the three- and six-month periods ended June 30, 2004, against the comparable periods in 2003. This increase was primarily due to our increased advertising expenses and sales efforts to market our newly established ASP (Application Service Provider) services "For-online", IT outsourcing services, as well as our EAI (Enterprise Application Integration) services. 5 Research and development expenses increased 23% and 29%, respectively, to $252,163 and $519,495, in the three- and six-month periods ended June 30, 2004, against the comparable periods in 2003 due to our continued focus on developing new products and solutions to increase our competitive advantages. General and administrative expenses increased 82% and 76%, respectively, to $335,306 and $927,086, in the three- and six-month periods ended June 30, 2004, against the comparable periods in 2003. The increase was primarily due to expenses associated with establishing ASP services. OPERATING PROFIT (LOSS). Our operating losses were $464,131 and $88,575, respectively, in the three- and six-month periods ended June 30, 2004, representing decreases of 170% and 135% against the comparable periods in 2003. The operating losses were largely the result of increased operating expenses, as discussed above. OTHER INCOME Our other income were $2,353 and $9,767, respectively, in the three- and six-month periods ended June 30, 2004, representing an increase of 84% and a decrease of 30% against the comparable periods in 2003. Our other income comes from a value added tax refund associated with software sales. Software sales in China are subject to a 17% value added tax, however, companies that develop their own software and have the software registered are generally entitled to a value added tax refund. If the net amount of the value added tax payable exceeds 3% of software sales, the excess portion of the value added tax is refundable upon our application to tax authority. This policy is effective until 2010. NET INCOME (LOSS). We recorded a net loss of $453,646, or basic and diluted loss of $0.006 per share, for the quarter ended June 30, 2004. LIQUIDITY AND CAPITAL RESOURCES Our capital requirements are primarily working capital requirements related to costs of hardware for network solution projects and costs associated with the expansion of our business. In order to minimize our working capital requirements, we generally obtain from our hardware vendors payment terms that are timed to permit us to receive payment from our customers for the hardware before our payments to hardware vendors are due. However, we sometimes obtain less favorable payment terms from our customers, thereby increasing our working capital requirements. We have historically financed our working capital and other financing requirements through careful management of our billing cycle and, to a limited extent, bank loans. Our accounts receivable balance at June 30, 2004 was $802,560. At the end of the second quarter of 2004, our days sales outstanding were 24 days, as compared to 13 days at the end of the first quarter of 2004. The higher days sales outstanding was caused by the increased account receivables level. We ended this quarter with a cash position of $1,152,300. We had negative operating cash flow of $1,789,451 in the first half year of 2004, primarily attributable to our paying down of account payable. Although our revenues and operating results for any period are not necessarily indicative of future periods, we anticipate that our available funds and cash flows generated from operations will be sufficient to meet our anticipated needs for working capital, capital expenditures and business expansion through 2004. We may need to raise additional funds in the future, however, in order to fund acquisitions, 6 develop new or enhanced services or products, respond to competitive pressures to compete successfully for larger projects involving higher levels of hardware purchases, or if our business otherwise grows more rapidly than we currently predict. If we do need to raise additional funds, we expect to raise those funds through new issuances of shares of our equity securities in one or more public offerings or private placements, or through credit facilities extended by lending institutions. OFF-BALANCE SHEET ARRANGEMENTS As of June 30, 2004, we have not entered into any off-balance sheet arrangements with any individuals or entities. CONTRACTUAL OBLIGATIONS As of June 30, 2004, we had commitments under non-cancelable operating leases requiring annual minimum rental payments as follows: July 1, 2004 to June 30, 2005 $214,333 July 1, 2005 to June 30, 2006 $ 54,624 INVESTMENT ACTIVITIES On December 18, 2003, the Company invested $760,870 in a privately held PRC company, All China Logistics Online Co., Ltd. ("All China"), a leading provider of logistic services in China, in exchange for a 17.8% equity interest. Through this investment, we have become the second largest shareholder of All China and its sole software solution provider. We recorded the investment at cost because we do not have the ability to exercise significant influence over All China. During the three and six months ended June 30, 2004, net sales derived from All China were $177,892 and $244,015 (2003: $21,203 and $33,849). RELATED PARTY TRANSACTIONS On January 11, 2001, the Company entered into a Plan of Reorganization with Beijing Slait Science & Technology Development Limited Co. (hereinafter "Slait"), under the terms of which the Company acquired up to 100% of the outstanding equity of Slait. Pursuant to the Plan of Reorganization (the "Plan"), in August 2001, the Company acquired 100% of the registered and fully paid-up capital of Slait in exchange for 59,430,000 shares of restricted common stock of the Company. Under the terms of the Plan, three former beneficial owners of Slait, Yi He, Honkeung Lam and Jing Zeng were issued 25,800,000, 10,500,000 and 5,760,000, respectively, of the Company's shares. Additionally, at closing all of the Company's officers and directors resigned with the exception of Xiaoxia Zhao who remained as an officer and director and Yi He was appointed as President and Director and Honkeung Lam as Director of the Company. The Company, from time to time, received from or made repayment to one major stockholder who is also a member of the management of the Company. The amounts due from/to stockholders do not bear any interest and do not have clearly defined terms of repayment. As of June 30, 2004 and December 31, 2003, the amount due from stockholder represented travel advances to Mr. Yi He, a director and stockholder of the Company. As of June 30, 2004 and December 31, 2003, the amounts due to stockholders represented advances from stockholders. 7 Mr. Yi He, an officer and director of the Company, purchased the building located in Chengdu on behalf of the Company. By a stockholders' resolution passed on March 8, 1999, it was ratified that the title to the building belonged to SLAIT. The building has been pledged as collateral for the mortgage loan granted to Mr. Yi He. The related mortgage still remains in the name of Mr. Yi He, however the Company has agreed to pay Mr. Yi He amounts equal to the required mortgage payments. As of June 30, 2004, the amount of the mortgage loan is $49,127 ($53,010 as of December 31, 2003) and is included in "Amounts due to stockholders" on the balance sheet. To comply with PRC laws and regulations Forlink will conduct its Internet value-added services in PRC via Beijing Forlink Hua Xin Technology Co. Ltd. ("BFHX"). BFHX was established in PRC on September 19, 2003 as a limited liability company. The registered capital of BFHX is $120,733 (RMB1,000,000) and the fully paid up capital was $36,232 (RMB300,000) as of June 30, 2004. In accordance with a directors' resolution of Forlink passed on September 15, 2003, Mr. Yi He and Mr. Xiaoxia Zhao were entrusted as nominee owners of BFHX to hold 70% and 30% of the fully paid up capital of BFHX respectively on behalf of Forlink and Forlink is the primary beneficiary. BFHX is considered a variable interest entity ("VIE") and as Forlink is the primary beneficiary, Forlink's consolidated financial statements include BFHX. Upon the request of Forlink, Mr. Yi He and Mr. Xiaoxia Zhao are required to transfer their ownership in BFHX to Forlink or to designees of Forlink at any time for the amount of the fully paid up capital of BFHX. In accordance with a registered capital transfer agreement dated and owners' resolutions of BFHX passed on February 16, 2004, Mr. Xiaoxia Zhao transferred the fully paid up capital of BFHX of $10,870 (RMB90,000) to Mr. Wei Li for $10,870. Mr. Yi He and Mr. Wei Li entered into agreements with Forlink on November 8, 2003 and March 18, 2004 respectively, under which agreements Mr. Yi He and Mr. Wei Li were entrusted as nominee owners of BFHX to hold 70% and 30%, respectively, of the fully paid up capital of BFHX on behalf of Forlink, and Forlink is the primary beneficiary. Upon the request of Forlink, Mr. Yi He and Mr. Wei Li are required to transfer their ownership in BFHX to Forlink or to designees of Forlink at any time for the amount of the fully paid up capital of BFHX. The capital of BFHX was funded by FTCL and recorded as interest-free loans to Mr. Yi He and Mr. Wei Li. These loans were eliminated with capital of BFHX during consolidation. Mr. Yi He is an officer, director and a major stockholder of Forlink. Mr. Xiaoxia Zhao is a former director and a major stockholder of Forlink. Mr. Wei Li is the administration manager of FTCL. In the opinion of the directors, except for the arrangements in connection with the purchase of the office in Chengdu, all the above transactions were negotiated at arm's length and entered into and executed under the normal course of business with no difference from those which would be negotiated with a clearly independent party. With respect to the purchase of the office in Chengdu, if Mr. Yi He would not have been able to obtain a mortgage for the property, the Company may not have been able to obtain one on its own and the financial resources may not have been available for the Company to purchase the property outright. CRITICAL ACCOUNTING POLICIES We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of those financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenues and cost of revenues under customer contracts, bad debts, income taxes, investment in affiliate, long-lived assets and goodwill. We base our 8 estimates and judgments on historical experience and on various other factors that we believe are reasonable. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. Revenue Recognition We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), as amended by SAB 101A and 101B. SAB 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectibility of those fees. Should changes in conditions cause management to determine that these criteria will not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. Details of revenue recognition policy are as follows: Revenue from provision of system integration services and other related services are recognized when services are rendered in stages as separate identifiable phases of a project are completed and accepted by customers. Revenue from software sales is recognized when the related products are delivered and installed, and collection of sales proceeds is deemed probable and persuasive evidence of an arrangement exists. Software license revenue is recognized over the accounting periods for the term of the relevant agreements. The sale of computer hardware is recognized as revenue on the transfer of risks and rewards of ownership, which generally coincides with the time when the goods are delivered to customers and title has passed. Computer Software Development Cost We account for computer software development costs in accordance with SFAS No. 86 "Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed". Accordingly, software development costs are expensed as incurred until technological feasibility in the form of a working model has been established. Deferred software development costs will be amortized over the estimated economic life of the software once the product is available for general release to customers. For the current products, the Company determined that technological feasibility was reached at the point in time it was available for general distribution. Therefore, no costs were capitalized. Long-lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. We do not perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change 9 that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, we measure fair value based on quoted market prices or based on discounted estimates of future cash flows. Accounting for goodwill On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets". SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. This Statement changes the accounting for goodwill from an amortization method to an impairment-only method. The amortization of goodwill, including goodwill recorded in past business combinations ceased upon adoption of this Statement, which began with our fiscal year beginning January 1, 2002. However, goodwill and intangible assets acquired after June 30, 2001 is subject to immediate adoption of the Statement. As the Company's acquisition described in Note 1 to the financial statements was accounted for under SFAS 141 and the transition requirements of SFAS 142, the goodwill arising from such acquisition has never been amortized. We do not have any other goodwill or indefinite lived intangible assets. During the quarter ended June 30, 2002, we completed the first step of the transitional goodwill impairment test (i.e. comparing the carrying amount of the net assets, including goodwill, with the fair value of us as of January 1, 2002). Based on the results of the first step of the test, we believe that there was no impairment of goodwill as of January 1, 2002. However, in the quarter ended June 30, 2002, the closing trading price of our common stock had fallen to $0.05 per share, which indicated that there might be a potential impairment of goodwill since January 1, 2002. Therefore, we performed an additional impairment test as of June 30, 2002. As a result of the impairment test performed, which was based on the fair value of the Company as determined by the trading price of our common stock, an impairment of $5,308,760 was recorded. Because, the closing trading price of our common stock as of December 31, 2002 had fallen to $0.04 per share, a total impairment of $6,966,546 was recorded for the year ended December 31, 2002. As of December 31, 2003, the Company completed the annual impairment test. Based on the result of the first step of the test, the Company believes that there was no further impairment of goodwill as of December 31, 2003. Consolidation of VIE The Company has adopted FASB Interpretation No. 46R (revised December 2003) "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46R"). FIN 46R requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns. 10 FACTORS AFFECTING OUR OPERATING RESULTS AND COMMON STOCK In addition to the other information in this report, the following factors should be considered in evaluating our business and our future prospects: POLITICAL AND ECONOMIC POLICIES OF THE CHINESE GOVERNMENT COULD AFFECT OUR INDUSTRY IN GENERAL AND OUR COMPETITIVE POSITION IN PARTICULAR Since the establishment of the People's Republic of China in 1949, the Communist Party has been the governing political party in the PRC. The highest bodies of leadership are the Politburo of the Communist Party, the Central Committee and the National People's Congress. The State Council, which is the highest institution of government administration, reports to the National People's Congress and has under its supervision various commissions, agencies and ministries, including The Ministry of Information Industry, the telecommunications regulatory body of the Chinese government. Since the late 1970s, the Chinese government has been reforming the Chinese economic system. Although we believe that economic reform and the macroeconomic measures adopted by the Chinese government have had and will continue to have a positive effect on economic development in China, there can be no assurance that the economic reform strategy will not from time to time be modified or revised. Such modifications or revisions, if any, could have a material adverse effect on the overall economic growth of China and investment in the Internet and the telecommunications industry in China. Such developments could reduce, perhaps significantly, the demand for our products and services. There is no guarantee that the Chinese government will not impose other economic or regulatory controls that would have a material adverse effect on our business. Furthermore, changes in political, economic and social conditions in China, adjustments in policies of the Chinese government or changes in laws and regulations could affect our industry in general and our competitive position in particular. THE GROWTH OF OUR BUSINESS IS DEPENDENT ON GOVERNMENT TELECOMMUNICATIONS INFRASTRUCTURE AND BUDGETARY POLICY, PARTICULARLY THE ALLOCATION OF FUNDS TO SUSTAIN THE GROWTH OF THE TELECOMMUNICATIONS INDUSTRY IN CHINA Virtually all of our large customers are directly or indirectly owned or controlled by the government of China. Accordingly, their business strategies, capital expenditure budgets and spending plans are largely decided in accordance with government policies, which, in turn, are determined on a centralized basis at the highest level by the National Development and Reform Commission of China. As a result, the growth of our business is heavily dependent on government policies for telecommunications and Internet infrastructure. Insufficient government allocation of funds to sustain the growth of China's telecommunications industries in the future could reduce the demand for our products and services and have a material adverse effect on our ability to grow our business. CURRENCY EXCHANGE RATE RISK DUE TO FLUCTUATIONS IN THE EXCHANGE RATE BETWEEN U.S. DOLLARS AND RENMINBI The functional currency of our operations is Renminbi and our financial statements are expressed in U.S. dollars. As a result, we are subject to the effects of exchange rate fluctuations between these currencies. Because of the unitary exchange rate system introduced in China on January 1, 1994, the official bank exchange rate for translation of Renminbi to U.S. dollars is set to US$1 to RMB8.28. Any future devaluation of the Renminbi against the U.S. dollars may have an adverse effect on our reported net income. As our operations are conducted in the PRC, substantially all our revenues, expenses, assets and liabilities are denominated in Renminbi. In general, our exposure to foreign exchange risks should be limited. However, the value in our shares may be affected by the foreign exchange rate between the U.S. 11 dollar and the Renminbi because the value of our business is effectively denominated in Renminbi, while our shares are traded in U.S. dollars. Furthermore, a decline in the value of Renminbi could reduce the U.S. dollar equivalent of the value of the earnings from, and our investment in, our subsidiaries in the PRC; while an increase in the value of the Renminbi may require us to exchange more U.S. dollars into Renminbi to meet the working capital requirements of our subsidiaries in China. Depreciation of the value of the U.S. dollar will also reduce the value of the cash we hold in U.S. dollars, which we may use for purposes of future acquisitions or other business expansion. We actively monitor our exposure to these risks and adjust our cash position in the Renminbi and the U.S. dollar when we believe such adjustments will reduce risks. ASSET IMPAIRMENT REVIEWS MAY RESULT IN FUTURE PERIODIC WRITE-DOWNS On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" which requires us, among other things, to review goodwill and other intangible assets for impairment annually. During the quarter ended June 30, 2002, we completed the first step of the transitional goodwill impairment test (i.e. comparing the carrying amount of the net assets, including goodwill, with the fair value of us as of January 1, 2002). Based on the results of the first step of the test, we believe that there was no impairment of goodwill as of January 1, 2002. However, during the quarter ended June 30, 2002, the closing trading price of our common stock had fallen to $0.05 per share, which indicated that there might be a potential impairment of goodwill since January 1, 2002. Therefore, we performed an additional impairment test as of June 30, 2002. As a result of the impairment test performed, which was based on the fair value of the Company as determined by the trading price of our common stock, an impairment of $5,308,760 was recorded. As the closing trading price of our common stock as of December 31, 2002 had fallen to $0.04 per share, a total impairment of $6,966,546 was recorded for the year ended December 31, 2002. There is no assurance that future reviews will not result in further write-downs to goodwill and other intangible assets. GENERAL RISK OF FINANCING In order for the Company to meet its continuing cash requirements and to successfully implement its growth strategy, the Company will need to rely on increased future revenues and/or will require additional financing. In the event additional financing is required, no assurances can be given that such financing will be available in the amount required or, if available, that it can be on terms satisfactory to the Company. 12 ITEM 3. CONTROLS AND PROCEDURES Based on their most recent evaluation, which was completed as of the end of the period covered by this periodic report on Form 10-QSB, the Company's Chief Executive Officer and Chief Financial Officer believe the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) are effective to ensure that information required to be disclosed by the Company in this report is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. During the fiscal quarter to which this report relates, there were no significant changes in the Company's internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation and there were no corrective actions with regard to significant deficiencies and material weaknesses. 13 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2. CHANGES IN SECURITIES. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. None. ITEM 5. OTHER INFORMATION. On August 3, 2004, the Board of Directors established a written code of ethics that applies to the Company's senior executive and financial officers. A copy of the code of ethics is posted on the Corporation's web-site at www.forlink.com. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit Number and Brief Description. 2.3 Plan of Reorganization dated January 11, 2001 between the Corporation and Beijing SLAIT Science & Technology Development Limited Co. (Incorporated by reference to Annex F of the Definitive Information Statement pursuant to Section 14C of the Securities Exchange Act of 1934, as amended, filed July 24, 2001.) 3.1 Articles of Incorporation, as amended and currently in effect. (Incorporated by reference to Exhibit No. 3.1 of the Form 10-QSB for the quarter ended March 31, 2000, and filed on May 13, 2000.) 3.2 Bylaws dated May 11, 2000. (Incorporated by reference to Exhibit No. 3.2 of the Form 10-QSB for the quarter ended March 31, 2000, and filed on May 13, 2000.) 10.1 Forlink Software Corporation, Inc. Stock Plan dated June 1, 2000. (Incorporated by reference to Exhibit 10.1 of the Company's Registration Statement on Form S-8 (file no. 333-41700) filed July 19, 2000.) 10.2 Forlink Software Corporation, Inc. 2002 Stock Plan dated August 16, 2002. (Incorporated by reference to Exhibit 10.2 of the Company's Registration Statement on Form S-8 (file no. 333-100645) filed October 21, 2002.) 31.1 Section 302 Certification by the Corporation's Chief Executive Officer. (Filed herewith). 31.2 Section 302 Certification by the Corporation's Chief Financial Officer. (Filed herewith). 32.1 Section 906 Certification by the Corporation's Chief Executive Officer. (Filed herewith). 32.2 Section 906 Certification by the Corporation's Chief Financial Officer. (Filed herewith). (b) Reports on Form 8-K. None. 14 SIGNATURES In accordance with the requirements of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FORLINK SOFTWARE CORPORATION, INC. Date: August 11, 2004 By: /s/ Yi He ----------------------------------------- Yi He, Chief Executive Officer Date: August 11, 2004 By: /s/ Hongkeung Lam ----------------------------------------- Hongkeung Lam, Chief Financial Officer 15 EXHIBIT INDEX Exhibit Number and Brief Description. 2.3 Plan of Reorganization dated January 11, 2001 between the Corporation and Beijing SLAIT Science & Technology Development Limited Co. (Incorporated by reference to Annex F of the Definitive Information Statement pursuant to Section 14C of the Securities Exchange Act of 1934, as amended, filed July 24, 2001.) 3.1 Articles of Incorporation, as amended and currently in effect. (Incorporated by reference to Exhibit No. 3.1 of the Form 10-QSB for the quarter ended March 31, 2000, and filed on May 13, 2000.) 3.2 Bylaws dated May 11, 2000. (Incorporated by reference to Exhibit No. 3.2 of the Form 10-QSB for the quarter ended March 31, 2000, and filed on May 13, 2000.) 10.1 Forlink Software Corporation, Inc. Stock Plan dated June 1, 2000. (Incorporated by reference to Exhibit 10.1 of the Company's Registration Statement on Form S-8 (file no. 333-41700) filed July 19, 2000.) 10.2 Forlink Software Corporation, Inc. 2002 Stock Plan dated August 16, 2002. (Incorporated by reference to Exhibit 10.2 of the Company's Registration Statement on Form S-8 (file no. 333-100645) filed October 21, 2002.) 31.1 Section 302 Certification by the Corporation's Chief Executive Officer. (Filed herewith). 31.2 Section 302 Certification by the Corporation's Chief Financial Officer. (Filed herewith). 32.1 Section 906 Certification by the Corporation's Chief Executive Officer. (Filed herewith). 32.2 Section 906 Certification by the Corporation's Chief Financial Officer. (Filed herewith).