UNITED
STATES





SECURITIES
AND EXCHANGE COMMISSION





WASHINGTON,
D.C. 20549





FORM
20-F


(Mark
One)




o
            REGISTRATION
      STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
      OF 1934





OR




x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,
2008





OR




o
            TRANSITIONAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934o
            SHELL
      COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934Date of event requiring this
      shell company report
__________





For
the transition period from __________ to __________





Commission
file number: 333-126007





EFUTURE
INFORMATION TECHNOLOGY INC.


(Exact
name of Registrant as specified in its charter)





Cayman
Islands


(Jurisdiction
of incorporation or organization)




eFuture
      Information Technology Inc.
              8F
      Topnew Tower
              15
      Guanghua Road
              Chaoyang
      District
              Beijing
      100026, People’s Republic of China
              86-10-51650988
              (Address
      of principal executive offices)
            Troe
      Wen, Secretary of the Board
              Telephone:
      +(86 10) 5165-0988
              Email:
      wenj@e-future.com.cn
              Facsimile:
      +(86 10) 5293-7688
              8F
      Topnew Tower, 15 Guanghua Road
              Chaoyang
      District
              Beijing,
      100026, People’s Republic of China





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


Title
      of each class
              Ordinary
      Shares, par value $0.0756 per share
            Name
      of each exchange on which registered
              NASDAQ
      Capital Market





Securities registered or to be
registered pursuant to Section 12(g) of the
Act:None.





Securities for which there is a
reporting obligation pursuant to Section 15(d) of the
Act:None.





Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report:


As of
December 31, 2008, there were 3,362,241shares of the registrant’s Ordinary
Shares outstanding.





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





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





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





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





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




Large
      accelerated filer o
            Accelerated
      filer o
            Non-accelerated
      filer x





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




US
      GAAP x
            International
      Financial Reporting Standards as issued by
              the
      International Accounting Standards Board o
            Other
      o





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





TABLE
OF CONTENTS





Item
      1.
                Identity
      of Directors, Senior Management and Advisers
                1Item
      2.
                Offer
      Statistics and Expected Timetable
                1Item
      3.
                Key
      Information
                1Item
      4.
                Information
      on the Company
                12Item
      4A.
                Unresolved
      Staff Comments
                27Item
      5.
                Operating
      and Financial Review and Prospects
                27Item
      6.
                Directors,
      Senior Management and Employees
                42Item
      7.
                Major
      Shareholder and Related Party Transactions
                48Item
      8.
                Financial
      Information
                48Item
      9.
                The
      Offer and Listing
                49Item
      10.
                Additional
      Information
                50Item
      11.
                Quantitative
      and Qualitative Disclosures about Market Risk
                57Item
      12.
                Description
      of Securities Other than Equity Securities
                58Item
      13.
                Defaults,
      Dividend Arrearages and Delinquencies
                58Item
      14.
                Material
      Modifications to the Rights of Securities Holders and Use of
      Proceeds
                58Item
      15.
                Controls
      and Procedures
                58Item
      15T.
                Controls
      and Procedures
                58Item
      16.
                [Reserved]
                60Item
      16A.
                Audit
      Committee Financial Expert
                60Item
      16B.
                Code
      of Ethics
                60Item
      16C.
                Principal
      Accountant Fees and Services
                60Item
      16D.
                Exemptions
      from the Listing Standards for Audit Committees
                61Item
      16E.
                Purchases
      of Equity Securities by the Issuer and Affiliated
    Purchasers
                61Item
      16F.
                Change
      in Registrant’s Certifying Accountant.
                61Item
      16G.
                Corporate
      Governance.
                61Item
      17.
                Financial
      Statements
                62Item
      18.
                Financial
      Statements
                62Item
      19.
                Exhibits
                62


i


SPECIAL
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS





Certain
matters discussed in this report may constitute forward-looking statements for
purposes of the Securities Act of 1933, as amended (the “Securities Act”), and
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievements to be materially different from
the future results, performance or achievements expressed or implied by such
forward-looking statements. The words “expect,” “anticipate,” “intend,” “plan,”
“believe,” “seek,” “estimate,” and similar expressions are intended to identify
such forward-looking statements. Our actual results may differ materially from
the results anticipated in these forward-looking statements due to a variety of
factors, including, without limitation, those discussed under “Item 3 - Key
Information-Risk Factors,” “Item 4 - Information on the Company,” “Item 5 -
Operating and Financial Review and Prospects,” and elsewhere in this report, as
well as factors which may be identified from time to time in our other filings
with the Securities and Exchange Commission (the “SEC”) or in the documents
where such forward-looking statements appear. All written or oral
forward-looking statements attributable to us are expressly qualified in their
entirety by these cautionary statements.





The
forward-looking statements contained in this report reflect our views and
assumptions only as of the date this report is signed. Except as required by
law, we assume no responsibility for updating any forward-looking
statements.


ii


PART
I





Unless
the context requires otherwise, references in this report to “eFuture,” “the
Company,” “we,” “us,” and “our” refer to eFuture Information Technology, Inc. ,
our wholly-owned subsidiary, eFuture (Beijing) Royalstone Information Technology
Inc., and the effectively controlled two variable interest entities
(“VIEs”), Beijing Wangku Hutong Information Technology Co., Ltd.
(“Wangku”), acquired on May 14, 2008, and Beijing Fuji Biaoshang
Information Technology Co., Ltd. (“Biaoshang” or “bFuture”), acquired on
October 24, 2007.





Item
1.                 Identity
of Directors, Senior Management and Advisers





Not
applicable.





Item
2.                 Offer
Statistics and Expected Timetable





Not
applicable.





Item
3.                 Key
Information





A.
Selected Financial Data


RMB
                
                USDFor the Year Ended December 31,
                
                For the Year
                  EndedDecember 31,2004
                
                2005
                
                2006
                
                2007
                
                2008
                
                2008(Restated)Total
      Revenues
                
                ¥
                34,703,297
                
                
                ¥
                39,244,001
                
                
                ¥
                47,843,530
                
                
                ¥
                84,920,993
                
                
                ¥
                139,863,502
                
                
                $
                20,500,330Profit (Loss)
      From Operations
                
                
                5,197,762
                
                
                
                5,843,028
                
                
                
                7,976,967
                
                
                
                6,562,255
                
                
                
                (10,037,244
                )
                
                
                (1,471,197
                )Earnings (Loss)
      From Operations Per Ordinary Share
                
                
                5.64
                
                
                
                4.73
                
                
                
                4.72
                
                
                
                2.44
                
                
                
                (3.12
                )
                
                
                (0.46
                )Net
      Income (Loss)
                
                
                4,525,190
                
                
                
                5,470,263
                
                
                
                8,104,726
                
                
                
                (21,526,314
                )
                
                
                (4,478,112
                )
                
                
                (656,374
                )Basic
      Earnings (Loss) Per Share
                
                
                4.91
                
                
                
                4.43
                
                
                
                4.80
                
                
                
                (8.01
                )
                
                
                (1.39
                )
                
                
                (0.20
                )Diluted
      Earnings (Loss) Per Share
                
                
                2.90
                
                
                
                3.50
                
                
                
                4.43
                
                
                
                (8.01
                )
                
                
                (1.39
                )
                
                
                (0.20
                )





RMB
                    
                    
                    USDAs of December 31,
                    
                    
                    As of December31,2004
                    
                    2005
                    
                    2006
                    
                    2007
                    
                    2008
                    
                    
                    2008(Restated)Total
      Assets
                    
                    ¥
                    25,893,808
                    
                    
                    ¥
                    31,657,674
                    
                    
                    ¥
                    83,025,047
                    
                    
                    ¥
                    208,877,159
                    
                    
                    ¥
                    238,862,093
                    
                    
                    $
                    35,010,933Total
      Current Liabilities
                    
                    
                    (21,981,899
                    )
                    
                    
                    (19,565,356
                    )
                    
                    
                    (18,476,058
                    )
                    
                    
                    (55,815,000
                    )
                    
                    
                    (93,306,490
                    )
                    
                    
                    (13,676,290
                    )Long-term
      Liabilities
                    
                    
                    (30,583,993
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (49,849,390
                    )
                    
                    
                    (10,800,131
                    )
                    
                    
                    (1,583,016
                    )Net
      Assets
                    
                    
                    (26,672,084
                    )
                    
                    
                    12,092,318
                    
                    
                    
                    64,548,989
                    
                    
                    
                    103,212,769
                    
                    
                    
                    134,755,472
                    
                    
                    
                    19,751,627Capital
      Stock
                    
                    
                    576,817
                    
                    
                    
                    938,550
                    
                    
                    
                    1,647,781
                    
                    
                    
                    1,811,589
                    
                    
                    
                    2,039,196
                    
                    
                    
                    298,893Number
      of Weighted-average Ordinary Shares
                    
                    
                    576,817
                    
                    
                    
                    938,550
                    
                    
                    
                    1,689,434
                    
                    
                    
                    2,687,380
                    
                    
                    
                    3,214,466
                    
                    
                    
                    3,214,466





Exchange
Rate Information





Our
business is primarily conducted in China and all of our revenues are denominated
in RMB. However, periodic reports made to shareholders will include current
period amounts translated into U.S. dollars using the then current exchange
rates, for the convenience of the readers. The conversion of RMB into U.S.
dollars in this annual financial report is based on the noon buying rate in The
City of New York for cable transfers of RMB as certified for customs purposes by
the Federal Reserve Bank of New York. Unless otherwise noted, all translations
from RMB to U.S. dollars and from U.S. dollars to RMB in this annual financial
report were made at a rate of RMB6.8225 to US$1.00, the noon buying rate in
effect as of December 31, 2008. We make no representation that any RMB or U.S.
dollar amounts could have been, or could be, converted into U.S. dollars or RMB,
as the case may be, at any particular rate, or at all. The government of the
People’s Republic of China (the “PRC”) imposes control over its foreign currency
reserves in part through direct regulation of the conversion of RMB into foreign
exchange and through restrictions on foreign trade. The Company does not
currently engage in currency hedging transactions. The following table sets
forth information concerning exchange rates between the RMB and the U.S. dollar
for the periods indicated.


1




Noon Buying RatePeriod
                  
                  Period-End
                  
                  Average (1)
                  
                  Low
                  
                  High(RMB per US Dollar)2004
                  
                  
                  8.2765
                  
                  8.2768
                  
                  
                  8.2771
                  
                  8.27652005
                  
                  
                  8.0702
                  
                  8.1940
                  
                  
                  8.0702
                  
                  8.27652006
                  
                  
                  7.8041
                  
                  7.9723
                  
                  
                  7.8041
                  
                  8.07022007
                  
                  
                  7.2946
                  
                  7.6072
                  
                  
                  7.2946
                  
                  7.81272008
                  
                  
                  6.8225
                  
                  6.9477
                  
                  
                  6.7800
                  
                  7.29462009January
                  
                  
                  6.8392
                  
                  6.8360
                  
                  
                  6.8225
                  
                  6.8403February
                  
                  
                  6.8395
                  
                  6.8363
                  
                  
                  6.8241
                  
                  6.8470March
                  
                  
                  6.8329
                  
                  6.8360
                  
                  
                  6.8240
                  
                  6.8438April
                  
                  
                  6.8180
                  
                  6.8305
                  
                  
                  6.8180
                  
                  6.8361May
                  
                  
                  6.8278
                  
                  6.8235
                  
                  
                  6.8176
                  
                  6.8326June
                  
                  
                  6.8302
                  
                  6.8334
                  
                  
                  6.8264
                  
                  6.8331July
                  
                  
                  6.8319
                  
                  6.8317
                  
                  
                  6.8300
                  
                  6.8342August
                  
                  
                  6.8299
                  
                  6.8323
                  
                  
                  6.8299
                  
                  6.8358September
                  
                  
                  6.8262
                  
                  6.8277
                  
                  
                  6.8247
                  
                  6.8303October
      (through October 2, 2009)
                  
                  
                  6.8260
                  
                  6.8260
                  
                  
                  6.8260
                  
                  6.8260





(1)
Averages are calculated using the average of the daily rates during the relevant
period.




B.
            Capitalization
      and Indebtedness





Not
applicable.




C.
            Reasons
      for the Offer and Use of Proceeds





Not
applicable.




D.
            Risk
      Factors





You
should carefully consider all of the information in this Annual Report and, in
particular, the risks outlined below.





We
are currently experiencing a global economic crisis, which could materially and
adversely affect our business, financial condition and results of
operations.





We are
currently experiencing a global economic crisis which affects all areas of
business in all the regions we operate in.





Disruptions
in orderly financial markets in recent months, resulting from, among other
factors, severely diminished liquidity and credit availability plus volatile and
declining valuations of securities and other investments have caused business
and consumer confidence to ebb, business activities to slow down, and
unemployment to increase. These factors along with the interconnectivity and
interdependence of international economies have created a global downturn in
economic activity.


2





We are
unable to predict how long the economic downturn will last. A continuing
economic downturn may adversely affect our business in a number of ways,
including:





·
            Reduced demand for our
      productsand
      services.  In a
      period of economic uncertainty, customers may adopt a strategy of
      deferring purchases to upgrade existing equipment or deploy new equipment
      until later periods. In addition, customers who must finance their capital
      expenditures through various forms of debt may find financing unavailable
      to them.





·
            Increased pricing pressure and
      lower margins.  Our competitors include a number of
      enterprises with relatively greater size in terms of revenues, working
      capital, financial resources and number of employees than we have. If the
      size of our potential markets contracts due to the global economic
      downturn, competition for available sales may become more intense, which
      could require us to offer or accept pricing, payment, or local content
      terms which are less favorable to remain competitive. In some cases we
      might be unwilling or unable to compete for business where competitive
      pressures make a potential opportunity unprofitable to
  us.





·
            Greater difficulty in
      collecting accounts receivable.  Any sales made to
      customers whose financial resources may be subject to rapid decline, could
      expose us to losing sales, delaying revenue recognition or accepting
      greater collection risks due to credit quality
  issues.





·
            Additional restructuring and
      impairment charges.  If we are unable to generate the
      level of revenues, profits, and cash flow contemplated by our business
      plan, management will be forced to take further action to focus our
      business activities and align our cost structure with anticipated
      revenues. These actions, if necessary could result in additional
      restructuring charges and/or asset impairment charges being recognized in
      2009 and beyond.





Our
management has determined that we have material weaknesses in our
internal controls over financial reporting.





In
connection with the preparation of annual report on internal control over
financial reporting, our management noted that our company has material
weaknesses in our internal controls over financial reporting. Specifically, our
management noted material weaknesses in our policies regarding (i) controls
over the financial reporting processes, (ii) effective internal audit function,
(iii) communication with independent auditors and (iv) monthly and year end
closing processes. See “Item 15T.  Controls and Procedures –
Management’s Annual Report on Internal Control over Financial
Reporting.”





We have
taken steps to improve the controls in these areas.  Despite these steps,
we may experience reportable conditions and significant deficiencies in the
future, which, if not remediated, may render us unable to detect in a timely
manner misstatements that could occur in our financial statements in amounts
that may be material.





Our
customers are Chinese companies engaged in retail and consumer goods industries,
and, consequently, our financial performance is dependent upon the economic
conditions of these industries.





We have
derived most of our revenues to date from software and services to the Chinese
retail and consumer goods industries for manufacturers, distributors, logistics
player and retailers, and our future growth is critically dependent on increased
sales to these particular industries. The success of our customers is
intrinsically linked to economic conditions in these industries, which in turn
are subject to intense competitive pressures and are affected by overall
economic conditions. We believe the license of our software solutions and the
purchase of our related services is discretionary and generally involves a
significant commitment of capital. As a result, although we believe our products
can assist China’s retailers, distributors, wholesalers, and logistics companies
in a competitive environment, demand for our products and services could be
disproportionately affected by instability or downturns in the retailing,
distribution, wholesaling and logistics industries, which may cause customers to
exit the industry or delay, cancel or reduce any planned expenditures for
information management systems and software products. We have previously
experienced this effect in connection with the global financial crises and
economic downturn, placed upon China’s retailing industry in recent years. There
can be no assurance that we will be able to continue our historical revenue
growth or sustain our profitability on a quarterly or annual basis or that our
results of operations will not be adversely affected by continuing or future
downturns in these industries. Any adverse change in the Chinese retail and
consumer goods industries could adversely affect the level of software
expenditure by the participants in these industries, which, in turn, could
result in a material reduction in our sales.


3


Although
we achieved profitability for the first time in 2004, since our formation we
have generated a significant shareholders’ deficit, and we cannot provide any
assurance that our recent profitability will continue.





Though we
achieved profitability from 2004 to 2006, we had an accumulated deficit of
RMB43,422,395 as of December 31, 2008. As of December 31, 2008, our
shareholders’ equity was RMB134,755,472. While we have achieved profitability in
previous years, there can be no assurance that we will be able to continue our
growth or profitability. Indeed, we had a net loss of RMB4,478,112 in the fiscal
year ended December 31, 2008.





Our
recent service fee revenue growth will require our officers to manage our
business efficiently while recruiting a significant number of new employees to
assist in further development and implementation of our software.





In 2008,
our service fee income increased by 76.4% in comparison to 2007, which was
mainly due to our efforts of focusing on services and expanding our direct sales
force in key geographic markets. The growth in the size and complexity of our
business has placed and is expected to continue to place a significant strain on
our management and operations. Continued growth will require us to recruit and
hire a substantial number of new employees, including consulting and product
development personnel. In particular, our ability to undertake new projects and
increase license revenues is substantially dependent on the availability of our
consulting personnel to assist in the licensing and implementation of our
software solutions. We will not be able to continue to increase our business at
historical rates without adding significant numbers of personnel skilled in
software implementation and integration. Although we have not incurred
significant difficulty in the hiring and training of skilled employees to date,
there can be no assurance that we will effectively locate, retain or train
additional personnel in the future. If we do not sufficiently increase our
integration and implementation workforce over time, we may be required to forego
licensing opportunities. Our ability to compete effectively and to manage future
growth, if any, also will depend on our ability to continue to implement and
improve operational, financial and management information systems on a timely
basis.





We
are heavily dependent upon the services of technical and managerial personnel
who develop and implement our supply chain management (“SCM”) software, and we
may have to actively compete for their services.





We are
heavily dependent upon our ability to attract, retain and motivate skilled
technical, managerial and consulting personnel, especially highly skilled
engineers involved in ongoing product development and consulting personnel. Our
ability to install, maintain and enhance our SCM software is substantially
dependent upon our ability to locate, hire and train qualified personnel. As SCM
concepts have only recently been adopted in China, the number of qualified
technical, managerial and consulting personnel is limited. Many of our
technical, managerial and consulting personnel possess skills that would be
valuable to all companies engaged in software development, and the Chinese
software industry is characterized by a high level of employee mobility and
aggressive recruiting of skilled personnel. Consequently, we expect that we will
have to actively compete with other Chinese software developers for these
employees. Our ability to profitably operate is substantially dependent upon our
ability to locate, hire, train and retain our technical, managerial and
consulting personnel. Although we have not experienced difficulty locating,
hiring, training or retaining our employees to date, there can be no assurance
that we will be able to retain our current personnel, or that we will be able to
attract and assimilate other personnel in the future. If we are unable to
effectively obtain and maintain skilled personnel, the quality of our software
products and the effectiveness of installation and training could be materially
impaired.





Competition
within the Chinese market for our software products is significant.





We
believe that while the Chinese market for SCM software is subject to intense
competition, the number of significant competitors is relatively limited.
According to the International Data Corporation, in 2006, total IT expenditures
in China’s retail market were $552 million, and the annual growth rate is
projected to be 13.3% from 2006 to 2011. In 2007, total IT expenditures in
China’s retail market were $625 million, and we generated approximately $20.5
million in 2008. As such, while we believe that we effectively compete in our
market, our competitors occupy a substantial competitive position. There can be
no assurance that we will be able to effectively compete in our industry on an
ongoing basis.


4


Our
financial performance is dependent upon the sale and implementation of SCM
software and related services, a single, concentrated group of
products.





We derive
all of our revenues from the license and implementation of software applications
for the Chinese supply chain industry, an industry that did not effectively
exist in China in recent years, and from providing consulting services. The life
cycle of our software is difficult to estimate due in large measure to the
potential effect of new software, applications and enhancements (including those
we introduce) on the maturation in the Chinese retail distribution, wholesaling
and logistics industries. To the extent we are unable to continually improve our
SCM software to address the changing needs of the Chinese supply chain front
market, we may experience a significant decline in the demand for our programs.
In such a scenario, our revenues may significantly decline.





The
market for SCM software is intensely competitive.





We
believe the principal competitive factors in our markets are:





·
            product
      quality;


·
            reliability;


·
            performance;


·
            price;


·
            vendor
      and product reputation;


·
            financial
      stability;


·
            features
      and functions;


·
            ease
      of use; and


·
            quality
      of support.





A number
of companies offer competitive products addressing certain of our target
markets. In the enterprise systems market, we compete with in-house systems
developed by our targeted customers and with third-party developers. In
addition, we believe that new market entrants may attempt to develop fully
integrated enterprise-level systems targeting the Chinese supply chain. Many of
our existing competitors, as well as a number of potential new competitors, have
significantly greater financial, technical and marketing resources than we do.
We cannot guarantee that we will be able to compete successfully against current
or future competitors. As a result of this product concentration and uncertain
product life cycles, we may not be as protected from new competition or industry
downturns as a more diversified competitor.





Our
financial performance is directly related to our ability to adapt to
technological change and evolving standards when developing and improving our
SCM software products.





The
software development industry is subject to rapid technological change, changing
customer requirements, frequent new product introductions and evolving industry
standards that may render existing software obsolete. In addition, as the
Chinese economy has only recently begun to incorporate various Western economic
factors, the concept of SCM has only recently been adopted by Chinese
businesses. As a result, our position in the Chinese SCM software industry could
erode to the extent Chinese businesses embrace different technology than we
implement.  The life cycles of our software are difficult to estimate.
Our software products must keep pace with technological developments, conform to
evolving industry standards and address the increasingly sophisticated needs of
Chinese retailers, wholesalers, distributors and logistics companies. In
particular, we believe that we must continue to respond quickly to users’ needs
for broad functionality. While we attempt to upgrade our software every one to
two years, we cannot guarantee that our software will continue to enjoy market
acceptance. To the extent we are unable to develop and introduce products in a
timely manner, we believe that participants in the Chinese supply chain will
obtain products from our competitors promptly and our sales will correspondingly
suffer. In addition, we strive to achieve compatibility between our products and
retailing systems platforms that we believe are or will become popular and
widely adopted. We invest substantial resources in development efforts aimed at
achieving this compatibility. If we fail to anticipate or respond adequately to
technology or market developments, we could incur a loss of competitiveness or
revenue.


5


We
are substantially dependent upon our key personnel, particularly Adam Yan, our
Chairman and Chief Executive Officer.





Our
performance is substantially dependent on the performance of our executive
officers and key employees. In particular, the services of:





·
            Adam
      Yan, our Chairman and Chief Executive
Officer;


·
            Deliang
      Tong, our Chief Operating Officer;


·
            Qicheng
      Yang, our Technology Officer;


·
            Hongjun
      Zou, our Chief Innovation Officer;


·
            Ping
      Yu, our Chief Financial Officer;


·
            Tony
      Zhao, our Chief Strategy
Officer,and


·
            James
      Mu, our Chief Marketing Officer.





would be
difficult to replace. We do not have in place “key person” life insurance
policies on any of our employees. The loss of the services of any of our
executive officers or other key employees could substantially impair our ability
to successfully implement our existing SCM software and develop new programs and
enhancements.





As
a software-oriented business, our ability to operate profitably is directly
related to our ability to develop and protect our proprietary
technology.





We rely
on a combination of trademark, trade secret, nondisclosure and copyright law to
protect our SCM software, which may afford only limited protection. Although the
Chinese government has issued us 68 copyrights on our software, we cannot
guarantee that competitors will be unable to develop technologies that are
similar or superior to our technology. Despite our efforts to protect our
proprietary rights, unauthorized parties, including customers, may attempt to
reverse engineer or copy aspects of our software products or to obtain and use
information that we regard proprietary. Although we are currently unaware of any
unauthorized use of our technology, in the future, we cannot guarantee that
others will not use our technology without proper authorization.





We
develop our software products on third-party middleware software programs that
are licensed by our customers from third parties, generally on a non-exclusive
basis. We currently utilize six major suppliers of these middleware programs.
Considering the fact that we believe that there are a number of widely available
middleware programs available, we do not currently anticipate that our customers
will experience difficulties obtaining these programs. The termination of any
such licenses, or the failure of the third-party licensors to adequately
maintain or update their products, could result in delay in our ability to ship
certain of our products while we seek to implement technology offered by
alternative sources. Nonetheless, while it may be necessary or desirable in the
future to obtain other licenses, there can be no assurance that they will be
able to do so on commercially reasonable terms or at all.





In the
future, we may receive notices claiming that we are infringing the proprietary
rights of third parties. While we believe that we do not infringe and have not
infringed upon the rights of others, we cannot guarantee that we will not become
the subject of infringement claims or legal proceedings by third parties with
respect to our current programs or future software developments. In addition, we
may initiate claims or litigation against third parties for infringement of our
proprietary rights or to establish the validity of our proprietary rights. Any
such claims could be time consuming, result in costly litigation, cause product
shipment delays or force us to enter into royalty or license agreements rather
than dispute the merits of such claims, thereby impairing our financial
performance by requiring us to pay additional royalties and/or license fees to
third parties. We have never lost an infringement claim since our
formation.


6


Our
SCM software may contain integration challenges, design defects or software
errors that could be difficult to detect and correct.





Implementation
of our software may involve a significant amount of systems developed by third
parties. Although we have not experienced a material number of defects
associated with our software to date, despite extensive testing, we may, from
time to time, discover defects or errors in our software only after use by a
customer. We may also experience delays in shipment of our software during the
period required to correct such errors. In addition, we may, from time to time,
experience difficulties relating to the integration of our software products
with other hardware or software in the customer’s environment that are unrelated
to defects in our software products. Such defects, errors or difficulties may
cause future delays in product introductions and shipments, result in increased
costs and diversion of development resources, require design modifications or
impair customer satisfaction with our software. Since our software solutions are
used by our customers to perform mission-critical functions, design defects,
software errors, misuse of our products, incorrect data from external sources or
other potential problems within or out of our control that may arise from the
use of our products could result in financial or other damages to our customers.
To date, however, we have not had significant difficulties integrating our
software into our customers’ existing systems. We do not maintain product
liability insurance. Although our license agreements with customers contain
provisions designed to limit our exposure to potential claims as well as any
liabilities arising from such claims, such provisions may not effectively
protect us against such claims and the liability and costs associated therewith.
To the extent we are found liable in a product liability case, we could be
required to pay a substantial amount of damages to an injured customer, thereby
impairing our financial condition.





We
may not pay dividends.





We have
not previously paid any cash dividends nor do we anticipate paying any dividends
on our ordinary shares. Although we achieved profitability for the first time in
2004, we cannot assure you that our operations will continue to result in
sufficient revenues to enable us to operate at profitable levels or to generate
positive cash flows. Indeed, we had net losses of RMB21,526,314 and RMB4,478,112
in the fiscal years ended December 31, 2007 and 2008, respectively. Furthermore,
there is no assurance our Board of Directors will declare dividends even if we
are profitable. Dividend policy is subject to the discretion of our Board of
Directors and will depend on, among other things, our earnings, financial
condition, capital requirements and other factors. Under Cayman law, we may only
pay dividends from profits or credit from the share premium account (the amount
paid over par value, which is $0.0756), and we must be solvent before and after
the dividend payment. If we determine to pay dividends on any of our ordinary
shares in the future, as a holding company, we will be dependent on receipt of
funds from our operating wholly- and partially-owned subsidiaries.





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





The
Chinese economy has grown at an approximately 9 percent rate for more than 25
years, making it the fastest growing major economy in recorded history. Much of
this growth has occurred in our customers’ industries. For example:





·
            China’s
      economy grew by 9% in 2008;


·
            retail
      sales in China increased 21.6% in
2008;


·
            China’s
      software industry reached RMB580 billion in sales in 2007, an increase of
      20% over 2006.





We cannot
assure you that growth of the Chinese economy will be steady or that any
slowdown will not have a negative effect on our business. Several years ago, the
Chinese economy experienced deflation, which may recur in the foreseeable
future. More recently, the Chinese government announced its intention to use
macroeconomic tools and regulations to slow the rate of growth of the Chinese
economy, the results of which are difficult to predict. Adverse changes in the
Chinese economy will likely impact the financial performance of the retailing,
distribution, logistics and manufacturing industries in China. Consequently,
under such circumstances, our customers may opt to delay discretionary
expenditures like those for our software, which, in turn, could result in a
material reduction in our sales.


7


We
do not have business interruption, litigation or natural disaster
insurance.





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





We
may become a passive foreign investment company, which could result in adverse
U.S. tax consequences to U.S. investors.





Based
upon the nature of our business activities, we may be classified as a passive
foreign investment company (“PFIC”) by the U.S. Internal Revenue Service (“IRS”)
for U.S. federal income tax purposes. Such characterization could result in
adverse U.S. tax consequences to you if you are a U.S. investor. For example, if
we are a PFIC, a U.S. investor will become subject to burdensome reporting
requirements. The determination of whether or not we are a PFIC is made on an
annual basis and will depend on the composition of our income and assets from
time to time. Specifically, we will be classified as a PFIC for U.S. tax
purposes if either:





·
            75%
      or more of our gross income in a taxable year is passive income;
      or


·
            the
      average percentage of our assets by value in a taxable year which produce
      or are held for the production of passive income (which includes cash) is
      at least 50%.





The
calculation of the value of our assets is based, in part, on the then market
value of our ordinary shares, which is subject to change. In addition, the
composition of our income and assets will be affected by how, and how quickly,
we spend the cash we raised in our initial public offering. We cannot assure you
that we will not be a PFIC for any taxable year.




SARS


The
possible quarantine of our offices or the sickness or death of our key officers
and employees would restrict our ability to develop and implement our software
products, thereby negatively impacting our sales. Any of the foregoing events or
other unforeseen consequences of public health problems could adversely affect
our markets or our ability to operate profitably. A slowdown of the Chinese
economy as a whole could reduce the level of discretionary expenditures by
Chinese business in the retailing, distribution, logistics and manufacturing
industries, thereby resulting in a material reduction in the demand for our
products.





Recent
PRC regulations relating to acquisitions of PRC companies by foreign entities
may create regulatory uncertainties that could limit our PRC subsidiaries’
ability to distribute dividends and/or pursue any acquisition strategy that we
may implement in the future.





The PRC
State Administration of Foreign Exchange (“SAFE”) issued a public notice in
January 2005 concerning foreign exchange regulations on mergers and acquisitions
in China. The public notice states that if an offshore company intends to
acquire a PRC company, such acquisition will be subject to strict examination by
the relevant foreign exchange authorities. The public notice also states that
the approval of the relevant foreign exchange authorities is required for any
sale or transfer by the PRC residents of a PRC company’s assets or equity
interest to foreign entities, such as us, for equity interests or assets of the
foreign entities.





In April
2005, SAFE issued another public notice clarifying the January notice. In
accordance with the April notice, if an acquisition of a PRC company by an
offshore company controlled by PRC residents had been confirmed by a Foreign
Investment Enterprise Certificate prior to the issuance of the January notice,
each of the PRC residents is required to submit a registration form to the local
SAFE branch to register his or her respective ownership interests in the
offshore company. The PRC resident must also amend such registration form if
there is a material event affecting the offshore company, such as, among other
things, a change to share capital, a transfer of shares, or if such company is
involved in a merger and an acquisition or a spin-off transaction or uses its
assets in China to guarantee offshore obligations. SAFE indicated that these
registration provisions applied retroactively to offshore restructurings, like
ours, that were completed prior to the initial public notice of the new
requirements in January 2005. However, SAFE did not impose any time limit within
which PRC residents must complete the mandated registration. The April notice
also provided that failure to comply with the registration procedures set forth
therein may result in the imposition of restrictions on the PRC company’s
foreign exchange activities and its ability to distribute profits to its
offshore parent company.


8


On
October 21, 2005, SAFE issued a new public notice concerning PRC residents’
investments through offshore investment vehicles. This notice took effect on
November 1, 2005 and replaces prior SAFE notices on this topic. According
to the November 2005 notice:





·
            any
      PRC resident that created an off-shore holding company structure prior to
      the effective date of the November notice must submit a registration form
      to a local SAFE branch to register his or her ownership interest in the
      offshore company on or before May 31,
2006;


·
            any
      PRC resident that purchases shares in a public offering of a foreign
      company would also be required to register such shares and notify SAFE of
      any change of their ownership interest;
and


·
            following
      the completion of an off-shore financing, any PRC shareholder may transfer
      proceeds from the financing into China for use within
    China.





To the
extent a PRC investor desires to purchase our ordinary shares in the secondary
market, such resident must obtain SAFE and other relevant government approval
prior to such investment. Upon the sale of our ordinary shares in the secondary
market, a PRC resident must promptly notify SAFE of a material change in
ownership. As (a) we do not anticipate a significant number of PRC
residents participating in our secondary market and (b) SAFE regulations
generally focus upon the initial foreign exchange transaction by which a PRC
resident will purchase our ordinary shares, we do not anticipate that SAFE
regulations will impact the resale of our ordinary shares in any significant
manner.





Most
recently, on August 8, 2006, six PRC regulatory agencies, including the Ministry
of Commerce, the State Administration for Industry and Commerce, CSRC and SAFE,
jointly issued the Regulations on Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors. This regulation became effective on September
8, 2006 and includes provisions that purport to require offshore special purpose
vehicles:





·
            controlled
      directly or indirectly by PRC companies or citizens;
  and


·
            formed
      for the purpose of effecting an overseas listing of a PRC
      company





to obtain
the approval of CSRC prior to the completion of the overseas listing. On
September 8, 2006, CSRC published procedures regarding the approval process
associated with overseas listings of special purpose vehicles. There is little
precedent as to how CSRC will interpret the new regulation and apply the related
procedures.





We
completed the formation of our offshore holding company structure prior to the
implementation of the new regulation. Further, given that these new regulations
are not retroactive in nature, we were not required to seek and obtain
governmental approval to complete our initial public offering.





Our
subsidiaries are subject to restrictions on paying dividends and making other
payments to us.





We are a
holding company incorporated in the Cayman Islands and do not have any assets or
conduct any business operations other than our investment in eFuture Beijing,
and two effectively controlled variable interest entities VIEs, Wangku and
Biaoshang. As a result of our holding company structure, we rely entirely
on the dividends payments from our subsidiaries. However, PRC regulations
currently permit payment of dividends only out of accumulated profits, as
determined in accordance with PRC accounting standards and regulations. Our
subsidiaries may also be required to set aside a portion of their after-tax
profits according to PRC accounting standards and regulations to fund certain
reserve funds. The PRC government also imposes controls on the conversion of RMB
into foreign currencies and the remittance of currencies out of China. We may
experience difficulties in completing the administrative procedures necessary to
obtain and remit foreign currency. Furthermore, if our subsidiaries incur debt
on their own in the future, the instruments governing the debt may restrict
their ability to pay dividends or make other payments. If we or our subsidiaries
are unable to receive all of the revenues from our operations through these
arrangements, we may be unable to pay dividends on our ordinary
shares.


9


Governmental
control of currency conversion may affect the value of our ordinary
shares.





The PRC
government imposes controls on the convertibility of the Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of China. We
receive substantially all of our revenues in Renminbi. Under our current
corporate structure, our income is derived from dividend payments from our PRC
subsidiaries. Shortages in the availability of foreign currency may restrict the
ability of our PRC subsidiaries to remit sufficient foreign currency to pay
dividends or other payments to us, or otherwise satisfy their foreign currency
denominated obligations. Under existing PRC foreign exchange regulations,
payments of current account items, including profit distributions, interest
payments and expenditures from trade-related transactions, can be made in
foreign currencies without prior approval from the PRC State Administration of
Foreign Exchange by complying with certain procedural requirements. However,
approval from appropriate government authorities is required where Renminbi are
to be converted into foreign currency and remitted out of China to pay capital
expenses such as the repayment of bank loans denominated in foreign currencies.
The PRC government may also at its discretion restrict access in the future to
foreign currencies for current account transactions. If the foreign exchange
control system prevents us from obtaining sufficient foreign currency to satisfy
our currency demands, we may not be able to pay dividends in foreign currencies
to our shareholders.





Fluctuation
in the value of the Renminbi may have a material adverse effect on the value of
our ordinary shares.





The value
of the Renminbi against the U.S. dollar and other currencies may fluctuate and
is affected by, among other things, changes in political and economic
conditions. On July 21, 2005, the PRC government changed its decade-old
policy of pegging the value of the Renminbi to the U.S. dollar. Under the new
policy, the Renminbi is permitted to fluctuate within a narrow and managed band
against a basket of certain foreign currencies. This change in policy has
resulted in an appreciation of the Renminbi against the U.S. dollar. While the
international reaction to the Renminbi revaluation has generally been positive,
there remains significant international pressure on the PRC government to adopt
an even more flexible currency policy, which could result in a further and more
significant appreciation of the Renminbi against the U.S. dollar. We rely
entirely on dividends and other fees paid to us by our subsidiaries in China.
Any significant revaluation of Renminbi may materially and adversely affect our
cash flows, revenues, earnings and financial position, and the value of, and any
dividends payable on, our ordinary shares in U.S. dollars. For example, an
appreciation of Renminbi against the U.S. dollar would make any new Renminbi
denominated investments or expenditures more costly to us, to the extent that we
need to convert U.S. dollars into Renminbi for such purposes. An appreciation of
Renminbi against the U.S. dollar would also result in foreign currency
translation losses for financial reporting purposes when we translate our U.S.
dollar denominated financial assets into Renminbi, as the Renminbi is our
reporting currency.





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





The
economy of China has historically been a planned economy subject to governmental
plans and quotas and has, in certain aspects, been transitioning to a more
market-oriented economy. Although we believe that the economic reform and the
macroeconomic measures adopted by the Chinese government have had a positive
effect on the economic development of China, we cannot predict the future
direction of these economic reforms or the effects these measures may have on
our business, financial position or results of operations. In addition, the
Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development (“OECD”). These
differences include:





·
            economic
      structure;


·
            level
      of government involvement in the
economy;


·
            level
      of development;


·
            level
      of capital reinvestment;


·
            control
      of foreign exchange;


·
            methods
      of allocating resources; and


·
            balance
      of payments position.





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


10


If
PRC law were to phase out the preferential tax benefits currently being extended
to qualified “High and New Technology Enterprises”, we would have to pay more
taxes, which could have a material and adverse effect on our financial condition
and results of operations.





Under the
current laws of the Cayman Islands, the Company is not subject to tax on income
or capital gains. Additionally, upon payments of dividends by the Company to its
shareholders, no Cayman Islands withholding tax will be imposed.





On
March 16, 2007, the National People’s Congress enacted the Enterprise
Income Tax Law (the “New EIT Law”), which became effective on January 1,
2008 and has replaced the previous separate income tax laws for domestic
enterprises and FIEs by adopting an unified 25% enterprise income tax rate
applicable to all resident enterprises in China, including FIEs and foreign
enterprises operating in the PRC, except for certain entities that are eligible
to tax holidays and entities enjoying tax holidays under the Previous IT Law
grandfathered by the New EIT Law. In accordance with the implementation rules of
the New EIT Law, a qualified “High and New Technology Enterprise” under the New
EIT Law will be granted the preferential tax rate of 15%. eFuture Beijing is
recognized as “High and New Technology Enterprise” under the New EIT Law by
relevant authorities effective from fiscal year 2008. Therefore, eFuture Beijing
enjoys the reduced EIT rate of 15% in 2008.  Biaoshang and Wangku are
not so certified and as a result were subject to the unified 25% tax rate in
2008.





Furthermore,
we may apply for a refund of the 5% business tax levied on our total revenues
derived from our technology consulting services. If the PRC law were to phase
out preferential tax benefits currently granted to “new or high-technology
enterprises” or if we ceased to qualify as such, we would be subject to the
standard statutory tax rate, which currently is 25%, and we would be unable to
obtain business tax refunds for our provision of technology consulting
services.





China’s
legal system embodies uncertainties that could adversely affect our ability to
engage in the development and integration of the SCM software.





Since
1979, the Chinese government has promulgated many new laws and regulations
covering general economic matters. Despite this activity to develop a legal
system, China’s system of laws is not yet complete. Even where adequate law
exists in China, enforcement of existing laws or contracts based on existing law
may be uncertain or sporadic, and it may be difficult to obtain swift and
equitable enforcement or to obtain enforcement of a judgment by a court of
another jurisdiction. The relative inexperience of China’s judiciary, in many
cases, creates additional uncertainty as to the outcome of any litigation. In
addition, interpretation of statutes and regulations may be subject to
government policies reflecting domestic political changes. Noting that our
business is substantially dependent upon laws protecting intellectual property
rights, any ambiguity in the interpretation or implementation of such laws may
negatively impact our business, its financial condition and results of
operation. Our activities in China will also be subject to administration review
and approval by various national and local agencies of China’s government.
Because of the changes occurring in China’s legal and regulatory structure, we
may not be able to secure the requisite governmental approval for our
activities. Although we have obtained all required governmental approval to
operate our business as currently conducted, to the extent we are unable to
obtain or maintain required governmental approvals, the Chinese government may,
in its sole discretion, prohibit us from conducting our business.





Shareholder
rights under Cayman Islands law may differ materially from shareholder rights in
the United States, which could adversely affect the ability of us and our
shareholders to protect our and their interests.





Our
corporate affairs are governed by our amended and restated memorandum and
articles of association, by the Companies Law (2004 Revision) and the common law
of the Cayman Islands. The rights of shareholders to take action against the
directors, actions by minority shareholders, and the fiduciary responsibilities
of our directors to us under Cayman Islands law are to a large extent governed
by the common law of the Cayman Islands. The common law in the Cayman Islands is
derived in part from comparatively limited judicial precedent in the Cayman
Islands as well as from English common law, the decisions of whose courts are of
persuasive authority but are not binding on a court in the Cayman Islands. The
rights of our shareholders and the fiduciary responsibilities of our directors
under Cayman Islands law in this area may not be as clearly established as they
would be under statutes or judicial precedent in existence in some jurisdictions
in the United States. In particular, the Cayman Islands has a less developed
body of securities laws as compared to the United States, and some states, such
as Delaware, have more fully developed and judicially interpreted bodies of
corporate laws. Moreover, our company could be involved in a corporate
combination in which dissenting shareholders would have no rights comparable to
appraisal rights which would otherwise ordinarily be available to dissenting
shareholders of United States corporations. Also, our Cayman Islands counsel is
not aware of a significant number of reported class actions or derivative
actions having been brought in Cayman Islands courts. Such actions are
ordinarily available in respect of United States corporations in U.S. courts.
Finally, Cayman Islands companies may not have standing to initiate shareholder
derivative action before the federal courts of the United States. As a result,
our public shareholders may face different considerations in protecting their
interests in actions against the management, directors or our controlling
shareholders than would shareholders of a corporation incorporated in a
jurisdiction in the United States, and our ability to protect our interests may
be limited if we are harmed in a manner that would otherwise enable us to sue in
a United States federal court.


11


As
we are a Cayman Islands company and most of our assets are outside the United
States, it will be extremely difficult to acquire jurisdiction and enforce
liabilities against us and our officers, directors and assets based in
China.





We are a
Cayman Islands exempt company, and our corporate affairs are governed by our
Memorandum and Articles of Association and by the Cayman Islands Companies Law
(2007 Revision) and other applicable Cayman Islands laws. Certain of our
directors and officers reside outside of the United States. In addition, the
Company’s assets are located outside the United States. As a result, it may be
difficult or impossible to effect service of process within the United States
upon our directors or officers and our subsidiaries, or enforce against any of
them court judgments obtained in United States courts, including judgments
relating to United States federal securities laws. In addition, there is
uncertainty as to whether the courts of the Cayman Islands and of other offshore
jurisdictions would recognize or enforce judgments of United States courts
obtained against us predicated upon the civil liability provisions of the
securities laws of the United States or any state thereof, or be competent to
hear original actions brought in the Cayman Islands or other offshore
jurisdictions predicated upon the securities laws of the United States or any
state thereof. Furthermore, because the majority of our assets are located in
China, it would also be extremely difficult to access those assets to satisfy an
award entered against us in United States court.





There
can be no guarantee that China will comply with the membership requirements of
the World Trade Organization.





Due in
part to the relaxation of trade barriers following World Trade Organization
accession in January 2002, we believe China will become one of the world’s
largest markets by the middle of the twenty-first century. As a result, we
believe the Chinese market presents a significant opportunity for both domestic
and foreign companies. With the Chinese accession to the World Trade
Organization, Chinese industries are gearing up to face the new regimes that are
required by World Trade Organization regulation. The Chinese government has
begun to reduce its average tariff on imported goods. We believe that a tariff
reduction on imported goods combined with increasing consumer demand in China
may lead to increased demand for our logistics programs. China has also agreed
that foreign companies will be allowed to import most products into any part of
China. Current trading rights and distribution restrictions are to be phased out
over a three-year period. In the sensitive area of intellectual property rights,
China has agreed to implement the trade-related intellectual property agreement
of the Uruguay Round. As our business is dependent upon the protection of our
intellectual property in China and throughout the world, China’s decision to
implement intellectual property protection standards that coordinate with other
major economies is of critical importance to our business and its ability to
generate profits. However, there can be no assurances that China will implement
any or all of the requirements of its membership in the World Trade Organization
in a timely manner, if at all.





Item
4.                 Information
on the Company





A.
            History
      and Development of the Company





We were
established as an offshore company incorporated in the Cayman Islands on
November 2, 2000.eFuture (Beijing)
Tornado Information Technology Inc. (“eFuture Tornado”), established as a
domestic Chinese company in April 2000 in an effort to maintain intellectual
property, has previously and will continue to conduct all of our software
development operations as our wholly-owned subsidiary within
China.


12


On
October 31, 2006, we listed on the NASDAQ Capital Market under the symbol
“EFUT.”





On August
28, 2007, following the successful acquisition of Guangzhou Royalstone System
Integration Co. Ltd., eFuture Tornado was renamed “eFuture (Beijing) Royalstone
Information Technology Inc.” (“eFuture Royalstone” or “eFuture
Beijing”).





With the
approval of our shareholders, we changed our name from “e-Future Information
Technology Inc.” to “eFuture Information Technology Inc.” in 2008.





Our
acquisition of Proadvancer in April 2008 has enhanced our core business and
enabled market leadership and significant share gains in China’s logistics
market; a majority stake in Beijing Fuji Biaoshang Information Technology Inc.
in 2007 and the effectively controlled 51% of the ownership in Beijing Wangku
Hutong Information Technology Co., Ltd. in 2007 and 2008, respectively, further
bolstered our eService strategy.





Our
principal executive offices and headquarters in Beijing moved to the central
business district in May of 2009, which is located at 8/F Topnew Tower, 15
Guanghua Road, Chaoyang Distinct, Beijing 100026, China. Our telephone number is
+86 10 5293 7699, and our fax number is +86 10 5293 7688. Our previous address
was No. 10, BUT Software Park, No.1 Disheng North Street, BDA, Beijing 100176,
China.





OUR
MARKET





China’s
population of approximately 1.3 billion people is expected to grow by roughly
15 million people per year. The country’s gross domestic product grew at a
rate of approximately 9% for more than 25 years, making it the fastest growing
major economy in recorded history. In the same 25 year period, China moved more
than 300 million people out of poverty and quadrupled the average Chinese
person’s income.




The
strength of China’s economy and rapid increases in personal wealth have
significantly grown China’s consumer goods market, as the spending power and
aspirations of consumers rise. In response, industries are consolidating and
leading retailers are penetrating second-tier and even some third-tier Chinese
cities. We believe that the need to modernize China’s supply chain
infrastructure is increasing at a dramatic rate. The appearance of modern
retailers in China is also generating demand for more efficient and reliable
systems and services.





According
to data from the National Bureau of Statistics of China, in 2008, total retail
sales of consumer goods reached RMB10.8 trillion, up by 21.6% over the previous
year. An analysis on different regions showed that retail sales of consumer
goods in cities reached RMB7.4 trillion, an increase of 22.1%, and retail sales
of consumer goods in regions at and below county level was RMB3.5 trillion, an
increase of 20.7%.





China’s
logistics industry realized RMB2 trillion (US$291.9 billion) in added value last
year, up 15.4% from 2007, according to the National Development and Reform
Commission (“NDRC”). The growth, however, was 4.5 percentage points lower than
2007 growth. The NDRC attributed the lower growth rate to the severe snowstorm
at the beginning of 2008, the May 12 earthquake in Sichuan province and the
adverse impacts of the global financial crisis. The added value accounted for
16.5% of the total added value for the service industry at large, down 0.1
percentage point year-on-year. Industry business volume rose 19.5% year-on-year
to RMB89.9 trillion. The growth rate was 6.7 percentage points lower than the
2007 level. Logistics sector expenditures reached RMB5.5 trillion nationwide in
2007, up 16.2%. The growth rate was 4.4 percentage points lower from the
prior year.





Participants
including manufacturers, distributors, wholesalers, logistics companies and
retailers in China’s front-end supply chain market are currently facing
intensifying competition, fluctuating demand, evolving retail channels and
increasing globalization. Sales are pressured, margins are compressed through
intensified competition and most companies are trying to achieve improved
results with fewer people. As a result, small and large Chinese companies are
increasingly seeking technology solutions to better manage their increasingly
complex businesses, improve their operating efficiencies and financial
performance, and strengthen their relationships with customers and suppliers.
Although Chinese businesses traditionally have low technology adoption rates, we
believe that China’s rapid economic development will require Chinese companies
to look to source ready-made solutions for SCM.


13





IT
Market Expenditures





According
to the International Data Corporation (the “IDC Report”), total expenditures on
software and services in China’s retail industry are expected to reach RMB2.6
billion (US$320.5 million) by 2011.





l
            Software
      expenditure In China’s retail
industry


·
            In
      2006, total software expenditure in China’s retail industry was RMB550
      million (US$68.3 million).


·
            By
      2011, total software expenditure is expected to increase to RMB1.11
      billion (US$137.9 million).


·
            This
      would be equal to annual growth of 15.1% from 2006 to
  2011.





l
            Services
      expenditure in China’s retail
industry


·
            In
      2006, total services expenditure in China’s retail industry was RMB630
      million (US$79 million).


·
            By
      2011, total services expenditure is expected to increase to RMB1.46
      billion (US$182.6 million).


·
            This
      would be equal to annual growth of 18.2% from 2006 to
  2011.





l
            In
      2006, total IT expenditures in China’s retail market were $552 million;
      and


l
            By
      2011, total IT expenditures are expected to increase to $1.03
      billion.


l
            This
      level of projected growth, if achieved, would be equal to annual growth of
      13.3% from 2006 to 2011.





The
Chinese supply chain software and services market continues to demonstrate
strong growth potential, and is projected to achieve growth of 22.5% in 2009 and
19.2% in 2010, according to Gartner Inc.’s “Forecast: Retail IT Spending,
Worldwide, 2006-2012, 1Q09Update.”





eFuture Market
Position





We have
built our leading market position of approximately 8% by focusing on the retail
industry and consumer goods market as China increases expenditures on software
and services. Our goal is to increase our market share to 18-20% from 8% within
three years.





We
encounter competitive products from a variety of vendors. We believe that while
our markets are still subject to intense competition, the number of significant
competitors for business in China is relatively limited. We believe the
principal competitive factors in our markets are:





l
            cultural
      differences;


l
            feature
      and functionality of products;


l
            product
      reputation;


l
            quality
      of reference accounts;


l
            vendor
      viability;


l
            retail
      and demand chain industry
expertise;


l
            total
      solution cost;


l
            technology
      platform; and


l
            quality
      of customer support.


14





B.           Business
Overview





General





We are a
leading provider of software and services in China’s rapidly growing retail and
consumer goods industries. eFuture provides integrated software and services to
manufacturers, distributors, wholesalers, logistics companies and retailers in
China’s front-end supply chain (from factory to consumer) market, especially in
the retail and fast moving consumer goods industries.










eFuture
currently serves more than 15 Fortune 500 companies, 1,000 retailers and 5,000
suppliers operating in China. eFuture is one of IBM’s premier business partners
in Asia Pacific and a strategic partner of Oracle, Microsoft, JDA, Motorola and
Samsung Network in China. eFuture has more than 600 employees and 20 branch
offices across China.





Mission and
Strategy





Mission





eFuture's
mission is to provide our clients with a sustained competitive advantage by
improving the DNA of the supply chain. It is our goal to be a leading provider
of software and services and an industry integrator in China’s rapidly growing
retail and consumer goods industries.





To pursue
this goal, we are solidifying our core enterprise software business and forging
into the new frontier of eService.





Growth
Strategy





As a
leading provider of software solutions and services in the retail and consumer
goods industries in China, we have the following three growth strategies
consisting of multiple organic and non-organic growth drivers:





l
            Organic
      Growth – Software Business - We aim to drive the long-term organic growth
      and profitability of our core software solutions business and related
      value added services by expanding our geographic coverage, including
      growth into second and third tier,
cities.





l
            Organic
      Growth – eServices - We plan to grow our eService business through organic
      expansion, which includes our business-to-business (“B2B”),
      Software-as-a-Service (“SaaS”) and transaction plus one day supply chain
      financing (“T+1 SCF”) service.  This is a key growth engine for
      the company and an area where we have made good progress by leveraging
      existing retailer relationships and
resources.


15


l
            M&A
      – We aim to expand our business through our merger and acquisition
      strategy of targeted “fill-in” acquisitions.  Our strategy is to
      actively pursue various M&A opportunities that complement organic
      growth by focusing on targets that will help us to achieve the following
      goals:





l
              Diversify
      our product offering - Independent Software Vendors
      (“ISV”) with offerings complementary to our solutions, which focus on
      industries including fashion, auto,consumer
      electronics,
      drugstores and fast-moving consumer
  goods.
 l
              Broaden
      our regional coverage - ISVs with extensive coverage
      in South, East, and North
China.
 l
              Penetrate
      the small and medium businesses (“SMB”) market - Companies withstandardized, scalable product
      offerings that facilitate penetration into SMBs insecond and third
      tiercities in
      China.
 l
              Create
      additional recurring revenue streams - Companies with products and
      services delivering a stable and recurring revenue stream and which
      provide potential for
growth





Our
Business





Our
businesses include our software business and our eService business.





Our
software business is our core business, and includes our software solutions and
related value-added services. This business provides front-end SCM software
solutions and related value-added services to companies in the retail and
consumer goods industries to help them cut costs and increase
efficiency.  Our software solutions, which optimize business
processes, can be further divided into three segments, which include our
foundation solutions, collaborative solutions and intelligent solutions. Our
software solutions are enhanced and supported by our software related
value-added services which includes recurring support services on existing
software installations, delivery services, consulting services and outsourcing
services.





Our
eService business is a fast growing business, and includes B2B services, SaaS
which includes SCM solutions and business to consumer (“B2C”) store solutions,
and T+1 SCF services.





By
solidifying our core software business, growing value-added service revenues,
and strengthening our eService offerings and capabilities, we have established a
diverse platform which we believe will allow us to further expand our market
share and generate consistent revenue in the coming years.





After
being listed for more than two years, we have achieved consistent organic growth
and expansion through mergers and acquisitions. We believe some of the key
factors which will support our continued growth include:





l
            Robust
      China macroeconomic environment and strong growth catalysts in the retail
      and consumer goods industries;


l
            Strong
      recognition of the eFuture brand among prominent international and local
      clients;


l
            Our
      leading market position and nationwide
network;


l
            Disciplined
      expansion of our core software business and leveraging of our large retail
      install base to expand into eServices;
and


l
            Track
      record of consistent top-line
growth.





The
market in China for our products and services is driven by robust growth
catalysts. Our brand is well known among prominent international and local
clients, including 15 Fortune 500 companies. We have a leading market share of
8% and are one of the only nationwide software and service vendors of our kind.
At the same time, we are expanding from our core competency of SCM software into
B2B services and SaaS by leveraging the resources of our large install-base of
retail clients. We believe we are well positioned to extend our track record of
growth throughout 2009.


16





SOFTWARE
BUSINESS





Software
solutions





Our
software solutions are specifically designed to optimize demand processes from
factory to consumer, and to address SCM, business processes, decision support,
inventory optimization, collaborative planning and forecasting requirements. Our
software solutions integrate industry know-how with predictive information
technologies, consulting services and best practices to help our clients create,
manage and fulfill customer demand.





Our
solutions can be deployed individually to meet specific needs, or as part of a
scalable and fully-integrated, end-to-end solution. Our software solutions
consist of three independently deployable groups of products: Foundation
Solutions, Collaborative Solutions and Intelligent Solutions, which range from
internal and external collaborative process management to sophisticated business
analysis.





Our Foundation
Solutionsare used to meet client needs for services such as retail
management, point of sale (“POS”), distribution management, logistics
management, warehouse management, vendor payment and control and loyalty card
management. Our clients use several of our Foundation Solutions, depending on
the type of customer and needs.





Our Collaborative
Solutionsare
used to meet client needs for services such as visual SCM and visual process
management systems. Our clients use a variety of our Collaborative Solutions,
depending on the type of customer and needs.





Our Intelligent
Solutionsare used to meet client
needs for services such as business intelligence, brand analysis, supplier
relationship management and customer relationship management systems.





Related
value-added Services





Our
software related value-added services business includes recurring support
services on existing software installations, delivery services, consulting
services and outsourcing services.





Support
Servicesare provided following
the installation of our software solutions, as clients will typically require
ongoing maintenance support and software
upgrades to ensure the efficient operation of their system. These
services are designed to assist our customers with integration issues and to
answer questions that may arise.





Following
a one-year regular maintenance program that is an element of our initial
software installation, our customers may purchase three levels of annual
continued maintenance services. As noted below, under our Regular and Silver
plans, we generally provide these maintenance services over the telephone during
regular business hours. For our customers who elect to purchase our Gold plan at
a higher cost, we will provide these services at the customer’s location and on
a real-time basis, if appropriate. Each level of maintenance offers customers
different options to meet their particular needs.





While
on-site with our Gold plan customers, it is common for us to identify problems
and issues that we believe the customer should consider in connection with the
use of our software. Items that we may discuss with our customers include
increasing the size of data storage or the configuration of hardware. We report
these items identified as a part of our maintenance by giving written
recommendations for actions the customer should consider. These services are
simply a report of our suggestions and not an extensive evaluation that would be
done under our consulting arrangements. If our customer deems additional
services to be necessary, we will enter into a separate consulting agreement
with the customer. These maintenance services are unrelated to the development
and installation of program upgrades that we develop from time to
time.





Software
upgradesaredependent upon the
customer and the type of software program and are developed on approximately 1-2
year cycles. Smaller customers or projects are updated on a two year cycle;
medium sized customers and projects are updated on an 18-month cycle; and larger
customers and projects are updated on a yearly cycle. We do not offer these
upgrades as part of our initial license arrangement. Rather, customers must pay
for each upgrade that they opt to install on their systems. Each upgrade is
delivered through the download of service packs.


17





Delivery
Servicesare provided to
customers to assist in planning and executing their projects throughout the
process.We
typically provide the following services at different stages in the management
of a project, as illustrated below:











Consulting
Servicesare provided by our
consulting services group which consists of business consultants, systems
analysts and technical personnel with extensive retail, manufacturing, and
wholesale industry experience. The consulting services group assists our
customers in all phases of systems implementation that exceed the limited
services we provide under our maintenance arrangements, including systems
planning and design, customer-specific configuration of application modules, and
on-site implementation or conversion from existing systems. We also offer a
variety of post-implementation consulting services designed to maximize our
customers’ return on software investment, which include enhanced utilization
reviews and business process optimization.





Outsourcing
Services include, but are not limited to, data center management.
Flexible by design to meet our clients’ changing requirements, eFuture
outsourcing services can manage all or parts of our clients’ non-core business
processes or technology operations, from selective outsourcing to full-scope
system and network outsourcing and data center management. eFuture teams manage
and operate client internal business processes. Leveraging technology and our
industry and process expertise, we provide design, development, implementation,
operation, and continuous improvement of both IT and business functions. Our
call center, based in Wuhan and also referred to as our help desk department,
provides a single point of contact to receive and manage all customers’ requests
(problem notification, information request, service request) across the entire
range of services provided.





eSERVICE
BUSINESS





Our
eServices business includes B2B services, SaaS which includes SCM solutions and
B2C store solutions, and T+1 SCF services.





B2B
services Business (Wangku www.99114.com and
www.Jindian.com.cn)





In May
2008, we effectively controlled 51% of the ownership in Wangku, a leading B2B
service provider in China with a focus on the retail and fast-moving consumer
goods industries. In the fourth quarter of 2008, we focused on establishing more
robust sales capabilities and practices at Wangku, to speed up the pipeline and
convert more prospects into deals. While we have not yet generated material
results, we are pleased with the progress we have made in the first half of
2009.


18


The goal
of our B2B services is two-fold:





l
            First,
      we aim to help local and overseas suppliers enter into nationwide stores
      in China through Wangku’s service at www.99114.com;
  and


l
            Second,
      we act as a bridge between potential suppliers and retailers to help
      efficiently exchange new product supply and demand information via China
      Jindian’s service (“jindian” means “enter store” in Mandarin) at
      www.jindian.com.cn.





SaaS
Business (www.bFuture.com.cn)





We placed
our focus in 2008 on enhancing our SaaS-based applications allowing us to be a
fully integrated software application company. A SaaS-based application allows
us to obtain revenue by not only selling our software but also by selling a
corresponding service agreement which brings in a consistent revenue
stream.





l
              SaaS
      is a model of software delivery where the software company provides
      maintenance, daily technical operation, and support for the software
      provided to their clients. SaaS is a model of software delivery rather
      than a market segment; software can be delivered using this method to any
      market segment including home consumers, small businesses, as well as
      medium and large businesses.
 l
              We
      will focus on using this method to deliver software to SMBs in China,
      especially in SCM, CRM, B2C store, and POS for mini
  store.





Given the
current macroeconomic pressures businesses are facing, the minimum upfront costs
of our SaaS offering provide an ideal solution for retail customers looking to
utilize eFuture’s services.





SCM
SaaS





We
co-developed a SCM SaaS service with IBM Research Lab and IBM Global Service
team in October of 2007. We control 51% of the ownership in Beijing Fuji
Biaoshang Information Technology Inc. (“bFuture”) by VIE.





In March
2008, eFuture and IBM entered into a strategic partnership to launch this SaaS
platform (bFuture, www.bfuture.com.cn) for the retail distribution industry in
China. Wangfujing Department Store Group, one of the largest department stores
in China, became the first to use this online SCM platform. Thus far, this
initiative has brought 4,000 of Wangfujing Group’s 15,000 suppliers onto the
platform, allowing them to exchange business information, arrange payments
online and access purchase orders, returns, payment status, inventory levels and
analysis of sales data. In addition, two new retailers have deployed this
software package as well.





SaaS
B2C Store





In
addition, we deployed our SaaS B2C stores, a web-based store for retailers and a
new element of our SaaS strategy, to five department stores.  While
still in its infancy, we believe this service has strong long-term growth
potential. As a result, at the end of 2008, our bFuture SaaS-B2C database
currently holds over 70,000 items and receives over 300 orders each day, with
over 2,000 suppliers offering merchandise through these online
stores.





In 2009,
we plan to roll out our SCM and B2C eShopping SaaS service based on our over
1,000 clients.  We hope to expand our SaaS customer base by bundling
the service with our POS-ERP software, and we expect to move our current install
base of 1,000 retailers over to the platform.  The service is free for
retailers and will allow customers to efficiently exchange a full range of data
with their suppliers that are within the network.





T+1
SCF Service (www.bFuture.com.cn)





In June,
2009, we announced the successful launch of a pilot T+1 SCF program through our
subsidiary bFuture.  The goal of this innovative program is to shorten
the payment cycle between retailers and their small- to medium-sized suppliers
by providing short term loans through participating banks to retailers with good
credit.  With the loans, the retailers will be able to shorten the
accounts payable cycle to their suppliers by the following day after the
transaction, hence the moniker “T+1 SCF” service.


19





bFuture
will provide software and service for retailer and their small-to-medium-sized
suppliers to execute the program with banks, and charge software and service fee
on the program implementation.





This
service is a perfect complement to bFuture’s existing suite of SaaS services
geared towards facilitating the flow of goods and services in a cost and time
efficient manner.





SALES
AND MARKETING





In 2008,
eFuture classified its software clients into seven categories in order to better
service the various markets and to enhance customer satisfaction.  The
new major categories are as follows:





l
            Department
      Store and Shopping Mall


l
            Grocery
      and Supermarket


l
            Specialty
      Retail


l
            Fast-Moving
      Consumer Goods


l
            Logistics


l
            Small-to-Medium
      Business


l
            Key
      Accounts





Marketing
Initiatives





To
further leverage the success of our ongoing marketing initiative in mega cities
and tier-one cities and our strategy to become the partner of choice for global
companies in China, we have invested approximately RMB7.5 million in a new
marketing initiative plan.  The aim of the plan is to expand our
geographic coverage by deepening our penetration in China’s second and third
tier cities, while providing seamless support for our global and top accounts as
we look to expand into these regions in China.





As part
of the plan, we established a new specialized marketing team with approximately
50 staff distributed across China in order to bolster sales in all the key
markets in China. This group has been dedicated to further speed up the sales
cycle from pre-pipeline to pipeline to order, with an aim to dramatically
increase eFuture’s market share in China’s retail and consumer goods
industries.





Furthermore,
we recently announced the appointment of a new Chief Marketing Officer, Mr.
James Mu, who brings over twenty years of experience in the retail and consumer
goods industries.  Mr. Mu will be responsible for overall marketing
strategy and brand building initiatives.  In addition, he will be in
charge of the re-organization and integration of our marketing and promotional
materials and tools, with the goal of streamlining and strengthening our
marketing initiatives.





Finally,
we have established dedicated accounts sales teams with extensive sector
experience within each of eFuture’s clients categories to provide specialized
support in generating new business for each industry that the Company
services.


20


Geographical
Coverage





To date,
we have provided our products and services to businesses located throughout
China, as indicated on the map below:










Our
Ecosystem





eFuture
partners with leading global companies like IBM, Oracle, Microsoft and JDA to
co-develop software and implement partners’ solutions locally.





We are
one of IBM's Premier Business Partners in Asia-Pacific, and our bFuture SaaS
platform was co-developed with IBM and runs on IBM hardware and
middleware.





As of the
date of this annual report, we have entered into the following agreements with
larger organizations to obtain business opportunities:





l
            In
      2004, we entered into a Memorandum of Understanding with IBM China Company
      Limited whereby we agreed to collaborate with IBM China on the development
      of a business proved retail solution proof of concept. Upon the
      development of a proof of concept, we will negotiate with IBM China to
      determine an acceptable agreement relating to such
      development.


l
            In
      2005, we entered into an ISV Advantage Agreement with IBM Technology
      Engineering (Shanghai) Co., Ltd. pursuant to which IBM agreed to provide
      us with technical assistance related to our developments based upon IBM
      middleware. In connection with this relationship, IBM Technology
      Engineering agreed to Market our business affiliation into
      IBM.


l
            In
      2005, we began collaborating with IBM China Research Lab with the goal of
      combining IBM’s integrated infrastructure and platforms with eFuture’s
      expertise and best practices in SCM software and
  service.


l
            In
      2007, IBM awarded us its Solution Developer Partnership Award - Asian
      Pacific Region. We have partnered with IBM to provide customer management
      systems and integrated retail supply chain software systems throughout
      China.


21


l
            In
      2007, we entered into a Value Added Systems Integrator (“VASI”) Agreement
      with JDA® Software Group, Inc. (NASDAQ: JDAS) pursuant to which we will
      aim to integrate people, processes and technology to provide local
      retailers with proven, robust solutions at an affordable
      price.


l
            In
      2007, we entered into an Independent Software Vendor Agreement with
      Motorola (China) Electronics Ltd., a subsidiary of Motorola, Inc. (NYSE:
      MOT) pursuant to which we will aim to integrate people, processes and
      technology to provide local retailers with proven, robust mobile solutions
      at an affordable price.


l
            In
      2007, we entered into an Independent Software Vendor Agreement with
      Samsung Network China, Inc. pursuant to which we will aim to integrate
      people, processes and technology to provide local retailers with proven,
      robust mobile point of sales solutions at an affordable
    price.


l
            In
      2008, we expanded our collaboration with IBM to launch a SaaS solution for
      the retail distribution industry in China. By combining IBM’s integrated
      infrastructure and platforms with our expertise and best practices in SCM
      software and service, we are confident that our partnership will allow us
      to offer first-rate solutions and services for upscale retailers in
      China’s consumer goods and retail
industry.





Our
Key Clients





We
provide software solutions and service to all participants in China’s front-end
supply chain market from factory to consumer. These customers include
manufacturers, distributors, wholesalers, logistics companies and retailers
throughout China.





We
currently serve over 1,000 retailers and over 5,000 suppliers and manufacturers
operating in China, including 34 of the top 100 retailers and 15 Fortune 500
companies that do business in China including Procter & Gamble,
Kimberly-Clark, the Chang’an Motors and Ford Motors joint venture,
B&Q-Kingfisher China, GUCCI China, L’oreal China, JUSCO Guangzhou China,
PARKSON China, SOGO China and Mickey’s Space stores (Disney franchises). Leading
local companies include China Resources Vangard, BELLE, Shanghai Lianhua,
Nanjing Suning, Wuhan Zhongbai, Wuhan Wushang Group, Hubei Bubugao, Fujian
Yonghui and China Duty-Free Stores.




Currently,
our software solutions are utilized:





l
            in
      all provinces in China except Taiwan and
Macau;


l
            in
      more than 200 cities;


l
            by
      more than 6,000 clients, including over 1,000 retailers who use over
      900,000 suppliers, and over 5,000 suppliers which include distributors and
      manufacturers;


l
            by
      more than 50 companies listed on public markets in Shanghai, Shenzhen,
      Hong Kong or Singapore;


l
            by
      over 10 foreign-owned enterprises;


l
            by
      more than 12,000 multi-format stores at more than 130,000 retailing
      points-of-sale;


l
            by
      over 34 of the top 100 retailers and 21 of the 60 largest retailers in
      China;


l
            at
      more than 5,000 distribution nodes.





Our
Competitive Landscape





A few of
our existing competitors, as well as a number of potential new competitors, have
significantly greater financial, technical, marketing and other resources than
we do, which could provide them with a significant competitive advantage over
us. In addition, we could face competition from large, multi-industry technology
companies that have historically not offered an enterprise solution set to the
Chinese supply chain market. Further, the enterprise software market is
consolidating, and this may result in larger, new competitors with greater
financial, technical and marketing resources than we possess. Such a
consolidation trend could negatively impact our business. We cannot guarantee
that we will be able to compete successfully against our current or future
competitors in the SCM software and service industry, or that competition will
not have a material adverse effect on our business, operating results and
financial condition.


22


The
front-end supply chain market is segmented into multiple tiers and we have a
leading market share in China’s front-end SCM market in retail and consumer
goods industries.





Tier 1 Market. We consider
the Tier 1 Market to include global accounts and the top local 30 retailers
operating in China. Our global peers, such as SAP, Oracle, JDA, Manhattan
Associates, RedPrairie and Retalix are very active and aggressive in this
market. Our strategy is to provide “global solution and local service” by
collaborating with competitors, such as JDA, the world’s leading supply chain
solutions provider. We help them to roll out category management solutions in
China. Oracle has acquired many retail-related software companies, such as
Retek, Commerce360, and ProfitLogic. NEC China closed an acquisition of a local
peer in 2007.





Tier 2 Market. We consider
the Tier 2 Market to include the top 100 retailers and top 100 regional
retailers in China outside the Tier 1 Market. We are very competitive in this
market. We won 34 clients among China’s top 100 retailers. We plan to increase
our earning power in this market by continuing to streamline our infrastructure,
increase our efficiency in R&D investment, and improve employee
productivity, while reducing our operating expenses.





Tier 3 Market and Others.We
consider the Tier 3 Market to be all customers outside the Tier 2 Market. Our
peers are local, and include over 150 ISVs, companies which deliver our
solutions to small to medium clients. These ISVs are very competitive in one
area or one segment of the market, such as drugstores or the fashion industry.
There is increasing pricing pressure in this tier. We will focus on building a
market presence in the Tier 3 Market by developing robust solutions and engaging
in strategic acquisitions as appropriate opportunities arise.





Competition in the Software
Consulting Industry.To date, our consulting services have been rendered
solely in connection with the implementation of our software products.
Consequently, we have not experienced a significant amount of competition for
these services. We expect, however, to offer stand-alone consulting services
unrelated to our software products in the future. Our competitors in the SCM
software and service industry are also our primary competitors in the software
consulting industry. Many of our competitors possess significantly greater
financial, technical, marketing and other resources than we do. Our larger
competitors, particularly SAP AG and Oracle may be in a financial position to
acquire smaller software consulting companies in China. Such consolidated
entities may possess significant competitive advantages over us. We cannot
guarantee that we will be able to compete successfully against our current or
future competitors in the software consulting industry.





Our
Research & Development





In 2008,
we added to our extensive product portfolio by launching eFuture ONE Congou SOA,
eFuture ONE WMS (Warehouse Management System Solution) and eFuture ONE CRM. We
continued to develop a next-generation Service-Oriented Architecture (“SOA”)
retail information system that employs a three layer web-based structure with
state-of-the-art information technology to assist our retail customers with
operations expanding nationally or world-wide. Our program includes advanced
modules such as merchandise planning, revenue management and space and category
management.





These
solutions further enhanced our open technology platform, characterized by
leading technological innovation, first to market next generation SOA
architecture, industry-leading functionality and seamless integration with our
existing product.





In
addition, eFuture and IBM China Research Lab also joint-developed eFuture ONE
SCM SaaS Platform based on IBM’s Blue Cloud computing architecture.





Merger
& Acquisition Activities





We are
pursuing M&A opportunities aimed at diversifying our product and service
offering and expanding our regional coverage and market share in three strategic
areas:





l
            Regional
      ISV companies that are complementary to our Company in South, East, and
      North China.


23


l
            ISVs
      that are complementary to our solutions such as those who focus on apparel
      and footwear, auto, consumer electronics, mobile, drugstores and
      fast-moving consumer goods
solutions.


l
            ISVs
      that are complementary to our focus on top tier global clients and top-100
      Chinese clients or lower tier, small-to-medium
  clients.





During
2008, two strategic acquisitions boosted our service fee income, software and
hardware sales. These acquisitions allowed us to grow our market share while
leveraging our core competency in delivering one-stop front-end SCM software and
service to streamline operations and maximize our clients’ competitive
advantages.





l
            In
      April 2008, we acquiredProadvancer Inc.,
      a leading provider of logistics software and services in China and Asia’s
      retail and consumer goods market. We expect that this acquisition will
      provide us with market leadership and significant share gains in China’s
      logistics market, allowing us to form a total front-end SCM
      solution.





We also
completed an acquisition of a majority interest in a company we believe will
expand our B2B offerings:





l
            In
      May 2008, we acquired an additional 31% ownership interest in Beijing
      Wangku Hutong Information Technology Co., Ltd. (www.99114.com.cn) by VIE
      which allows us to deploy our SaaS model and offer an innovative B2B
      platform that connects small to medium-sized suppliers with retailers. We
      are especially optimistic about the online marketing opportunity that this
      presents for both retailers and
suppliers.





Together,
the two companies contributed 17.4% of our revenue in 2008.





We intend
to enter into additional acquisitions in order to solidify our leading position
in China’s front-end supply chain market for the retail and consumer goods
industries. We plan to solidify our core business, develop new business
opportunities through our SaaS model and explore additional strategic
acquisitions.





In
connection with our M&A transactions and in accordance with our long-term
vision for our company, we have sought to integrate our various employees into
one team and to involve them in our corporate culture.





We remain
committed to maintaining a competitive cost base and continue to review all
areas of business to enhance cost and operational efficiency.





Regulation





Proprietary
Rights





Our
success and competitive position depend in part upon our ability to develop and
maintain the proprietary aspect of our technology. The reverse engineering,
unauthorized copying, or other misappropriation of our technology could enable
third parties to benefit from our technology without paying for it. We rely on a
combination of trademark, trade secret, copyright law and contractual
restrictions to protect the proprietary aspects of our technology. We seek to
protect the source code to our software, documentation and other written
materials under trade secret and copyright laws. While we actively take steps to
protect our proprietary rights, such steps may not be adequate to prevent the
infringement or misappropriation of our intellectual property. This is
particularly the case in China where the laws may not protect our proprietary
rights as fully as in the United States.




We
license our software products under signed license agreements that impose
restrictions on the licensee’s ability to utilize the software and do not permit
the re-sale, sublicense or other transfer of the software. Finally, we seek to
avoid disclosure of our intellectual property by requiring employees and
independent consultants to execute confidentiality agreements with us and by
restricting access to our source code.





Although
we develop our own software products, each is based upon middleware developed by
third parties, including IBM and Oracle. We integrate this technology, licensed
by our customers from third parties in our software products. If our customers
are unable to continue to license any of this third party software, or if the
third party licensors do not adequately maintain or update their products, we
would face delays in the releases of our software until equivalent technology
can be identified, licensed or developed, and integrated into our software
products. These delays, if they occur, could harm our business, operating
results and financial condition.


24





There has
been a substantial amount of litigation in the software and internet industries
regarding intellectual property rights. It is possible that in the future third
parties may claim that our current or potential future software solutions
infringe their intellectual property. We expect that software product developers
and providers of e-commerce products will increasingly be subject to
infringement claims as the number of products and competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. In addition, we may find it necessary to initiate claims or litigation
against third parties for infringement of our proprietary rights or to protect
our trade secrets. Although we may disclaim certain intellectual property
representations to our customers, these disclaimers may not be sufficient to
fully protect us against such claims. We may be more vulnerable to patent claims
since we do not have any issued patents that we can assert defensively against a
patent infringement claim. Any claims, with or without merit, could be time
consuming, result in costly litigation, cause product shipment delays or require
us to enter into royalty or license agreements. Royalty or licensing agreements,
if required, may not be available on terms acceptable to us or at all, which
could have a material adverse effect on our business, operating results and
financial condition.





Our
standard software license agreements contain an infringement indemnity clause
under which we agree to indemnify and hold harmless our customers and business
partners against liability and damages arising from claims of various copyright
or other intellectual property infringement by our products. We have never lost
an infringement claim and our costs to defend such lawsuits have been
insignificant. Although it is possible that in the future third parties may
claim that our current or potential future software solutions infringe on their
intellectual property, we do not currently expect a significant impact on our
business, operating results, or financial condition.




China’s
Intellectual Property Rights Enforcement System




In 1998,
China established the State Intellectual Property Office (“SIPO”) to coordinate
China’s intellectual property enforcement efforts. SIPO is responsible for
granting and enforcing patents, as well as coordinating intellectual property
rights related to copyrights and trademarks. Protection of intellectual property
in China follows a two-track system. The first track is administrative in
nature, whereby a holder of intellectual property rights files a complaint at a
local administrative office. Determining which intellectual property agency can
be confusing, as jurisdiction of intellectual property matters is diffused
throughout a number of government agencies and offices, each of which is
typically responsible for the protection afforded by one statute or one specific
area of intellectual property-related law. The second track is a judicial track,
whereby complaints are filed through the Chinese court system. Since 1993, China
has maintained various intellectual property tribunals. The total volume of
intellectual property related litigation, however, remains small.




Although
there are differences in intellectual property rights between the United States
and China, the most significant difference to our company is the inexperience of
China in connection with the development and protection of intellectual property
rights. Similar to the United States, China has chosen to protect software under
copyright law rather than trade secret, patent or contract law. As such, we will
attempt to protect our most significant asset (software) pursuant to Chinese
laws that have only recently been adopted. Unlike the United States, which has
lengthy case law related to the interpretation and applicability of intellectual
property law, China is currently in the process of developing such
interpretations.




Regulation
on Software Products




On
October 27, 2000, the Ministry of Information Industry issued the
Administrative Measures on Software Products (the “Software Measures”) to
strengthen the regulation of software products and to encourage the development
of the Chinese software industry. Under the Software Measures, a software
developer must have all software products imported into or sold in China tested
by a testing organization approved by the Ministry of Information Industry. The
software products must be registered with the Ministry of Information Industry
or with its provincial branch. The sale of unregistered software products in
China is forbidden. Software products can be registered for five years, and the
registration is renewable upon expiration.


25




Regulation
of Intellectual Property Rights




China has
adopted legislation governing intellectual property rights, including trademarks
and copyrights. China is a signatory to the main international conventions on
intellectual property rights and became a member of the Agreement on Trade
Related Aspects of Intellectual Property Rights upon its accession to the WTO in
December 2001.




Copyright. China adopted its
first copyright law in 1990. The National People’s Congress amended the
Copyright Law in 2001 to widen the scope of works and rights that are eligible
for copyright protection. The amended Copyright Law extends copyright protection
to software products, among others. In addition, there is a voluntary
registration system administered by the China Copyright Protection Center.
Unlike patent and trademark registration, copyrighted works do not require
registration for protection. Protection is granted to individuals from countries
belonging to the international copyright conventions or bilateral agreements of
which China is a member.




Trademark. The Chinese
Trademark Law, adopted in 1982 and revised in 1993 and 2001, protects registered
trademarks. The Trademark Office under the Chinese State Administration for
Industry and Commerce handles trademark registrations and grants a term of ten
years to registered trademarks. Trademark license agreements must be filed with
the Trademark Office for record. China has a “first-to-register” system that
requires no evidence of prior use or ownership. We have registered a number of
our product names with the Trademark Office.





Sales
Organization Compensation




We employ
a sales staff designed to effectively market our suite of software solutions
throughout China. Our ability to continue to grow our business is directly tied
to the performance of our sales force. We structure our sales force compensation
on a commission basis. Theoretically, each of our salespersons can earn more
than each of our executive officers, and in recent years, several have achieved
such distinction.





C.
            Organizational
      structure





The
following is a list of our subsidiaries and consolidated affiliated entities
established since our inception, all of which were organized in
China:





JoiningName
            
            the Company
            
            RelationshipeFuture
      (Beijing) Royalstone Information Technology Inc.
            
            April
      2000
            
            Wholly-owned subsidiaryBeijing
      Fuji Biaoshang Information Technology Co., Ltd.
            
            December
      2007
            
            Consolidated affiliated
      entity
              with
      51% ownershipBeijing
      Wangku Hutong Information Technology Co., Ltd.
            
            May
      2008
            
            Consolidated affiliated
      entity
              with
      51% ownership





D.           Property,
Plant and Equipment





Facilities





We
currently operate six facilities throughout China. Our headquarters are located
in Beijing. Our research and development operations are generally located in
Guangzhou. We also maintain customer support and programming operations in Wuhan
and Guangzhou.


26




Office
                    
                    Address
                    
                    Rental Term
                    
                    SpaceBeijing
                    
                    8/F
      Topnew Tower
                      15
      Guanghua Road
                      Chaoyang
      Distinct
                      Beijing
      100026, PRC
                    
                    Expires
      April 24, 2012
                      Commenced
      on April 25, 2009
                    
                    1,496.77
      sq. metersShanghai
                    
                    Floor
      19E, F, G
                      Shentong
      Information Plaza
                      55
      West Road of Huaihai Street
                      Shanghai,
      Xu Jiahu District, PRC
                    
                    Expires
      March 19, 2010
                    
                    757.47
      sq. metersNanjing
                    
                    Floor
      3,49 Jiangsu Software Park,169 Road of Longpan zhong street,
                      Nanjing,
      Jiangsu province, PRC
                    
                    Expires
      January 1, 2010
                    
                    283
      sq. metersShijiazhuang
                    
                    R2108,Floor
      21
                      Changan
      Plaza
                      289
      East Road of Zhongshan Street
                      Shijiazhuang,
      Hebei province, PRC
                    
                    Expires
      January 1, 2010
                    
                    400
      sq. metersGuangzhou
                    
                    Rear
      Building
                      Huicheng
      Plaza
                      130
      Zhongshan Street
                      Guangzhou,
      Guangdong province, PRC
                    
                    Expires
      March 5, 2010
                    
                    1,730
      sq. metersWuhan
                    
                    Floors
      2 and 3
                      Office
      Building of Machine Bureau
                      Fujiapo,
      Wuchang District
                      Wuhan,
      Hubei Province, PRC
                    
                    Expires
      June 30, 2010
                    
                    846
      sq. meters





We have
no plans to construct new facilities or improve old ones.





Item
4A.                   Unresolved
Staff Comments




Not
applicable.




Item
5.                      Operating
and Financial Review and Prospects





In
2008, we engaged Grant Thornton, the Hong Kong member firm of Grant Thornton
International, as our new independent registered public accountants.  
During the annual audit of 2008, we identified errors that required correction
in certain line items in our financial statements at and for the year ended
December 31, 2007.  On October 11, 2009, our management, in
consultation with our Audit Committee, concluded that our previously filed
financial statements as of December 31, 2007 should be restated and should no
longer be relied upon, and this Annual Report contains our audited financial
statements at and for the years ended December 31, 2008 and 2007 and data
derived therefrom. Data for the fiscal year ended 2007 have been revised in this
report.





The
following discussion and analysis should be read in conjunction with our audited
historical consolidated financial statements, together with the respective notes
thereto, included elsewhere in this prospectus. Our audited historical
consolidated financial statements have been prepared in accordance with US GAAP.
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. See “Introduction — Forward-Looking
Statements.” In evaluating our business, you should carefully consider the
information provided under Item 3.D, “Risk Factors.” We caution you that
our businesses and financial performance are subject to substantial risks and
uncertainties. See “Risk Factors — We are currently experiencing a
global economic crisis, which could materially and adversely affect our
business, financial condition and results of operations.”





A.    
Operating Results





Overview





We are a
leading provider of software and services in China’s rapidly growing retail and
consumer goods industries. eFuture provides integrated software and services to
manufacturers, distributors, wholesalers, logistics companies and retailers in
China’s front-end supply chain (from factory to consumer) market, especially in
the retail and fast moving consumer goods (“FMCG”) industries.


27


Our core
business is to provide front-end SCM software solutions and value-added services
to companies in the retail and consumer goods industries to help them reduce
costs and increase efficiency, while leveraging our core business’ resources and
exploring new opportunities in eService.  We believe our bundling
strategy will allow our customers to benefit from synergies in our various
product offerings in retail and consumer goods industries





Revenues





Our
revenues increased from ¥47,843,530 in 2006 to ¥84,920,993 in 2007 and to
¥139,863,502 in 2008. These significant increases reflect organic growth driven
by success in expanding our product and services lines and our increasing market
penetration, both in China’s largest cities and expansion into second and third
tier cities.  The increase also reflects our acquisitions of Nanjing
Tangcheng Network Technology Development Corporation, Crownhead, Crownhead’s
subsidiary Guangzhou Royalstone and a majority stake in Beijing Fuji Biaoshang
Information Technology Inc. in 2007; Beijing Wangku Hutong Information
Technology Co., Ltd. in 2007 and 2008 and Proadvancer Systems Inc. in
2008.





Our
ability to increase our revenues depends in large part on our ability to
(i) increase the market penetration of our existing products and services
and (ii) successfully identify, develop, introduce and commercialize, in a
timely and cost-effective manner, new and upgraded products. We generally choose
to devote resources to product development efforts that we believe are
commercially feasible, can generate significant revenues and margins and can be
introduced into the market in the near term.





In any
period, several factors will impact our net revenues, including:




·
            global
      economic conditions;


·
            the
      level of acceptance of our products among our existing and potential
      customers;


·
            our
      ability to attract and retain key customers and our sales
      force;


·
            new
      product introductions by us and our
competitors;


·
            our
      ability to price our products at levels that provide favorable
      margins;


·
            exchange
      rate fluctuations;


·
            the
      availability of credit for our
customers;





Cost of
Revenues





Cost of
our revenues includes wages, materials, handling charges, and other expenses
associated with the development of software, sale of hardware, and technical
support services. We expect cost of revenue to grow as our revenues grow. As
noted above, development costs will increase in the future, and we expect
revenues to increase at the same time. It is possible that we could incur
development costs with little revenue recognition, but based upon our past
history, we expect our revenues to grow.





Because
our cost of revenues will vary according to the software developed, hardware and
the technical support services provided, the mix of products and services
provided is the most significant factor in determining our cost of revenues as a
percentage of revenues, amortization of acquired technologies and software cost
also affect the cost of revenues.





Operating
Expenses





Our
operating expenses consist of research and development expenses, general and
administrative expenses and selling and distribution expenses.


28


Summary
of 2008 Developments





In 2008,
we solidified our core enterprise software business, grew value-added service
revenues, and strengthened our eService offerings and capabilities. Our
underlying operations performed well in the face of the world economic
crisis.  We believe this performance reflects our continued execution,
focused growth strategy consisting of both organic and acquisitive initiatives,
affordable and flexible suite of solutions, a large and diversified install base
and the continued resilience of China’s retail and consumer goods
industry.





As part
of our organic growth strategy, our organization of our clients into seven major
categories began yielding positive results in 2008, helping to streamline our
operations and allowing us to leverage our capabilities to better serve clients
and accelerate growth. The result has been revenue increases across all
categories.  Our strengthening relationships with existing customers
resulted in an increase of 117% in licensing revenues from current
clients.





We also
solidified our core enterprise software business and forged into new frontiers
of eService, including our B2B service and SaaS service for SCM and B2C
eShopping.  Our SaaS strategy remains a key near- to long-term growth
driver, and this service began to make a positive contribution in 2008,
representing 7.3% of our total full year revenues.





On the
M&A front, our acquisition of Proadvancer in April 2008 has provided us with
market leadership and significant share gains in China’s logistics market,
allowing us to form a total front-end SCM solution. Additionally, we increased
our stake in Wangku from 20% in 2007 to 51% in 2008. Together, these deals
comprised 17.4% of our revenue in 2008.  Going forward, we will
continue to seek further growth opportunities through mergers and acquisitions
to diversify our product and service offerings.


29





Results
of Operations





The
following table presents the results of our operations for the periods
indicated. Our historical reporting results are not necessarily indicative of
the results to be expected for any future period.





Chinese
      Yuan (Renminbi)
                                                                                                                  
                                                                                                                  
                                                                                                                  U.S. DollarsFor theYear EndedFor
      the Years Ended December 31,
                                                                                                                  
                                                                                                                  
                                                                                                                  December 31,2006
                                                                                                                  
                                                                                                                  
                                                                                                                  2007
                                                                                                                  
                                                                                                                  
                                                                                                                  2008
                                                                                                                  
                                                                                                                  
                                                                                                                  2008(Restated)RevenuesSoftware
      sales
                                                                                                                  
                                                                                                                  ¥
                                                                                                                  29,832,720
                                                                                                                  
                                                                                                                  
                                                                                                                  ¥
                                                                                                                  42,076,411
                                                                                                                  
                                                                                                                  
                                                                                                                  ¥
                                                                                                                  66,215,769
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  9,705,499Hardware
      sales
                                                                                                                  
                                                                                                                  
                                                                                                                  11,403,473
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  16,198,402
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  26,655,967
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  3,907,067Service
      fee income
                                                                                                                  
                                                                                                                  
                                                                                                                  6,607,337
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  26,646,180
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  46,991,766
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  6,887,764Total
      Revenues
                                                                                                                  
                                                                                                                  
                                                                                                                  47,843,530
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  84,920,993
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  139,863,502
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  20,500,330Cost
      of revenuesCost
      of software
                                                                                                                  
                                                                                                                  
                                                                                                                  7,665,866
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  15,648,282
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  22,928,605
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  3,360,733Cost
      of hardware
                                                                                                                  
                                                                                                                  
                                                                                                                  10,548,649
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  12,601,230
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  21,989,087
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  3,223,025Cost
      of service fee income
                                                                                                                  
                                                                                                                  
                                                                                                                  1,887,676
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  6,965,367
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  20,247,922
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  2,967,816Amortization
      of acquired technology
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  8,231,375
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  13,308,030
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  1,950,609Amortization
      of software costs
                                                                                                                  
                                                                                                                  
                                                                                                                  2,727,198
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  2,889,118
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  3,632,744
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  532,465Total
      Cost of Revenue
                                                                                                                  
                                                                                                                  
                                                                                                                  22,829,389
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  46,335,372
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  82,106,388
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  12,034,648Gross
      Profit
                                                                                                                  
                                                                                                                  
                                                                                                                  25,014,141
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  38,585,621
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  57,757,114
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  8,465,682Operating
      ExpensesResearch
      and development
                                                                                                                  
                                                                                                                  
                                                                                                                  527,219
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  816,479
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  6,512,776
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  954,602General
      and administrative
                                                                                                                  
                                                                                                                  
                                                                                                                  7,298,980
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  19,192,286
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  40,488,964
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  5,934,623Selling
      and distribution expenses
                                                                                                                  
                                                                                                                  
                                                                                                                  9,210,975
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  12,014,601
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  20,792,618
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  3,047,654Total
      Operating Expenses
                                                                                                                  
                                                                                                                  
                                                                                                                  17,037,174
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  32,023,366
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  67,794,358
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  9,936,879Profit/(loss)
      from operations
                                                                                                                  
                                                                                                                  
                                                                                                                  7,976,967
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  6,562,255
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  (10,037,244
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  (1,471,197
                                                                                                                  )Interest
      income
                                                                                                                  
                                                                                                                  
                                                                                                                  141,230
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  3,533,326
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  1,424,029
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  208,725Interest
      expense
                                                                                                                  
                                                                                                                  
                                                                                                                  (13,471
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  (2,813,489
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  (1,246,780
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  (182,745
                                                                                                                  )Interest
      expenses - amortization of discount on notespayable
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  (22,415
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  (33,212
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  (4,868
                                                                                                                  )Interest
      expenses - amortization of deferred loan costs
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  (2,114,685
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  (978,204
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  (143,379
                                                                                                                  )Income/(loss)
      on investments
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  985,085
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  (3,552,902
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  (520,763
                                                                                                                  )Gain
      on derivatives
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  10,324,874
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  33,122,465
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  4,854,887Loss
      on extinguishment of convertible notes
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  (39,504,662
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  (22,529,233
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  (3,302,196
                                                                                                                  )Foreign
      currency exchange gain
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  544,173
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  368,127
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  53,958Profit/(loss)
      before tax
                                                                                                                  
                                                                                                                  
                                                                                                                  8,104,726
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  (22,505,538
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  (3,462,954
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  (507,578
                                                                                                                  )Income
      tax expense/(benefit)
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  946,704
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  (810,744
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  (118,834
                                                                                                                  )Minority
      interest in profit/(loss) of consolidatedsubsidiary
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  32,520
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  (204,414
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  (29,962
                                                                                                                  )Net
      Income/(loss)
                                                                                                                  
                                                                                                                  ¥
                                                                                                                  8,104,726
                                                                                                                  
                                                                                                                  
                                                                                                                  ¥
                                                                                                                  (21,526,314
                                                                                                                  )
                                                                                                                  
                                                                                                                  ¥
                                                                                                                  (4,478,112
                                                                                                                  )
                                                                                                                  
                                                                                                                  $
                                                                                                                  (656,374
                                                                                                                  )Earnings/(loss)
      per ordinary shareBasic
                                                                                                                  
                                                                                                                  ¥
                                                                                                                  4.80
                                                                                                                  
                                                                                                                  
                                                                                                                  ¥
                                                                                                                  (8.01
                                                                                                                  )
                                                                                                                  
                                                                                                                  ¥
                                                                                                                  (1.39
                                                                                                                  )
                                                                                                                  
                                                                                                                  $
                                                                                                                  (0.20
                                                                                                                  )Diluted
                                                                                                                  
                                                                                                                  ¥
                                                                                                                  4.43
                                                                                                                  
                                                                                                                  
                                                                                                                  ¥
                                                                                                                  (8.01
                                                                                                                  )
                                                                                                                  
                                                                                                                  ¥
                                                                                                                  (1.39
                                                                                                                  )
                                                                                                                  
                                                                                                                  $
                                                                                                                  (0.20
                                                                                                                  )Basic
      Weighted-average Shares Outstanding
                                                                                                                  
                                                                                                                  
                                                                                                                  1,689,434
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  2,687,380
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  3,214,466
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  3,214,466Fully-Diluted
      Weighted-average Shares Outstanding
                                                                                                                  
                                                                                                                  
                                                                                                                  1,831,258
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  2,687,380
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  3,214,466
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  3,214,466


30





The
following table sets forth certain selected financial information expressed as a
percentage of total revenues for the periods indicated and cost of revenues and
product development expenses expressed as a percentage of the related revenues:
In addition, the table sets forth a comparison of selected financial
information, expressed as a percentage change between 2008 and
2007.





RMBPercentage
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      Percentage
                                                      
                                                      
                                                      Changeof FY 2007
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      of FY 2008
                                                      
                                                      
                                                      FY 2007 v FYFY 2007
                                                      
                                                      
                                                      Revenues
                                                      
                                                      
                                                      FY 2008
                                                      
                                                      
                                                      Revenues
                                                      
                                                      
                                                      2008
                                                      
                                                      
                                                      % Change(Restated)RevenuesSoftware
      sales
                                                      
                                                      
                                                      42,076,411
                                                      
                                                      
                                                      
                                                      49.5
                                                      %
                                                      
                                                      
                                                      66,215,769
                                                      
                                                      
                                                      
                                                      47.3
                                                      %
                                                      
                                                      
                                                      24,139,358
                                                      
                                                      
                                                      
                                                      57.4
                                                      %Hardware
      sales
                                                      
                                                      
                                                      16,198,402
                                                      
                                                      
                                                      
                                                      19.1
                                                      %
                                                      
                                                      
                                                      26,655,967
                                                      
                                                      
                                                      
                                                      19.1
                                                      %
                                                      
                                                      
                                                      10,457,565
                                                      
                                                      
                                                      
                                                      64.6
                                                      %Service
      fee income
                                                      
                                                      
                                                      26,646,180
                                                      
                                                      
                                                      
                                                      31.4
                                                      %
                                                      
                                                      
                                                      46,991,766
                                                      
                                                      
                                                      
                                                      33.6
                                                      %
                                                      
                                                      
                                                      20,345,586
                                                      
                                                      
                                                      
                                                      76.4
                                                      %Total
      Revenues
                                                      
                                                      
                                                      84,920,993
                                                      
                                                      
                                                      
                                                      100.0
                                                      %
                                                      
                                                      
                                                      139,863,502
                                                      
                                                      
                                                      
                                                      100.0
                                                      %
                                                      
                                                      
                                                      54,942,509
                                                      
                                                      
                                                      
                                                      64.7
                                                      %Cost
      of RevenuesCost
      of software
                                                      
                                                      
                                                      15,648,282
                                                      
                                                      
                                                      
                                                      18.4
                                                      %
                                                      
                                                      
                                                      22,928,605
                                                      
                                                      
                                                      
                                                      16.4
                                                      %
                                                      
                                                      
                                                      7,280,323
                                                      
                                                      
                                                      
                                                      46.5
                                                      %Cost
      of hardware
                                                      
                                                      
                                                      12,601,230
                                                      
                                                      
                                                      
                                                      14.8
                                                      %
                                                      
                                                      
                                                      21,989,087
                                                      
                                                      
                                                      
                                                      15.7
                                                      %
                                                      
                                                      
                                                      9,387,857
                                                      
                                                      
                                                      
                                                      74.5
                                                      %Cost
      of service fee income
                                                      
                                                      
                                                      6,965,367
                                                      
                                                      
                                                      
                                                      8.2
                                                      %
                                                      
                                                      
                                                      20,247,922
                                                      
                                                      
                                                      
                                                      14.5
                                                      %
                                                      
                                                      
                                                      13,282,555
                                                      
                                                      
                                                      
                                                      190.7
                                                      %Amortization
      of acquired technology
                                                      
                                                      
                                                      8,231,375
                                                      
                                                      
                                                      
                                                      9.7
                                                      %
                                                      
                                                      
                                                      13,308,030
                                                      
                                                      
                                                      
                                                      9.5
                                                      %
                                                      
                                                      
                                                      5,076,655
                                                      
                                                      
                                                      
                                                      61.7
                                                      %Amortization
      of software costs
                                                      
                                                      
                                                      2,889,118
                                                      
                                                      
                                                      
                                                      3.4
                                                      %
                                                      
                                                      
                                                      3,632,744
                                                      
                                                      
                                                      
                                                      2.6
                                                      %
                                                      
                                                      
                                                      743,626
                                                      
                                                      
                                                      
                                                      25.7
                                                      %Total
      Cost of Revenue
                                                      
                                                      
                                                      46,335,372
                                                      
                                                      
                                                      
                                                      54.6
                                                      %
                                                      
                                                      
                                                      82,106,388
                                                      
                                                      
                                                      
                                                      58.7
                                                      %
                                                      
                                                      
                                                      35,771,016
                                                      
                                                      
                                                      
                                                      77.2
                                                      %Gross
      Profit
                                                      
                                                      
                                                      38,585,621
                                                      
                                                      
                                                      
                                                      45.4
                                                      %
                                                      
                                                      
                                                      57,757,114
                                                      
                                                      
                                                      
                                                      41.3
                                                      %
                                                      
                                                      
                                                      19,171,492
                                                      
                                                      
                                                      
                                                      49.7
                                                      %Operating
      ExpensesResearch
      and development
                                                      
                                                      
                                                      816,479
                                                      
                                                      
                                                      
                                                      1.0
                                                      %
                                                      
                                                      
                                                      6,512,776
                                                      
                                                      
                                                      
                                                      4.7
                                                      %
                                                      
                                                      
                                                      5,696,297
                                                      
                                                      
                                                      
                                                      697.7
                                                      %General
      and administrative
                                                      
                                                      
                                                      19,192,286
                                                      
                                                      
                                                      
                                                      22.6
                                                      %
                                                      
                                                      
                                                      40,488,964
                                                      
                                                      
                                                      
                                                      28.9
                                                      %
                                                      
                                                      
                                                      21,296,678
                                                      
                                                      
                                                      
                                                      111.0
                                                      %Selling
      and distribution expenses
                                                      
                                                      
                                                      12,014,601
                                                      
                                                      
                                                      
                                                      14.1
                                                      %
                                                      
                                                      
                                                      20,792,618
                                                      
                                                      
                                                      
                                                      14.9
                                                      %
                                                      
                                                      
                                                      8,778,017
                                                      
                                                      
                                                      
                                                      73.1
                                                      %Total
      Operating Expenses
                                                      
                                                      
                                                      32,023,366
                                                      
                                                      
                                                      
                                                      37.7
                                                      %
                                                      
                                                      
                                                      67,794,358
                                                      
                                                      
                                                      
                                                      48.5
                                                      %
                                                      
                                                      
                                                      35,770,992
                                                      
                                                      
                                                      
                                                      111.7
                                                      %Profit/(Loss)
      from operations
                                                      
                                                      
                                                      6,562,255
                                                      
                                                      
                                                      
                                                      7.7
                                                      %
                                                      
                                                      
                                                      (10,037,244
                                                      )
                                                      
                                                      
                                                      7.2
                                                      %
                                                      
                                                      
                                                      (16,599,499
                                                      )
                                                      
                                                      
                                                      -253.0
                                                      %Interest
      income
                                                      
                                                      
                                                      3,533,326
                                                      
                                                      
                                                      
                                                      4.2
                                                      %
                                                      
                                                      
                                                      1,424,029
                                                      
                                                      
                                                      
                                                      1.0
                                                      %
                                                      
                                                      
                                                      (2,109,297
                                                      )
                                                      
                                                      
                                                      -59.7
                                                      %Interest
      expense
                                                      
                                                      
                                                      (2,813,489
                                                      )
                                                      
                                                      
                                                      3.3
                                                      %
                                                      
                                                      
                                                      (1,246,780
                                                      )
                                                      
                                                      
                                                      0.9
                                                      %
                                                      
                                                      
                                                      1,566,709
                                                      
                                                      
                                                      
                                                      -55.7
                                                      %Interest
      expenses-amortization of discount on notes payable
                                                      
                                                      
                                                      (22,415
                                                      )
                                                      
                                                      
                                                      0.0
                                                      %
                                                      
                                                      
                                                      (33,212
                                                      )
                                                      
                                                      
                                                      0.0
                                                      %
                                                      
                                                      
                                                      (10,797
                                                      )
                                                      
                                                      
                                                      48.2
                                                      %Interest
      expenses-amortization of loan costs
                                                      
                                                      
                                                      (2,114,685
                                                      )
                                                      
                                                      
                                                      2.5
                                                      %
                                                      
                                                      
                                                      (978,204
                                                      )
                                                      
                                                      
                                                      0.7
                                                      %
                                                      
                                                      
                                                      1,136,481
                                                      
                                                      
                                                      
                                                      -53.7
                                                      %Income
      (loss) on investments
                                                      
                                                      
                                                      985,085
                                                      
                                                      
                                                      
                                                      1.2
                                                      %
                                                      
                                                      
                                                      (3,552,902
                                                      )
                                                      
                                                      
                                                      2.5
                                                      %
                                                      
                                                      
                                                      (4,537,987
                                                      )
                                                      
                                                      
                                                      -460.7
                                                      %Gain
      on derivatives
                                                      
                                                      
                                                      10,324,874
                                                      
                                                      
                                                      
                                                      12.2
                                                      %
                                                      
                                                      
                                                      33,122,465
                                                      
                                                      
                                                      
                                                      -23.7
                                                      %
                                                      
                                                      
                                                      22,797,592
                                                      
                                                      
                                                      
                                                      220.8
                                                      %Loss
      on extinguishment of convertible notes
                                                      
                                                      
                                                      (39,504,662
                                                      )
                                                      
                                                      
                                                      -46.5
                                                      %
                                                      
                                                      
                                                      (22,529,233
                                                      )
                                                      
                                                      
                                                      16.1
                                                      %
                                                      
                                                      
                                                      16,975,429
                                                      
                                                      
                                                      
                                                      -43.0
                                                      %Foreign
      exchange gain
                                                      
                                                      
                                                      544,173
                                                      
                                                      
                                                      
                                                      -0.6
                                                      %
                                                      
                                                      
                                                      368,127
                                                      
                                                      
                                                      
                                                      0.3
                                                      %
                                                      
                                                      
                                                      (176,046
                                                      )
                                                      
                                                      
                                                      -32.4
                                                      %Minority
      interest in profit/(loss) of consolidated subsidiary
                                                      
                                                      
                                                      32,520
                                                      
                                                      
                                                      
                                                      0.0
                                                      %
                                                      
                                                      
                                                      (204,414
                                                      )
                                                      
                                                      
                                                      0.1
                                                      %
                                                      
                                                      
                                                      (236,934
                                                      )
                                                      
                                                      
                                                      -728.6
                                                      %Income
      tax expense/(benefit)
                                                      
                                                      
                                                      946,704
                                                      
                                                      
                                                      
                                                      1.1
                                                      %
                                                      
                                                      
                                                      (810,744
                                                      )
                                                      
                                                      
                                                      -0.6
                                                      %
                                                      
                                                      
                                                      (1,757,448
                                                      )
                                                      
                                                      
                                                      -185.6
                                                      %Net
      Income(loss)
                                                      
                                                      
                                                      (21,526,314
                                                      )
                                                      
                                                      
                                                      -25.3
                                                      %
                                                      
                                                      
                                                      (4,478,112
                                                      )
                                                      
                                                      
                                                      -3.2
                                                      %
                                                      
                                                      
                                                      17,048,202
                                                      
                                                      
                                                      
                                                      -79.2
                                                      %Earnings
      (loss) per ordinary shareBasic
                                                      
                                                      
                                                      (8.01
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (1.39
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      6.62
                                                      
                                                      
                                                      
                                                      -82.6
                                                      %Diluted
                                                      
                                                      
                                                      (8.01
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      (1.39
                                                      )
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      6.62
                                                      
                                                      
                                                      
                                                      -82.6
                                                      %





31




The
following table sets forth certain gross margin data expressed as a percentage
of software sales revenues, hardware revenues and services fee revenue, as
appropriate:





RMBGross Margin
                              
                              
                              
                              
                              
                              Grossfor FY 2007
                              
                              
                              
                              
                              
                              Margin forFY 2007
                              
                              
                              
                              
                              
                              FY 2008
                              
                              
                              FY 2008(Restated)RevenuesSoftware
      sales
                              
                              
                              42,076,411
                              
                              
                              
                              
                              
                              
                              66,215,769Hardware
      sales
                              
                              
                              16,198,402
                              
                              
                              
                              
                              
                              
                              26,655,967Service
      fee income
                              
                              
                              26,646,180
                              
                              
                              
                              
                              
                              
                              46,991,766Total
      Revenues
                              
                              
                              84,920,993
                              
                              
                              
                              
                              
                              
                              139,863,502Cost
      of RevenuesCost
      of software
                              
                              
                              15,648,282
                              
                              
                              
                              62.8
                              %
                              
                              
                              22,928,605
                              
                              
                              
                              65.4
                              %Cost
      of hardware
                              
                              
                              12,601,230
                              
                              
                              
                              22.2
                              %
                              
                              
                              21,989,087
                              
                              
                              
                              17.5
                              %Cost
      of service fee income
                              
                              
                              6,965,367
                              
                              
                              
                              73.9
                              %
                              
                              
                              20,247,922
                              
                              
                              
                              56.9
                              %Amortization
      of acquired technology
                              
                              
                              8,231,375
                              
                              
                              
                              
                              
                              
                              
                              13,308,030Amortization
      of software costs
                              
                              
                              2,889,118
                              
                              
                              
                              
                              
                              
                              
                              3,632,744Total
      Cost of Revenue
                              
                              
                              46,335,372
                              
                              
                              
                              
                              
                              
                              
                              82,106,388Gross
      Profit
                              
                              
                              38,585,621
                              
                              
                              
                              45.4
                              %
                              
                              
                              57,757,114
                              
                              
                              
                              41.3
                              %





Comparison
of Years Ended December 31, 2006, 2007 and 2008





Revenue




Total revenue. Total
revenue is comprised of software sales, hardware sales and service fee revenue.
Total revenue increased 77.5% from RMB47.8 million in 2006 to RMB84.9 million in
2007 and increased 64.7% from 2007 to RMB139.9 million in 2008.





These
increases were, primarily attributable to our significant growth across all
product lines and revenues generated from the acquired companies.





Software sales. Our
software sales increased 41.0% from RMB29.8 million in 2006 to RMB42.1 million
in 2007 and increased 57.4% from 2007 to RMB66.2 million in 2008.





The 2007
increase was primarily attributable to our decision to focus our marketing
efforts upon small and medium-sized businesses in our marketplace and the impact
of our four acquisitions. The 2008 increase was primarily attributable to the
re-alignment of the clients into seven major categories and improved operating
efficiency.





Hardware sales. Our
hardware sales increased 42.0% from RMB11.4 million in 2006 to RMB16.2 million
in 2007 and increased 64.6% from 2007 to RMB26.7 million in 2008.





In recent
years, we decided to de-emphasize hardware sales in an increasingly competitive
hardware sales market. The margins that we are able to achieve from hardware
sales have diminished significantly. As a relatively young company, we do not
believe that it is strategically justifiable to leverage a low margin, high
volume sales sector. Consequently, while we will continue to sell computer
hardware in connection with our software sales, we have not emphasized and do
not expect to emphasize hardware sales as part of our marketing and sales
strategies. Nonetheless, there may be occasions where we may profitably include
hardware in projects that we complete for clients that possess superior credit.
This has occurred since 2007, especially during 2008 when several customers from
our key accounts required the purchase of new hardware for integration into
their software products. As a result, we experienced an increase in hardware
sales in both 2008 and 2007, compared to the previous year. Over time, however,
we expect to experience reduced hardware sales as we focus our efforts on higher
margin areas of our business. We expect that, in the short-term, we may fail to
capture additional revenues from hardware sales, but our management believes
that the long-term health of our company is substantially dependent upon the
licensing of our software products. As a result of our decision to de-emphasize
hardware sales, we have altered our revenue structure in an effort to enhance
our software sales and service fees.





32




Service fee income.
Service fee income revenues increased 303.3% from RMB6.6 million in 2006 to
RMB26.6 million in 2007 and increased 76.4% from 2007 to RMB47.0 million in
2008.  Service fee income revenues represented 13.8%, 31.4% and 33.6%
of our total revenues, respectively, in 2006, 2007 and 2008. These increases are
primarily attributable to the following factors:





2007
Increases in Service Fee Income





·
            We
      generated service fee income from SaaS in 2007. We will focus on using
      this method to deliver our software to small and medium-sized businesses
      in China, especially in specialty stores, in future fiscal
      periods.


·
            The
      free service periods for many contracts previously signed began to expire
      during 2007, and further services are charged on an annual basis,
      resulting in increased service fee income. Maintenance services revenues
      increased 60% in 2007 compared to
2006.


·
            The
      increase in software sales provided additional opportunities for our
      company to generate service fees associated with such
      software.





2008
Increases in Service Fee Income





·
            Service
      fee income generated from eService in 2008 includes B2B services and SaaS.
      In May 2007, we acquired an additional 31% ownership interest in Beijing
      Wangku Hutong Information Technology Co., Ltd. to further expand its
      eService business initiatives, allowing us to offer a leading B2B platform
      that connects retailers and small to medium-sized
    suppliers.


·
            As
      our software sales continue to grow, our customer base has also increased
      year-over-year, which provides additional opportunities for our company to
      generate service fees associated with such
  software.





As we
continue to refine our business model, we expect to generate increased service
fees income.





Cost
of revenues




Cost of software.
Cost of software consists of wages, materials, handling charges and other
expenses associated with the development of our software. Cost of software
increased 104.1% from RMB7.7 million in 2006 to RMB15.6 million in 2007 and
increased 46.5% from 2007 to RMB22.9 million in 2008.





These
increases resulted from our expanded sales force in key geographic markets in
2007 and a proportionate increase in sales volume in 2008. We will continue to
pursue marquee global accounts in China including B&Q-Kingfisher, Johnson
& Johnson, Jusco and Aeon as well as leading domestic software providers
such as Beijing Jade Bird Sihua and others. We are now supplying solutions to
over 1,000 retail clients. As such, these projects require more integration
services to reach completion. Over time, however, we believe that as our
customer base grows, our cost of license and related maintenance revenue will
increase as we hire personnel for our customer support
organization.





As a
percentage of software sales, cost of software was 25.7% for 2006, 37.2% for
2007 and 34.6% for 2008. The 2007 increase was primarily attributable to the
proportionate increase in software sales. The 2008 decrease was primarily
attributable to improved processes to shorten the software implementation cycle.
In 2007, the completion percentage for contracts signed in the current year was
44%; at the end of 2008, the percentage increased to 54.2%. The higher
completion rate was achieved through improved training programs, hiring
policies, and software design.





Cost of hardware.
Cost of hardware consists primarily of fees for third party hardware products
that are utilized in connection with our software products. Cost of hardware
increased by 19.3% from RMB10.5 million in 2006 to RMB12.6 million in 2007 and
increased by 74.5% from 2007 to RMB22.0 million in 2008.





33




This
increase resulted directly from the increase in hardware sales we experienced in
2007 and 2008. As a percentage of hardware sales, cost of hardware was 93% in
2006, 78% in 2007 and 82.5% in 2008. The 2007 decrease was primarily
attributable to our selective high margin deal in hardware sales, and the 2008
increase was primarily attributable to the diminished margin in hardware
sales.  Gross margins were 22.2% and 17.5% in 2007 and 2008,
respectively.





Cost of service fee
income. Cost of service fee income includes salaries and related expenses
of our consulting organization and an allocation of our facilities and
depreciation expenses. Cost of services increased 269% from RMB1.9 million for
2006 to RMB7.0 million for 2007 and increased 190.7% from 2007 to RMB20.2
million for 2008. The 2007 increase resulted directly from the dramatic increase
in our service fee income and the increased size in our labor force necessary to
fulfill our service obligations. The 2008 increase was a result of several
factors:





·
            Increased
      allotment of senior technical personnel on major accounts to explore
      service expansion and additional monetization opportunities. In addition,
      high-end configurations and higher salaries of senior personnel added
      extra expenses to our projects.


·
            Increased
      marketing efforts on major accounts to further explore customers’
      potential needs in their IT operating
plans.





Amortization of acquired
technology. The amortization of acquired software technology in 2007 and
2008 resulted from amortization of software technology acquired in a variety of
acquisitions noted above. Amortization of acquired technology expense increased
61.7% from RMB8.2 million in 2007 to RMB13.3 million in 2008.





We have
been making acquisitions since 2007, the increase in amortization of acquired
technology is attributable to the four acquisitions we did in 2007 and
additional acquisitions we did in 2008.





Amortization of software
costs. Intangible assets include the cost of computer software we
acquired and developed. These costs are amortized over the useful life of the
software. Costs included are mostly salary and employee benefits for those
involved in the development of the software. Amortization expense increased 5.9%
from RMB2.7 million in 2006 to RMB2.9 million in 2007 and increased 25.7% from
2007 to RMB3.6 million in 2008.





The
increase is due to the increase of software products being amortized since year
2007. Because we are continually developing our products, we expect amortization
to increase in future years based upon our success in developing new products
for our customers.





Operating
expenses





Research and
development. Research and development expenses, which are expensed as
incurred, consist primarily of salaries and related costs of our engineering
organization; consultants; and an allocation of our facilities and depreciation
expenses. We believe that our success depends on continued enhancement of our
current products and our ability to develop new technologically advanced
products that meet the increasingly sophisticated requirements of our customers.
Research and development expenses increased 54.9% from RMB527,219 in 2006 to
RMB816,479 in 2007 and increased 697.7% from 2007 to RMB6.5 million in
2008.





The 2007
increase was primarily attributable to the fact that in 2007 we focused on
upgrading software products to meet the evolving complexities of our customers’
businesses to gain market acceptance of our software products that were
developed in previous fiscal periods. The large increase in these expenses in
2008 was primarily attributable to greater expenditure in software integration
and upgrading.  We expect these efforts will reduce the Company’s
R&D costs and future software implementation costs in the
long-term.  Research and development represented 1.1% of total revenue
for 2006, 1.0% of total revenue for 2007 and 4.7% of total revenue for
2008.





General and
administrative. General and administrative expenses consist primarily of
costs from our finance and human resources departments; third party legal and
other professional services fees; and an allocation of our facilities costs and
depreciation expenses. General and administrative expenses increased 162.9% from
RMB7.3 million in 2006 to RMB19.2 million in 2007 and increased 111.0% from 2007
to RMB40.5 million in 2008.





34




The 2007
increase in general and administrative expenses was attributable to a 27%
increase in average headcount, which resulted in a RMB3.2 million increase
in salaries and related benefits, a RMB2.5 million increase in incentive
compensation due to the Company’s improved operating performance and a RMB1.1
million increase in legal and accounting costs as result of the larger combined
company and compliance costs incurred to implement the internal control system
required by the 2002 Sarbanes-Oxley Act.  The 2008 increase in general
and administrative expenses was attributable to a RMB1.5 million increase in
salaries, a RMB3.0 million increase in maintenance costs of eight new branches,
and RMB1.6 million expenses associated with audit and Sarbanes-Oxley Act
compliance.





General
and administrative expenses were 15% of total revenue for 2006, 22.6% of total
revenue for 2007 and 28.9% of total revenues in 2008. This increase in general
and administrative expenses as a percentage of revenue was attributable to the
increase of general and administrative expenses noted above. We expect that as a
public company we will likely experience an increase in general and
administrative expenses as a percentage of total revenues in future fiscal
periods. These expenses include additional legal and accounting fees and public
relations costs.





Selling and distribution
expenses. Selling and distribution expenses consist primarily of salaries
and related costs of our sales and marketing departments, sales bonuses, costs
of our marketing programs, public relations, advertising, trade shows,
collateral sales bonuses, and an allocation of our facilities and depreciation
expenses. Selling and distribution expenses increased 30.4% from RMB9.2 million
in 2006 to RMB12.0 million in 2007 and increased 73.1% from 2007 to RMB20.8
million in 2008.





The
increase in selling and distribution expenses was due to additional labor costs
associated with the expansion of our sales force and the proportionate increase
in sales volume year over year. We added 26 employees to our sales department in
2007 and 10 employees in 2008. We anticipate that sales and marketing expenses
will increase to support our intended expansion of our sales and marketing
organization. Selling and distribution expenses were 19.0% of total revenue for
2006, 14.1% of total revenue for 2007 and 14.9% of total revenues in 2008. The
decrease in selling and distribution expenses as a percentage of revenue in 2007
was attributable to the fact that the costs associated with our larger sales
department were offset by increased sales that we could recognize in 2007.
Selling and distribution expenses as a percentage of revenue were stable in 2007
and 2008.





Other
Expenses





Interest Income.
Interest income represents the interest accrued as a result of bank deposits.
Our interest income increased 2400% from RMB141,230 in 2006 to RMB3.5 million in
2007 and decreased 59.7% from 2007 to RMB1.4 million in 2008.





The
substantial increase in 2007 was primarily due to interest earned in 2007 on the
proceeds of our initial public offering.  Conversely, the substantial
decrease in 2008 was primarily due to reduced interest earned in 2008 on
proceeds from our initial public offering and private offering in 2007 as we
began to use such proceeds to grow our business.





Interest Expense. Our
interest expense increased dramatically from RMB13,471 in 2006 to RMB5.0 million
in 2007 and decreased to RMB2.3 million in 2008.





The 2007
increase primarily resulted from the interest on the Convertible Notes issued to
institutional investors on March 13, 2007. The 2008 decrease primarily resulted
from the reduced interest on the Convertible Notes issued to institutional
investors on March 13, 2007 as the institutional investors began to convert the
Convertible Notes.





Gain on Derivative.
In March 13, 2007, the Company raised $10 million Convertible Notes. On
conversion into shares or at every reporting period, the fair value of changes
on the carrying amount is treated as a gain or loss in the current period
operations.





Our gain
on derivatives increased dramatically from RMB10,324,874 in 2007 to
RMB33,122,465 in 2008.





Gain or Loss on
Extinguishment of Convertible Notes. Upon conversion of Convertible
Notes, the Company recognized a gain or loss on extinguishment of Convertible
Notes.





35


The
Company recognized loss of ¥39,504,662 in 2007 and ¥22,529,233 in 2008 on
extinguishment of Convertible Notes. This is recorded as a non-operating expense
in the consolidated statement of operations.





Holding
Company Structure





We are a
holding company with no operations of our own. All of our operations are
conducted through eFuture Beijing, our Chinese subsidiary. As a result, our
ability to pay dividends and to finance any debt that we may incur is dependent
upon dividends and other distributions paid by eFuture Beijing. If eFuture
Beijing incurs debt on its own behalf in the future, the instruments governing
the debt may restrict its ability to pay dividends to us. In addition, Chinese
legal restrictions permit payment of dividends to us by eFuture Beijing only out
of its net income, if any, determined in accordance with Chinese accounting
standards and regulations. Under Chinese law, eFuture Beijing may also be
required to set aside a portion (at least 10%) of its after tax net income, if
any, each year for certain reserve funds until the amount of the reserve reaches
50% of eFuture Beijing’s registered capital. According to Chinese law, however,
eFuture Beijing is required to withdraw reserve funds only in fiscal years
following the elimination of its accumulated deficit in which it paid income
tax. Noting our accumulated deficit and the tax deferrals associated with our
business, we have not funded these reserves in the past and do not expect to do
so in the near future. Consequently, we do not believe that these fund reserves
had or will have a material impact upon our liquidity. Although these statutory
reserves can be used, among other ways, to increase the registered capital and
eliminate future losses in excess of retained earnings, the reserve funds are
not distributable as cash dividends except in the event of a solvent liquidation
of eFuture Beijing. This reserve fund is not distributable as a cash
dividend.





Critical
Accounting Policies and Estimates





We
prepare our financial statements in conformity with US GAAP, which requires us
to make estimates and assumptions that affect our reporting of, among other
things, assets and liabilities, contingent assets and liabilities and net
revenues and expenses. We continually evaluate these estimates and assumptions
based on the most recently available information, our own historical experiences
and other factors that we believe to be relevant under the circumstances. Since
our financial reporting process inherently relies on the use of estimates and
assumptions, our actual results could differ from what we expect. This is
especially true with some accounting policies that require higher degrees of
judgment than others in their application. We consider the policies discussed
below to be critical to an understanding of our audited consolidated financial
statements because they involve the greatest reliance on our management’s
judgment.





Revenue
Recognition





We
generate revenue from the sale of software, related hardware, value-added
services including maintenance and support contracts, and professional
consulting, training and contract development services and eService including
B2B services and SaaS services. At this time, we generally license our products
to customers on a perpetual basis and we recognize revenue upon delivery of the
products. Under certain of our license agreements, we will provide technical
advisory services after the delivery of our products to help our customers
exploit the full value and functionality of our products. We recognize revenue
from the sale of software licenses and technical advisory services under these
agreements as the services are performed over the contract period. We recognize
revenue from eService over the period of the agreement.





We
recognize revenue when it is realized and earned. We consider revenue realized
or realizable and earned when:




l
              we
      have persuasive evidence of an
arrangement;
 l
              delivery
      has occurred;
 l
              the
      sales price is fixed or determinable;
and
 l
              collectability
      is reasonably assured.





We
consider delivery to occur when (i) products have been shipped or services
have been provided to the client, (ii) risk of loss has transferred to the
client, (iii) we have obtained client acceptance, (iv) client
acceptance provisions have lapsed, or (v) we have objective evidence that
the criteria specified in client acceptance provisions have been satisfied. We
consider the sales price to be fixed or determinable when all contingencies
related to the sale have been resolved. We have not encountered significant
difficulty in the past with our customers accepting our products and services.
Our products and services have generally fulfilled our customers’ needs. Should
other products or services be introduced in the market that compete with our
products and services, our future customers may choose those products and
services instead of ours, which may affect our ability to generate revenues. We
believe that our continuous efforts to develop of our software products will
allow us to remain competitive in our market.





36




For
software sales, we recognize revenues in accordance with the provisions of
Statement of Position No. 97-2, “Software Revenue Recognition,” and related
interpretations. We recognize revenue from perpetual (one-time charge) licensed
software at the inception of the license term. We recognize revenue from term
(monthly license charge) arrangements on a subscription basis over the term of
the license. We include revenues from maintenance for the first year and initial
training in the purchase price of the software. We provide initial training at
the time of installation and recognize such income as part of the price of the
software since it is minimal in value. We value maintenance based on a fee
schedule we use for providing our regular level of maintenance. We include
maintenance revenue in the income statement under services and recognize it over
the term of the agreement. We allocate revenues applicable to multiple-element
fee arrangements among elements such as software, hardware, and post-contact
service using vendor-specific objective evidence of fair value. Such evidence
consists primarily of pricing of multiple elements sold as separate elements in
the contract.




We
recognize revenue from hardware sales when the product is shipped to the
customer and when there are no unfulfilled company obligations that affect the
customer’s final acceptance of the arrangement.





We
provide value-added services for system integration which involve the design and
development of complex information technology systems to the customer’s
specifications. We provide these services on a fixed-price contract, and the
contract terms generally are short. We recognize revenue when delivery and
acceptance is determined by a completion report signed by our
customer.  In addition to value-added services, we provide eServices,
including our B2B services, which help link local and overseas suppliers to
stores throughout China and help efficiently exchange new product supply and
demand information between potential suppliers and retailers, and our SaaS
services, which serve the retail distribution industry in China by bringing
retailers’ suppliers onto a single platform, allowing them to exchange business
information, arrange payments online and access purchase orders, returns,
payment status, inventory levels and analysis of sales data. We recognize
revenue over the period of the agreement.





Allowance
for Doubtful Accounts





From the
date a contract for our products is signed through the date of customer
acceptance, we generally require our customers to deposit up to 60% of the
contract price. We also generally grant credit to customers allowing them to pay
30% to 35% of the contract price 30 to 60 days after acceptance and 10% or 5% of
the contract price up to one year after acceptance.





We
provide for doubtful accounts based on several factors which include the aging
of the accounts receivable, trends within and ratios involving the age of the
accounts receivable, the nature of the receivable, our historical provision for
doubtful accounts, the creditworthiness of the customer, and the economic
conditions of the customer's industry as well as general economic
conditions.





Our
allowance for doubtful accounts was RMB2.1 million in 2006, RMB4.7 million in
2007 and RMB4.7 million in 2008.





Stock-Based
Compensation





Through
December 31, 2005, we accounted for stock options issued to directors, officers
and employees under Accounting Principles Board Opinion No. 25 and related
interpretations (“APB 25”). Since January 1, 2006, we have accounted for stock
options at their fair value in accordance with SFAS 123R. We account for options
and warrants issued to non-employees at their fair value in accordance with SFAS
No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).





37




Property
and Equipment





We
depreciate property and equipment on a straight-line basis over their estimated
useful lives, which range from five years for motor vehicles and four years for
purchased software and communication and office equipment to three years for
leasehold improvements. These estimated lives have been reasonably accurate in
the past and have been based on historical experience and the estimated useful
lives of similar assets by other software companies. These estimates are
reasonably likely to change in the future since they are based upon matters that
are highly uncertain such as the general economy, potential changes in
technology and estimated cash flows from the use of these assets.




Intangible
Assets





We charge
all of our development costs to research and developmentexpensesuntil we have established
technological feasibility. We acknowledge technological feasibility of our
software when a detailed program design or working model is completed. Upon
reaching technological feasibility, we capitalize additional software costs
until the software is available for general release to customers.





We
amortize the cost of intangible assets over the estimated period of realization
of revenue from the related intangible assets. The estimated life of our
software is based upon historical usefulness of similar software products and
the rate of change in technology in general. Our estimate of the useful lives of
our software has been reasonably accurate in the past, but it is reasonably
likely to change in the future due to the highly uncertain nature of this
estimate. Should economic conditions change or technological advances occur
rapidly, our estimate of the useful lives of our software products could decline
quickly, which would result in recognition of increased
amortization.




Valuation
of Long-Lived Assets





We
evaluate long-lived assets, such as fixed assets and purchased or internally
developed intangible assets with finite lives, for impairment whenever events or
changes in circumstances indicate the carrying value of an asset may not be
recoverable in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. When such events occur, we assess
the recoverability of the assets group based on the undiscounted future cash
flow the asset group is expected to generate and recognizes an impairment loss
when estimated undiscounted future cash flow expected to result from the use of
the asset group plus net proceeds expected from disposition of the assets group,
if any, is less than the carrying value of the assets group. If we identify an
impairment, we reduce the carrying amount of the assets group to its estimated
fair value based on a discounted cash flow approach or, when available and
appropriate, to comparable market values. We use estimates and judgments in our
impairment tests and if different estimates or judgments had been utilized, the
timing or the amount of any impairment charges could be different. Asset groups
to be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell, and no longer depreciated. The assets and liabilities of a
disposal group classified as held for sale would be presented separately in the
appropriate asset and liability sections of the balance
sheet.  However, circumstances could cause us to have to reduce the
value of our capitalized software more rapidly than we have in the past if our
revenues were to significantly decline. Estimated cash flows from the use of the
long-lived assets are highly uncertain and therefore the estimation of the need
to impair these assets is reasonably likely to change in the future. Should the
economy or acceptance of our software change in the future, it is likely that
our estimate of the future cash flows from the use of these assets will change
materially. The amount of possible change is discussed above under Property and Equipment and
Intangible
Assets.





Goodwill





Goodwill
represents the excess of the purchase price over the fair value of the
identifiable net assets acquired in a business combination. Under Statement of
Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,”
goodwill is subject to an annual impairment test. If an event occurs or
circumstances change that would more-likely-than-not reduce the fair value of a
reporting unit below its carrying amount, an interim impairment test is
performed between annual tests. The impairment test includes a comparison of
estimated discounted cash flows associated with the asset’s carrying amount. If
the fair value is less than the carrying amount of the asset, the second step of
the impairment test shall be performed to measure the amount of impairment loss,
if any. In the second step, the implied fair market value of goodwill is
estimated and compared to the carrying amount. If the carrying amount of
goodwill exceeds its implied fair market value, an impairment loss equal to this
excess is recorded. The recorded loss cannot exceed the carrying amount of
goodwill.





38




Research
and Development, Patents and Licenses, etc.





We charge
all of our development costs to research and development expenses until we have
established technological feasibility. We acknowledge technological feasibility
of our software when a detailed program design has been completed, or upon the
completion of a working model. Upon reaching technological feasibility, we
capitalize additional software costs until the software is available for general
release to customers. Although we have not established a budget or time table
for software development, we anticipate the need to continue the development of
our software products in the future and the cost could be significant. We
believe that, as in the past, the costs of development will result in new
products that will increase revenue and therefore justify costs. There is,
however, a reasonable possibility that we may be unable to realize the carrying
value of our software, and the amount not so realized may adversely affect our
financial position, results of operation or liquidity in the
future.





B. Liquidity and
Capital Resources




Overview





We
anticipate that our working capital will be sufficient to fund our cash needs
and operations and to make payments on any existing liabilities for at least the
next 12 months.  We do not anticipate that we will need to use
non-operational sources of cash, such as debt or equity financing, to meet our
current cash needs. We may, however, require additional cash due to changing
business conditions or other future developments, including any investments or
acquisitions we may decide to pursue. If our existing cash is insufficient to
meet our requirements, we may seek to sell additional equity securities, debt
securities or borrow from banks.





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





2007
                
                
                2008(In
      millions)Cash
      and cash equivalents
                
                ¥
                67.2
                
                
                ¥
                60.8Net
      cash generated from operating activities
                
                
                16.5
                
                
                
                31.1Net
      cash used in investing activities
                
                
                (68.3
                )
                
                
                (32.8
                )Net
      cash (used in) generated from financing activities
                
                
                60.1
                
                
                
                (4.4
                )





Operating activitiesprovided
cash of RMB31.1 million in 2008 compared to RMB16.5 million in 2007.
The principal sources of our cash flow from operations are net income adjusted
for depreciation, software amortization, the gain on derivatives and loss on
extinguishment of convertible notes and compensation expenses for directors and
employees.  The growth in cash provided by operating activities was
primarily due to a proportionate increase in revenue.





Investing activitiesused
cash of RMB32.8 million in 2008 and RMB68.3 million in 2007. The primary use of
cash in investing activities in 2008 included RMB28.3 million in payment of
direct costs related to the Royalstone and other acquisitions and
RMB4.5 million in capital expenditures, compared with our expenditures in
2007 of RMB57.7 million in payment of direct costs related to the Royalstone and
other acquisitions and RMB7.7 million in capital expenditures. The Royalstone
payments were made across accounting periods.




Financing activitiesused
cash of RMB4.4 million in 2008 and provided cash of RMB60.1 million in
2007. Financing activities in 2008 included RMB8.1 million payment of the
make-whole obligation on the convertible notes completed in March 2007, which
was partially offset by the receipt of proceeds of RMB3.6 million from the
warrants issued to the underwriter in the IPO.  In 2007, we received
proceeds of RMB69.1 million from the convertible notes completed in March and
RMB1.1 million in proceeds from the warrants issued to the underwriter in the
IPO, and we paid RMB10.0 million in make-whole obligations on the
convertible notes.




39




Indebtedness




On
March 13, 2007, we closed a Securities Purchase Agreement with three funds
affiliated with two institutional investors, pursuant to which we raised
¥69,079,430 (net of cash loan costs of ¥8,330,570) by issuing $10,000,000 senior
convertible notes along with Series A warrants and Series B
warrants.





The
convertible notes were initially convertible into 400,160 of our ordinary shares
at $24.99 per share. Pursuant to the Agreement, the conversion price reset to
$19.00 on June 11, 2008 since the market price of the Company’s common stock was
below $19.00 on that day.




The
Series A warrants are exercisable by the Holder within five years on any day on
or after September 9, 2007 for an aggregate of 184,077 Shares, at an initial
price of $28.25 per ordinary share, subject to adjustment. The Series B warrants
to purchase an aggregate of 230,097 ordinary shares at an initial exercise price
of $24.99 per Share expired on September 8, 2008.  Likewise, the
Placement Agent warrants to purchase 73,291 ordinary shares of the Company at an
initial price of $24.99 per Share expired on September 8, 2008.





On
October 3, 2007, one of the investors converted ¥37,529,400 ($5,000,000) of the
convertible notes into 200,080 ordinary shares. In July and August of 2008,
another investor converted ¥27,326,700 ($4,000,000) of the convertible notes
into 210,526 ordinary shares.  As of the date of this filing,
$1,000,000 in convertible notes remains outstanding.  These notes bear
interest at an annual rate of 3% from issuance to March 12, 2008; 5% from March
13, 2008 through March 12, 2009; 7% from March 13, 2009 through March 12, 2010
and 10% from March 13, 2010 through maturity.





Other
than as discussed in this section, there has not been any material change in our
indebtedness, commitments and contingent liabilities since December 31,
2008.





C. Research and
Development





Our
success depends on continued enhancement of our current products and our ability
to develop new technologically advanced products that meet the increasingly
sophisticated requirements of our customers.  The information provided
under Item 5.A, "Operating Results" details the Company's research and
development activities.





D. Trend Information





China
Outlook





In
November, 2008, China unveiled a stimulus package estimated at RMB4 trillion
(about $570 billion U.S. dollars). It will be spent over the next two years to
finance programs in 10 major areas, such as low-income housing, rural
infrastructure, water, electricity, transportation, the environment,
technological innovation and rebuilding from several disasters, most notably the
May 12, 2008 earthquake in Sichuan province.  We believe China’s
recent stimulus package is likely to contribute to our growth and the growth of
our customers in the retail and consumer goods industries in future
periods.





As part
of the overall stimulus package, China announced stimulus sub-packages for 10
industries in February 2009. Previous support packages include the auto, steel,
shipbuilding, textile, machinery-manufacturing, electronics and information
industries, the light industry and petrochemical sectors. In addition, the State
Council of China central government announced a plan to support the logistics
sector, including the building of a special district for logistics development,
and to accelerate urban delivery, wholesale and rural logistics. To the extent
the stimulus plan is spent in China’s logistics industry in general and in the
retail goods logistics industry in particular, we believe the package is likely
to result in continued growth in our industry.





Industry and Market
Outlook





Management
expects macroeconomic factors, such as retail sales of consumer goods and IT
spending, to increase at a healthy rate for 2009.  According to data
from National Bureau of Statistics of China, for the first quarter of 2009,
total retail sales of consumer goods in China reached RMB2,940 billion (US$430.9
billion), an increase of 15% over the prior year. eFuture expects to remain in a
strong position to compete in the SCM sector.





40




While we
expect that retail sales of consumer goods in China are likely to grow in 2009,
in light of the world financial crisis and the current instability in the
world’s markets, it is impossible to predict the effect of global macroeconomic
factors on our industry and company.  Any prolonged weakness in the
world retail industry in general or in China in particular could harm our
customers and, as a result, our business.





Top Line Growth
Drivers





·
            As
      of December 31, 2008, our uncompleted project base was RMB44.3 (US$6.5
      million), including RMB18.2 million (US$2.7 million) of software license
      income and RMB RMB24.8 million (US$3.6 million) of service fee income
      expected to be recognized in future
years.





·
            We
      anticipate increasing demand for value-added service such as maintenance
      and outsourcing, and the upward trend in license revenue from existing
      customers.





·
            We
      anticipate solid demand from department stores, supermarkets, and key
      customer accounts under challenging economic
  conditions.





·
            We
      seek to deepen penetration and expand market share via our plan to further
      develop our B2B services, SaaS businesses (including SCM and B2C store
      eShopping) and T+1 SCF service by leveraging our relationships with over
      1,000 retailers, their base of over 13,000 stores and over 900,000
      suppliers as well as nearly 80 million end
  consumers.





Channel Expansion
Initiatives





Currently,
we derive approximately half of our revenue from China’s three
mega-cities—Beijing, Shanghai and Guangzhou—and approximately 80% of our total
revenue from eight first tier cities (including the mega-cities) in
China.  However, the continued expansion of many retailers, including
current eFuture customers, into China’s second and third tier cities presents a
significant opportunity to gain additional market share in these growing
markets.  As such, one of our key initiatives in 2009 is to enhance
penetration into second and third tier cities, by investing approximately RMB7.5
million in order to increase the coverage of our sales and distribution network
from 10 up to 15 provinces in China.





In 2009,
eFuture plans to focus on continued execution on its growth strategy by
investing in technology and business model innovations, expanding our client
base within second and third tier cities in China, actively pursuing domestic
and international clients, and forging into new frontiers of eService and
investing. As we continue to expand our client base into smaller cities, we may
find that the comparatively greater effort involved in growing in such smaller
markets will negatively affect our profit margins.





E. Off-Balance Sheet
Arrangements





We have
not entered into any financial guarantees or other commitments to guarantee the
payment obligations of any third parties. We do not have any retained or
contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity or market risk support to such entity. Moreover, we
do not have any variable interest in an unconsolidated entity that provides
financing, liquidity, market risk or credit support to us or engages in leasing,
hedging or research and development services with us.





41




F. Tabular Disclosure of Contractual
Obligations





The
following table sets forth our contractual obligations as of December 31,
2008:





Payments
      Due By PeriodLess
      than
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        More
      thanTotal
                                        
                                        
                                        1
      Year
                                        
                                        
                                        1-3
      Years
                                        
                                        
                                        3-5
      Years
                                        
                                        
                                        5
      YearsConvertible
      Notes
                                        
                                        ¥
                                        8,732,800
                                        
                                        
                                        ¥
                                        450,285
                                        
                                        
                                        ¥
                                        8,282,515
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Operating
      Lease Obligations
                                        
                                        ¥
                                        5,745,762
                                        
                                        
                                        ¥
                                        2,241,674
                                        
                                        
                                        ¥
                                        3,504,088
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Purchase
      Obligations
                                        
                                        ¥
                                        37,362,365
                                        
                                        
                                        ¥
                                        37,362,365
                                        
                                        
                                        ¥
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Total
                                        
                                        ¥
                                        51,840,927
                                        
                                        
                                        ¥
                                        40,054,324
                                        
                                        
                                        ¥
                                        11,786,603
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -





Item
6.                      Directors,
Senior Management and Employees





A.           Directors
and Senior Management





The
following table sets forth our executive officers and directors, their ages and
the positions held by them as of October 12, 2009.





Name
            
            Age
            
            PositionAdam
      Yan (1)(8)
            
            41
            
            Chairman
      and Chief Executive OfficerDeliang
      Tong (1)
            
            44
            
            Chief
      Operating OfficerQicheng
      Yang (1)
            
            43
            
            Chief
      Technology OfficerHongjun
      Zou (1)
            
            41
            
            Senior
      Vice President and Chief Innovation OfficerPing
      Yu (1)(7)
            
            39
            
            Chief
      Financial Officer and DirectorTony
      Zhao (1)
            
            44
            
            Vice
      President and Chief Strategy OfficerJames
      Mu (1)
            
            46
            
            Vice
      President and Chief Marketing OfficerMing
      Zhu (2)(9)
            
            50
            
            DirectorDong
      Cheng, Ph.D. (1)(3)(4)(5)(9)
            
            41
            
            DirectorJohn
      Dai (1)(4)(5)(8)
            
            46
            
            DirectorDennis
      O. Laing(3)(5)(6)(7)
            
            63
            
            DirectorBrian
      Lin (1)(3)(4)(9)
            
            44
            
            Director





(1)
            The
      individual’s business address is c/o eFuture Information Technology Inc.,
      8/F Topnew Tower, 15 Guanghua Road, Chaoyang Distinct, Beijing 100026,
      China.(2)
            Mr.
      Zhu’s business address is c/o RMCC International, Inc. 6724 Patterson
      Avenue, Richmond, Virginia 23226.(3)
            Member
      of audit committee.(4)
            Member
      of compensation committee.(5)
            Member
      of corporate governance committee.(6)
            Mr.
      Laing’s business address is 4860 Cox Road, Suite 200, Glen Allen, Virginia
      23060.(7)
            Class
      II director whose term expires in 2010.(8)
            Class
      III director whose term expires in 2011.(9)
            Class
      I director whose term expires in
2009.





42




Adam Yan.Mr. Yanis our Chairman, Chief
Executive Officer and a director. He founded eFuture in 1997. From 1997 to 1999
and 2002 to 2004, Mr. Yan also served as our Chief Accounting Officer. From 1991
to 1997, Mr. Yan served as the general manager of the Bangda Information
Industry Center of the Haikou Financial Bureau in the Hainan province of China.
Mr. Yan received a bachelor’s degree in computer science and a master’s degree
in machine vision engineering from Chonqing University in China. From 1991 to
1994, Mr. Yan also served as the chief accounting software designer for Haikou
Accounting Firm in the Hainan province of China. In his role as chief accounting
software designer, Mr. Yan served as the development team leader responsible for
writing the software in accordance with the accounting policies of the Chinese
government, developing system architecture, and developing team organization. He
has also studied accounting and finance at the Central University of Finance and
Economics.




Deliang Tong. Mr. Tong has
served as our Chief Operating Officer since July 1, 2008 and also is the
President of our wholly-owned subsidiary, eFuture (Beijing). Mr. Tong founded
Guangzhou Royalstone System Integration Co. Ltd. in 1992, and served as its
Chairman and CEO. Mr. Tong received a bachelor’s degree in electronics and a
master’s degree in software engineering from the University of Electronic
Science and Technology of China. Mr. Tong served as department manager for
Sichuan Xinchao Computing Group from 1989 to 1991. Mr. Tong also served as the
general manager for the south for Beijing Stone Group from 1991 to
1992.





Qicheng Yang.Mr. Yang has
served as our Chief Technology Officer since 1997. From 1995 to 1997, Mr. Yang
served as the Chief Technology Officer of Hainan Fujie Industrial Inc., an
information technology company delivering software and system integration
services in the Hainan province of China. From 1993 to 1995, he served as a
manager in the system network department of Hainan Zhouli Sci-Tech Industrial
Inc., an information technology company delivering software and system
integration services in the Hainan province of China. From 1990 to 1993, Mr.
Yang taught computer courses at Huazhong University of Science and Technology.
He received a bachelor’s degree in automatic control and a master’s degree in
automatic control from Huazhong University of Science and Technology in
China.





Hongjun Zou.Mr. Zou is our
Senior Vice President and Chief Innovation Officer and has served as our Chief
Operating Officer since 1997. From 1993 to 1997, Mr. Zou served as Chief
Technology Officer of Hainan Fujie Industrial Company, an information technology
company providing multi-media development platform software to various
industries in China. Mr. Zou received a bachelor’s degree in computer science
from Chongqing University in China.





Ping Yu. Ms. Yu became our
Chief Financial Officer on January 1, 2007. Prior to joining eFuture, she was a
specialist with Beijing Smartdot Technologies, Inc. from August 2005 to December
2006, advising companies listed in the United States on meeting Sarbanes-Oxley
Act requirements and implementing the COSO-Enterprise Risk Management-Integrated
framework. From March 2004 to July 2005, Ms. Yu served as the internal auditing
section manager at Dongfeng Nissan, and from October 1999 to April 2001, she was
the chief officer of the accounting department at Walkalone Real Estate Co. From
July 1996 to September 1999, she served as a senior analyst at Citi Industrial
Bank. Ms. Yu received her bachelor’s degree from Hubei University and her
master’s degree in business administration from Rutgers University. Ms. Yu is a
Certified Public Accountant (CPA).





Tony Zhao, Ph.D. Dr. Zhao is
our Chief Strategy Officer. Dr. Zhao joined us in May 2007. From 2000 to 2007,
Dr. Zhao was the chief editor of “E-commerce World”, which is a leading magazine
covering B2B and B2C matters in China. Since 2003, Dr. Zhao has served as a
consulting expert for alibaba.com, hc360.com, chemnet.com, ebay.com and others.
Dr, Zhao has also served as an e-commerce expert for the National Development
and Reform Commission, the Ministry of Commerce and the Ministry of Information
Industry of the PRC. Dr. Zhao has written numerous articles on the development
of e-commerce theory and practices in China. From 1997 to 2000, Dr. Zhao was the
chief editor of the “Hardware Channel” for “Popular Computer Week”, a top
newspaper for end-users of computers in China. Dr. Zhao received a bachelor’s
degree and a master’s degree in precision optoelectronic engineering from
Chongqing University in China. He also received a doctorate degree in fiber
sensing engineering from Chongqing University.





James Mu. Mr. Mu is our Vice
President and Chief Marketing Officer, a role he previously held from 2001 to
2005.  Mr. Mu is responsible for the company’s brand and image
development and its marketing strategy. With over 20 years of retail and
technology sales and marketing leadership experience in China, Mr. Mu managed
project planning and operations for many shopping malls and large-scale
department stores across China. He was most recently the CEO of Beijing United
Power Real Estate Investment Management Co.  Previously, Mr. Mu served
as Vice President of the Causeway Bay Group, Hong Kong, an industry leading
commercial real estate developer in China. From 1984 to 1997, he served as an
official and Senior Engineer for the Ministry of Commerce of the
PRC.  He holds a bachelor’s degree in Agricultural Mechanization from
the Anhui Agricultural University.





43




Ming Zhu.Mr. Zhu has served
as a director since 2005. Since 1994, Mr. Zhu has been an international business
consultant with RMCC International, Inc., a Richmond, Virginia based
import/export consulting firm. Mr. Zhu received a bachelor’s degree in English
from Beijing Second Foreign Language Institute and a master’s degree in tourism
and business from Virginia Commonwealth University.





Dong Cheng, Ph.D.Dr. Cheng
has served as a director since 2005. Since 2002, Dr. Cheng has served as a Full
Professor at the Business School at Renmin University of China. From 1995 to
2002, Dr. Cheng served as an Associate Professor at Renmin University, and from
1993 to 1995, Dr. Cheng served as an Assistant Professor at Renmin University.
Dr. Cheng has written numerous articles on the development of Chinese business
practices. Dr. Cheng received a bachelor’s degree and a master’s degree in
computer software from Xi’an Jiao Tong University in China. He also received a
doctorate degree in Business Administration from Renmin University and was a
doctorate candidate in Computer Science from Peking University in Beijing,
China.





John Dai.Mr. Dai is
currently the Director of External Relationship and International Cooperation of
China Association of Small and Medium Enterprises (CASME), an organization aimed
at advancing the interests of China’s small and medium enterprises
internationally. He is also former CEO of Vanda Computer Systems, a Hong Kong
based public company focused on systems integration and banking application
services in China. Mr. Dai has served in various other executive positions
including General Manager of SAS China and General Manager of IBM’s Greater
China Distribution Industry Group. Mr. Dai received his bachelor’s degree in
Industrial and Civil Construction from Wuhan Industrial University and his
master’s degree in Civil Engineering from Tsinghua University.





Dennis O. Laing.Mr. Laing
has practiced law in Richmond, Virginia for over 30 years. Mr. Laing’s law
practice centers upon corporate law with special interest in energy, healthcare
and technology sectors. Mr. Laing received a bachelor’s degree in
government from the University of Virginia and a law degree from the University
of Richmond. Mr. Laing also serves as a director of Sino-Global Shipping
America, Ltd. (NASDAQ: SINO).




Brian Lin. Mr. Lin is
currently the Chief Executive Officer and a director of China Fire &
Security Group, Inc. (NASDAQ: CFSG), a leading total solution provider of
industrial fire protection systems in China. Prior to joining China Fire &
Security, from 2001 to 2005, Mr. Lin served as CEO of Beijing Linkhead
Technologies, a company that he co-founded in 1994 and sold to PacificNet Inc.
in December 2003. Prior to Linkhead, Mr. Lin was Director of R&D,
Value-added Services Division of UTStarcom and held various management and
technical positions with Nortel Networks, Motorola and Tandem Telecom in the
United States. Mr. Lin received a bachelor’s degree in electrical engineering
from Huazhong University of Science and Technology and a master’s degree in
Electrical Engineering from University of Toronto, Canada in 1989.




There are
no family relationships among any of the persons named above, and there are no
arrangements or understandings with major shareholders, customers, suppliers or
others, pursuant to which any such person was selected as a director or member
of senior management.


44


B.
            Compensation




Executive
and Director Compensation




The
following table shows the estimated annual compensation paid by us to our
executive officers and directors for the year ended December 31,
2008.




Summary
Compensation Table




Annual Compensation for Year Ended December 31, 2008OrdinarySharesUnderlying
                                                      
                                                      
                                                      Other Annual
                                                      
                                                      
                                                      All OtherName
                                                      
                                                      Salary
                                                      
                                                      
                                                      Bonus
                                                      
                                                      
                                                      Options
                                                      
                                                      
                                                      Compensation
                                                      
                                                      
                                                      CompensationAdam
      Yan
                                                      
                                                      ¥
                                                      312,119
                                                      
                                                      
                                                      ¥
                                                      210,951
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —Chairman,
      Chief Executive Officer and DirectorDeliang
      Tong
                                                      
                                                      ¥
                                                      374,500
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —Qicheng
      Yang
                                                      
                                                      ¥
                                                      318,228
                                                      
                                                      
                                                      ¥
                                                      205,903
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —Chief
      Technology OfficerHongjun
      Zou
                                                      
                                                      ¥
                                                      310,028
                                                      
                                                      
                                                      ¥
                                                      176,429
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —Senior
      Vice President and Chief Innovation OfficerPing
      Yu
                                                      
                                                      ¥
                                                      261,924
                                                      
                                                      
                                                      ¥
                                                      160,000
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —Chief
      Financial Officer and DirectorTony
      Zhao
                                                      
                                                      ¥
                                                      216,868
                                                      
                                                      
                                                      ¥
                                                      135,000
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —Chief
      Strategy OfficerJames
      Mu(1)
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —Vice
      President and Chief Marketing OfficerMing
      Zhu
                                                      
                                                      $
                                                      7,100
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —DirectorDong
      Cheng, Ph.D.
                                                      
                                                      $
                                                      7,100
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —DirectorJohn
      Dai
                                                      
                                                      $
                                                      7,100
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —DirectorDennis
      O. Laing
                                                      
                                                      $
                                                      7,100
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —DirectorBrian
      Lin
                                                      
                                                      $
                                                      9,100
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —Wenhua
      Tong
                                                      
                                                      $
                                                      8,000
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —




(1)
            Mr.
      Mu has been nominated to serve as Vice President and Chief Marketing
      Officer in 2009 while he did not receive any compensation in
      2008.





Our
company and subsidiaries have set aside or accrued, in the aggregate, ¥6.0
million to provide pension, retirement and other similar benefits for our
employees.





C.
            Board
      practices




See
information provided in response to Item 6.A. above as to the current directors
and the expiration of current director terms.




Board
of Directors and Board Committees





Our board
of directors consists of seven members. There are no family relationships
between any of our executive officers and directors.


45





The
directors are divided into three classes, as nearly equal in number as the then
total number of directors permits. Class I directors shall face re-election at
our annual general meeting of shareholders in 2009 and every three years
thereafter. Class II directors shall face re-election at our annual general
meeting of shareholders in 2010 and every three years thereafter. Class III
directors shall face re-election at our annual general meeting of shareholders
in 2011 and every three years thereafter.





If the
number of directors changes, any increase or decrease will be apportioned among
the classes so as to maintain the number of directors in each class as nearly as
possible. Any additional directors of a class elected to fill a vacancy
resulting from an increase in such class will hold office for a term that
coincides with the remaining term of that class. Decreases in the number of
directors will not shorten the term of any incumbent director. These board
provisions could make it more difficult for third parties to gain control of our
company by making it difficult to replace members of the Board of
Directors.





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




There are
no membership qualifications for directors. Further, there are no share
ownership qualifications for directors unless so fixed by us in a general
meeting. Our independent directors do not have any service contracts with our
company that provide for benefits upon termination of service.





Currently,
three committees have been established under the board: the audit committee, the
compensation committee and the nominating committee. The audit committee is
responsible for overseeing the accounting and financial reporting processes of
our company and audits of the financial statements of our company, including the
appointment, compensation and oversight of the work of our independent auditors.
The audit committee consists of Dr. Cheng, Mr. Laing and Mr. Lin.





The
compensation committee of the board of directors reviews and makes
recommendations to the board regarding our compensation policies for our
officers and all other forms of compensation, and also administers our incentive
compensation plans and equity-based plans (but our board retains the authority
to interpret those plans). The corporate governance committee of the board of
directors is responsible for the assessment of the performance of the board,
considering and making recommendations to the board with respect to the
nominations or elections of directors and other governance
issues.  The compensation committee consists of Dr. Cheng, Mr. Dai and
Mr. Lin.




There are
no other arrangements or understandings pursuant to which our directors are
selected or nominated.




There are
no family relationships among any of the persons named above, and there are no
arrangements or understandings with major shareholders, customers, suppliers or
others, pursuant to which any such person was selected as a director or member
of senior management.




D.
            Employees




As of
December 31, 2008, we had 601 employees, all of whom were based in China. We
believe that our relations with our employees are good. We have never had a work
stoppage, and our employees are not subject to a collective bargaining
agreement. As of December 31, 2008, 2007 and 2006, we had 601, 588 and 331
employees, respectively.




46




December 31, 2007
                
                
                December 31, 2008Total
                
                
                588
                
                
                
                601Mid
      and high level Manager
                
                
                47
                
                
                
                45Sales
                
                
                94
                
                
                
                72R&D
      and Customization
                
                
                152
                
                
                
                224Service
                
                
                248
                
                
                
                184Pre-sales
                
                
                12
                
                
                
                25Back-office
                
                
                35
                
                
                
                51





E.
            Share
      ownership




The
following table sets forth information with respect to beneficial ownership of
our ordinary shares and options as of October 12, 2009, for all of our executive
officers and directors individually. Beneficial ownership is determined in
accordance with the rules of the SEC and includes voting or investment power
with respect to the securities. Except as indicated below, and subject to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all ordinary shares shown as
beneficially owned by them. The number of our ordinary shares outstanding used
in calculating the percentage for each listed person includes our ordinary
shares underlying options held by such persons, but excludes ordinary shares
underlying options held by any other person. Percentage of beneficial ownership
is based on 3,362,241 shares outstanding as of October 12, 2009. These
shareholders do not possess voting rights that differ from our other
shareholders.





Amount of Beneficial Ownership (1)
                        
                        
                        PercentageOwnership (2)Adam
      Yan (3)
                        
                        
                        388,050
                        
                        
                        
                        11.5
                        %Deliang
      Tong
                        
                        
                        68,545
                        
                        
                        
                        2
                        %Qicheng
      Yang (4)
                        
                        
                        37,444
                        
                        
                        
                        1.1
                        %Hongjun
      Zou (5)
                        
                        
                        164,043
                        
                        
                        
                        4.9
                        %Ping
      Yu (6)
                        
                        
                        3,000
                        
                        
                        
                        *Tony
      Zhao
                        
                        
                        —
                        
                        
                        
                        —James
      Mu
                        
                        
                        —
                        
                        
                        
                        —Ming
      Zhu
                        
                        
                        —
                        
                        
                        
                        —Dong
      Cheng, Ph.D. (6)
                        
                        
                        3,600
                        
                        
                        
                        *Dennis
      O. Laing
                        
                        
                        —
                        
                        
                        
                        —Brian
      Lin
                        
                        
                        —
                        
                        
                        
                        —All
      directors and executive officers as a group (11 people)
(7)
                        
                        
                        664,682
                        
                        
                        
                        19.8
                        %




* Less
than 1%.





(1)
            Beneficial
      ownership is determined in accordance with the rules of the SEC and
      includes voting or investment power with respect to the ordinary
      shares.


(2)
            The
      number of our ordinary shares outstanding used in calculating the
      percentage for each listed person includes the ordinary shares underlying
      currently exercisable options held by such
  person.


(3)
            Includes
      currently exercisable options to purchase 4,622 ordinary
      shares.


(4)
            Includes
      currently exercisable options to purchase 4,179 ordinary
      shares.


(5)
            Includes
      currently exercisable options to purchase 4,377 ordinary
      shares.


(6)
            Represents
      currently exercisable options to purchase ordinary
  shares.


(7)
            Includes
      currently exercisable options to purchase 15,203 ordinary
      shares.




47




Share
Option Plan and Grants





As of
December 31, 2008, we had two share incentive plans in effect.  62,499
shares underlie our 2001 Share Incentive Plan and 131,678 shares underlie our
2005 Share Incentive Plan. All of the shares underlying
our 2001 and 2005 Plans have been issued at December 31, 2008.





We have
not granted any share options during the fiscal year ended December 31,
2008.




Item
      7.
            Major
      Shareholder and Related Party
Transactions




A.
            Major
      shareholders




The
following table sets forth information with respect to beneficial ownership of
our ordinary shares and options as of October 12, 2009, for all of our executive
officers and directors individually. Beneficial ownership is determined in
accordance with the rules of the SEC and includes voting or investment power
with respect to the securities. Except as indicated below, and subject to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all ordinary shares shown as
beneficially owned by them. The number of our ordinary shares outstanding used
in calculating the percentage for each listed person includes our ordinary
shares underlying options held by such persons, but excludes ordinary shares
underlying options held by any other person. Percentage of beneficial ownership
is based on 3,362,241 shares outstanding as of October 12,
2009.  These shareholders do not possess voting rights that differ
from our other shareholders.





Amount of Beneficial Ownership (1)
                      
                      
                      Percentage Ownership (2)Adam
      Yan (3)
                      
                      
                      388,050
                      
                      
                      
                      11.50
                      %Unitrust
                      
                      
                      397,175
                      
                      
                      
                      11.80
                      %Hudson
      Bay Fund, LP
                      
                      
                      194,489
                      
                      
                      
                      5.80
                      %Hudson
      Bay Overseas Fund Ltd.
                      
                      
                      237,772
                      
                      
                      
                      7.10
                      %




(1)
            Beneficial
      ownership is determined in accordance with the rules of the SEC and
      includes voting or investment power with respect to the ordinary
      shares.(2)
            The
      number of our ordinary shares outstanding used in calculating the
      percentage for each listed person includes the ordinary shares underlying
      options held by such person.(3)
            Includes
      currently exercisable options to purchase 4,622 ordinary
      shares.





B.
            Related party
      transactions





The
Company did not enter into any related party transactions in the fiscal years
ended December 31, 2008.




C.
            Interests of experts and
      counsel




Not
applicable.




Item
      8.
            Financial
      Information




See
information provided in response to Item 18 below.




48




Item
      9.
            The
      Offer and Listing




A.
            Offer and listing
      details




The
following chart shows the price history of our ordinary shares following the
completion of our initial public offering in 2006.





High
                  
                  
                  Low2007
                  
                  $
                  38.84
                  
                  
                  $
                  11.01First
      Quarter 2007
                  
                  
                  38.84
                  
                  
                  
                  18.68Second
      Quarter 2007
                  
                  
                  22.9
                  
                  
                  
                  14.70Third
      Quarter 2007
                  
                  
                  20.85
                  
                  
                  
                  11.01Fourth
      Quarter 2007
                  
                  
                  34.00
                  
                  
                  
                  13.802008
                  
                  
                  19.44
                  
                  
                  
                  2.51First
      Quarter 2008
                  
                  
                  19.44
                  
                  
                  
                  10.79Second
      Quarter 2008
                  
                  
                  18.43
                  
                  
                  
                  10.72Third
      Quarter 2008
                  
                  
                  12.67
                  
                  
                  
                  6.01Fourth
      Quarter 2008
                  
                  
                  8.45
                  
                  
                  
                  2.512009
                  
                  
                  13.84
                  
                  
                  
                  4.71First
      Quarter 2009
                  
                  
                  7.48
                  
                  
                  
                  4.71Second
      Quarter 2009
                  
                  
                  13.84
                  
                  
                  
                  5.45Third
      Quarter 2009
                  
                  
                  11.28
                  
                  
                  
                  7.50January
      2009
                  
                  
                  6.99
                  
                  
                  
                  4.87February
      2009
                  
                  
                  7.48
                  
                  
                  
                  4.83March
      2009
                  
                  
                  6.47
                  
                  
                  
                  4.71April
      2009
                  
                  
                  11.75
                  
                  
                  
                  5.45May
      2009
                  
                  
                  12.24
                  
                  
                  
                  8.41June
      2009
                  
                  
                  13.84
                  
                  
                  
                  6.50July
      2009
                  
                  
                  10.76
                  
                  
                  
                  7.50August
      2009
                  
                  
                  9.94
                  
                  
                  
                  7.81September
      2009
                  
                  
                  11.28
                  
                  
                  
                  8.06October
      2009 (through October 7)
                  
                  
                  8.42
                  
                  
                  
                  7.65




B.
            Plan of
      distribution




Not
applicable.




C.
            Markets




Our
ordinary shares are listed on the NASDAQ Capital Market under the symbol
“EFUT.”




D.
            Selling
      shareholders




Not
applicable.





E.
              Dilution




Not
applicable.





F.
            Expenses
      of the issue




Not
applicable.




49




Item
      10.
            Additional
      Information




A.
            Share
      capital




Not
applicable.




B.
            Memorandum and articles of
      association




The
information required by this item is incorporated by reference to the material
headed “Description of Share Capital” in our Registration Statement on Form F-1,
File No. 333-126007, as filed with the SEC.




C.
            Material
      contracts





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




·
              On
      April 8, 2008, our company signed an asset purchase agreement to acquire
      Proadvancer Systems Inc., a leading provider of logistics software and
      services in Mainland China and Asia., for an aggregate price of
      ¥22,498,006 in cash and ¥22,498,006 in the Company’s ordinary shares.
      We may be obligated to make an additional contingent payment required of
      up to ¥10,000,000 in the Company’s ordinary shares if its audited net
      income for the year ending December 31, 2009 reaches
      ¥10,500,000.


·
              On
      May 14, 2008, we completed the acquisition of additional 31% stake in
      Wangku for ¥6,762,679 in cash, as explained in Note 12 to our financial
      statements.




D.
            Exchange
      controls




Foreign
Currency Exchange




The
principal regulations governing foreign currency exchange in China are the
Foreign Exchange Administration Regulations (1996), as amended in 2007 and 2008,
and the Administration Rules of the Settlement, Sale and Payment of Foreign
Exchange (1996). Under these regulations, Renminbi are freely convertible for
current account items, including the distribution of dividends, interest
payments, trade and service-related foreign exchange transactions, but not for
most capital account items, such as direct investment, loan, repatriation of
investment and investment in securities outside China, unless the prior approval
of SAFE or its local counterparts is obtained. In addition, any loans to an
operating subsidiary in China that is a foreign invested enterprise, cannot, in
the aggregate, exceed the difference between its respective approved total
investment amount and its respective approved registered capital amount.
Furthermore, any foreign loan must be registered with SAFE or its local
counterparts for the loan to be effective. Any increase in the amount of the
total investment and registered capital must be approved by the PRC Ministry of
Commerce or its local counterpart. We may not be able to obtain these government
approvals or registrations on a timely basis, if at all, which could result in a
delay in the process of making these loans.




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




Dividend
Distribution




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




50




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




Notice 75




On
October 21, 2005, SAFE issued Notice 75, which became effective as of
November 1, 2005. According to Notice 75, prior registration with the
local SAFE branch is required for PRC residents to establish or to control an
offshore company for the purposes of financing that offshore company with assets
or equity interests in an onshore enterprise located in the PRC. An amendment to
registration or filing with the local SAFE branch by such PRC resident is also
required for the injection of equity interests or assets of an onshore
enterprise in the offshore company or overseas funds raised by such offshore
company, or any other material change involving a change in the capital of the
offshore company.




Moreover,
Notice 75 applies retroactively. As a result, PRC residents who have
established or acquired control of offshore companies that have made onshore
investments in the PRC in the past are required to complete the relevant
registration procedures with the local SAFE branch by March 31, 2006. Under
the relevant rules, failure to comply with the registration procedures set forth
in Notice 75 may result in restrictions being imposed on the foreign
exchange activities of the relevant onshore company, including the increase of
its registered capital, the payment of dividends and other distributions to its
offshore parent or affiliate and capital inflow from the offshore entity, and
may also subject relevant PRC residents to penalties under PRC foreign exchange
administration regulations.




PRC
residents who control our company are required to register with SAFE in
connection with their investments in us. Such individuals completed this
registration in 2007. If we use our equity interest to purchase the assets or
equity interest of a PRC company owned by PRC residents in the future, such PRC
residents will be subject to the registration procedures described in Notice
75.





New
M&A Regulations and Overseas Listings




On
August 8, 2006, six PRC regulatory agencies, including the Ministry of
Commerce, the State Assets Supervision and Administration Commission, the State
Administration for Taxation, the State Administration for Industry and Commerce,
CSRC and SAFE, jointly issued the Regulations on Mergers and Acquisitions of
Domestic Enterprises by Foreign Investors, or the New M&A Rule, which became
effective on September 8, 2006. This New M&A Rule, among other things,
includes provisions that purport to require that an offshore special purpose
vehicle formed for purposes of overseas listing of equity interests in PRC
companies and controlled directly or indirectly by PRC companies or individuals
obtain the approval of CSRC prior to the listing and trading of such special
purpose vehicle’s securities on an overseas stock exchange.




On
September 21, 2006, CSRC published on its official website procedures
regarding its approval of overseas listings by special purpose vehicles. The
CSRC approval procedures require the filing of a number of documents with the
CSRC and it would take several months to complete the approval process. The
application of this new PRC regulation remains unclear with no consensus
currently existing among leading PRC law firms regarding the scope of the
applicability of the CSRC approval requirement.




E .      
  Taxation





Cayman
Islands Taxation




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




51




Pursuant
to Section 6 of the Tax Concessions Law (1999 Revision) of the Cayman
Islands, we have obtained an undertaking from the
Governor-in-Council:





·
            that
      no law which is enacted in the Cayman Islands imposing any tax to be
      levied on profits or income or gains or appreciation shall apply to us or
      our operations; and


·
            that
      the aforesaid tax or any tax in the nature of estate duty or inheritance
      tax shall not be payable on the shares, debentures or other of our
      obligations.




The
undertaking for us is for a period of twenty years from December 19,
2000.





United
States Federal Income Taxation




The
following is a summary of material United States federal income tax consequences
under present law relating to the purchase, ownership, and disposition of our
ordinary shares. This description does not provide a complete analysis of all
potential tax consequences. The information provided below is based on the
Internal Revenue Code of 1986, as amended, or the Code, Treasury Regulations,
proposed Treasury Regulations, Internal Revenue Service, or the IRS, published
rulings and court decisions, all as of the date hereof. These authorities may
change, possibly on a retroactive basis, or the IRS might interpret the existing
authorities differently. In either case, the tax consequences of purchasing,
owning or disposing of ordinary shares could differ from those described below.
We do not intend to obtain a ruling from the IRS with respect to the tax
consequences of acquiring or holding the ordinary shares.




This
description is general in nature and does not discuss all aspects of U.S.
federal income taxation that may be relevant to a particular investor in light
of the investor’s particular circumstances, or to certain types of investors
subject to special treatment under U.S. federal income tax laws, such
as:




·
            banks
      or financial institutions;


·
            life
      insurance companies;


·
            tax-exempt
      organizations;


·
            dealers
      in securities or foreign
currencies;


·
            traders
      in securities that elect to apply a mark-to-market method of
      accounting;


·
            persons
      holding ordinary shares as part of a position in a “straddle” or as part
      of a “hedging,” “conversion” or “integrated” transaction for U.S. federal
      income tax purposes;


·
            persons
      subject to the alternative minimum tax provisions of the Code;
      and


·
            persons
      that have a “functional currency” other than the U.S.
    dollar.




This
description generally applies to purchasers of our ordinary shares as capital
assets. This description does not consider the effect of any foreign, state,
local or other tax laws that may be applicable to particular
investors.




Investors
considering the purchase of ordinary shares should consult their own tax
advisors regarding the application of the U.S. federal income tax laws to their
particular situations and the consequences of U.S. federal estate or gift tax
laws, foreign, state, or local laws, and tax treaties.




U.S.
Holders




As used
herein, the term “U.S. Holder” means a beneficial owner of ordinary shares that
is:





·
            a
      citizen or resident of the U.S. or someone treated as a U.S. citizen or
      resident for U.S. federal income tax
purposes;


·
            a
      corporation or other entity taxable as a corporation for U.S. federal
      income tax purposes organized in or under the laws of the U.S. or any
      political subdivision thereof;


·
            an
      estate the income of which is subject to U.S. federal income taxation
      regardless of its source; or




52




·
            a
      trust, if such trust validly elects to be treated as a U.S. person for
      U.S. federal income tax purposes, or if (a) a court within the U.S.
      can exercise primary supervision over its administration and (b) one
      or more U.S. persons have the authority to control all of the substantial
      decisions of such trust.





If a
partnership (including for this purpose any entity treated as a partnership for
U.S. tax purposes) is a beneficial owner of the ordinary shares, the U.S. tax
treatment of a partner in the partnership will generally depend on the status of
the partner and the activities of the partnership. A holder of the ordinary
shares that is a partnership and partners in such partnership should consult
their individual tax advisors about the U.S. federal income tax consequences of
holding and disposing of the ordinary shares.




If
you are not a U.S. Holder, this subsection does not apply to you and you should
refer to “Non-U.S. Holders” below.





Taxation
of Dividends and Other Distributions on Ordinary Shares




Subject
to the passive foreign investment company rules discussed below, all
distributions to a U.S. Holder with respect to the ordinary shares, other than
certain pro rata distributions of our shares, will be includible in a U.S.
Holder’s gross income as ordinary dividend income when received, but only to the
extent that the distribution is paid out of our current or accumulated earnings
and profits. For this purpose, earnings and profits will be computed under U.S.
federal income tax principles. The dividends will not be eligible for the
dividends-received deduction allowed to corporations. To the extent that the
amount of the distribution exceeds our current and accumulated earnings and
profits, it will be treated first as a tax-free return of the tax basis in the
ordinary shares, and to the extent the amount of the distribution exceeds the
U.S. Holder’s tax basis, the excess will be taxed as capital gain. Any gain
recognized by a non-corporate U.S. Holder on the sale or exchange of ordinary
shares generally will be subject to a maximum tax rate of 15%, which maximum tax
rate will increase under current law to 20% for dispositions occurring during
taxable years beginning on or after January 1, 2009.




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




Dividends
will constitute foreign source income for foreign tax credit limitation
purposes. The limitation on foreign taxes eligible for credit is calculated
separately with respect to specific classes of income. For this purpose,
dividends distributed by us with respect to the ordinary shares will be “passive
income” or, in the case of certain U.S. Holders, “financial services income.” In
particular circumstances, a U.S. Holder that:




·
            has
      held the ordinary shares for less than a specified minimum period during
      which it is not protected from risk of
loss,


·
            is
      obligated to make payments related to the dividends,
  or


·
            holds
      the ordinary shares in arrangements in which the U.S. Holder’s expected
      economic profit, after non-U.S. taxes, is insubstantial will not be
      allowed a foreign tax credit for foreign taxes imposed on dividends paid
      on the ordinary shares.





Distributions
to a U.S. Holder of shares or rights to subscribe for shares that are received
as part of a pro rata distribution to all our shareholders should not be subject
to U.S. federal income tax. The basis of the new shares or rights so received
will be determined by allocating the U.S. Holder’s tax basis in the ordinary
shares between the ordinary shares and the new shares or rights received, based
on their relative fair market values on the date of distribution. However, the
basis of the new shares or rights will be zero if:




53




·
            the
      fair market value of the new shares or rights is less than 15.0% of the
      fair market value of the old ordinary shares at the time of distribution;
      and


·
            the
      U.S. Holder does not make an election to determine the basis of the new
      shares by allocation as described
above.




The U.S.
Holder’s holding period in the new shares or rights will generally include the
holding period of the old ordinary shares on which the distribution was
made.





Taxation
of Disposition of Ordinary Shares




Subject
to the passive foreign investment company rules discussed below, a U.S. Holder
will recognize taxable gain or loss on any sale or exchange of ordinary shares
equal to the difference between the amount realized (in U.S. dollars) for the
ordinary shares and the U.S. Holder’s tax basis (in U.S. dollars) in the
ordinary shares. The gain or loss will be capital gain or loss. Any gain or loss
that you recognize will generally be treated as United States source income or
loss, except that losses will be treated as foreign source losses to the extent
you received dividends that were includible in the financial services income
basket during the 24-month period prior to the sale. If the ordinary shares are
not stock in a passive foreign investment company with respect to a U.S. Holder
in either the taxable year of the distribution or the preceding taxable year,
the distribution otherwise constitutes qualified dividend income for United
States federal income tax purposes, certain holding period and other
requirements are met, and the distribution is received in a taxable year
beginning prior to January 1, 2009, the distribution will be taxable to a
non-corporate U.S. Holder at a maximum rate of 15%.




Passive
Foreign Investment Company




We
believe that we are not a passive foreign investment company for U.S. federal
income tax purposes, but we cannot be certain whether we will be treated as a
passive foreign investment company for any future taxable year. If we are a
passive foreign investment company in any year in which a U.S. Holder holds
ordinary shares, the U.S. Holder generally will be subject to increased U.S. tax
liabilities and reporting requirements on receipt of certain dividends or on a
disposition of ordinary shares, in that year and all subsequent years although a
shareholder election to terminate such deemed passive foreign investment company
status may be made in certain circumstances. U.S. Holders should consult their
own tax advisors regarding our status as a passive foreign investment company,
the consequences of an investment in a passive foreign investment company, and
the consequences of making a shareholder election to terminate deemed passive
foreign investment company status if we no longer meet the income or asset test
for passive foreign investment company status in a subsequent taxable
year.




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





·
            at
      least 75.0% of its gross income is passive income,
  or


·
            at
      least 50.0% of the value of its assets (based on an average of the
      quarterly values of the assets during a taxable year) is attributable to
      assets that produce or are held for the production of passive
      income.




We will
be treated as owning our proportionate share of the assets and earning our
proportionate share of the income of any other corporation in which we own,
directly or indirectly, more than 25.0% (by value) of the stock of such
corporation.




Our
belief that we are not a passive foreign investment company is based on our
estimate of the fair market value of our intangible assets, including goodwill,
not reflected in our financial statements under US GAAP. In the future, in
calculating the value of these intangible assets, we will value our total
assets, in part, based on our total market value determined using the average of
the quarterly selling prices of the ordinary shares for the relevant year. We
believe this valuation approach is reasonable. However, it is possible that the
IRS will challenge the valuation of our intangible assets, which may result in
our classification as a passive foreign investment company. In addition, if our
actual acquisitions and capital expenditures do not match our projections, the
likelihood that we are or will be classified as a passive foreign investment
company may also increase.




54




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




If we are
a passive foreign investment company for any taxable year during which a U.S.
Holder holds ordinary shares, the U.S. Holder will be subject to special tax
rules with respect to:





·
            Any
      “excess distribution” that the U.S. Holder receives on ordinary shares,
      and


·
            Any
      gain the U.S. Holder realizes from a sale or other disposition (including
      a pledge) of the ordinary shares, unless the U.S. Holder makes a
      “mark-to-market” election as discussed
below.





Distributions
the U.S. Holder receives in a taxable year that are greater than 125% of the
average annual distributions the U.S. Holder received during the shorter of the
three preceding taxable years or the U.S. Holder’s holding period for the
ordinary shares will be treated as an excess distribution. Under these special
tax rules:





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


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


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




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




A U.S.
shareholder of a passive foreign investment company may avoid taxation under the
excess distribution rules discussed above by making a “qualified electing fund”
election to include the U.S. Holder’s share of our income on a current basis.
However, a U.S. Holder may make a qualified electing fund election only if the
passive foreign investment company agrees to furnish the shareholder annually
with certain tax information, and we do not presently intend to prepare or
provide such information.




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




The
mark-to-market election is available only for stock which is regularly traded on
a national securities exchange that is registered with the SEC or on NASDAQ, or
an exchange or market that the U.S. Secretary of the Treasury determines has
rules sufficient to ensure that the market price represents a legitimate and
sound fair market value. The mark-to-market election would be available to a
U.S. Holder unless our ordinary shares are delisted from The NASDAQ Capital
Market and do not subsequently become regularly traded on another qualified
exchange or market.




55




A U.S.
Holder who holds our ordinary shares in any year in which we are a passive
foreign investment company would be required to file IRS Form 8621 regarding
distributions received on our ordinary shares and any gain realized on the
disposition of our ordinary shares.




Non-U.S.
Holders




A
Non-U.S. Holder generally will not be subject to U.S. federal income tax on
dividends paid by us with respect to our ordinary shares unless the income is
effectively connected with the Non-U.S. Holder’s conduct of a trade or business
in the United States.




A
Non-U.S. Holder generally will not be subject to U.S. federal income tax on any
gain attributable to a sale or other disposition of our ordinary shares unless
such gain is effectively connected with the Non-U.S. Holder’s conduct of a trade
or business within the United States or the Non-U.S. Holder is a natural person
who is present in the United States for 183 days or more and certain other
conditions exist.




Dividends
and gains that are effectively connected with a Non-U.S. Holder’s conduct of a
trade or business in the United States generally will be subject to tax in the
same manner as they would be if the Non-U.S. Holder were a U.S. Holder, except
that the passive foreign investment company rules will not apply. Effectively
connected dividends and gains received by a corporate Non-U.S. Holder may also
be subject to an additional branch profits tax at a 30.0% rate or a lower tax
treaty rate.




Information
Reporting and Backup Withholding




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





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





F.
            Dividends
      and paying agents




Not
applicable.




G.
            Statement
      by experts





Not
applicable.





H.
            Documents
      on display




We are
subject to the information requirements of the Exchange Act. In accordance with
these requirements, the Company files reports and other information with the
SEC. You may read and copy any materials filed with the SEC at the Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains a web site at http://www.sec.govthat contains reports,
proxy statements and other information regarding registrants that file
electronically with the SEC.




I.
            Subsidiary
      Information





Not
applicable.




56




Item
      11.
            Quantitative
      and Qualitative Disclosures about Market
Risk





Interest
Rate Risk





Our
exposure to market risk for changes in interest rates relates primarily to the
interest income generated by our cash deposits in banks and interest expense
arising from our short-term bank borrowings that we incur in our ordinary course
of business. We have not used derivative financial instruments in our investment
portfolio. Interest-earning instruments and floating rate debt carry a degree of
interest rate risk. We have not been exposed, nor do we anticipate being
exposed, to material risks due to changes in interest rates. Our future interest
income may fluctuate in line with changes in interest rates. However, the risk
associated with fluctuating interest rates is principally confined to our cash
deposits in banks, and, therefore, our exposure to interest rate risk is minimal
and immaterial.




Foreign
Exchange Risk




Virtually
all of our revenues and costs are denominated in Renminbi and substantially all
of our assets and liabilities are denominated in Renminbi. As a result, we are
exposed to foreign exchange risk as our revenues and results of operations may
be impacted by fluctuations in the exchange rate between U.S. dollars and
Renminbi. We have not hedged exposures denominated in foreign currencies
using any derivative financial instruments. Any significant revaluation of RMB
against the U.S. dollar may materially affect our revenues, earnings and
financial position in U.S. dollars. The RMB appreciated by 6.47% against
the U.S. dollar in 2008. If the Renminbi continuously appreciates against
the U.S. dollar, the value of our Renminbi revenues and assets as expressed in
U.S. dollars in our financial statements will be subject to change. See “Risk
Factors — Fluctuation of the Renminbi could materially affect our financial
condition and results of operations.”




Inflation





Inflation
in China has not had a material impact on our results of operations in recent
years. According to the National Bureau of Statistics of China, the change in
the Consumer Price Index in China was 1.6%, 4.8% and 5.9% in 2006, 2007 and
2008, respectively. The Chinese government may introduce measures in the future
intended to reduce the inflation rate in China.  We cannot assure you that
these measures will not have a significant impact on our business.  Any
such measures may not be successful or immediately effective in reducing or
slowing the increase in China’s inflation rate.  Sustained or increased
inflation in China may have an impact on China’s economy and our customers,
which may adversely affect our business and financial results.





Taxation




The
Company is incorporated in the Cayman Islands and conducts its primary business
operations through its subsidiaries and VIEs in the PRC. Under the current laws
of the Cayman Islands and BVI, the Company is not subject to tax on income or
capital gains. Additionally, upon payments of dividends by the Company to its
shareholders, no Cayman Islands and BVI withholding tax will be
imposed.





On
March 16, 2007, the National People’s Congress enacted the Enterprise
Income Tax Law (the “New EIT Law”), which became effective on January 1,
2008 and has replaced the previous separate income tax laws for domestic
enterprises and FIEs by adopting an unified 25% enterprise income tax rate
applicable to all resident enterprises in China, including FIEs and foreign
enterprises operating in the PRC, except for certain entities that are eligible
to tax holidays and entities enjoying tax holidays under the Previous IT Law
grandfathered by the New EIT Law. In accordance with the implementation rules of
the New EIT Law, a qualified “High and New Technology Enterprise” under the New
EIT Law will be granted the preferential tax rate of 15%. eFuture Beijing is
recognized as “High and New Technology Enterprise” under the New EIT Law by
relevant authorities effective from fiscal year 2008. Therefore, eFuture Beijing
enjoyed the reduced EIT rate of 15% in 2008.  Biaoshang and Wangku
were subject to a 25% tax rate in 2008.




Under the
New EIT Law, dividends paid by a FIE to any of its foreign non-resident
enterprise investors are subject to a 10% withholding tax, which were exempt
under the Previous IT Law. Thus, the dividends, if and when payable by eFuture
Beijing eFuture Cayman, would be subject to 10% withholding tax. A lower tax
rate will be applied if such foreign non-resident enterprise investor’s
jurisdiction of incorporation has signed a tax treaty or arrangement for the
avoidance of double taxation and the prevention of fiscal evasion with respect
to taxes on income with China. Furthermore, pursuant to the interpretation under
Article 4 of Cai Shui [2008] Circular No. 1 of the New EIT Law,
dividends from earnings created prior to 2008 but distributed after 2008 are not
subject to withholding income tax.




57




The New
EIT Law stipulates that a resident enterprise, which includes an enterprise
established outside of the PRC with management and control located in the PRC,
will be subject to PRC income tax on its worldwide income. If the PRC tax
authorities subsequently determine that the Company and its subsidiaries
registered outside the PRC should be deemed a resident enterprise, the Company
and its subsidiaries registered outside the PRC will be subject to the PRC
income tax at a rate of 25%. The Company will continue to monitor its tax
status.




Item
      12.
            Description
      of Securities Other than Equity
Securities




Not
applicable.




PART
II




Item
      13.
            Defaults,
      Dividend Arrearages and
Delinquencies




None.




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




None.





Item
      15.
            Controls
      and Procedures




See Item
15T.




Item
      15T.
            Controls
      and Procedures




Disclosure
Controls and Procedures




As
required by Rule 13a-15 under the Securities Exchange Act, our management has
carried out an evaluation, with the participation of an external internal
control consultant and under the supervision of our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2008. Disclosure controls
and procedures refer to controls and other procedures designed to ensure that
information required to be disclosed in the reports we file or submit under the
Securities Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the SEC and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating and implementing possible
controls and procedures.





Management’s
Annual Report on Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control over financial reporting
is a process designed under the supervision of our Chief Executive Officer and
Chief Financial Officer to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of our financial
statements for external reporting purposes in accordance with U.S. generally
accepted accounting principles.




58




Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008. In making this assessment, management used the framework
set forth in the report entitled “Internal Control - Integrated Framework”
issued by the Committee of Sponsoring Organizations of the Treadway Commission,
or COSO. The COSO framework summarizes each of the components of a company’s
internal control system, including (i) the control environment,
(ii) risk assessment, (iii) control activities, (iv) information
and communication and (v) monitoring. Based on that evaluation, management
concluded that these controls were not effective at December 31, 2008 and
December 31, 2007, based on the following internal control matters that
constitute material weaknesses:





1.           We did not maintain sufficient control
over the financial reporting processes due to an insufficient complement of
internal personnel with a level of accounting knowledge, experience and training
in the application of US GAAP to ensure that the financial statements were
prepared in compliance with US GAAP and SEC requirements. As a result, we did
not adequately review accounting policies and US GAAP adjustments relating
to revenue recognition,
cost allocation, employees’ social welfare reserve, accounting for convertible
notes, and FIN 48 “Accounting for Uncertain Tax Positions”
application.




2.           We
did not maintain an effective internal audit function due to the lack of
qualified internal auditors with sufficient internal audit and US GAAP
experience. Furthermore, we did not implement adequate and proper supervisory
review to ensure that the significant internal control deficiencies can be
detected and remediated timely. This included a lack of sufficient communication
between the internal audit department and the Audit Committee, and lack of
documented review or approval of management’s risk assessment.





3.           The
Audit committee did not maintain sufficient communication with the independent
auditor during the financial reporting process.





4.           We
did not maintain sufficient internal controls over the monthly and year end
closing process to ensure that standard and non-standard transactions were
accurately recorded and that financial information was provided to management
and the Audit Committee for their review on a timely basis. Furthermore,
controls in place were insufficient to ensure that adequate identification,
review, and approval of journal entries was performed and
documented.





Despite
the issues above, the Company's management believesthat the consolidated
financial statements included in the Annual Report on Form 20-F fairly state, in
all material respects, our financial condition, results of operations and cash
flows for the periods presented in conformity with generally accepted accounting
principles in the United States of America.





Management’s
assessment of internal controls over financial reporting was not subject to
auditor attestation as of December, 31 2008 pursuant to temporary rules of the
Securities and Exchange Commission. Accordingly, this Annual Report does not
include an attestation report by our independent registered public accounting
firm regarding internal control over financial reporting.





Remediation
of Material Weaknesses





To
remediate the material weaknesses described above in "Management's Report on
Internal Control over Financial Reporting," we have implemented or plan to
implement the measures described below, and will continue to evaluate and may in
the future implement additional measures.





We have
planned remediation measures of hiring and training of personnel which are
intended to generally address these significant deficiencies by ensuring that we
will have sufficient personnel with knowledge, experience and training in the
application of US GAAP commensurate with our financial reporting requirements.
These measures include the following:





1.           We
plan to hire and train up our staff internally in 2009 with relevant accounting
experience, skills and knowledge in the preparation of financial statements
under the requirements of US GAAP and financial reporting disclosure under the
requirement of SEC rules;





2.           We
are establishing a formalized documented set of internal audit processes to
ensure that adequate and proper supervisory review is in place that the
significant internal control deficiencies can be detected or
prevented;




59




3.           We
plan to improve our written policies and procedures, as well as amend and
supplement the existing code of conduct to ensure the compliance with Section
406 of Sarbanes-Oxley Act; and





4.           We
intend to retain the services of outside counselors to advise us on the SEC
disclosure requirements.





We
believe that we are taking the steps necessary for remediation of the
significant deficiencies identified above, and we will continue to monitor the
effectiveness of these steps and to make any changes that our management deems
appropriate.





Changes
in Internal Controls over Financial Reporting




Other
than the remediation measures described above, there were no changes in our
internal controls over financial reporting during the year ended December 31,
2008 that have materially affected, or are reasonably likely to materially
affect our internal control over financial reporting.





Item
      16.
            [Reserved]




Item
      16A.
            Audit
      Committee Financial Expert




The
Company’s Board of Directors has determined that Mr. Brian Lin qualifies as an
“audit committee financial expert” in accordance with applicable NASDAQ Capital
Market standards. The Company’s Board of Directors has also determined that Mr.
Lin and the other members of the Audit Committee are all “independent” in
accordance with the applicable NASDAQ Capital Market standards.




Item
      16B.
            Code
      of Ethics




The
Company has adopted a Code of Business Conduct and Ethics that applies to the
Company’s employees, including its principal executive officer, principal
financial officer, principal accounting officer, controller and persons
performing similar functions. A copy of the Code of Business Conduct and Ethics
was filed as an exhibit to our 2006 Annual Report. In addition, the Company has
posted this information on its website at www.eFuture.com.cn.
The Company will provide any person a copy of its Code of Business Conduct and
Ethics, without charge, upon request. Such request should be addressed
to:





eFuture
Information Technology Inc.


8F Topnew
Tower


15
Guanghua Road


Chaoyang
District


Beijing
100026, People’s Republic of China


Attention:
Secretary




Item
      16C.
            Principal
      Accountant Fees and Services




Audit
Fees




We paid
Grant Thornton Hong Kong and Hansen, Barnett & Maxwell’s fees in the
aggregate amounts of $135,000 and $100,000 for the annual audit of our financial
statements for fiscal years 2008 and 2007, respectively.  All fees
paid in 2008 were paid to Grant Thornton Hong Kong, and all fees paid in 2007
were paid to Hansen, Barnett & Maxwell.





Audit
Related Fees




We paid
Hansen, Barnett & Maxwell nil and $15,000 for audit-related services for
fiscal years 2008 and 2007, respectively. These audit-related fees consisted of
services related to our registration statement on Form F-3 filing to register
the placement agent warrants from the IPO and services related to our
acquisition of Crownhead and Royalstone.




60


Tax
Fees





We did
not pay Grant Thornton Hong Kong and Hansen, Barnett & Maxwell any fees for
tax services for fiscal years 2008 and 2007, respectively.





Pre-Approval
Policies





Our Audit
Committee has the sole authority to approve all audit engagement fees and terms,
and the Audit Committee, or as member of the Audit Committee, must pre-approve
any audit and non-audit service provided to the Company by the Company’s
independent auditor.





Item
      16D.
            Exemptions
      from the Listing Standards for Audit
Committees





Not
applicable.





Item
      16E.
            Purchases
      of Equity Securities by the Issuer and Affiliated
    Purchasers





Not
applicable.





Item
      16F.
            Change
      in Registrant’s Certifying
Accountant.





Not
applicable.





Item
      16G.
            Corporate
      Governance.





Our
corporate governance practices do not differ from those followed by domestic
companies listed on the NASDAQ Capital Market.


61


PART
III


Item
      17.
            Financial
      Statements





See Item
18.





Item
      18.
            Financial
      Statements





The
consolidated financial statements of eFuture Information Technology Inc. are
included at the end of this annual report, beginning with page F-1.





Item
      19.
            Exhibits




1.1
              Amended
      and Restated Memorandum and Articles of Association of the Registrant
      (1)1.2
              Amended
      and Restated Memorandum of Association of the Registrant
    (1)1.3
              Written
      resolutions of the Registrant amending the terms of its Memorandum of
      Association dated June 16, 2005 (1)2.1
              Specimen
      Certificate for Ordinary Shares (1)4.1
              Securities
      Purchase Agreement dated as of March 13, 2007 by and among the Company,
      Capital Ventures International (“CVI”), Hudson Bay Fund, LP (“HBF”) and
      Hudson Bay Overseas Fund, Ltd. (“HBOF”) (2)4.2
              Registration
      Rights Agreement, dated March 13, 2007 by and among the Company, CVI, HBF
      and HBOF (2)4.3
              Form
      of Senior Convertible Note issued pursuant to the Securities Purchase
      Agreement dated as of March 13, 2007 (2)4.4
              Form
      of Series A Warrant issued pursuant to the Securities Purchase Agreement
      dated as of March 13, 2007 (2)4.5
              Form
      of Series B Warrant issued pursuant to the Securities Purchase Agreement
      dated as of March 13, 2007 (2)4.6
              Acquisition
      of Beijing Wangku Hutong Information Technology Co., Ltd.
    (3)4.7
              Acquisition
      of Crownhead Holdings Ltd. and Royalstone System Integrated Co., Ltd
      (4)8.1
              Subsidiaries
      of the Registrant (5)12.1
              Section
      302 Certification of Adam Yan (5)12.2
              Section
      302 Certification of Yu Ping (5)13.1
              Section
      906 Certification of Adam Yan (5)13.2
              Section
      906 Certification of Yu Ping
(5)





(1)
            Incorporated
      by reference to the Registrant’s Registration Statement on Form F-1 (File
      No. 333-126007).(2)
            Incorporated
      by reference to the Registrant’s Current Report on Form 6-K (File No.
      001-33113) filed with the SEC on March 15, 2007.(3)
            Incorporated
      by reference to the Registrant’s Current Report on Form 6-K (File No.)
      filed with the SEC on May 21, 2007 (File No.
011-33113).(4)
            Incorporated
      by reference to the Registrant’s Current Report on Form 6-K (File No.)
      filed with the SEC on August 15, 2007 (File No.
  011-33113).(5)
            Filed
      herewith.




62


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
undersigned certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form 20-F and has duly caused this Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on
Form 20-F to be signed on its behalf by the undersigned, thereunto duly
authorized, in the People’s Republic of China, on the 12th day of October,
2009.





EFUTURE
      INFORMATION TECHNOLOGY INC.By:
                  /s/
      Adam YanName:
                  Adam
      YanTitle:
                  Chairman
      and Chief Executive OfficerDate:  October
      12, 2009




S-1




EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES





INDEX
TO FINANCIAL STATEMENTS





PageReports
      of Independent Registered Public Accounting Firms
              F-2Consolidated
      Balance Sheets as of December 31, 2007 and 2008
              F-4Consolidated
      Statements of Operations and Comprehensive Income (loss) for the
      Years Ended December 31, 2006, 2007 and 2008
              F-6Consolidated
      Statements of Stockholders’ Equity (Deficit) for the Years Ended December
      31, 2006, 2007 and 2008
              F-7Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2006, 2007 and
      2008
              F-8Notes
      to Consolidated Financial Statements
              F-10




F-1





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board of
Directors and Shareholders


eFuture
Information Technology, Inc.








We have
audited the accompanying consolidated balance sheet of eFuture Information
Technology, Inc. and subsidiaries (the "Company") as of December 31, 2008, and
the related consolidated statement of operations and comprehensive income
(loss), stockholders’ equity (deficit), and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of eFuture
Information Technology, Inc. and subsidiaries as of December 31, 2008, and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.





/s/ GRANT
THORNTON


GRANT
THORNTON


Hong
Kong


October
12, 2009


F-2





HANSEN, BARNETT& MAXWELL,
      P.C.
            
            Registered
      with the Public Company
              Accounting
      Oversight Board
              
              
              A
      Member of the Forum of FirmsA
      Professional CorporationCERTIFIED
      PUBLIC ACCOUNTANTS5
      Triad Center, Suite 750Salt
      Lake City, UT 84180-1128Phone:
      (801) 532-2200Fax:
      (801) 532-7944www.hbmcpas.com





INDEPENDENT
AUDITORS’ REPORT




To the
Board of Directors and Stockholders of eFuture Information Technologies,
Inc..





We have
audited the accompanying consolidated balance sheet of eFuture Information
Technologies, Inc. and subsidiaries as of December 31, 2007, and the related
consolidated statements of operations and comprehensive income (loss),
stockholders’ equity (deficit), and cash flows for each of the years in the
two-year period ended December 31, 2007. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.  An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of eFuture Information
Technologies, Inc. and subsidiaries as of December 31, 2007, and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 2007 in conformity with accounting principles
generally accepted in the United States of America.





As
discussed in Note 16, the accompanying consolidated financial statements have
been restated for the effects of the following errors identified in the
Company’s consolidated financial statements for the year ended December 31,
2007: an understatement of revenue on certain software maintenance contracts,
failure to apply step acquisition accounting, improper timing of recognition for
contingent acquisition payments, improper calculation of deferred tax
liabilities, understatement of payroll accruals, and improper recording of
convertible notes.





/s/
            HANSEN,
      BARNETT & MAXWELL, P.C.HANSEN,
      BARNETT & MAXWELL, P.C.Salt
      Lake City, UtahJune
      24, 2008, except for Note 16,as
      to which the date is October 12, 2009




F-3


EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 
 Chinese Yuan (Renminbi)
                                
                                
                                U.S. DollarsDecember 31,
                                
                                
                                December
      31,2007
                                
                                
                                2008
                                
                                
                                2008(Restated)ASSETSCurrent
      assetsCash
      and cash equivalents
                                
                                ¥
                                67,227,348
                                
                                
                                ¥
                                60,787,734
                                
                                
                                $
                                8,909,891Trade
      receivables, less allowance for doubtful accounts of ¥4,695,898
      and¥4,743,679($695,299),
      respectively
                                
                                
                                17,259,965
                                
                                
                                
                                19,468,029
                                
                                
                                
                                2,853,504Refundable
      value added tax
                                
                                
                                3,691,035
                                
                                
                                
                                2,755,702
                                
                                
                                
                                403,914Deposits
                                
                                
                                156,695
                                
                                
                                
                                -
                                
                                
                                
                                -Advances
      to employees
                                
                                
                                3,576,947
                                
                                
                                
                                3,205,953
                                
                                
                                
                                469,909Advances
      to suppliers
                                
                                
                                657,724
                                
                                
                                
                                198,752
                                
                                
                                
                                29,132Notes
      receivable - related party
                                
                                
                                3,000,000
                                
                                
                                
                                -
                                
                                
                                
                                -Other
      receivables
                                
                                
                                576,965
                                
                                
                                
                                2,229,535
                                
                                
                                
                                326,791Prepaid
      expenses
                                
                                
                                862,653
                                
                                
                                
                                735,083
                                
                                
                                
                                107,744Inventory
      and work in process
                                
                                
                                5,749,951
                                
                                
                                
                                2,879,250
                                
                                
                                
                                422,023Total
      current assets
                                
                                
                                102,759,283
                                
                                
                                
                                92,260,038
                                
                                
                                
                                13,522,908Non-current
      assetsLong-term
      investments
                                
                                
                                4,264,433
                                
                                
                                
                                654,192
                                
                                
                                
                                95,887Deferred
      loan costs
                                
                                
                                7,557,383
                                
                                
                                
                                1,182,588
                                
                                
                                
                                173,336Property
      and equipment, net of accumulated depreciation of
      ¥5,191,489  and¥3,020,838($442,776),
      respectively
                                
                                
                                2,065,040
                                
                                
                                
                                3,605,458
                                
                                
                                
                                528,466Intangible
      assets, net of accumulated amortization of ¥19,799,245 and¥34,704,373($5,086,753),
      respectively
                                
                                
                                47,217,193
                                
                                
                                
                                49,875,082
                                
                                
                                
                                7,310,382Goodwill
                                
                                
                                45,013,827
                                
                                
                                
                                91,284,735
                                
                                
                                
                                13,379,954Total
      non-current assets
                                
                                
                                106,117,876
                                
                                
                                
                                146,602,055
                                
                                
                                
                                21,488,025Total
      assets
                                
                                ¥
                                208,877,159
                                
                                
                                ¥
                                238,862,093
                                
                                
                                $
                                35,010,933
 
 See the
accompanying notes to consolidated financial statements.
  F-4
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS (CONTINUED)
 
 Chinese Yuan (Renminbi)
                              
                              
                              U.S. DollarsDecember 31,
                              
                              
                              December
      31,2007
                              
                              
                              2008
                              
                              
                              2008(Restated)LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilitiesTrade
      accounts payable
                              
                              ¥
                              3,845,873
                              
                              
                              ¥
                              5,646,259
                              
                              
                              $
                              827,594Other
      payable
                              
                              
                              844,753
                              
                              
                              
                              11,097,702
                              
                              
                              
                              1,626,632Accrued
      expenses
                              
                              
                              4,626,683
                              
                              
                              
                              6,873,703
                              
                              
                              
                              1,007,505Accrued
      interest
                              
                              
                              278,420
                              
                              
                              
                              -
                              
                              
                              
                              -Taxes
      payable
                              
                              
                              8,976,305
                              
                              
                              
                              7,933,734
                              
                              
                              
                              1,162,878Advances
      from customers
                              
                              
                              13,025,978
                              
                              
                              
                              22,839,530
                              
                              
                              
                              3,347,678Royalstone
      acquisition obligation
                              
                              
                              19,818,925
                              
                              
                              
                              6,416,970
                              
                              
                              
                              940,560Health
      field acquisition obligation
                              
                              
                              3,300,000
                              
                              
                              
                              594,000
                              
                              
                              
                              87,065Proadvancer
      System acquisition obligation
                              
                              
                              -
                              
                              
                              
                              29,958,518
                              
                              
                              
                              4,391,135BFuture
      acquisition obligation
                              
                              
                              -
                              
                              
                              
                              392,877
                              
                              
                              
                              57,585Deferred
      tax, current portion
                              
                              
                              1,098,063
                              
                              
                              
                              1,553,197
                              
                              
                              
                              227,658Total
      current liabilities
                              
                              
                              55,815,000
                              
                              
                              
                              93,306,490
                              
                              
                              
                              13,676,290Long-term
      liabilities3%-10%
      ¥6,822,500 ($1,000,000) convertible note payable, net of
      ¥6,796,432($996,179)
      of unamortized discount
                              
                              
                              90,771
                              
                              
                              
                              26,068
                              
                              
                              
                              3,821Derivative
      liabilities
                              
                              
                              46,521,310
                              
                              
                              
                              5,111,417
                              
                              
                              
                              749,200Minority
      shareholder interests
                              
                              
                              -
                              
                              
                              
                              204,414
                              
                              
                              
                              29,962Deferred
      tax
                              
                              
                              3,237,309
                              
                              
                              
                              5,458,232
                              
                              
                              
                              800,033Total
      long-term liabilities
                              
                              
                              49,849,390
                              
                              
                              
                              10,800,131
                              
                              
                              
                              1,583,016Shareholders’
      equityOrdinary
      shares, $0.0756 U.S. dollars par value; 6,613,756 sharesauthorized;
      2,924,702 shares and 3,362,241 shares outstanding,
      respectively
                              
                              
                              1,811,589
                              
                              
                              
                              2,039,196
                              
                              
                              
                              298,893Additional
      paid-in capital
                              
                              
                              137,261,443
                              
                              
                              
                              173,054,651
                              
                              
                              
                              25,365,284Statutory
      reserves
                              
                              
                              3,084,020
                              
                              
                              
                              3,084,020
                              
                              
                              
                              452,037Accumulated
      deficit
                              
                              
                              (38,944,283
                              )
                              
                              
                              (43,422,395
                              )
                              
                              
                              (6,364,587
                              )Total
      shareholders’ equity
                              
                              
                              103,212,769
                              
                              
                              
                              134,755,472
                              
                              
                              
                              19,751,627Total
      liabilities and shareholders’ equity
                              
                              ¥
                              208,877,159
                              
                              
                              ¥
                              238,862,093
                              
                              
                              $
                              35,010,933
 
 See the
accompanying notes to consolidated financial statements.
  F-5
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
 
 Chinese Yuan (Renminbi)
                            
                            
                            U.S. DollarsFor the Years Ended December
      31,
                            
                            
                            For the
                              Year Ended
                              December 31,2006
                            
                            
                            2007
                            
                            
                            2008
                            
                            
                            2008(Restated)RevenuesSoftware
      sales
                            
                            ¥
                            29,832,720
                            
                            
                            ¥
                            42,076,411
                            
                            
                            ¥
                            66,215,769
                            
                            
                            $
                            9,705,499Hardware
      sales
                            
                            
                            11,403,473
                            
                            
                            
                            16,198,402
                            
                            
                            
                            26,655,967
                            
                            
                            
                            3,907,067Service
      fee income
                            
                            
                            6,607,337
                            
                            
                            
                            26,646,180
                            
                            
                            
                            46,991,766
                            
                            
                            
                            6,887,764Total
      Revenues
                            
                            
                            47,843,530
                            
                            
                            
                            84,920,993
                            
                            
                            
                            139,863,502
                            
                            
                            
                            20,500,330Cost
      of revenuesCost
      of software
                            
                            
                            7,665,866
                            
                            
                            
                            15,648,282
                            
                            
                            
                            22,928,605
                            
                            
                            
                            3,360,733Cost
      of hardware
                            
                            
                            10,548,649
                            
                            
                            
                            12,601,230
                            
                            
                            
                            21,989,087
                            
                            
                            
                            3,223,025Cost
      of service fee income
                            
                            
                            1,887,676
                            
                            
                            
                            6,965,367
                            
                            
                            
                            20,247,922
                            
                            
                            
                            2,967,816Amortization
      of acquired technology
                            
                            
                            -
                            
                            
                            
                            8,231,375
                            
                            
                            
                            13,308,030
                            
                            
                            
                            1,950,609Amortization
      of software costs
                            
                            
                            2,727,198
                            
                            
                            
                            2,889,118
                            
                            
                            
                            3,632,744
                            
                            
                            
                            532,465Total
      Cost of Revenue
                            
                            
                            22,829,389
                            
                            
                            
                            46,335,372
                            
                            
                            
                            82,106,388
                            
                            
                            
                            12,034,648Gross
      Profit
                            
                            
                            25,014,141
                            
                            
                            
                            38,585,621
                            
                            
                            
                            57,757,114
                            
                            
                            
                            8,465,682Operating
      ExpensesResearch
      and development
                            
                            
                            527,219
                            
                            
                            
                            816,479
                            
                            
                            
                            6,512,776
                            
                            
                            
                            954,602General
      and administrative
                            
                            
                            7,298,980
                            
                            
                            
                            19,192,286
                            
                            
                            
                            40,488,964
                            
                            
                            
                            5,934,623Selling
      and distribution expenses
                            
                            
                            9,210,975
                            
                            
                            
                            12,014,601
                            
                            
                            
                            20,792,618
                            
                            
                            
                            3,047,654Total
      Operating Expenses
                            
                            
                            17,037,174
                            
                            
                            
                            32,023,366
                            
                            
                            
                            67,794,358
                            
                            
                            
                            9,936,879Profit/(loss)
      from operations
                            
                            
                            7,976,967
                            
                            
                            
                            6,562,255
                            
                            
                            
                            (10,037,244
                            )
                            
                            
                            (1,471,197
                            )Interest
      income
                            
                            
                            141,230
                            
                            
                            
                            3,533,326
                            
                            
                            
                            1,424,029
                            
                            
                            
                            208,725Interest
      expense
                            
                            
                            (13,471
                            )
                            
                            
                            (2,813,489
                            )
                            
                            
                            (1,246,780
                            )
                            
                            
                            (182,745
                            )Interest
      expenses - amortization of discount on notes payable
                            
                            
                            -
                            
                            
                            
                            (22,415
                            )
                            
                            
                            (33,212
                            )
                            
                            
                            (4,868
                            )Interest
      expenses - amortization of deferred loan costs
                            
                            
                            -
                            
                            
                            
                            (2,114,685
                            )
                            
                            
                            (978,204
                            )
                            
                            
                            (143,379
                            )Income/(loss)
      on investments
                            
                            
                            -
                            
                            
                            
                            985,085
                            
                            
                            
                            (3,552,902
                            )
                            
                            
                            (520,763
                            )Gain
      on derivatives
                            
                            
                            -
                            
                            
                            
                            10,324,874
                            
                            
                            
                            33,122,465
                            
                            
                            
                            4,854,887Loss
      on extinguishment of convertible notes
                            
                            
                            -
                            
                            
                            
                            (39,504,662
                            )
                            
                            
                            (22,529,233
                            )
                            
                            
                            (3,302,196
                            )Foreign
      currency exchange gain
                            
                            
                            -
                            
                            
                            
                            544,173
                            
                            
                            
                            368,127
                            
                            
                            
                            53,958Profit/(loss)
      before tax
                            
                            
                            8,104,726
                            
                            
                            
                            (22,505,538
                            )
                            
                            
                            (3,462,954
                            )
                            
                            
                            (507,578
                            )Income
      tax expense/(benefit)
                            
                            
                            -
                            
                            
                            
                            946,704
                            
                            
                            
                            (810,744
                            )
                            
                            
                            (118,834
                            )Minority
      interest in profit/(loss) of consolidated subsidiary
                            
                            
                            -
                            
                            
                            
                            32,520
                            
                            
                            
                            (204,414
                            )
                            
                            
                            (29,962
                            )Net
      Income/(loss)
                            
                            
                            8,104,726
                            
                            
                            
                            (21,526,314
                            )
                            
                            
                            (4,478,112
                            )
                            
                            
                            (656,374
                            )Other
      comprehensive income/(loss)Foreign
      currency translation adjustment
                            
                            
                            (491,079
                            )
                            
                            
                            491,079
                            
                            
                            
                            -
                            
                            
                            
                            -Comprehensive
      Income/(loss)
                            
                            ¥
                            7,613,647
                            
                            
                            ¥
                            (21,035,235
                            )
                            
                            ¥
                            (4,478,112
                            )
                            
                            $
                            (656,374
                            )Earnings/(loss)
      per ordinary shareBasic
                            
                            ¥
                            4.80
                            
                            
                            ¥
                            (8.01
                            )
                            
                            ¥
                            (1.39
                            )
                            
                            $
                            (0.20
                            )Diluted
                            
                            ¥
                            4.43
                            
                            
                            ¥
                            (8.01
                            )
                            
                            ¥
                            (1.39
                            )
                            
                            $
                            (0.20
                            )Basic
      Weighted-average Shares Outstanding
                            
                            
                            1,689,434
                            
                            
                            
                            2,687,380
                            
                            
                            
                            3,214,466
                            
                            
                            
                            3,214,466Fully-Diluted
      Weighted-average Shares Outstanding
                            
                            
                            1,831,258
                            
                            
                            
                            2,687,380
                            
                            
                            
                            3,214,466
                            
                            
                            
                            3,214,466
 
 See the
accompanying notes to consolidated financial statements.
  F-6
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
 FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
  Chinese
      Yuan (Renminbi)Additional
                    
                    
                    
                    
                    
                    Accumulated
      OtherOrdinary
      Shares
                    
                    
                    Paid-in
                    
                    
                    Statutory
                    
                    
                    Comprehensive
                    
                    
                    AccumulatedShares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Reserves
                    
                    
                    Income/(loss)
                    
                    
                    Deficit
                    
                    
                    TotalBalance
      as of  January 1, 2006
                    
                    
                    1,500,000
                    
                    
                    ¥
                    938,550
                    
                    
                    ¥
                    33,592,443
                    
                    
                    ¥
                    3,084,020
                    
                    
                    ¥
                    -
                    
                    
                    ¥
                    (25,522,695
                    )
                    
                    ¥
                    12,092,318Issuance
      of ordinary shares and warrants for cash, net of offering
      costs
                    
                    
                    1,133,500
                    
                    
                    
                    709,231
                    
                    
                    
                    44,133,793
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    44,843,024Net
      income for the year
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    8,104,726
                    
                    
                    
                    8,104,726Foreign
      currency translation adjustment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (491,079
                    )
                    
                    
                    -
                    
                    
                    
                    (491,079
                    )Balance
      as of December 31, 2006
                    
                    
                    2,633,500
                    
                    
                    ¥
                    1,647,781
                    
                    
                    ¥
                    77,726,236
                    
                    
                    ¥
                    3,084,020
                    
                    
                    ¥
                    (491,079
                    )
                    
                    ¥
                    (17,417,969
                    )
                    
                    ¥
                    64,548,989Conversion
      of convertible notes
                    
                    
                    200,080
                    
                    
                    
                    113,445
                    
                    
                    
                    47,305,512
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    47,418,957Issuance
      of ordinary shares in Royalstone acquisition
                    
                    
                    71,122
                    
                    
                    
                    39,223
                    
                    
                    
                    8,516,738
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    8,555,961Warrants
      exercised
                    
                    
                    20,000
                    
                    
                    
                    11,140
                    
                    
                    
                    1,049,852
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,060,992Issuance
      of options to employees
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,663,105
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,663,105Net
      loss for the year
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (21,526,314
                    )
                    
                    
                    (21,526,314
                    )Foreign
      currency translation adjustment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    491,079
                    
                    
                    
                    -
                    
                    
                    
                    491,079Balance
      as of December 31,2007(Restated)
                    
                    
                    2,924,702
                    
                    
                    ¥
                    1,811,589
                    
                    
                    ¥
                    137,261,443
                    
                    
                    ¥
                    3,084,020
                    
                    
                    ¥
                    -
                    
                    
                    ¥
                    (38,944,283
                    )
                    
                    ¥
                    103,212,769Conversion
      of convertible notes
                    
                    
                    210,526
                    
                    
                    
                    108,518
                    
                    
                    
                    14,834,371
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    14,942,889Issuance
      of ordinary shares in Health Field acquisition
                    
                    
                    6,184
                    
                    
                    
                    3,192
                    
                    
                    
                    590,808
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    594,000Issuance
      of ordinary shares in Royalstone acquisition
                    
                    
                    66,035
                    
                    
                    
                    34,158
                    
                    
                    
                    6,382,812
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    6,416,970Issuance
      of ordinary shares in Proadvancer acquisition
                    
                    
                    83,944
                    
                    
                    
                    43,357
                    
                    
                    
                    7,255,788
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    7,299,145Warrants
      exercised
                    
                    
                    70,850
                    
                    
                    
                    38,382
                    
                    
                    
                    3,619,526
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,657,908Issuance
      of options to employees
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,109,903
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,109,903Net
      loss for the year
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (4,478,112
                    )
                    
                    
                    (4,478,112
                    )Balance
      as of December 31,2008
                    
                    
                    3,362,241
                    
                    
                    ¥
                    2,039,196
                    
                    
                    ¥
                    173,054,651
                    
                    
                    ¥
                    3,084,020
                    
                    
                    ¥
                    -
                    
                    
                    ¥
                    (43,422,395
                    )
                    
                    ¥
                    134,755,472
 
 U.S.
      DollarsAdditional
                    
                    
                    
                    
                    Accumulated
      OtherOrdinary
      Shares
                    
                    Paid-in
                    
                    Statutory
                    
                    Comprehensive
                    
                    AccumulatedShares
                    
                    Amount
                    
                    Capital
                    
                    Reserves
                    
                    Income/(loss)
                    
                    Deficit
                    
                    TotalBalance
      as of January 1, 2008(Restated)
                    
                    
                    2,924,702
                    
                    
                    $
                    265,532
                    
                    
                    $
                    20,118,936
                    
                    
                    $
                    452,037
                    
                    
                    $
                    -
                    
                    
                    $
                    (5,708,213
                    )
                    
                    $
                    15,128,292Conversion
      of convertible notes
                    
                    
                    210,526
                    
                    
                    
                    15,905
                    
                    
                    
                    2,174,331
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,190,236Issuance
      of ordinary shares in Health Field acquisition
                    
                    
                    6,184
                    
                    
                    
                    468
                    
                    
                    
                    86,597
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    87,065Issuance
      of ordinary shares in Royalstone acquisition
                    
                    
                    66,035
                    
                    
                    
                    5,007
                    
                    
                    
                    935,553
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    940,560Issuance
      of ordinary shares in Proadvancer acquisition
                    
                    
                    83,944
                    
                    
                    
                    6,355
                    
                    
                    
                    1,063,509
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,069,864Warrants
      exercised
                    
                    
                    70,850
                    
                    
                    
                    5,626
                    
                    
                    
                    530,528
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    536,154Issuance
      of options to employees
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    455,830
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    455,830Net
      loss for the year
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (656,374
                    )
                    
                    
                    (656,374
                    )Balance
      as of December 31, 2008
                    
                    
                    3,362,241
                    
                    
                    $
                    298,893
                    
                    
                    $
                    25,365,284
                    
                    
                    $
                    452,037
                    
                    
                    $
                    -
                    
                    
                    $
                    (6,364,587
                    )
                    
                    $
                    19,751,627
 
 See the
accompanying notes to consolidated financial statements.
  F-7
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 Chinese Yuan (Renminbi)
                    
                    
                    U.S. DollarsFor
      theYear
      EndedFor the Years Ended December
      31,
                    
                    
                    December 31,2006
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2008(Restated)Cash
      flows from operating activities:Net
      income (loss)
                    
                    ¥
                    8,104,726
                    
                    
                    ¥
                    (21,526,314
                    )
                    
                    ¥
                    (4,478,112
                    )
                    
                    $
                    (656,374
                    )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
                    
                    
                    679,876
                    
                    
                    
                    500,633
                    
                    
                    
                    891,183
                    
                    
                    
                    130,624Amortization
      of intangible assets
                    
                    
                    2,727,198
                    
                    
                    
                    11,120,493
                    
                    
                    
                    16,940,774
                    
                    
                    
                    2,483,074Impairment
      of intangible assets
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,143,290
                    
                    
                    
                    314,150Amortization
      of discount on notes payable
                    
                    
                    -
                    
                    
                    
                    22,413
                    
                    
                    
                    33,212
                    
                    
                    
                    4,868Amortization
      of deferred loan costs
                    
                    
                    -
                    
                    
                    
                    2,114,685
                    
                    
                    
                    978,204
                    
                    
                    
                    143,379Gain
      on derivatives
                    
                    
                    -
                    
                    
                    
                    (10,324,873
                    )
                    
                    
                    (33,122,465
                    )
                    
                    
                    (4,854,887
                    )Loss
      on extinguishment of convertible notes
                    
                    
                    -
                    
                    
                    
                    39,504,662
                    
                    
                    
                    22,529,233
                    
                    
                    
                    3,302,196Investment
      (income)/loss
                    
                    
                    -
                    
                    
                    
                    (985,085
                    )
                    
                    
                    3,552,902
                    
                    
                    
                    520,762Loss
      on disposition of property and equipment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    385,995
                    
                    
                    
                    56,577Provision
      for doubtful debt
                    
                    
                    -
                    
                    
                    
                    2,585,988
                    
                    
                    
                    2,340,706
                    
                    
                    
                    343,086Provision
      for loss in inventory and work in process
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,449,542
                    
                    
                    
                    212,465Compensation
      expense for options issued to employees
                    
                    
                    -
                    
                    
                    
                    2,663,105
                    
                    
                    
                    3,109,903
                    
                    
                    
                    455,830Deferred
      taxes
                    
                    
                    -
                    
                    
                    
                    (946,704
                    )
                    
                    
                    481,774
                    
                    
                    
                    70,615Foreign
      exchange loss
                    
                    
                    -
                    
                    
                    
                    (652,397
                    )
                    
                    
                    (2,222,996
                    )
                    
                    
                    (325,833
                    )Minority
      interest
                    
                    
                    -
                    
                    
                    
                    (32,520
                    )
                    
                    
                    204,414
                    
                    
                    
                    29,962Change
      in assets and liabilities:Accounts
      receivable
                    
                    
                    (664,562
                    )
                    
                    
                    (13,788,696
                    )
                    
                    
                    (2,526,441
                    )
                    
                    
                    (370,310
                    )Refundable
      value added tax
                    
                    
                    72,593
                    
                    
                    
                    (1,220,094
                    )
                    
                    
                    935,333
                    
                    
                    
                    137,095Deposits
                    
                    
                    466,458
                    
                    
                    
                    (111,752
                    )
                    
                    
                    156,695
                    
                    
                    
                    22,967Advances
      to employees
                    
                    
                    (162,781
                    )
                    
                    
                    (2,378,346
                    )
                    
                    
                    370,994
                    
                    
                    
                    54,378Advances
      to suppliers
                    
                    
                    (334,840
                    )
                    
                    
                    (214,694
                    )
                    
                    
                    991,888
                    
                    
                    
                    145,385Other
      receivables
                    
                    
                    60,552
                    
                    
                    
                    537,784
                    
                    
                    
                    136,565
                    
                    
                    
                    20,017Prepaid
      expenses
                    
                    
                    (66,189
                    )
                    
                    
                    (291,548
                    )
                    
                    
                    305,014
                    
                    
                    
                    44,707Inventories
                    
                    
                    25,277
                    
                    
                    
                    265,645
                    
                    
                    
                    1,421,159
                    
                    
                    
                    208,305Trade
      payables
                    
                    
                    208,096
                    
                    
                    
                    1,827,696
                    
                    
                    
                    1,230,861
                    
                    
                    
                    180,412Other
      payables
                    
                    
                    -
                    
                    
                    
                    (1,013,731
                    )
                    
                    
                    7,269,063
                    
                    
                    
                    1,065,454Accrued
      expenses
                    
                    
                    (101,711
                    )
                    
                    
                    1,570,905
                    
                    
                    
                    2,360,449
                    
                    
                    
                    345,980Accrued
      interest
                    
                    
                    -
                    
                    
                    
                    278,420
                    
                    
                    
                    (278,420
                    )
                    
                    
                    (40,809
                    )Taxes
      payable
                    
                    
                    (482,309
                    )
                    
                    
                    2,437,452
                    
                    
                    
                    (1,084,826
                    )
                    
                    
                    (159,007
                    )Advances
      from customers
                    
                    
                    2,116,454
                    
                    
                    
                    4,575,302
                    
                    
                    
                    4,542,952
                    
                    
                    
                    665,878Net
      cash provided by operating activities
                    
                    ¥
                    12,648,838
                    
                    
                    ¥
                    16,518,429
                    
                    
                    ¥
                    31,048,845
                    
                    
                    $
                    4,550,948Cash
      flows from investing activities:Purchases
      of property and equipment
                    
                    
                    (537,340
                    )
                    
                    
                    (527,743
                    )
                    
                    
                    (1,618,331
                    )
                    
                    
                    (237,205
                    )Payments
      for intangible assets
                    
                    
                    (3,818,597
                    )
                    
                    
                    (7,151,309
                    )
                    
                    
                    (2,930,247
                    )
                    
                    
                    (429,498
                    )Long-term
      investments
                    
                    
                    -
                    
                    
                    
                    (4,475,216
                    )
                    
                    
                    -
                    
                    
                    
                    -Acquisition
      of business
                    
                    
                    -
                    
                    
                    
                    (53,188,175
                    )
                    
                    
                    (28,278,247
                    )
                    
                    
                    (4,144,851
                    )Loan
      to Guarantor
                    
                    
                    800,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Amounts
      due from a related party
                    
                    
                    -
                    
                    
                    
                    (3,000,000
                    )
                    
                    
                    -
                    
                    
                    
                    -Net
      cash used in investing activities
                    
                    ¥
                    (3,555,937
                    )
                    
                    ¥
                    (68,342,443
                    )
                    
                    ¥
                    (32,826,825
                    )
                    
                    $
                    (4,811,554
                    )
 
 See the
accompanying notes to consolidated financial statements.
  F-8
 
 EFUTURE INFORMATION TECHNOLOGY INC.
AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
 
 Chinese Yuan (Renminbi)
                          
                          
                          U.S. DollarsFor
      theYear
      EndedFor the Years Ended December
      31,
                          
                          
                          December 31,2006
                          
                          
                          2007
                          
                          
                          2008
                          
                          
                          2008(Restated)Cash
      flows from financing activities:Issuance
      of ordinary shares for cash,  net ofoffering
      costs paid
                          
                          
                          47,128,495
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Proceeds
      from exercise of warrants
                          
                          
                          -
                          
                          
                          
                          1,060,992
                          
                          
                          
                          3,657,908
                          
                          
                          
                          536,154Issuance
      of convertible notes
                          
                          
                          -
                          
                          
                          
                          69,079,430
                          
                          
                          
                          -
                          
                          
                          
                          -Payment
      of make-whole obligation
                          
                          
                          -
                          
                          
                          
                          (10,015,958
                          )
                          
                          
                          (8,054,079
                          )
                          
                          
                          (1,180,517
                          )Repayment
      of short-term loans
                          
                          
                          (2,800,000
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Net
      cash provided by (used in) financing activities
                          
                          
                          44,328,495
                          
                          
                          
                          60,124,464
                          
                          
                          
                          (4,396,171
                          )
                          
                          
                          (644,363
                          )Effect
      of exchange rate changes on cash
                          
                          
                          (791,476
                          )
                          
                          
                          (2,537,839
                          )
                          
                          
                          (265,463
                          )
                          
                          
                          (38,910
                          )Net
      increase (decrease) in cash
                          
                          
                          52,629,920
                          
                          
                          
                          5,762,611
                          
                          
                          
                          (6,439,614
                          )
                          
                          
                          (943,879
                          )Cash
      and cash equivalents at beginning of year
                          
                          
                          8,834,817
                          
                          
                          
                          61,464,737
                          
                          
                          
                          67,227,348
                          
                          
                          
                          9,853,770Cash
      and cash equivalents at end of year
                          
                          ¥
                          61,464,737
                          
                          
                          ¥
                          67,227,348
                          
                          
                          ¥
                          60,787,734
                          
                          
                          $
                          8,909,891Supplemental
      cash flow informationInterest
      paid
                          
                          ¥
                          66,593
                          
                          
                          ¥
                          510,282
                          
                          
                          ¥
                          1,525,200
                          
                          
                          $
                          223,554Non-cash
      Investing and Financing ActivitiesAcquiring
      assets by assuming payment obligation
                          
                          
                          -
                          
                          
                          ¥
                          23,118,925
                          
                          
                          ¥
                          36,813,365
                          
                          
                          $
                          5,395,876Conversion
      of convertible notes
                          
                          
                          -
                          
                          
                          ¥
                          36,473,000
                          
                          
                          ¥
                          27,273,200
                          
                          
                          $
                          3,997,538Issuance
      of common stock for acquisition
                          
                          
                          -
                          
                          
                          ¥
                          8,555,961
                          
                          
                          ¥
                          14,310,115
                          
                          
                          $
                          2,097,488
 
 See the
accompanying notes to consolidated financial statements.
  F-9
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 
 NOTE
1. ORGANIZATION AND NATURE OF OPERATIONS
 
 Organization–eFuture
Information Technology, Inc. (the “Company” or “eFuture Cayman”) is a Cayman
Islands Corporation. Its wholly owned subsidiary eFuture (Beijing) Tornado
Information Technology, Inc. is a Beijing foreign investment enterprise in the
People’s Republic of China (the “PRC”). In August, 2007, eFuture (Beijing)
Tornado Information Technology Inc. was renamed as eFuture (Beijing) Royalstone
Information Technology Inc. (“eFuture Beijing”). As of December 31, 2008
and 2007, eFuture Information Technology, Inc. effectively controlled two
variable interest entities (“VIEs”), the details of which are as follows (see
note 11):
 
 •
              Beijing
      Wangku Hutong Information Technology Co., Ltd. (“Wangku”), variable
      interest acquired on May 14,
2008, and
 •
              Beijing
      Fuji Biaoshang Information Technology Co., Ltd.
      (“Biaoshang”), variable interest acquired on October 24,
      2007.
 
 Nature of
Operations– The Company is mainly engaged in developing and selling
Enterprise Resource Planning (ERP) software and providing ONE-STOP solutions for
distribution, retail and logistics businesses focused on the supply chain front
market for manufacturers, retailers, distributors and third party logistics, and
in providing the related system integration service and technical training
services. Systems integration services involve system design and system
implementation through the application of the software as well as ongoing
technical supporting services. Revenues are generated solely from sales to
customers in China.
 
 NOTE
2. SIGNIFICANT ACCOUNTING POLICIES
 
 Basis of
Presentation and Translating Financial Statements– The accompanying
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
Company’s functional currency is the Chinese Yuan (Renminbi) and the
accompanying consolidated financial statements have been expressed in Chinese
Yuan. The consolidated financial statements as of and for the year ended
December 31, 2008 have been translated into United States dollars solely for the
convenience of the reader. Solely for this purpose, the consolidated financial
statements have been translated into U.S. dollars at the rate of ¥6.8225 =
US$1.00, the approximate exchange rate prevailing on December 31, 2008. These
translated U.S. dollar amounts should not be construed as representing Chinese
Yuan amounts or that the Chinese Yuan amounts have been or could be converted
into U.S. dollars.
 
 Consolidation-The accompanying
consolidated financial statements include the accounts of eFuture Information
Technology Inc., its wholly owned subsidiary, eFuture (Beijing) Royalstone
Information Technology Inc., and its 51% owned variable interest entities, Fuji
Biaoshang Information Technology Co., Ltd., and Wangku Hutong Information
Technology Co., Ltd., from the respective dates of their acquisitions. All
significant inter-company balances and transactions have been eliminated in
consolidation. Our
consolidated financial statements for the year ended December 31, 2008 were
evaluated for subsequent events through October 12, 2009, the date the
consolidated financial statements were issued.
 
 The
Company adopted the provisions of Financial Accounting Standards Board
Interpretation No. 46R, “Consolidation of Variable Interest
Entities” (“FIN 46R”). Pursuant to FIN 46R, Biaoshang and Wangku are
variable interest entities of the Company and the Company is the primary
beneficiary of these variable interest entities. Accordingly, these variable
interest entities have been consolidated in the Company’s financial
statements.
 
 Accounting
Estimates– The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosures of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. In particular, the estimated allowance for doubtful
accounts could change in the near term.
 
 Foreign Currency
Translation-The Renminbi is the
functional currency for all of the Company's subsidiaries. The assets and
liabilities of entities whose records are denominated in currencies other than
the functional currency are remeasured at the end of the period exchange rates,
except non monetary assets, which have been remeasured at historical rates. The
statements of operations have been remeasured at average rates of exchange for
the period. Gains and losses from remeasurement are recognized as foreign
currency exchange gain or loss in the income statement.
  F-10
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 
 Fair Values of
Financial Instruments— The carrying amounts reported in the consolidated
balance sheets for trade receivables, other receivables, advances to suppliers,
advances to employees, accounts payable, other payables, accrued liabilities,
advances from customers and acquisition obligations approximate fair value
because of the immediate or short-term maturity of these financial
instruments.
 
 Cash and Cash
Equivalents– Cash and cash equivalents are comprised of cash on
hand and demand deposits with original maturities of no more than three
months. As of December 31, 2008 and 2007, ¥60,787,734 and ¥67,227,348,
of the Company’s cash and equivalents were maintained in non-US banks or
financial institutions.
 
 Trade
and Other receivables– Trade receivables are carried
at original invoiced amounts less a provision for doubtful accounts. In
estimating the provision for doubtful accounts, we consider the aging of the
accounts receivable, trends within and ratios involving the age of the accounts
receivable, the nature of the receivable, our historical provision for doubtful
accounts, the credit worthiness of the customer, and the economic conditions of
the customer's industry as well as general economic conditions, among other
factors.
 
 Other
receivables consist of miscellaneous items arising from transactions with
non-trade customers.
 
 Inventory and Work in
Process– Inventory is comprised of purchased software available for
resale and other consumable materials. Inventory is stated at the lower of
average cost or net realizable value. Work in process consists of costs incurred
on contracts that have not been completed. In the year ended December 31, 2008
the Company modified its inventory costing method to allocate labor and overhead
costs to each project based on actual labor hours incurred to improve the method
of allocation of overhead to contracts. The Company determined that the impact
of this change on our income from operations, net income, and inventory for the
year ended December 31, 2008 was not available since it was impractical to
evaluate the effect of applying this change retrospectively, as complete labor
records for prior periods were not available.
 
 Deferred Offering
Costs – The Company capitalizes direct and incremental costs
associated with the acquisition of equity financing, which will be netted
against the actual equity proceeds. If the equity offering is abandoned, the
deferred offering costs will be charged to expense.
 
 Long-term
Investments – The Company accounts for an equity investment over which it
has significant influence but does not own a majority equity interest or
otherwise control using the equity method. For equity investments over which the
Company does not have significant influence, cost method accounting is
used.
 
 Valuation of
Long-lived Assets - The Company evaluates long-lived assets, such as
fixed assets and purchased or internally developed intangible assets with finite
lives, for impairment whenever events or changes in circumstances indicate the
carrying value of an asset may not be recoverable in accordance with
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets.” When such events occur, the Company assesses the recoverability of the
assets group based on the undiscounted future cash flow the asset group is
expected to generate and recognizes an impairment loss when estimated
undiscounted future cash flow expected to result from the use of the asset group
plus net proceeds expected from disposition of the assets group, if any, is less
than the carrying value of the assets group. If the Company identifies an
impairment, the Company reduces the carrying amount of the assets group to its
estimated fair value based on a discounted cash flow approach or, when available
and appropriate, to comparable market values. The Company uses estimates and
judgments in its impairment tests and if different estimates or judgments had
been utilized, the timing or the amount of any impairment charges could be
different. Asset groups to be disposed of would be reported at the lower of the
carrying amount or fair value less costs to sell, and no longer depreciated. The
assets and liabilities of a disposal group classified as held for sale would be
presented separately in the appropriate asset and liability sections of the
balance sheet.
 
 Intangible
Assets - Computer Software
Costs and Research and Development–The Company charges all
development costs to research and development until technological feasibility
has been established. Technological feasibility is established when a detail
program design or working model is completed. After reaching technological
feasibility, additional software costs are capitalized until the software is
available for general release to customers. The estimated useful life of
capitalized software development expenditures is the shorter of four years or
the estimated period of realization of revenue from the related
software.
  F-11
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 
 Accounting for
Impairment of Goodwill -Goodwill represents the
excess of the purchase price over the fair value of the identifiable net assets
acquired in a business combination. Under Statement of Financial Accounting
Standards No. 142, Goodwill
and Other intangible Assets, goodwill is subject to an annual impairment
test. If an event occurs or circumstances change that would more-likely-than-not
reduce the fair value of a reporting unit below its carrying amount, an interim
impairment test is performed between annual tests. The impairment test includes
a comparison of estimated discounted cash flows associated with the asset’s
carrying amount. If the fair value is less than the carrying amount of the
asset, the second step of the impairment test shall be performed to measure the
amount of impairment loss, if any. In the second step, the implied fair market
value of goodwill is estimated and compared to the carrying amount. If the
carrying amount of goodwill exceeds its implied fair market value, an impairment
loss equal to this excess is recorded. The recorded loss cannot exceed the
carrying amount of goodwill.
 
 Revenue
Recognition – The Company recognizes revenue when it is realized and
earned. The Company considers revenue realized or realizable and earned when (1)
it has persuasive evidence of an arrangement, (2) delivery has occurred, (3) the
sales price is fixed or determinable, and (4) collectability is reasonably
assured. Delivery does not occur until products have been shipped or services
have been provided to the client and the client has signed a completion and
acceptance report, risk of loss has transferred to the client, client acceptance
provisions have lapsed, or the Company has objective evidence that the criteria
specified in client acceptance provisions have been satisfied. The sales price
is not considered to be fixed or determinable until all contingencies related to
the sale have been resolved.
 
 The
Company provides the following products and services: self-developed software,
purchased software, purchased hardware, system design and integration, and
value-added services, including post contract maintenance, technical support,
and eServices.
 
 Software
 
 The
Company sells self-developed software and software purchased from other vendors.
For software sales, the Company recognizes revenues in accordance with the
provisions of Statement of Position No. 97-2, “Software Revenue Recognition,”
and related interpretations. Revenue from perpetual (one-time charge) licensed
software is recognized at the inception of the license term. Revenue from term
(monthly license charge) arrangements is recognized on a subscription basis over
the period that the customer is using the license. We do not provide any rights
of return or warranties on our software.
 
 Revenues
applicable to multiple-element fee arrangements are bifurcated among the
elements such as software, hardware and post-contract service using
vendor-specific objective evidence of fair value. Such evidence consists of
pricing of multiple elements when those same elements are sold as separate
products or arrangements. Software maintenance for the first year and initial
training are included in the purchase price of the software. Initial training is
provided at the time of installation and is recognized as income as part of the
price of the software since it is minimal in value. Maintenance is valued based
on the fee schedule used by the Company for providing the regular level of
maintenance service as sold to customers when renewing their maintenance
contracts on a stand alone basis. Maintenance revenue is included in the income
statement under services and is recognized over the term of the
agreement.
 
 Hardware
 
 Revenue
from hardware sales is recognized when the product is shipped to the customer
and when there are no unfulfilled company obligations that affect the customer’s
final acceptance of the arrangement.
  F-12
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 
 Services
 
 Value-added
service
 
 The
Company provides system integration which involves the design and development of
complex IT systems to the customer’s specifications. These services are provided
on a fixed-price contract and the contract terms are generally short term.
Revenue is recognized on the completed contract method when delivery and
acceptance is determined by a completion report signed by the
customer.
 
 The
Company offers telephone and minimal on-site support to its customers. Revenue
from maintenance and technical support is recognized over the period of the
agreement.
 
 eService
 
 The
Company provides eServices including B2B service which helps link local and
overseas suppliers to stores throughout China and help efficiently exchange new
product supply and demand information between potential suppliers and retailers,
and SaaS service which serves the retail distribution industry in China by
bringing retailer’s suppliers onto a platform, allowing them to exchange
business information, arrange payments online and access purchase orders,
returns, payment status, inventory levels and analysis of sales data. Revenue is
recognized over the period of the agreement.
 
 Advances From
Customers -Amounts collected related to projects that have yet to be
completed and unearned amounts billed to customers related to post-contract
maintenance agreements are deferred until earned.
 
 Cost of
Revenues– Costs associated with contracts are deferred and
recognized as inventory and work in process until the services are completed,
the products and software are installed and delivered to and accepted by the
customer. When the criteria for revenue recognition have been met, costs
incurred are recognized as cost of revenue. Cost of revenues include wages,
materials, handling charges, and other expenses associated with the development
of IT systems to customers’ specifications, the cost of purchased hardware and
software, and costs related to technical support services. Amortization of
capitalized software costs and costs of acquired technology are included in the
cost of revenue.
 
 Advertising Costs- Advertising costs are expensed when incurred. Total advertising expense
was ¥280,891, ¥430,757, and ¥546,585 ($80,115) for the years ended December 31,
2006, 2007 and 2008, respectively.
 
 Income
Taxes-The
Company recognizes income taxes under the liability method. Deferred income
taxes are recognized for differences between the financial reporting and tax
bases of assets and liabilities at enacted tax rates in effect for the years in
which the differences are expected to reverse. A valuation allowance is recorded
against deferred tax assets if management does not believe the Company has met
the "more likely than not" standard imposed by SFAS no. 109.
 
 The
Company adopted the provisions of FASB Interpretation No. 48
(“FIN 48”), “Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109,” on January 1, 2008.
FIN 48 clarified the accounting for uncertainty in income taxes by
prescribing the recognition threshold a tax position is required to meet before
being recognized in the financial statements. The Company did not incur a
cumulative effect adjustment upon adoption of FIN 48 nor did the standard
have a material impact on the Company’s financial statements for the years ended
December 31, 2007 and 2008.
 
 In
general, the PRC tax authorities have up to five years to conduct examinations
of the Company’s tax filings. Accordingly, the PRC subsidiaries’ tax years
2004-2008 remain open to examination by the respective taxing
jurisdictions.
 
 Convertible debt
and embedded derivatives -The Company applies APB No. 14 “Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants” to determine the
classification of its convertible debt.
  F-13





EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements





The
Company identifies any embedded derivative instruments that may be contained
within its convertible debt instruments in accordance with the provisions of
SFAS No. 133 and records the fair value of such derivatives separately from the
value of the host instrument. Changes in the fair value of the derivative
instruments are recorded in the statements of operations and comprehensive
income for each reporting period. The fair value of the embedded derivative is
bifurcated from the host contract at inception and is recorded as a discount to
the face value of the convertible debt. The discount is amortized as additional
finance cost over the period of the debt.





Net Earnings
(Loss) per Ordinary Share-Basic earnings (loss) per
ordinary share is computed by dividing net income (loss) by the weighted-average
number of ordinary shares outstanding. Diluted earnings (loss) per ordinary
share are computed by dividing net income (loss) by the weighted-average number
of ordinary shares and dilutive potential ordinary share equivalents
outstanding. Potential ordinary share equivalents consist of shares issuable
upon the conversion of preferred stock and convertible notes and the exercise of
stock options and warrants.




The
number of anti-dilutive shares excluded from the calculation of diluted net
income (loss) per share was as follows as of December 31, 2006, 2007 and
2008:




Years ended
    December 31,2006
                                      
                                      
                                      2007
                                      
                                      
                                      2008Stock
      options and warrants
                                      
                                      
                                      -
                                      
                                      
                                      
                                      774,989
                                      
                                      
                                      
                                      462,794Contingent
      issuable shares in acquisition obligation
                                      
                                      
                                      -
                                      
                                      
                                      
                                      138,807
                                      
                                      
                                      
                                      150,174Issuable
      shares from Convertible notes
                                      
                                      
                                      -
                                      
                                      
                                      
                                      200,080
                                      
                                      
                                      
                                      52,631Total
      anti-dilutive shares
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,113,876
                                      
                                      
                                      
                                      665,599




The
following table is a reconciliation of the numerators and denominators used in
the calculation of basic and diluted earnings (loss) per share and the
weighted-average ordinary shares outstanding for the years ended December 31,
2006, 2007 and 2008:




Chinese
      Yuan (Renminbi)
                                                  
                                                  
                                                  U.S.
      DollarsFor
      theYear
      EndedFor
      the Years Ended December 31,
                                                  
                                                  
                                                  December
      31,2006
                                                  
                                                  
                                                  2007
                                                  
                                                  
                                                  2008
                                                  
                                                  
                                                  2008(Restated)Net
      income (loss)
                                                  
                                                  ¥
                                                  8,104,726
                                                  
                                                  
                                                  ¥
                                                  (21,526,314
                                                  )
                                                  
                                                  ¥
                                                  (4,478,112
                                                  )
                                                  
                                                  $
                                                  (656,374
                                                  )Basic
      weighted-average ordinary shares outstanding
                                                  
                                                  
                                                  1,689,434
                                                  
                                                  
                                                  
                                                  2,687,380
                                                  
                                                  
                                                  
                                                  3,214,466
                                                  
                                                  
                                                  
                                                  3,214,466Effect
      of dilutive securities:Stock
      options and warrants
                                                  
                                                  
                                                  141,824
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Diluted
      weighted-average ordinary shares outstanding
                                                  
                                                  
                                                  1,831,258
                                                  
                                                  
                                                  
                                                  2,687,380
                                                  
                                                  
                                                  
                                                  3,214,466
                                                  
                                                  
                                                  
                                                  3,214,466Basic
      earnings (loss) per share
                                                  
                                                  ¥
                                                  4.80
                                                  
                                                  
                                                  ¥
                                                  (8.01
                                                  )
                                                  
                                                  ¥
                                                  (1.39
                                                  )
                                                  
                                                  $
                                                  (0.20
                                                  )Diluted
      earnings (loss) per share
                                                  
                                                  ¥
                                                  4.43
                                                  
                                                  
                                                  ¥
                                                  (8.01
                                                  )
                                                  
                                                  ¥
                                                  (1.39
                                                  )
                                                  
                                                  $
                                                  (0.20
                                                  )





Stock-Based
Compensation – Effective January 1, 2006, the Company adopted
Financial Accounting Standards Board Statement of Financial Accounting Standards
123 (Revised 2004), “Share-Based Payment”(“SFAS 123R”). SFAS
123R requires the recognition of the cost of employee services received in
exchange for an award of equity instruments in the financial statements and is
measured based on the grant date fair value of the award. SFAS 123R also
requires the stock option compensation expense to be recognized over the period
during which an employee is required to provide service in exchange for the
award (the vesting period). Prior to the Company adopting SFAS 123R, stock-based
compensation plans were accounted for under Accounting Principles Board Opinion
("APB") No. 25, “Accounting for Stock Issued to Employees”(“APB 25”). Under APB
25, generally no compensation expense is recorded when the terms of the award
are fixed and the exercise price of the employee stock option equals or exceeds
the fair value of the underlying stock on the date of grant. The Company adopted
the disclosure-only provision of SFAS No. 123, “Accounting for Stock-Based
Compensation” (“SFAS 123”).


F-14


EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements





For
options granted subsequent to the adoption date of SFAS 123R on January 1, 2006,
the fair value of each stock option grant is estimated on the date of grant
using the Black-Scholes option pricing model. The Company recognizes the
relevant share-based compensation expenses over the requisite service
period.





Recently Enacted
Accounting Standards - On January 1, 2008, the Company adopted
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements,” (“SFAS 157”) as it relates to financial assets and financial
liabilities. In February 2008, the Financial Accounting Standards Board
(“FASB”) issued FASB Staff Position (“FSP”) No. FAS 157-2, “Effective Date
of FASB Statement No. 157,”(“FSP FAS 157-2”) which delayed the effective
date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on at least an annual basis, until January 1, 2009 for calendar
year-end entities. SFAS 157 and FSP FAS 157-2 were effective for financial
statements issued for fiscal years beginning after November 15,
2007.





SFAS 157
defines fair value, establishes a framework for measuring fair value in
accordance with US GAAP, and expands disclosures about fair value measurements.
The provisions of this standard apply to other accounting pronouncements that
require or permit fair value measurements and are to be applied prospectively
with limited exceptions. The adoption of SFAS 157, as it relates to financial
assets and financial liabilities, had no material impact on the Company’s
financial statements.





In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active” (FSP FAS
157-3”). This FSP clarifies the application of SFAS No. 157 in a market
that is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that
financial asset is not active. FSP FAS 157-3 is effective upon issuance,
including prior periods for which financial statements have not been issued. The
Company determined that the adoption did not have any impact on its consolidated
balance sheets, statements of operations, or disclosures.





On
January 1, 2008, the Company adopted SFAS No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities—including an amendment of
FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose
to measure many financial instruments and certain other assets and liabilities
at fair value on an instrument-by-instrument basis (the fair value option) with
changes in fair value reported in earnings. The adoption of SFAS 159 had no
impact on the Company’s financial statements as management did not elect the
fair value option for any financial instruments other than cash or any other
assets and liabilities.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007) “Business
Combinations” (“SFAS 141(R)”). SFAS 141(R) retains the fundamental requirements
of the original pronouncement requiring that the purchase method be used for all
business combinations. SFAS 141(R) defines the acquirer as the entity that
obtains control of one or more businesses in the business combination,
establishes the acquisition date as the date that the acquirer achieves control
and requires the acquirer to recognize the assets acquired, liabilities assumed
and any non-controlling interest at their fair values as of the acquisition
date. SFAS 141(R) also requires that acquisition-related costs be recognized
separately from the acquisition. SFAS 141(R) is effective for us for fiscal year
2009. We expect the impact to be limited to any business combination transaction
that occurs after December 31, 2008.




In
April 2008, the FASB issued FSP FAS 142-3, “Determination of Useful Life of
Intangible Assets” (“FSP FAS 157-3”). FSP FAS 142-3 amends the factors that
should be considered in developing the renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS
No. 142, “Goodwill and Other Intangible Assets”. FSP FAS 142-3 also
requires expanded disclosure related to the determination of intangible asset
useful lives. FSP FAS 142-3 is effective for fiscal years beginning after
December 15, 2008. Earlier adoption is prohibited. The guidance for
determining the useful life of intangible assets included in this FSP will be
applied prospectively to intangible assets acquired after December 31,
2008.





In
May 2008, the FASB issued FSP APB 14-1, “Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)”, which clarifies that convertible debt instruments that may be
settled in cash upon conversion (including partial cash settlement) are not
addressed by paragraph 12 of APB Opinion No. 14, “Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants.” Additionally,
this FSP specifies that issuers of such instruments should separately account
for the liability and equity components in a manner that will reflect the
entity’s non-convertible debt borrowing rate when interest cost is recognized in
subsequent periods. This FSP is effective for the Company as of January 1,
2009 and will have to be applied retrospectively to all periods presented. The
Company does not expect this to have a material impact on its consolidated
financial statements.


F-15


EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements





In
June 2008, the FASB issued EITF Issue No. 07-5 “Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”. This EITF
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early
application is not permitted. Paragraph 11(a) of SFAS No. 133 “Accounting
for Derivatives and Hedging Activities” specifies that a contract that would
otherwise meet the definition of a derivative but is both (a) indexed to
the Company’s own stock and (b) classified in stockholders’ equity in the
statement of financial position would not be considered a derivative financial
instrument. EITF No.07-5 provides a new two-step model to be applied in
determining whether a financial instrument or an embedded feature is indexed to
an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a)
scope exception. The Company does not expect this to have a material impact on
its consolidated financial statements.





In
June 2008, the FASB issued EITF Issue No. 08-4, “Transition Guidance
for Conforming Changes to Issue No. 98-5”. The objective of this EITF is to
provide transition guidance for conforming changes made to EITF No. 98-5,
“Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios”, that result from EITF No. 00-27
“Application of Issue No. 98-5 to Certain Convertible Instruments”, and
SFAS No. 150, “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity”. This Issue is effective for
financial statements issued for fiscal years ending after December 15,
2008. Early application is permitted. The Company does not expect this to have a
material impact on its consolidated financial statements.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements — an amendment of ARB No. 51
(“SFAS 160”), or SFAS 160. This statement affects the entities that have an
outstanding non-controlling interest in one or more subsidiaries or that
deconsolidate a subsidiary. SFAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008. The Company currently has an interest of 15% in a joint
venture company, considering the investment is not material, the adoption will
not have material impact on the Company’s consolidated financial
statements.





Business
Segments– In accordance with SFAS No. 131, “Disclosures
about segments of an Enterprise and Related Information” (“SFAS 131”), the
Company’s chief operating officer relies upon consolidated results of operations
when making decisions about allocating resources and assessing performance of
the Company.  Additionally, the Company does not distinguish between
markets or segments for the purpose of internal reporting. Therefore, no
business segment information has been presented.





NOTE
3. ACCOUNTS RECEIVABLE





Accounts
receivable consisted of the following:




Chinese Yuan (Renminbi)
                      
                      
                      U.S. DollarsDecember 31,
                      
                      
                      December 31,2007
                      
                      
                      2008
                      
                      
                      2008(Restated)Trade
      accounts receivable
                      
                      ¥
                      21,955,863
                      
                      
                      ¥
                      24,211,708
                      
                      
                      $
                      3,548,803Allowance
      for doubtful accounts
                      
                      
                      (4,695,898
                      )
                      
                      
                      (4,743,679
                      )
                      
                      
                      (695,299
                      )Trade
      accounts receivable, net
                      
                      ¥
                      17,259,965
                      
                      
                      ¥
                      19,468,029
                      
                      
                      $
                      2,853,504


F-16


EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements





Chinese Yuan (Renminbi)
                
                
                U.S. DollarsDecember 31,
                
                
                December 31,2007
                
                
                2008
                
                
                2008Movements
      in allowance for doubtful accountsBalance
      at the beginning of the year
                
                ¥
                2,109,910
                
                
                ¥
                4,695,898
                
                
                $
                688,296Provision
      for the year
                
                
                2,585,988
                
                
                
                2,340,706
                
                
                
                343,086Write-offs
                
                
                -
                
                
                
                (2,292,925
                )
                
                
                (336,083
                )Balance
      at the end of the year
                
                ¥
                4,695,898
                
                
                ¥
                4,743,679
                
                
                $
                695,299




NOTE
4. INVENTORY AND WORK IN PROCESS





Inventory
and work in process consisted of the following at December 31, 2007 and
2008:





Chinese Yuan (Renminbi)
                  
                  
                  U.S. DollarsDecember 31,
                  
                  
                  December 31,2007
                  
                  
                  2008
                  
                  
                  2008Work
      in process
                  
                  ¥
                  5,658,249
                  
                  
                  ¥
                  2,842,262
                  
                  
                  $
                  416,601Other
      inventory
                  
                  
                  91,702
                  
                  
                  
                  36,988
                  
                  
                  
                  5,422Total
      inventory
                  
                  ¥
                  5,749,951
                  
                  
                  ¥
                  2,879,250
                  
                  
                  $
                  422,023





NOTE
5. PROPERTY AND EQUIPMENT





Property
and equipment are stated at cost. Depreciation is computed on a straight-line
basis over the estimated useful lives of the assets as follows:





Motor
      vehicles
                5
      YearsLeasehold
      improvements - shorter of
                3
      Years or Lease TermOffice
      equipment
                4
      YearsCommunication
      equipment
                4
      YearsSoftware
                4
      Years




Maintenance
and repairs are charged to expense as incurred and major improvements are
capitalized. Gains or losses on sales or retirements are included in the
consolidated statements of operations in the year of disposition as general and
administrative expenses.





Depreciation expense was ¥679,876,
¥500,633 and ¥891,183 ($130,624) for the years ended December 31, 2006, 2007,
and 2008, respectively.


F-17


EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements





Property and equipment consisted
of the following at December 31, 2007 and 2008:





Chinese Yuan (Renminbi)
                      
                      
                      U.S. DollarsDecember 31,
                      
                      
                      December 31,2007
                      
                      
                      2008
                      
                      
                      2008Motor
      vehicles
                      
                      ¥
                      352,113
                      
                      
                      ¥
                      1,056,762
                      
                      
                      $
                      154,894Leasehold
      improvements
                      
                      
                      433,394
                      
                      
                      
                      403,394
                      
                      
                      
                      59,127Office
      equipment
                      
                      
                      5,602,699
                      
                      
                      
                      4,599,800
                      
                      
                      
                      674,210Communication
      equipment
                      
                      
                      232,974
                      
                      
                      
                      15,700
                      
                      
                      
                      2,301Software
                      
                      
                      635,349
                      
                      
                      
                      550,640
                      
                      
                      
                      80,710Total
                      
                      
                      7,256,529
                      
                      
                      
                      6,626,296
                      
                      
                      
                      971,242Less:  Accumulated
      depreciation
                      
                      
                      (5,191,489
                      )
                      
                      
                      (3,020,838
                      )
                      
                      
                      (442,776
                      )Property
      and equipment, net
                      
                      ¥
                      2,065,040
                      
                      
                      ¥
                      3,605,458
                      
                      
                      $
                      528,466




NOTE
6. GOODWILL AND INTANGIBLE ASSETS





The
changes in the carrying amount of goodwill are as follows for the year ended
December 31, 2008:





Chinese Yuan (Renminbi)
                        
                        
                        U.S. Dollars2007
                        
                        
                        2008
                        
                        
                        2008(Restated)Balance
      as of January 1
                        
                        ¥
                        -
                        
                        
                        ¥
                        45,013,827
                        
                        
                        $
                        6,597,849Goodwill
      acquired
                        
                        
                        45,013,827
                        
                        
                        
                        46,270,908
                        
                        
                        
                        6,782,105Balance
      as of December 31
                        
                        ¥
                        45,013,827
                        
                        
                        ¥
                        91,284,735
                        
                        
                        $
                        13,379,954





Intangible
assets consist of the following at December 31, 2008:





WeightedAverage
                        AmortizationPeriod
                      
                      GrossCarrying
                        Amount
                      
                      
                      Accumulated
                        Amortization
                      
                      
                      NetBookValueCustomer
      relationship
                      
                      4.48
      years
                      
                      ¥
                      36,747,048
                      
                      
                      ¥
                      9,927,364
                      
                      
                      ¥
                      26,819,684
                      
                      
                      $
                      3,931,064Contract
      backlog
                      
                      7.67
      months
                      
                      
                      9,089,998
                      
                      
                      
                      7,296,665
                      
                      
                      
                      1,793,333
                      
                      
                      
                      262,856Non-compete
                      
                      2.42
      years
                      
                      
                      1,399,999
                      
                      
                      
                      611,107
                      
                      
                      
                      788,892
                      
                      
                      
                      115,631Software
                      
                      5
      years
                      
                      
                      9,137,686
                      
                      
                      
                      3,665,027
                      
                      
                      
                      5,472,659
                      
                      
                      
                      802,149Distributor
      network
                      
                      15
      years
                      
                      
                      3,463,000
                      
                      
                      
                      134,672
                      
                      
                      
                      3,328,328
                      
                      
                      
                      487,846Internally
      generated software
                      
                      4  years
                      
                      
                      22,291,724
                      
                      
                      
                      13,069,538
                      
                      
                      
                      9,222,186
                      
                      
                      
                      1,351,731Trademark
                      
                      Indefinite
                      
                      
                      2,450,000
                      
                      
                      
                      -
                      
                      
                      
                      2,450,000
                      
                      
                      
                      359,106Balance
      at of December 31,2008
                      
                      
                      
                      ¥
                      84,579,455
                      
                      
                      ¥
                      34,704,373
                      
                      
                      ¥
                      49,875,082
                      
                      
                      $
                      7,310,383




In 2008,
management identified impairment on certain internally generated software as
well as software acquired through acquisitions as they are not expected to
generate future revenue, or be sellable to a third party. These intangibles were
significantly aged, and no further capital investment for upgrades is planned as
the software does not fit the Company's development strategy going forward. As a
result, impairment expense of ¥2,143,290 was recognized for the year ended
December 31, 2008. There was no impairment expense recognized for the year ended
December 31, 2006 and 2007.


F-18


EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements





Amortization
expense for the years ended December 31, 2006, 2007 and 2008 was ¥2,727,198,
¥11,120,493, ¥16,940,774 ($2,483,074), respectively. Estimated aggregate
amortization expense as of December 31, 2008 for the succeeding five years
ending December 31, is as follows:





Chinese Yuan(Renminbi)
                  
                  
                  U.S. Dollars2009
                  
                  ¥
                  15,729,349
                  
                  
                  $
                  2,305,5112010
                  
                  
                  13,625,505
                  
                  
                  
                  1,997,1432011
                  
                  
                  10,195,672
                  
                  
                  
                  1,494,4192012
                  
                  
                  5,183,696
                  
                  
                  
                  759,7942013
                  
                  
                  516,867
                  
                  
                  
                  75,759Thereafter
                  
                  
                  2,173,993
                  
                  
                  
                  318,650




Research
and development costs for the years ended December 31, 2006, 2007 and 2008 were
¥527,219, ¥816,479 and ¥6,512,776 ($954,603), respectively.





NOTE
7. OTHER PAYABLES





Other
payables consisted of the following at December 31, 2007 and 2008:





Chinese Yuan (Renminbi)
                            
                            
                            U.S.
      DollarsDecember 31,
                            
                            
                            December
      31,2007
                            
                            
                            2008
                            
                            
                            2008Social
      welfare accrual
                            
                            ¥
                            -
                            
                            
                            ¥
                            7,229,212
                            
                            
                            $
                            1,059,613Others
                            
                            
                            844,753
                            
                            
                            
                            3,868,490
                            
                            
                            
                            567,019Total
      other payables
                            
                            ¥
                            844,753
                            
                            
                            ¥
                            11,097,702
                            
                            
                            $
                            1,626,632





NOTE
8. ACCRUED EXPENSES





Accrued
expenses consisted of the following at December 31, 2007 and 2008:





Chinese Yuan (Renminbi)
                              
                              
                              U.S. DollarsDecember
      31,
                              
                              
                              December
      31,2007
                              
                              
                              2008
                              
                              
                              2008(Restated)Accrued
      payroll
                              
                              ¥
                              3,217,159
                              
                              
                              ¥
                              6,010,380
                              
                              
                              $
                              880,964Other
      accruals
                              
                              
                              1,409,524
                              
                              
                              
                              863,323
                              
                              
                              
                              126,541Total
      accrued expenses
                              
                              ¥
                              4,626,683
                              
                              
                              ¥
                              6,873,703
                              
                              
                              $
                              1,007,505





NOTE
9. STOCKHOLDERS’ EQUITY (DEFICIT)





Preferred
stock– The Company’s Articles of Association allows for the
issuance of convertible preferred stock in the amount of 10,000,000 shares at a
par value of $0.0756 per share with the rights as described in those articles.
Holders of the preferred stock have the same voting rights as holders of
ordinary stock. All other material rights are to be determined by special
resolution of the Company.





Ordinary
Shares – During October 2006 the Company closed its initial public
offering of 1,133,500 ordinary shares at ¥47.27 per share under the terms of the
offering and realized gross proceeds of ¥53,581,679 before cash offering costs
of ¥8,738,655. In addition, the Company issued the placement agents warrants to
purchase 113,350 shares of common stock at ¥56.19 per share for a period of five
years. The Company accounted for the warrants as an additional offering cost. On
December 21, 2007, warrants to purchase 20,000 ordinary shares were exercised.
The Company received ¥1,060,992 proceeds and recorded ¥1,049,852 additional
paid-in capital. On October 3, 2007, $5,000,000 of convertible notes was
converted into 200,080 ordinary shares at a conversion price of $24.99 per
share; the Company recorded ¥47,305,512 additional paid-in capital for this
conversion. In connection with the Royalstone acquisition, the Company issued
71,122 ordinary shares on December 31, 2007 as part of the satisfaction of the
purchase obligation.


F-19


EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements





On
January 3, January 7, March 19 and May 5 of 2008, warrants to purchase 20,000,
16,675, 16,675 and, 17,500 ordinary shares were exercised by the placement
agents of the initial public offering, respectively. The Company received
¥3,657,907 proceeds and recorded ¥3,619,526 additional paid-in capital. In July
and August of 2008, $4,000,000 of convertible notes was converted into 210,526
ordinary shares at a conversion price of $19 per share; the Company recorded
¥14,834,371 additional paid-in capital for this conversion. In connection with
the Royalstone acquisition, the Company issued 66,035 ordinary shares on
September 1, 2008 as part of the satisfaction of the purchase obligation, and
finally, the company issued 83,944 and 6,184 ordinary shares on September 1,
2008 and November 25, 2008 to the Proadvancer and Healthfield acquisition,
respectively.





Statutory
Reserves– According to the Articles of Association, the Company is
required to transfer a certain portion of its net profits, as determined under
PRC accounting regulations, to both the surplus reserve fund and the public
welfare fund. There were no transfers to these reserve funds in 2002 or 2003. In
2004 and 2005, the Company transferred to these funds ¥678,779 and ¥820,539,
respectively. There was no change in statutory reserves for the years ended
December 31, 2006, 2007, and 2008. As of December 31, 2008, the amount
comprising the surplus reserve fund was ¥2,056,013; the amount comprising the
public welfare fund was ¥1,028,007.





Stock
Options – During 2002, the Company granted stock options to
purchase 62,499 shares of ordinary shares to employees and directors. Options
were granted for a term of ten years and vest over a five year
period.





On
January 31, 2007, the Company issued employee stock options to purchase 65,875
ordinary shares to its employees and directors with an exercise price of $25.42.
On September 17, 2007, the Company issued employee stock options to purchase
65,800 employee stock options with an exercise price of $11.71. Options granted
during the year ended December 31, 2007 were granted for a term of ten years and
vest over a five year period. Plans are administered by the Company’s Nominee
and Compensation Committee. The Nominee and Compensation Committee has the
authority to determine the individuals who will receive grants, the type of
grant, the number of shares subject to the grant, the terms of the grant, the
time the grants will be made, the duration of any exercise or restriction
period, and to deal with any other matters arising under the Plan. The Company’s
board of directors may amend or terminate the Plan at any time if required under
the Plan, subject to shareholder approval.





The fair
value of this option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:




Set One
                      
                      
                      Set TwoGrant
      date
                      
                      January 31,
                        2007
                      
                      
                      September 17,
                        2007Expected
      life
                      
                      6.5
      years
                      
                      
                      6.5
      yearsRisk-free
      interest rate
                      
                      4.82%
                      
                      
                      4.32%Expected
      volatility
                      
                      75%
                      
                      
                      75%Expected
      dividend yield
                      
                      0%
                      
                      
                      0%





The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock volatility. Because the
Company’s employee stock options have characteristics significantly different
from those of traded options, and because changes in subjective input
assumptions can materially affect the fair value estimate, in management’s
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. Compensation cost which
is based on the fair value of options granted is recognized on a straight line
basis over the service period.


F-20


EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements





A summary
of the options issued by the Company as of December 31, 2008 is as
follows:





Weighted Average
                                  
                                  
                                  Average Remaining
                                  
                                  
                                  AggregateExercise Price
                                  
                                  
                                  Contractual Term
                                  
                                  
                                  IntrinsicOptions
                                  
                                  PerShare
                                  
                                  
                                  (inyears)
                                  
                                  
                                  ValueOutstanding on January 1, 2008
                                  
                                  
                                  194,174
                                  
                                  
                                  $
                                  14.30Granted
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Exercised
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Canceled
                                  
                                  
                                  7,608
                                  
                                  
                                  $
                                  14.30Outstanding
      on December 31, 2008
                                  
                                  
                                  186,566
                                  
                                  
                                  $
                                  14.30
                                  
                                  
                                  
                                  1.86
                                  
                                  
                                  
                                  2,196,294Exercisable
      on December 31, 2008
                                  
                                  
                                  100,924
                                  
                                  
                                  $
                                  10.99
                                  
                                  
                                  
                                  1.37
                                  
                                  
                                  
                                  245,613





There
were no options issued by the Company for the year 2008 nor any stock options
exercised during the year.





A summary
of the status of the Corporation’s non-vested shares as of December 31,
2008 is presented below:





Weighted-AverageNonvested Shares
                  
                  Shares
                  
                  
                  Grant-Date Fair ValueNonvested
      at January 1, 2008
                  
                  
                  111,006
                  
                  
                  $
                  23.34Granted
                  
                  
                  -
                  
                  
                  
                  -Vested
                  
                  
                  (25,315
                  )
                  
                  
                  23.34Canceled
                  
                  
                  -
                  
                  
                  
                  -Nonvested
      at December 31, 2008
                  
                  
                  85,691
                  
                  
                  $
                  23.34





The
unrecognized share-based compensation cost related to stock option expense at
December 31, 2008 was ¥ 9,852,155 and will be recognized over a
weighted average of 3.1 years.





The
share-based compensation costs during the years ended December 31, 2008,
2007 and 2006 were ¥3,109,903, ¥2,663,105 and nil, respectively.





NOTE
10. ACQUISITIONS





Proadvancer





On April
8, 2008, the Company acquired Proadvancer Systems Inc. (“Proadvancer) for
an aggregate price of ¥22,498,006 in cash and ¥22,498,006 in the Company’s
ordinary shares. Proadvancer is a logistics software and services provider in
Mainland China and other areas of Asia. Proadvancer leverages a decade of
experience in logistics operations as well as advanced logistics planning theory
and professional information and project management technology personnel to
provide comprehensive logistics services to many top 100 retailers in
China.





We have
allocated our investment basis to Proadvancer’s assets and liabilities as of the
acquisition date based on the estimated fair values of such assets and
liabilities on such date, and the excess of our investment basis over the fair
values of such identifiable net assets has been allocated to goodwill. For
financial reporting purposes, we have accounted for Proadvancer as part of our
consolidated operations since April 8, 2008.


F-21


EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements





The
following table summarizes the allocation of the purchase price for
Proadvancer’s net assets acquired at fair value:





Purchase
      PriceValue
      of shares to acquire Proadvancer
                            
                            ¥
                            22,498,006Cash
      consideration
                            
                            
                            22,498,006¥
                            44,996,012Less:
      Fair Value of identifiable assets acquired:Current
      assets
                            
                            ¥
                            1,797,949Fixed
      assets
                            
                            
                            75,094¥
                            1,873,043Plus:
      Fair value of liabilities assumed:Current
      liabilities
                            
                            ¥
                            574,487Deferred
      taxes
                            
                            
                            2,194,283¥
                            2,768,770Excess
      of cost over fair value of net assets acquired-intangible assets and
      goodwill
                            
                            ¥
                            45,891,739





The
excess cost of the fair value of the net assets acquired has been allocated to
the following identifiable intangibles, and the remaining amount of ¥30,561,739
has been recorded as goodwill:





WeightedAverage
                        AmortizationPeriod
                      
                      GrossCarryingAmount
                      
                      
                      Accumulated
                        Amortization
                      
                      
                      NetBookValueCustomer
      relationship
                      
                      3
      years
                      
                      ¥
                      7,990,000
                      
                      
                      ¥
                      1,775,556
                      
                      
                      ¥
                      6,214,444Contract
      backlog
                      
                      2
      years
                      
                      
                      2,690,000
                      
                      
                      
                      896,667
                      
                      
                      
                      1,793,333Non-compete
                      
                      2
      years
                      
                      
                      360,000
                      
                      
                      
                      120,000
                      
                      
                      
                      240,000Software
                      
                      5
      years
                      
                      
                      4,290,000
                      
                      
                      
                      572,000
                      
                      
                      
                      3,718,000Balance
      as of December 31,2008
                      
                      
                      
                      ¥
                      15,330,000
                      
                      
                      ¥
                      3,364,223
                      
                      
                      ¥
                      11,965,777





Pursuant
to the purchase agreement, the Company is subject to pay a contingent payment of
¥10,000,000 in the Company’s ordinary shares if the audited net income of
Proadvancer for the year ending December 31, 2009 reaches ¥10,500,000. Were this
contingency to materialize, this payment would be recorded as an increase to
goodwill.





Crownhead
and Royalstone





On July
31, 2007, the Company completed the acquisition of Crownhead and its subsidiary,
Royalstone, a leading retail software and service provider in China, for an
aggregate price of ¥58,285,976 in cash and ¥24,809,902 in the Company’s ordinary
shares contingent upon Crownhead and Royalstone meeting certain earnings targets
during the 17 month period from August 1, 2007 to December 31, 2008. The
acquisition has been accounted for under the purchase method of
accounting.


F-22


EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements





The
following table summarizes the allocation of the purchase price for Crownhead
and Royalstone’s net assets acquired at fair value as of July 31,
2007:





Purchase
      PriceValue
      of shares to acquire Crownhead and Royalstone
                                                  
                                                  ¥
                                                  18,392,932Cash
      consideration
                                                  
                                                  
                                                  58,285,967¥
                                                  76,678,899Less:
      Fair Value of identifiable assets acquired:Current
      assets
                                                  
                                                  ¥
                                                  3,678,877Fixed
      assets
                                                  
                                                  
                                                  994,224¥
                                                  4,673,101Plus:
      Fair value of liabilities assumed:Current
      liabilities
                                                  
                                                  ¥
                                                  2,073,553Deferred
      taxes
                                                  
                                                  
                                                  5,282,076¥
                                                  7,355,629Excess
      of cost over fair value of net assets acquired-intangible assets
      and goodwill
                                                  
                                                  ¥
                                                  79,361,427





The
excess cost of the fair value of the net assets acquired has been allocated to
the following identifiable intangibles, and the remaining amount of ¥38,241,427
has been recorded as goodwill:




Weighted
      Average Amortization Period
              
              Gross
      Carrying Amount
              
              
              Accumulated
      Amortization
              
              
              Net
      Book ValueCustomer
      relationship
              5
      years
              
              ¥
              28,280,000
              
              
              ¥
              8,012,670
              
              
              ¥
              20,267,330Contract
      backlog
              0.5
      years
              
              
              6,400,000
              
              
              
              6,400,000
              
              
              
              -Non-compete
              3
      years
              
              
              1,040,000
              
              
              
              491,107
              
              
              
              548,893Software
              5
      years
              
              
              2,950,000
              
              
              
              1,422,488
              
              
              
              1,527,512Trademark
              Indefinite
              
              
              2,450,000
              
              
              
              -
              
              
              
              2,450,000Balance
      as of December 31,2008
              
              
              ¥
              41,120,000
              
              
              ¥
              16,326,265
              
              
              ¥
              24,793,735


The
Company recorded ¥19,818,925 as Royalstone acquisition obligation as of December
31, 2007 which included a contingent purchase price of ¥3,420,000 as at December
31, 2007 as Crownhead and Royalstone met the earnings targets during the period
from August 1, 2007 to December 31, 2007. During 2008, the company settled the
contingent purchase price by paying ¥1,539,000 in cash and ¥1,710,000 in
shares.  The Company accrued an additional contingent payment of
¥6,416,970 as of December 31, 2008 upon Crownhead and Royalstone meeting the
earnings targets for the year ended December 31, 2008. This was considered
additional purchase consideration and recorded as an increase to
goodwill.





NOTE
11. VARIABLE INTEREST ENTITIES AND OTHER LONG-TERM INVESTMENT





(a)
Variable interest entities





FIN 46R
“Consolidation of Variable Interest Entities” requires a variable interest
entity to be consolidated by a company if that company is the primary
beneficiary of that variable interest entity.





To
satisfy PRC laws and regulations, the Company conducts its Internet information
and certain other businesses in the PRC via its variable interest entities.
These variable interest entities are directly owned by certain employees of the
Company. Capital for the variable interest entities is funded by the Company
through loans provided to those employees, and is initially recorded as loans to
related parties. These loans are eliminated for accounting purposes with the
capital of variable interest entities during consolidation.


F-23


EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements





Under
contractual agreements with the Company, employees who are shareholders of the
variable interest entities are required to transfer their ownership in these
entities to the Company, if permitted by PRC laws and regulations, or, if not so
permitted, to designees of the Company at any time to repay the loans
outstanding. All voting rights of the variable interest entities are assigned to
the Company, and the Company has the right to designate all directors and senior
management personnel of the variable interest entities. Employees who are
shareholders of the variable interest entities have pledged their shares in the
variable interest entities as collateral for the loans. As of December 31, 2008,
the aggregate amount of these loans was ¥10,762,679.





As of
December 31, 2008 the Company effectively controlled two variable interest
entities, Biaoshang and Wangku, which have been consolidated in the Company's
financial statements.





Wangku





Wangku
Hutong Information Technology, Co. Ltd., (“Wangku”) is a Web enabler of China
Yellow Pages and a B2B e-Business service provider. In May, 2007, the Company
purchased 20% of Wangku’s equity interest at a price of ¥3,000,000 through
Xuejun Zhang, an employee of the Company.





The
following table summarizes the allocation of the purchase price for the
proportionate share of Wangku’s net assets acquired at fair value:





Purchase
      PriceCash
      to acquire 20% of Wangku
                          
                          ¥
                          3,000,000Less:
      Fair Value of identifiable assets acquired:Current
      assets
                          
                          ¥
                          846,792Fixed
      assets
                          
                          
                          203,136¥
                          1,049,928Plus:
      Fair value of liabilities assumed:Current
      liabilities
                          
                          ¥
                          445,796¥
                          445,796Excess
      of cost over fair value of net assets acquired-intangible assets and
      goodwill
                          
                          ¥
                          2,395,868





The
excess cost over the fair value of the net assets acquired has been allocated
¥1,200,000 to distributor network, the only identifiable intangible asset, as of
the date of the acquisition. The remaining amount of ¥1,195,868 was recorded as
goodwill.





Goodwill
and the intangible asset are not deductible for tax purposes. The intangible
asset, except for goodwill, is being amortized over its estimated useful life as
described above from the date of acquisition and was recorded against our equity
in earnings. Wangku generated net income of ¥6,038,135 for the period from June
1 to December 31, 2007 and our 20% equity ownership accounted for investment
income of ¥1,207,627 by equity method.





Prior to
purchase accounting adjustments, Wangku generated net loss of ¥14,489,530 for
the period from January 1 to May 13, 2008 and our 20% equity ownership accounted
for investment loss of ¥2,929,636 by equity method.


F-24


EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements





On May
14, 2008, the Company gained effective control over an additional 31% of Wangku
for ¥6,762,679 in cash. The acquisition of Wangku has been accounted for as
a step acquisition business combination in fiscal year 2008. We have allocated
our investment basis to our pro rata share of Wangku’s assets and liabilities at
each significant acquisition date based on the estimated fair values of such
assets and liabilities on such dates, and the excess of our investment basis
over the adjusted estimated fair values of such identifiable net assets has been
allocated to goodwill. For financial reporting purposes, we have accounted for
Wangku using the equity method through May 2008, and as a consolidated
subsidiary thereafter.





The
following table summarizes the allocation of the 31% purchase price for the
proportionate share of Wangku’s net assets acquired at fair value at the date of
acquisition:





Purchase
      PriceCash
      to acquire an additional 31% of Wangku
                          
                          ¥
                          6,762,679Less:
      Fair Value of identifiable assets acquired:Current
      asstes
                          
                          ¥
                          1,321,761Fixed
      assets
                          
                          
                          372,403¥
                          1,694,164Plus:
      Fair value of liabilities assumed:Current
      liabilities
                          
                          ¥
                          3,465,288Non-current
      liabilities
                          
                          
                          2,799,519¥
                          6,264,807Excess
      of cost over fair value of net assets acquired-intangible assets and
      goodwill
                          
                          ¥
                          11,333,322





The excess cost over the fair
value of the net assets acquired of ¥2,263,000 has been allocated to distributor
network, the only identifiable intangible asset, as of the date of the
acquisition, and the remaining amount of ¥9,070,322 was recorded as
goodwill.





In 2008,
Wangku realized a net loss of ¥3,675,205 for the period from June 1 to December
31, 2008 , which was consolidated into the Company’s statements of
operations.





Biaoshang





Biaoshang
was incorporated in the PRC in 2000 and engages in B2B business to connect
retailers to their suppliers, enabling them to share information and manage work
processes in China. On October 24, 2007, the Company effectively controlled 51%
of the interest in Biaoshang through Tingchao Zhao, an employee of the Company.
Before the transaction, Peter Jiang held 100% equity interest in Biaoshang. Then
Peter Jiang sold 51% of the equity interest to Tingchao Zhao, while Peter Jiang
held the remaining 49%.





In 2007
and 2008, Biaoshang realized a net loss of ¥253,099 and a net profit of ¥564,148
, which were consolidated into the Company’s statements of operations after the
minority interest of ¥32,520 and ¥204,414, respectively.





Pursuant
to the equity interest transfer agreement between Peter Jiang and Tingchao Zhao,
the Company is subject to pay a contingent payment of ¥ 392,877 since the
audited net income for the six month period ended June 30, 2008 was more than
¥300,000. This was considered additional purchase consideration and recorded as
an increase to goodwill.


F-25


EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements





(b)
Other long-term investment





Other
long-term investment includes the investment in which the Company does not have
the ability to exercise significant influence (generally, when the Company has
an investment of less than 20% ownership) and for which there is not a readily
determinable fair value, is accounted for using the cost method. Dividends and
other distributions of earnings from investee, if any, are included in income
when declared.





On March
5, 2007, the Company entered into an agreement with three other parties to
establish a new company: Beijing Kubang Fuji New Media Technology Limited
Company (“Kubang”). Kubang is an advertising company, specializing in new media
advertising, customer behavior research and business data mining. The total
paid-in capital of Kubang is ¥5,000,000; the Company contributed ¥1,500,000 and
so held 30% of the equity interest. Kubang realized a net loss of ¥741,806 in
2007 and the Company recognized an investment loss on Kubang of ¥222,642 for the
year ended December 31, 2007 by applying the equity method of
accounting.





On August
28, 2008, Kubang raised an additional ¥5,000,000 as paid in capital and
consequently the Company's equity interest was diluted from 30% to 15% at which
point the Company determined it did not have significant influence on the
management of Kubang. From January 1, 2008 through August 28, 2008, in applying
the equity method of accounting the Company recognized an investment loss on
Kubang of ¥623,266. Subsequent to August 28, 2008, the Company accounted for the
15% interest under the cost method. The carrying value of the investment was
¥654,192 and ¥1,277,458 as of December 31, 2008 and 2007,
respectively.





NOTE
12. RELATED PARTY TRANSACTIONS





On August
3, 2008, the Company renewed its one-year loan of ¥3,000,000 to Wangku in
support of its business development. The loan carries an annual interest of 6%.
Interest is payable 20 days after each calendar quarter. The loan was due on
August 2, 2009 and the Company has since granted a one-year extension to be paid
on an installment basis.  The Company acquired control over Wangku
during the current period and the loan balance eliminates at the consolidated
level.





NOTE
13. INCOME TAXES





The
Company is incorporated in the Cayman Islands and conducts its primary business
operations through the subsidiaries and VIEs in the PRC. Under the current laws
of the Cayman Islands, the Company is not subject to tax on income or capital
gains. Additionally, upon payments of dividends by the Company to its
shareholders, no Cayman Islands withholding tax will be
imposed.  Before 2008, Enterprises with foreign investment and foreign
enterprises doing business in the People’s Republic of China (“PRC”) were
generally subject to Enterprise Income Tax (“EIT”) at a rate of 30% and a local
income tax at a rate of 3%; however, due to the Company’s location in a State
Standard High Technology Development Zone, the Company was granted a
certification of High Technology Enterprise and was taxed at a 15% federal rate
for taxable income generated after 2001 and was exempt from local
tax.





On
March 16, 2007, the National People’s Congress enacted the Enterprise
Income Tax Law (the “New EIT Law”), which became effective on January 1,
2008 and has replaced the previous separate income tax laws for domestic
enterprises and FIEs by adopting an unified 25% enterprise income tax rate
applicable to all resident enterprises in China, including FIEs and foreign
enterprises operating in the PRC, except for certain entities that are eligible
to tax holidays and entities enjoying tax holidays under the Previous IT Law
grandfathered by the New EIT Law. In accordance with the implementation rules of
the New EIT Law, a qualified “High and New Technology Enterprise” under the New
EIT Law will be granted the preferential tax rate of 15%. This preferential tax
rate is subject to annual government approval. eFuture Beijing is recognized as
“High and New Technology Enterprise” under the New EIT Law by relevant
authorities effective from fiscal year 2008. Therefore, eFuture Beijing enjoyed
the reduced EIT rate of 15%.  Biaoshang and Wangku were subject to a
25% tax rate in 2008.




Under the
New EIT Law, dividends paid by a FIE to any of its foreign non-resident
enterprise investors are subject to a 10% withholding tax, which were exempt
under the Previous IT Law. Thus, the dividends, if and when payable by eFuture
Beijing to eFuture Cayman, would be subject to 10% withholding tax. A lower tax
rate will be applied if such foreign non-resident enterprise investor’s
jurisdiction of incorporation has signed a tax treaty or arrangement for the
avoidance of double taxation and the prevention of fiscal evasion with respect
to taxes on income with China. Furthermore, pursuant to the interpretation under
Article 4 of Cai Shui [2008] Circular No. 1 of the New EIT Law,
dividends from earnings created prior to 2008 but distributed after 2008 are not
subject to withholding income tax.


F-26


EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements




The New
EIT Law stipulates that a resident enterprise, which includes an enterprise
established outside of the PRC with management and control located in the PRC,
will be subject to PRC income tax on its worldwide income. If the PRC tax
authorities subsequently determine that the Company and its subsidiaries
registered outside the PRC should be deemed a resident enterprise, the Company
and its subsidiaries registered outside the PRC will be subject to the PRC
income tax at a rate of 25%. The Company will continue to monitor its tax
status.





Profit/(loss)
before tax for the years ended December 31, 2008, 2007 and 2006 was taxed in the
following jurisdictions:




Chinese Yuan (Renminbi)
                                  
                                  
                                  U.S. DollarsFor the
                                    Year EndedFor the Years Ended December 31,
                                  
                                  
                                  December 31,2006
                                  
                                  
                                  2007
                                  
                                  
                                  2008
                                  
                                  
                                  2008(Restated)PRC
                                  
                                  ¥
                                  8,396,431
                                  
                                  
                                  ¥
                                  19,505,557
                                  
                                  
                                  
                                  7,830,387
                                  
                                  
                                  $
                                  1,147,730Cayman Islands
                                  
                                  
                                  (291,705
                                  )
                                  
                                  
                                  (42,011,095
                                  )
                                  
                                  
                                  (11,293,341
                                  )
                                  
                                  
                                  (1,655,308
                                  )Profit/(Loss) before tax
                                  
                                  ¥
                                  8,104,726
                                  
                                  
                                  ¥
                                  (22,505,538
                                  )
                                  
                                  ¥
                                  (3,462,954
                                  )
                                  
                                  $
                                  (507,578
                                  )





The
provision (benefit) from income taxes is as follows:




Chinese Yuan (Renminbi)
                                  
                                  
                                  U.S. DollarsFor the
                                    Year EndedFor the Years Ended December 31,
                                  
                                  
                                  December 31,2006
                                  
                                  
                                  2007
                                  
                                  
                                  2008
                                  
                                  
                                  2008(Restated)Current
      tax before benefit of operatingloss
      carry forwards
                                  
                                  ¥
                                  1,332,590
                                  
                                  
                                  ¥
                                  2,761,443
                                  
                                  
                                  ¥
                                  672,476
                                  
                                  
                                  $
                                  98,567Benefit of operating loss carry
      forwards
                                  
                                  
                                  (1,332,590
                                  )
                                  
                                  
                                  (2,761,443
                                  )
                                  
                                  
                                  (343,506
                                  )
                                  
                                  
                                  (50,349
                                  )Current
      tax
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  328,970
                                  
                                  
                                  
                                  48,218Deferred tax
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (946,704
                                  )
                                  
                                  
                                  481,774
                                  
                                  
                                  
                                  70,616Total provision for income
      taxes
                                  
                                  ¥
                                  -
                                  
                                  
                                  ¥
                                  (946,704
                                  )
                                  
                                  ¥
                                  810,744
                                  
                                  
                                  
                                  118,834





The
reconciliation of income tax (benefit) computed by applying the statutory income
tax rate to pre-tax income (loss) to the actual tax (benefit) is as
follows:


Chinese Yuan (Renminbi)
                              
                              
                              U.S. DollarsFor the
                                Year EndedFor the Years Ended December 31,
                              
                              
                              December 31,2006
                              
                              
                              2007
                              
                              
                              2008
                              
                              
                              2008(Restated)Income
      tax computed atstatutory
      tax rate
                              
                              ¥
                              2,431,418
                              
                              
                              ¥
                              (6,751,661
                              )
                              
                              
                              (865,739
                              )
                              
                              $
                              (126,895
                              )Non-deductible
      expenses
                              
                              
                              56,720
                              
                              
                              
                              12,309,561
                              
                              
                              
                              3,592,737
                              
                              
                              
                              526,601Non-taxable
      income
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (1,808,246
                              )
                              
                              
                              (265,042
                              )Effect
      of lower actual tax rates
                              
                              
                              (1,244,069
                              )
                              
                              
                              (2,778,950
                              )
                              
                              
                              (600,183
                              )
                              
                              
                              (87,971
                              )Valuation allowance
                              
                              
                              (1,244,069
                              )
                              
                              
                              (3,725,654
                              )
                              
                              
                              492,176
                              
                              
                              
                              72,141Total income tax
                              
                              ¥
                              -
                              
                              
                              ¥
                              (946,704
                              )
                              
                              ¥
                              810,744
                              
                              
                              $
                              118,834


F-27


EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements




The
components of the deferred income tax asset and liabilities were as
follows:





Chinese Yuan (Renminbi)
                                                                                    
                                                                                    
                                                                                    U.S. DollarsDecember 31,
                                                                                    
                                                                                    
                                                                                    December 31,2007
                                                                                    
                                                                                    
                                                                                    2008
                                                                                    
                                                                                    
                                                                                    2008(Restated)Deferred
      Tax Assets:Net
      operating loss carry forwards
                                                                                    
                                                                                    ¥
                                                                                    86,325
                                                                                    
                                                                                    
                                                                                    ¥
                                                                                    1,109,413
                                                                                    
                                                                                    
                                                                                    $
                                                                                    162,611Bad
      debt allowance and write offs
                                                                                    
                                                                                    
                                                                                    752,462
                                                                                    
                                                                                    
                                                                                    
                                                                                    621,244
                                                                                    
                                                                                    
                                                                                    
                                                                                    91,058Inventories
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,917,900
                                                                                    
                                                                                    
                                                                                    
                                                                                    281,114Account
      receivables
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    640,322
                                                                                    
                                                                                    
                                                                                    
                                                                                    93,854Accruals and others
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    768,770
                                                                                    
                                                                                    
                                                                                    
                                                                                    112,682Gross
      deferred tax assets
                                                                                    
                                                                                    
                                                                                    838,787
                                                                                    
                                                                                    
                                                                                    
                                                                                    5,057,649
                                                                                    
                                                                                    
                                                                                    
                                                                                    741,319Valuation allowance
                                                                                    
                                                                                    
                                                                                    (838,787
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (2,372,086
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (347,686
                                                                                    )Total deferred tax assets
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,685,563
                                                                                    
                                                                                    
                                                                                    
                                                                                    393,633Deferred
      Tax Liabilities:Intangible
      assets
                                                                                    
                                                                                    
                                                                                    (4,335,372
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (2,175,403
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (318,857
                                                                                    )Advance from customers
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    (7,521,589
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (1,102,468
                                                                                    )Total deferred tax
    liabilities
                                                                                    
                                                                                    
                                                                                    (4,335,372
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (9,696,992
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (1,421,325
                                                                                    )Net deferred tax
liabilities
                                                                                    
                                                                                    ¥
                                                                                    (4,335,372
                                                                                    )
                                                                                    
                                                                                    ¥
                                                                                    (7,011,429
                                                                                    )
                                                                                    
                                                                                    $
                                                                                    (1,027,692
                                                                                    )





At
December 31, 2008, the Company had the following operating loss carry forwards
that will expire, if unused:





ExpireDecember
      31:2009
                                    
                                    
                                    3,070,1312010
                                    
                                    
                                    370,6532011
                                    
                                    
                                    -2012
                                    
                                    
                                    -2013
                                    
                                    
                                    2,373,180¥
                                    5,813,964





NOTE
14. CONVERTIBLE NOTES AND WARRANTS - DERIVATIVE FINANCIAL
INSTRUMENTS





On
March 13, 2007, the Company closed a Securities Purchase Agreement (the
“Agreement”) with three funds affiliated with two institutional investors,
pursuant to which the Company raised ¥77,410,000 by issuing $10,000,000 of
senior convertible notes along with Series A warrants and Series B
warrants.





In
connection with the issuance, the Company incurred ¥17,627,511 of loan costs,
including ¥8,330,570 in cash and ¥9,296,941of warrants issued to the placement
agent. Proceeds, net of cash loan costs, were ¥69,079,430. The Company is
amortizing the loan costs over the period the convertible notes are
outstanding.





The
convertible notes are due on March 12, 2012 and bear interest per annum as
below, payable quarterly:





Period
                    
                    Interest RateMarch
      13, 2007-March 12, 2008
                    
                    
                    3
                    %March
      13, 2008-March 12, 2009
                    
                    
                    5
                    %March
      13, 2009-March 12, 2010
                    
                    
                    7
                    %March
      13, 2010-March 12, 2012
                    
                    
                    10
                    %


F-28


EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 
 The
convertible notes were initially convertible into 400,160 ordinary shares of the
Company at $24.99 per share. Pursuant to the Agreement, the conversion price was
reset to $19.00 per share on June 11, 2008 since the market price of the
Company’s common stock was below $19.00 at that day. The maximum number of
Ordinary Shares into which the Convertible Notes were convertible, based on a
conversion Floor Price of $19.00 per share, was 526,316 Shares. If the Company
fails to convert timely, the Company shall pay damages to the Holder for each
Trading Day of such Conversion Failure in an amount equal to 1.5% of the product
of the sum of the number of Ordinary Shares not issued to the Holder on or prior
to the Share Delivery Date and to which the Holder is entitled, and the Closing
Sale Price of the Ordinary Shares on the Share Delivery Date.
 
 The
Agreement contains an optional redemption right whereby if the market price of
the ordinary shares for any thirty consecutive trading days following the
optional redemption eligibility date exceeds 150% of the conversion price $24.99
on the issuance date (subject to appropriate adjustments for share splits, share
dividends, share combinations and other similar transactions after the
subscription date) and there has been no equity conditions failure, the Company
has the right to redeem all or any portion of the remaining unconverted
notes.
 
 The
Agreement also contains a Make-Whole provision which guarantees the payment of
the present value of the interest that, but for the applicable conversion or
redemption, would have been paid to the holder through the maturity date minus
the amount of interest already paid to the holder through the conversion date or
optional redemption date.
 
 The
Series A warrants are exercisable by the holder within five years on any day on
or after September 9, 2007 for an aggregate of 184,077 Shares, at an initial
price of $28.25 per ordinary share, subject to adjustment. Series B warrants
have expired since they had a one year life and were exercisable on any day on
or after September 9, 2007 to purchase an aggregate of 230,097 ordinary shares,
with an initial exercise price of $24.99 per Share. Warrants were also issued to
the Placement Agent to purchase 73,291 ordinary shares of the Company,
exercisable by the Holder within five years on any day on or after September 9,
2007 at an initial price of $24.99. The Series A Warrants, Series B Warrants and
Placement Agent Warrants contain a Cashless provision that if at any time
following one calendar year from the Date of Issuance a Registration Statement
is not available for the resale of such Unavailable Warrant Shares, the Holder
may exercise this Warrant in whole or in part and elect instead to receive upon
such exercise the "Net Number" of Ordinary Shares determined according to the
defined formula.
 
 On June
12, 2007, the Securities and Exchange Commission declared the Company's
registration statement effective. The Company will not receive any of the
proceeds of the sale of the shares by the Selling Shareholders; however, the
Company could receive up to $12,781,841 from the exercise by the Selling
Shareholders and Placement Agent of all of the Series A, Series B and Placement
Agent warrants at their current prices of $28.25, $24.99 and $24.99,
respectively.
 
 We
identified the following instruments and derivatives requiring valuation and
accounting under the relevant guidance applicable to
financial derivatives:
 
 ·Conversion
price reset feature
 ·Company’s
optional early redemption right
 ·Make-whole
provision
 ·Warrants with
exercise price reset feature
 
 We
identified the conversion price reset feature, our optional
early redemption right and the make-whole provision within the Convertible
Notes to represent embedded derivatives. These embedded derivatives were
bifurcated from the host debt contracts and accounted for as derivative
liabilities in accordance with EITF 00-19. The conversion price reset feature,
our optional early redemption right and the make-whole provision within the
Convertible Notes were bundled together as a single hybrid compound instrument
in accordance with SFAS No. 133 Derivatives Implementation Group
Implementation Issue No. B-15, “Embedded Derivatives: Separate Accounting for
Multiple Derivative Features Embedded in a Single Hybrid
Instrument.”
 
 We
identified the ordinary share warrants to be detachable derivatives. The warrant
exercise price reset provision was identified as an embedded derivative
within the ordinary share warrants. The ordinary share warrants and the
embedded warrants exercise price reset provision were accounted for as a
separate single hybrid compound instrument.
  F-29
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 
 The
single compound embedded derivative within convertible notes was recorded
at fair value at the date of issuance (March 13, 2007). We utilized a
third party valuation firm to determine the fair value of the single
compound embedded derivatives under the following methods: The fair value
of the compound embedded derivative was determined using the Monte Carlo
method when the conversion price was adjustable, and by the binomial tree model
when the conversion price effectively became fixed, subsequent to the price
reset on June 11, 2008.
 
 The fair
value of these derivatives was determined to be ¥87,775,199 and was recorded as
a derivative liability at inception. The debt discount amount of ¥77,255,180 is
being accreted through charges to the statement of operations using the
effective interest method over the period of the note obligations. At December
31, 2008 and 2007, the fair value of the derivatives was ¥5,111,417 and
¥46,521,310, respectively. The gain on derivatives for the year ended
December 31, 2008 and 2007 was ¥33,122,465 and ¥10,324,874,
respectively.
 
 The fair
value of Series A warrants and Series B warrants at the issuance date was
¥38,619,849 and the fair value of Placement Agent warrants was ¥9,296,941,
computed using Black- Scholes pricing model based upon the following
assumptions: future estimated volatility of 100%, risk-free interest rate of
4.41% and 4.9%, estimated life of 5.5 years, and 0% dividend yield.
 
 On
October 3, 2007, one of the investors converted ¥37,529,400 ($5,000,000) of the
convertible notes to 200,080 ordinary shares. Pursuant to the terms of the Note,
the Company paid ¥11,239,036 under the Make-Whole provision of the Note. Upon
conversion the Company recognized a loss on extinguishment of the convertible
notes of ¥39,504,662. This is recorded as a non-operating expense in the
consolidated statement of operations and comprehensive income
(loss).
 
 In July
and August of 2008, another investor converted ¥27,326,700 ($4,000,000) of the
convertible notes to 210,526 ordinary shares. Pursuant to the terms of the Note,
the Company paid ¥8,054,079 under the Make-Whole provision of the Note. Upon
conversion the Company recognized a loss on extinguishment of ¥22,529,233. This
is recorded as a non-operating expense in the consolidated statement of
operations and comprehensive income (loss). No warrants have been exercised in
the transactions.
 
 NOTE
15. OTHER NOTES PAYABLE AND CONTINGENCIES
 
 Operating Lease
Agreements –Operating lease commitments include the commitments under the lease
agreements for the Company’s office premises. The Company leases office
facilities in Beijing, Guangzhou and Shanghai under non-cancelable operating
leases with various expiration dates. The amounts of commitments for
non-cancelable operating leases in effect at December 31, 2008, were as
follows:
 
 Chinese Yuan(Renminbi)
                              
                              
                              U.S. Dollars2009
                              
                              ¥
                              2,241,674
                              
                              
                              $
                              328,5702010
                              
                              
                              631,207
                              
                              
                              
                              92,518Total
                              
                              ¥
                              2,872,881
                              
                              
                              $
                              421,088
 
 The
Company incurred rental expense, of ¥1,625,148, ¥2,207,402 and ¥4,591,404,
during the years ended December 31, 2006, 2007 and 2008, respectively. All
leases agreements have different lease period, ranging from 1 year to 4
years.
 
 Software
Infringement Indemnity –Standard software license agreements
contain an infringement indemnity clause under which the company agrees to
indemnify and hold harmless customers and business partners against liability
and damages arising from claims of various copyright or other intellectual
property infringements by their software products. The terms constitute a form
of guarantee that is subject to the provisions of Financial Accounting Standards
Board Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of the Indebtedness of Others.”
The estimated liability under the guarantee is zero as of December 31, 2007 and
2008.
  F-30
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 
 Litigation –
In August 2002, the Company was sued for the termination of contracts between
the Company and another party. The other party sued for costs and losses in the
amount of ¥665,500 ($82,464). The case was resolved on September 26, 2008 and
the Company is liable to pay ¥403,300. The Company recorded this amount as other
payables at December 31, 2008.
 
 NOTE
16. ADJUSTMENTS TO PREVIOUSLY REPORTED FINANCIAL STATEMENTS
 
 Several
errors were identified in the Company’s consolidated financial statements for
the year ended December 31, 2007.  As a result, certain amounts in the
consolidated financial statements were corrected from the amounts previously
reported.
 
 The
nature of these errors included a net understatement of revenue on certain
software maintenance contracts, failure to apply step acquisition accounting,
improper timing of recognition for contingent acquisition payments, improper
calculation of deferred tax liabilities, understatement of payroll accruals, and
improper recording of convertible notes.
 
 The
convertible notes, issued on March 13, 2007, contained beneficial conversion
feature and a make-whole provision that were originally recorded at their
intrinsic values according to EITF 00-27 "Application of Issue No. 98-5 to
Certain Convertible Instruments." The Series A Warrants, Series B Warrants and
Placement Agent Warrants issued in connection to these notes were recorded as
equity instruments at their grant date fair value.
 
 It was
subsequently determined that the make-whole provision, beneficial conversion
feature, and Series A and B warrants contained provisions that triggered
derivative treatment under SFAS 133 "Accounting for Derivatives.” Adjustments
were subsequently made to record the make-whole provision, beneficial conversion
feature, and optional early redemption right as a bundled derivative liability.
The Series A Warrants, Series B Warrants and Placement Agent Warrants were
considered separable instruments and recorded as a separate derivative
liability. Changes in the fair values of these derivatives are recorded as gains
and losses on derivatives in the consolidated statement of
operations.
 
 Pursuant
to paragraph 26 of Statement of Financial Accounting Standards No. 154,
“Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20
and FASB Statement No. 3” (“SFAS 154”), the effect of the correction on each
financial statement line item for all identified errors was as
follows:
  F-31
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 
 Reconciliation of
Consolidated Balance Sheet and Consolidated Statements of Operations for the
year ended December 31, 2007
 
 Note
                                                
                                                
                                                Previously
                                                  reported
                                                  December 31,
                                                  2007
                                                
                                                
                                                Correction of
                                                  Errors
                                                
                                                
                                                December 31,
                                                  2007
                                                  (Restated)ASSETSCurrent
      assetsCash
      and cash equivalents
                                                
                                                
                                                
                                                
                                                ¥
                                                67,227,348
                                                
                                                
                                                ¥
                                                
                                                
                                                ¥
                                                67,227,348Trade
      receivables, less allowance for doubtful accounts
                                                
                                                a
                                                
                                                
                                                
                                                16,409,333
                                                
                                                
                                                
                                                850,632
                                                
                                                
                                                
                                                17,259,965Refundable
      value added tax
                                                
                                                
                                                
                                                
                                                
                                                
                                                3,691,035
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3,691,035Deposits
                                                
                                                
                                                
                                                
                                                
                                                
                                                156,695
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                156,695Advances
      to employees
                                                
                                                
                                                
                                                
                                                
                                                
                                                3,576,947
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3,576,947Advances
      to suppliers
                                                
                                                
                                                
                                                
                                                
                                                
                                                657,724
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                657,724Notes
      receivable - related party
                                                
                                                
                                                
                                                
                                                
                                                
                                                3,000,000
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3,000,000Other
      receivables
                                                
                                                
                                                
                                                
                                                
                                                
                                                576,965
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                576,965Prepaid
      expenses
                                                
                                                
                                                
                                                
                                                
                                                
                                                862,653
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                862,653Inventory
                                                
                                                
                                                
                                                
                                                
                                                
                                                5,749,951
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                5,749,951Total
      current assets
                                                
                                                
                                                
                                                
                                                
                                                
                                                101,908,651
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                102,759,283Non-current
      assetsLong-term
      investments
                                                
                                                b
                                                
                                                
                                                
                                                5,460,301
                                                
                                                
                                                
                                                (1,195,868
                                                )
                                                
                                                
                                                4,264,433Deferred
      loan costs
                                                
                                                c
                                                
                                                
                                                
                                                4,847,633
                                                
                                                
                                                
                                                2,709,750
                                                
                                                
                                                
                                                7,557,383Property
      and equipment, net of accumulated depreciation
                                                
                                                
                                                
                                                
                                                
                                                
                                                2,065,040
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                2,065,040Intangible
      assets, net of accumulated amortization
                                                
                                                
                                                
                                                
                                                
                                                
                                                47,217,193
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                47,217,193Goodwill
                                                
                                                d
                                                
                                                
                                                
                                                46,814,929
                                                
                                                
                                                
                                                (1,801,102
                                                )
                                                
                                                
                                                45,013,827Total
      non-current assets
                                                
                                                
                                                
                                                
                                                
                                                
                                                106,405,096
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                106,117,876Total
      assets
                                                
                                                
                                                
                                                
                                                
                                                ¥
                                                208,313,747
                                                
                                                
                                                
                                                
                                                
                                                
                                                ¥
                                                208,877,159LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilitiesTrade
      accounts payable
                                                
                                                
                                                
                                                
                                                
                                                ¥
                                                3,845,873
                                                
                                                
                                                
                                                
                                                
                                                
                                                ¥
                                                3,845,873Other
      payable
                                                
                                                
                                                
                                                
                                                
                                                
                                                844,753
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                844,753Accrued
      expenses
                                                
                                                e
                                                
                                                
                                                
                                                3,395,790
                                                
                                                
                                                
                                                1,230,893
                                                
                                                
                                                
                                                4,626,683Accrued
      interest
                                                
                                                
                                                
                                                
                                                
                                                
                                                278,420
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                278,420Taxes
      payable
                                                
                                                
                                                
                                                
                                                
                                                
                                                8,976,305
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                8,976,305Advances
      from customers
                                                
                                                
                                                
                                                
                                                
                                                
                                                13,025,978
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                13,025,978Royalstone
      acquisition obligation, current portion
                                                
                                                f
                                                
                                                
                                                
                                                16,398,925
                                                
                                                
                                                
                                                3,420,000
                                                
                                                
                                                
                                                19,818,925Health
      Field acquisition obligation
                                                
                                                
                                                
                                                
                                                
                                                
                                                3,300,000
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3,300,000Make-whole
      obligation, current portion
                                                
                                                g
                                                
                                                
                                                
                                                1,164,116
                                                
                                                
                                                
                                                (1,164,116
                                                )
                                                
                                                
                                                -Deferred
      tax, current portion
                                                
                                                h
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                1,098,063
                                                
                                                
                                                
                                                1,098,063Total
      current liabilities
                                                
                                                
                                                
                                                
                                                
                                                
                                                51,230,160
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                55,815,000Long-term
      liabilitiesRoyalstone
      acquisition obligation, net of current portion
                                                
                                                
                                                
                                                
                                                
                                                
                                                6,416,970
                                                
                                                
                                                
                                                (6,416,970
                                                )
                                                
                                                
                                                -Make-whole
      obligation, net of current portion
                                                
                                                g
                                                
                                                
                                                
                                                9,290,082
                                                
                                                
                                                
                                                (9,290,082
                                                )
                                                
                                                
                                                -3%
      - 10% convertible note payable, net of unamortized
discount
                                                
                                                i
                                                
                                                
                                                
                                                10,419,491
                                                
                                                
                                                
                                                (10,328,720
                                                )
                                                
                                                
                                                90,771Derivative
      liabilities
                                                
                                                j
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                46,521,310
                                                
                                                
                                                
                                                46,521,310Deferred
      tax, net of current portion
                                                
                                                k
                                                
                                                
                                                
                                                5,282,076
                                                
                                                
                                                
                                                (2,044,767
                                                )
                                                
                                                
                                                3,237,309Total
      long-term liabilities
                                                
                                                
                                                
                                                
                                                
                                                
                                                31,408,619
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                49,849,390Shareholders’
      equityOrdinary
      shares, $0.0756 U.S. dollars par value; 6,613,756 shares authorized;
      2,924,702 shares outstanding
                                                
                                                
                                                
                                                
                                                
                                                
                                                1,811,589
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                1,811,589Additional
      paid-in capital
                                                
                                                l
                                                
                                                
                                                
                                                165,678,075
                                                
                                                
                                                
                                                (28,416,632
                                                )
                                                
                                                
                                                137,261,443Statutory
      reserves
                                                
                                                
                                                
                                                
                                                
                                                
                                                3,084,020
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3,084,020Accumulated
      deficit
                                                
                                                m
                                                
                                                
                                                
                                                (44,898,716
                                                )
                                                
                                                
                                                5,954,433
                                                
                                                
                                                
                                                (38,944,283
                                                )Total
      shareholders’ equity
                                                
                                                
                                                
                                                
                                                
                                                
                                                125,674,968
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                103,212,769Total
      liabilities and shareholders’ equity
                                                
                                                
                                                
                                                
                                                
                                                ¥
                                                208,313,747
                                                
                                                
                                                
                                                
                                                
                                                
                                                ¥
                                                208,877,159
  F-32
 EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 Note
                                                  
                                                  
                                                  Previously
                                                    reported
                                                    December 31,
                                                    2007
                                                  
                                                  
                                                  Correction of
                                                    Errors
                                                  
                                                  
                                                  December 31,
                                                    2007
                                                    (Restated)RevenuesSoftware
      sales
                                                  
                                                  a
                                                  
                                                  
                                                  ¥
                                                  41,360,165
                                                  
                                                  
                                                  ¥
                                                  716,246
                                                  
                                                  
                                                  ¥
                                                  42,076,411Hardware
      sales
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  16,198,402
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  16,198,402Service
      fee income
                                                  
                                                  a
                                                  
                                                  
                                                  
                                                  26,511,794
                                                  
                                                  
                                                  
                                                  134,386
                                                  
                                                  
                                                  
                                                  26,646,180Total
      Revenues
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  84,070,361
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  84,920,993Cost
      of RevenueCost
      of software
                                                  
                                                  e
                                                  
                                                  
                                                  
                                                  15,412,948
                                                  
                                                  
                                                  
                                                  235,334
                                                  
                                                  
                                                  
                                                  15,648,282Cost
      of hardware
                                                  
                                                  e
                                                  
                                                  
                                                  
                                                  12,587,418
                                                  
                                                  
                                                  
                                                  13,812
                                                  
                                                  
                                                  
                                                  12,601,230Cost
      of service fee income
                                                  
                                                  e
                                                  
                                                  
                                                  
                                                  6,857,161
                                                  
                                                  
                                                  
                                                  108,206
                                                  
                                                  
                                                  
                                                  6,965,367Amortization
      of acquired technology
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  8,231,375
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  8,231,375Amortization
      of software costs
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  2,889,118
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  2,889,118Total
      Cost of Revenue
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  45,978,020
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  46,335,372Gross
      Profit
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  38,092,341
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  38,585,621Operating
      ExpensesResearch
      and development
                                                  
                                                  e
                                                  
                                                  
                                                  
                                                  436,923
                                                  
                                                  
                                                  
                                                  379,556
                                                  
                                                  
                                                  
                                                  816,479General
      and administrative
                                                  
                                                  e
                                                  
                                                  
                                                  
                                                  18,957,385
                                                  
                                                  
                                                  
                                                  234,901
                                                  
                                                  
                                                  
                                                  19,192,286Selling
      and distribution expenses
                                                  
                                                  e
                                                  
                                                  
                                                  
                                                  11,755,517
                                                  
                                                  
                                                  
                                                  259,084
                                                  
                                                  
                                                  
                                                  12,014,601Total
      Operating Expenses
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  31,149,825
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  32,023,366Profit
      from operations
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  6,942,516
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  6,562,255Interest
      income
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  3,533,326
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  3,533,326Interest
      expense
                                                  
                                                  n
                                                  
                                                  
                                                  
                                                  (841,277
                                                  )
                                                  
                                                  
                                                  (1,972,212
                                                  )
                                                  
                                                  
                                                  (2,813,489
                                                  )Interest
      expense- amortization of discount on notes payable
                                                  
                                                  o
                                                  
                                                  
                                                  
                                                  (31,320,836
                                                  )
                                                  
                                                  
                                                  31,298,421
                                                  
                                                  
                                                  
                                                  (22,415
                                                  )Interest
      expense- amortization of deferred loan costs
                                                  
                                                  p
                                                  
                                                  
                                                  
                                                  (6,610,234
                                                  )
                                                  
                                                  
                                                  4,495,549
                                                  
                                                  
                                                  
                                                  (2,114,685
                                                  )Income
      on investments
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  985,085
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  985,085Gain
      on derivative liabilities
                                                  
                                                  q
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  10,324,874
                                                  
                                                  
                                                  
                                                  10,324,874Loss
      on extinguishment of convertible notes
                                                  
                                                  r
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (39,504,662
                                                  )
                                                  
                                                  
                                                  (39,504,662
                                                  )Foreign
      currency exchange gain/(loss)
                                                  
                                                  s
                                                  
                                                  
                                                  
                                                  (201,847
                                                  )
                                                  
                                                  
                                                  746,020
                                                  
                                                  
                                                  
                                                  544,173Loss
      before taxation
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (27,513,267
                                                  )
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (22,505,538
                                                  )Income
      tax
                                                  
                                                  t
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  946,704
                                                  
                                                  
                                                  
                                                  946,704Minority
      interest in loss of consolidated subsidiary
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  32,520
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  32,520Net
      loss
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  ¥
                                                  (27,480,747
                                                  )
                                                  
                                                  ¥
                                                  5,954,433
                                                  
                                                  
                                                  ¥
                                                  (21,526,314
                                                  )
  F-33
 
 EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 
 Explanation
of the effect of the correction of errors
 (a)
              Understatement of maintenance
      revenue
 
 (b)
                Reclassification of goodwill
      due to application of step-up acquisition accounting to the 20% Wangku
      purchase
 
 (c)
                Understatement of convertible
      note issuance costs due to derivative
  accounting
 
 (d)
                            Goodwill
                            
                            RMBOverstated
      contingent consideration related to the acquisition of Crownhead and
      Royalstone
                            
                            
                            (2,996,970
                            )Reclassification
      of goodwill due to application of step-up acquisition accounting to the
      20% Wangku purchase
                            
                            
                            1,195,868Decrease
      in goodwill
                            
                            
                            (1,801,102
                            )
 
 (e)
                  Understatement of
      accrued
      payroll
 
 (f)
                  Overstatement of contingent
      considerations in Crownhead and Royalstone acquisition
      obligation.
 
 (g)
                Reversal of make-whole
      obligation, which was subsequently identified as an embedded derivative
      and recorded as a derivative
liability
 
 (h)
                Reclassification of current
      portion of deferred tax liabilities to current
      liabilities
 
 (i)
                Understatement of unamortized
      debt discount due to the application of derivative accountingto the make-whole obligation,
      optional redempton feature, conversion feature , and series A and B
      warrants
 
 (j)
                Recognition of derivative
      liabilities
 
 (k)
                            Deferred
      tax
                            
                            RMBReclassification
      of current portion to current liabilities
                            
                            
                            (1,098,063
                            )Recognition
      of amortization of deferred tax liabilities in statement of
      operations
                            
                            
                            (946,704
                            )Decrease
      in deferred tax liabilities, net of current portion
                            
                            
                            (2,044,767
                            )
 
 (l)
                Effect
      of accounting for derivatives identified in convertible note and
      warrants
 
 (m)
                            Accumulated
      deficit
                            
                            RMBUnderstatement
      of revenue on first year maintenance service that recognised upon the
      expiration of maintenance term
                            
                            
                            850,632Understatement
      of accrued payroll
                            
                            
                            (1,230,893
                            )Amortization
      of deferred tax liabilities
                            
                            
                            946,704Effect
      of accounting for derivatives in convertible notes and
      warrants
                            
                            
                            5,387,990Decrease
      in accumulated deficit
                            
                            
                            5,954,433
 
 (n)
                Understatement of interest
      expense in convertible
notes
 
 (o)
                Overstatement of amortization
      of discount on
      notes payable which is partially included in the loss on extinguishment of
      convertible notes
 
 (p)
                Overstatement of amortization
      of deferred loan costs which is partially included in the loss on
      extinguishment of convertible
notes
 
 (q)
                Recognition of gain on
      derivative liabilities
 
 (r)
                Recognition of loss on
      extinguishment of convertible notes due to derivative accounting
      treatment
 
 (s)
                Understatement of foreign
      currency exchange gain due to derivative accounting
      treatment
 
 (t)
                Recognition of amortization of
      deferred tax
liabilities
  F-34
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 
 NOTE
17. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
 
 Parent
Company Only Condensed Balance Sheets
 Chinese Yuan (Renminbi)
                                  
                                  
                                  U.S. DollarsDecember 31,
                                  
                                  
                                  December
      31,2007
                                  
                                  
                                  2008
                                  
                                  
                                  2008(Restated)ASSETSCurrent
      assetsCash
      and cash equivalents
                                  
                                  ¥
                                  41,848,057
                                  
                                  
                                  ¥
                                  3,836,317
                                  
                                  
                                  $
                                  562,304Other
      receivables
                                  
                                  
                                  129,332
                                  
                                  
                                  
                                  120,959
                                  
                                  
                                  
                                  17,729Advances
      to employees
                                  
                                  
                                  -
                                  
                                  
                                  
                                  52,956
                                  
                                  
                                  
                                  7,762Prepaid
      expense
                                  
                                  
                                  291,784
                                  
                                  
                                  
                                  267,215
                                  
                                  
                                  
                                  39,167Total
      current assets
                                  
                                  
                                  42,269,173
                                  
                                  
                                  
                                  4,277,447
                                  
                                  
                                  
                                  626,962Non-current
      assetsInvestment
      in and receivables due from subsidiaries
                                  
                                  
                                  50,939,163
                                  
                                  
                                  
                                  64,649,549
                                  
                                  
                                  
                                  9,475,932Long-term
      investment
                                  
                                  
                                  2,986,975
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Intangible
      assets, net of accumulated amortization of¥
      6,981,305 ($957,051) and ¥ 18,054,442 ($2,646,309),
      respectively
                                  
                                  
                                  29,167,695
                                  
                                  
                                  
                                  31,549,463
                                  
                                  
                                  
                                  4,624,326Goodwill
                                  
                                  
                                  44,637,178
                                  
                                  
                                  
                                  80,927,975
                                  
                                  
                                  
                                  11,861,924Deferred
      loan cost
                                  
                                  
                                  7,557,383
                                  
                                  
                                  
                                  1,182,588
                                  
                                  
                                  
                                  173,336Total
      non-current assets
                                  
                                  
                                  135,288,394
                                  
                                  
                                  
                                  178,309,575
                                  
                                  
                                  
                                  26,135,518Total
      assets
                                  
                                  ¥
                                  177,557,567
                                  
                                  
                                  ¥
                                  182,587,022
                                  
                                  
                                  $
                                  26,762,480LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilitiesAccrued
      expense
                                  
                                  
                                  -
                                  
                                  
                                  
                                  434,076
                                  
                                  
                                  
                                  63,624Accrued
      interest
                                  
                                  
                                  278,420
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Royalstone
      acquisition obligation
                                  
                                  
                                  19,818,925
                                  
                                  
                                  
                                  6,416,970
                                  
                                  
                                  
                                  940,560Healthfield
      acquisition obligation
                                  
                                  
                                  3,300,000
                                  
                                  
                                  
                                  594,000
                                  
                                  
                                  
                                  87,065Proadvancer
      System acquisition obligation
                                  
                                  
                                  -
                                  
                                  
                                  
                                  29,958,518
                                  
                                  
                                  
                                  4,391,135BFuture
      acquisition obligation
                                  
                                  
                                  -
                                  
                                  
                                  
                                  392,877
                                  
                                  
                                  
                                  57,585Deferred
      tax, current portion
                                  
                                  
                                  1,098,063
                                  
                                  
                                  
                                  1,553,197
                                  
                                  
                                  
                                  227,658Total
      current liabilities
                                  
                                  
                                  24,495,408
                                  
                                  
                                  
                                  39,349,638
                                  
                                  
                                  
                                  5,767,627Long-term
      liabilities3%-10%
      ¥6,822,500 ($1,000,000) convertible note payable, net of ¥6,796,432
      ($996,179) of unamortized discount
                                  
                                  
                                  90,771
                                  
                                  
                                  
                                  26,068
                                  
                                  
                                  
                                  3,821Derivative
      liabilities
                                  
                                  
                                  46,521,310
                                  
                                  
                                  
                                  5,111,417
                                  
                                  
                                  
                                  749,200Deferred
      tax, net of current portion
                                  
                                  
                                  3,237,309
                                  
                                  
                                  
                                  3,344,427
                                  
                                  
                                  
                                  490,205Total
      long-term liabilities
                                  
                                  
                                  49,849,390
                                  
                                  
                                  
                                  8,481,912
                                  
                                  
                                  
                                  1,243,226Shareholders'
      equityOrdinary
      shares, $0.0756 U.S. dollars par value; 6,613,756 shares authorized;
      2,924,702 shares and 3,362,241 shares outstanding,
      respectively
                                  
                                  
                                  1,811,589
                                  
                                  
                                  
                                  2,039,196
                                  
                                  
                                  
                                  298,893Additional
      paid-in capital
                                  
                                  
                                  137,261,443
                                  
                                  
                                  
                                  173,054,651
                                  
                                  
                                  
                                  25,365,284Statutory
      reserves
                                  
                                  
                                  3,084,020
                                  
                                  
                                  
                                  3,084,020
                                  
                                  
                                  
                                  452,037Accumulated
      deficit
                                  
                                  
                                  (38,944,283
                                  )
                                  
                                  
                                  (43,422,395
                                  )
                                  
                                  
                                  (6,364,587
                                  )Total
      shareholders' equity
                                  
                                  
                                  103,212,769
                                  
                                  
                                  
                                  134,755,472
                                  
                                  
                                  
                                  19,751,627Total
      liabilities and shareholders' equity
                                  
                                  ¥
                                  177,557,567
                                  
                                  
                                  ¥
                                  182,587,022
                                  
                                  
                                  $
                                  26,762,480
  F-35
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 
 Parent
Company Only Condensed Statements of Operations
 
 Chinese Yuan (Renminbi)
                      
                      
                      U.S. DollarsFor the
                        Year EndedFor the Years Ended December
      31,
                      
                      
                      December 31,2006
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2008(Restated)Operating
      expenses
                      
                      ¥
                      (401,123
                      )
                      
                      ¥
                      (11,859,795
                      )
                      
                      ¥
                      (16,936,713
                      )
                      
                      $
                      (2,482,479
                      )Operating
      loss
                      
                      
                      (401,123
                      )
                      
                      
                      (11,859,795
                      )
                      
                      
                      (16,936,713
                      )
                      
                      
                      (2,482,479
                      )Equity
      in profit of subsidiary
                      
                      
                      8,396,431
                      
                      
                      
                      19,157,816
                      
                      
                      
                      5,767,873
                      
                      
                      
                      845,419Interest
      income
                      
                      
                      109,418
                      
                      
                      
                      3,235,834
                      
                      
                      
                      672,737
                      
                      
                      
                      98,606Interest
      expense
                      
                      
                      -
                      
                      
                      
                      (2,790,550
                      )
                      
                      
                      (983,924
                      )
                      
                      
                      (144,218
                      )Interest
      expense - amortization of discount on notes payable
                      
                      
                      -
                      
                      
                      
                      (22,415
                      )
                      
                      
                      (33,212
                      )
                      
                      
                      (4,868
                      )Interest
      expense - amortization of deferred loan costs
                      
                      
                      -
                      
                      
                      
                      (2,114,685
                      )
                      
                      
                      (978,204
                      )
                      
                      
                      (143,379
                      )Income
      on investments
                      
                      
                      -
                      
                      
                      
                      1,207,627
                      
                      
                      
                      (2,929,636
                      )
                      
                      
                      (429,408
                      )Loss/(Gain)
      on derivatives
                      
                      
                      -
                      
                      
                      
                      10,324,874
                      
                      
                      
                      33,122,465
                      
                      
                      
                      4,854,887Loss
      on extinguishment of convertible notes
                      
                      
                      -
                      
                      
                      
                      (39,504,662
                      )
                      
                      
                      (22,529,233
                      )
                      
                      
                      (3,302,196
                      )Foreign
      currency exchange loss
                      
                      
                      -
                      
                      
                      
                      839,642
                      
                      
                      
                      349,735
                      
                      
                      
                      51,262Net
      income (loss)
                      
                      ¥
                      8,104,726
                      
                      
                      ¥
                      (21,526,314
                      )
                      
                      ¥
                      (4,478,112
                      )
                      
                      $
                      (656,374
                      )
  F-36
  EFUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 
 Parent
Company Only Condensed Cash Flow Statements
 
 Chinese Yuan (Renminbi)
                          
                          
                          U.S. DollarsFor the
                            Year EndedFor the Years Ended December 31,
                          
                          
                          December 31,2006
                          
                          
                          2007
                          
                          
                          2008
                          
                          
                          2008(Restated)Cash
      flows from operating activities:Net
      income (loss)
                          
                          ¥
                          8,104,726
                          
                          
                          ¥
                          (21,526,314
                          )
                          
                          ¥
                          (4,478,112
                          )
                          
                          $
                          (656,374
                          )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Equity
      in (profit) loss of subsidiary
                          
                          
                          (8,396,431
                          )
                          
                          
                          (19,157,816
                          )
                          
                          
                          (5,767,873
                          )
                          
                          
                          (845,419
                          )Amortization
      of intangible assets
                          
                          
                          -
                          
                          
                          
                          6,981,305
                          
                          
                          
                          11,281,835
                          
                          
                          
                          1,653,622Impairment
      of intangible assets
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          286,000
                          
                          
                          
                          41,920Amortization
      of discount on notes payable
                          
                          
                          -
                          
                          
                          
                          22,415
                          
                          
                          
                          33,212
                          
                          
                          
                          4,868Amortization
      of deferred loan costs
                          
                          
                          -
                          
                          
                          
                          2,114,685
                          
                          
                          
                          978,204
                          
                          
                          
                          143,379Gain
      on derivatives
                          
                          
                          -
                          
                          
                          
                          (10,324,874
                          )
                          
                          
                          (33,122,465
                          )
                          
                          
                          (4,854,887
                          )Loss
      on extinguishment of convertible notes
                          
                          
                          -
                          
                          
                          
                          39,504,662
                          
                          
                          
                          22,529,233
                          
                          
                          
                          3,302,196Investment
      income
                          
                          
                          -
                          
                          
                          
                          (1,207,627
                          )
                          
                          
                          2,929,636
                          
                          
                          
                          429,408Expenses
      paid by subsidiary on behalf of parent
                          
                          
                          (11,433,110
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Foreign
      exchange loss
                          
                          
                          -
                          
                          
                          
                          93,622
                          
                          
                          
                          (3,922,302
                          )
                          
                          
                          (574,907
                          )Compensation
      expense for options issued to employees
                          
                          
                          -
                          
                          
                          
                          2,663,105
                          
                          
                          
                          3,109,903
                          
                          
                          
                          455,830Deferred
      taxes
                          
                          
                          -
                          
                          
                          
                          (946,704
                          )
                          
                          
                          406,252
                          
                          
                          
                          59,546Changes
      in assets and liabilitiesOther
      receivables
                          
                          
                          -
                          
                          
                          
                          26,033
                          
                          
                          
                          8,373
                          
                          
                          
                          1,227Accrued
      interest
                          
                          
                          -
                          
                          
                          
                          278,420
                          
                          
                          
                          (278,420
                          )
                          
                          
                          (40,809
                          )Prepaid
      expenses
                          
                          
                          (330,717
                          )
                          
                          
                          33,387
                          
                          
                          
                          24,569
                          
                          
                          
                          3,601Accrued
      expenses
                          
                          
                          (889,691
                          )
                          
                          
                          (124,145
                          )
                          
                          
                          434,076
                          
                          
                          
                          63,624Advance
      to employees
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (52,956
                          )
                          
                          
                          (7,762
                          )-Net
      cash used in operating activities
                          
                          
                          (12,945,223
                          )
                          
                          
                          (1,569,846
                          )
                          
                          
                          (5,600,835
                          )
                          
                          
                          (820,936
                          )Cash
      flows from investing activities:Acuqisition
      of business
                          
                          
                          -
                          
                          
                          
                          (42,858,738
                          )
                          
                          
                          (27,647,116
                          )
                          
                          
                          (4,052,344
                          )Investment
      in consolidated subsidiaries
                          
                          
                          -
                          
                          
                          
                          (987,937
                          )
                          
                          
                          -
                          
                          
                          
                          -Long-term
      investments
                          
                          
                          -
                          
                          
                          
                          (2,975,216
                          )
                          
                          
                          -
                          
                          
                          
                          --Net
      cash used in investing activities
                          
                          
                          -
                          
                          
                          
                          (46,821,891
                          )
                          
                          
                          (27,647,116
                          )
                          
                          
                          (4,052,344
                          )Cash
      flows from financing activities:Issuance
      of ordinary shares for cash, net of  offering costs
      paid
                          
                          
                          47,128,495
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Proceeds
      from exercise of warrants
                          
                          
                          -
                          
                          
                          
                          1,060,992
                          
                          
                          
                          3,612,727
                          
                          
                          
                          529,531Issuance
      of convertible notes
                          
                          
                          -
                          
                          
                          
                          69,079,430
                          
                          
                          
                          -
                          
                          
                          
                          -Payment
      of make-whole obligation
                          
                          
                          -
                          
                          
                          
                          (10,015,958
                          )
                          
                          
                          (8,054,079
                          )
                          
                          
                          (1,180,517
                          )Proceeds
      from subscription receivable
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Net
      cash provided by (used in) investing activities
                          
                          
                          47,128,495
                          
                          
                          
                          60,124,464
                          
                          
                          
                          (4,441,352
                          )
                          
                          
                          (650,986
                          )Effect
      of exchange rate changes on cash
                          
                          
                          (791,476
                          )
                          
                          
                          (3,283,859
                          )
                          
                          
                          (322,437
                          )
                          
                          
                          (47,261
                          )Net
      increase (decrease) in cash
                          
                          
                          33,391,796
                          
                          
                          
                          8,448,868
                          
                          
                          
                          (38,011,740
                          )
                          
                          
                          (5,571,527
                          )Cash
      and cash equivalents at beginning of year
                          
                          
                          7,393
                          
                          
                          
                          33,399,189
                          
                          
                          
                          41,848,057
                          
                          
                          
                          6,133,830Cash
      and cash equivalents at end of year
                          
                          ¥
                          33,399,189
                          
                          
                          ¥
                          41,848,057
                          
                          
                          ¥
                          3,836,317
                          
                          
                          $
                          562,304
  F-37
  E-FUTURE
INFORMATION TECHNOLOGY INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements
 
 Basis
of presentation
 For the
purposes of the presentation of eFuture Cayman’s (the parent) condensed
financial information, the parent has recorded its investment in eFuture
(Beijing) Royalstone Information Technology, Inc., Biaoshang Information
Technology Co. Ltd., and Wangku Hutong Information Technology Co. Ltd. under the
equity method of accounting as prescribed in APB opinion No. 18, “The Equity
Method of Accounting for Investments in Common Stock.” Such investments are
presented as “Long-term Investment” in the balance sheets and the profit or loss
from the subsidiaries are reflected on the condensed statements of operations as
“Equity in profit (loss) of subsidiaries”.
 These
Company-only financial statements should be read in conjunction with the
Company’s consolidated financial statements.
 
 Under PRC
laws and regulations, there are restrictions on the Company’s PRC subsidiary,
eFuture Beijing, to transfer certain of its net assets to the Company either in
the form of dividends, loans, and advances. The amounts restricted include
paid-in capital and statutory reserves of eFuture Beijing totaling approximately
¥3,084,020 as of December 31, 2008.
  F-38